J.C. Penney Slumps After Cold Snap Weighs on Sales, Outlook

(Bloomberg) -- J.C. Penney Co. cut its profit forecast after sales trailed estimates during an unseasonable cold spell, reviving concerns that department stores aren’t nimble enough to compete and sending shares tumbling.

Same-store sales, a closely watched measure, rose 0.2 percent in the first quarter. That missed analysts’ estimates for 2.1 percent growth. The shares fell as much as 12 percent, the biggest intraday drop in almost 11 weeks.

The results damped investor optimism that the industry is improving after Macy’s Inc. trumpeted strong consumer spending on Wednesday. J.C. Penney Chief Executive Officer Marvin Ellison has streamlined expenses and personnel costs while trying to drive sales with big-ticket items like appliances.

The retailer is also looking to boost traffic with services that customers can get only in its stores, like salons and Sephora cosmetics shops. But the quarterly report shows that improvement in apparel is still needed.

“There is no getting around the fact that today’s results from J.C. Penney are inauspicious,” Neil Saunders, managing director of GlobalData Retail, wrote in a note to clients. “J.C. Penney is still not standing out amongst a sea of competing products and concepts.”

The shares traded at $2.74 at 10:48 a.m. in New York. The stock had slipped 2.8 percent this year through Wednesday’s close.

Macy’s Beats

The disappointing results fueled concerns that J.C. Penney isn’t benefiting from improving consumer trends. On Wednesday, Macy’s posted total comparable sales that increased 4.2 percent in the quarter, far outpacing analysts’ estimates. The department-store chain expects the positive momentum to continue, raising its outlook for full-year profit.

“In Macy’s case, they were able to start seeing the fruits of their labor, and J.C. Penney is trying to be the new Sears,” said Bob Phibbs, CEO of consulting firm The Retail Doctor. “They’re playing in the value space, and other people do it better.”

Excluding some items, J.C. Penney posted a loss of 22 cents a share in the quarter ended May 5, the company said. That met analysts’ average projection. For the full fiscal year, J.C. Penney lowered its forecast for adjusted earnings to a loss or a profit of as much as 13 cents. The company had previously expected to post profit of at least 5 cents. The top end of that new range missed analysts’ projection of 18 cents.

Accounting Changes

The company said accounting changes that now recognize the service cost of pension expenses had a 10-cent impact on its earnings outlook, Chief Financial Officer Jeffrey Davis said on a conference call. Pension service costs don’t affect the retailer’s operating cash flow, and the company doesn’t expect to make cash contributions.

J.C. Penney sold bonds in a boosted offering of $400 million in the quarter, using the proceeds to buy back some debt that matures starting next year. That gives the company more time and funds as it weathers the challenging retail environment. J.C. Penney also used $190 million to retire near-term debut. That left the retailer’s cash holdings at $181 million, the lowest since 1997.

Still, the company plans to rebuild its cash holdings and continue to improve its apparel offerings, Ellison said. J.C. Penney is expanding its athletic-apparel offerings and is investing in extended sizes to try to win market share.

“We believe that our strategies are beginning to take hold as we are seeing improvement in a number of areas,” Ellison said in the release.

--With assistance from Vivian Li

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net.

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Mark Schoifet, Kevin Miller

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