JC Penney profit down 50 pct; sees difficult year

By Nicole Maestri

NEW YORK (Reuters) - J.C. Penney Co Inc <JCP.N> said on Thursday its first-quarter profit dropped 50 percent as the retailer cut prices to clear unsold merchandise, and it forecast a similar profit drop for its current quarter.

But its shares, which had fallen 42 percent in the past year through Wednesday, rose 4 percent to its highest level in four months.

The department store operator's most recent profit decline was less than Wall Street expected, and while price cuts will pressure margins in the current quarter, it forecast second-quarter earnings that could surpass current analyst targets.

Wayne Hood, a retail analyst with BMO Capital Markets, said the first quarter earnings were able to beat very low expectations and Penney's second-quarter forecast was above his estimate, which is seen as a positive in this difficult environment.

"I think it's good news in the sense that things have stabilized. It doesn't appear to be getting worse," he said of Penney's forecast.

Penney's net income was $120 million, or 54 cents per share, for its fiscal first quarter ended May 3, down from $238 million, or $1.04 per share, a year earlier.

Analysts, on average, were expecting it to earn 50 cents per share, according to Reuters Estimates.

Penney's middle-income consumers have been hit hard by the weakened U.S. economy. More of their paychecks are going toward paying for necessities like food and fuel at the same time as their home values are declining and their access to credit has diminished.

Worried about their financial situation, Penney's shoppers have reined in discretionary spending and cut down on trips to the mall. That prompted Penney in March to slash its first-quarter earnings forecast to approximately 50 cents per share, down from a previous view of 75 to 80 cents per share.

SALES SLUMP

Quarterly sales fell about 5 percent to $4.13 billion from $4.35 billion a year earlier. Sales at its stores open at least a year, a key retail gauge known as comparable store sales, fell 7.4 percent.

Speaking to reporters at its analyst meeting in April, Chairman and Chief Executive Myron "Mike" Ullman said the retailer witnessed a "precipitous" drop in store traffic in March, leaving it with unsold Easter holiday merchandise.

"We obviously planned Easter like it was going to happen and, without being too flippant, it didn't," Ullman said at the meeting.

Sales weakness in the quarter was "broad-based," but Penney said the best performing categories were men's apparel and family footwear, with weakness in most home categories and fine jewelry.

Its gross margin decreased by 1.5 percentage points to 40.0 percent of sales as it cut prices to spur sales.

"Our customers continue to be challenged by rising food prices and a gas price increase that has reduced discretionary spending capacity by almost $70 billion," said President Ken Hicks on a call with analysts.

Penney expects conditions to remain difficult for the rest of 2008, and plans to cut prices on existing merchandise and pare future orders to try to get its inventory aligned with the weaker sales environment.

Despite the tough climate, Penney is still introducing new brands, like Dorm Life for back-to-school and Fabulosity for juniors. While consumers are seeking low prices, Penney said they are also responding to "newness," and the brands will help it gain market share when the environment improves.

For its fiscal second quarter, Penney expects total sales to decrease in the low-single digits, and comparable department store sales to fall mid-single digits.

It forecast earnings per share of approximately 38 cents -- a steep drop from earnings of 78 cents per share from continuing operations a year ago.

But analysts had already lowered expectations for the quarter and, on average, were expecting earnings of 37 cents per share.

Shares rose $1.84 to $46.09 in recent trading.

(Reporting by Nicole Maestri; Editing by Derek Caney and Dave Zimmerman)