Update: Penney, Target See Possible Earnings Shortfalls

Updated from 11:13 a.m. EDT

Students aren't the only ones suffering back-to-school blues.

Department stores, which usually enjoy a sales boost in August as students stock up on the latest fall fashions, said sales were unusually slow this month. As a result, both J.C. Penney (JCP Quote - Cramer on JCP - Stock Picks) and Target (TGT Quote - Cramer on TGT - Stock Picks) warned Thursday that third-quarter earnings were likely to be lower than Wall Street's estimates.

These warnings follow an announcement by Gap(GPS Quote - Cramer on GPS - Stock Picks) that stunned investors Wednesday evening by disclosing that the retailer's same-store sales had dropped 14% this month compared to last August -- well below analysts' expectations.

The news spurred a sell-off in the stocks. Shares of J.C. Penney fell $1.19, or 8%, to close at $14 Thursday, while Target's stock ended the day down $2.82, or 11%, at $23.25, after trading at a 52-week low of $21.63. Gap's stock, meanwhile, was pummeled in after-hours trading Wednesday, dropping more than 12%. It ended Thursday's session down 6 cents at $22.44, after hitting a 52-week low of $21.13.

J.C. Penney's profit warning was its second for the current quarter.

The Plano, Tex.-based retailer said overall sales declined 0.5% to about $2.46 billion in the four weeks ended Aug. 26, from $2.47 billion in the comparable year-earlier period.

Department store sales suffered most, falling 5.4% to $1.13 billion, from $1.19 billion the previous year. At stores open a year or more, sales fell 4.5%. Gains in J.C. Penney's catalog, drugstore, direct marketing and online sales were not enough to offset its sagging in-store sales.

"They 're having a tough time; they've got to fix the Penney brand," said Steve Kernkraut, retail analyst at Bear Stearns. "They really need to start connecting with the customer and getting the fashion right."

Despite numerous attempts to reinvent and restructure its business, the retailer has struggled to improve its sagging sales and stock price.

J.C. Penney sold its credit card unit in 1999 and announced plans in February to close nearly 50 department stores and almost 300 drugstores. Earlier this month, the retailer said the initial public offering of an Eckerd tracking stock would not occur this year as previously announced, and its postponed the offering indefinitely until its financial results improve.

J.C. Penney's stock was downgraded after Thursday's announcement by at least one Wall Street firm, PaineWebber, which changed its rating to neutral from "buy."

Kernkraut of Bear Stearns maintained a neutral rating on the stock, but lowered the retailer's third-quarter earnings estimate Thursday to 13 cents a share, down from 28 cents a share. Bear Stearns does no underwriting for J.C. Penney.

Analysts surveyed by First Call/ Thomson Financial before the retailer's latest profit warning had forecast earnings of 31 cents per share for the current quarter.

Meanwhile, Target, the Minneapolis-based retailer, announced Thursday that while same-store sales were up 3.2% at its Target discount stores and up 3.7% at its Mervyn's stores, department store sales slipped 5.3% this month compared to last August. Altogether, overall same-store sales rose just 2.5% in August, leading the company to issue a profit warning for the current quarter.

``In light of current business trends and the strength of last year's results, we now expect earnings per share to decline somewhat in the third quarter,'' Bob Ulrich, Target's chairman and chief executive, said in a statement. He added that sales should improve by the fourth quarter.

Gap's disappointing sales led at least five investment firms removed their "buy" ratings on the stock after the news, including Prudential Securities, Banc of America Securities, Salomon Smith Barney, Credit Suisse First Boston, and Paine Webber. Robertson Stephens, which had forecast a 6% drop in Gap sales in August, retained its buy rating on the stock, but analyst Janet Kloppenburg said the stock is likely to trade sideways through mid-October.

Among other retailers, August same-store sales at May Department Stores(MAY Quote - Cramer on MAY - Stock Picks) chain also suffered, dropping 3.6% from August 1999, while total sales rose just 1.7%.

Nonetheless, the St. Louis-based company opened four new department stores this month. It currently operates 426 department stores and 113 David's Bridal stores in 43 states, the District of Columbia, and Puerto Rico.

Shares of May Department Stores fell to a new 52-week low Thursday of $22.13, before recovering slightly to close down 63 cents, or 2.7%, at $22.94.

Not all retailers suffered a summer slowdown, however.

Wal-Mart,(WMT Quote - Cramer on WMT - Stock Picks) the nation's largest retailer, and No. 3 Sears, Roebuck(S Quote - Cramer on S - Stock Picks) both reported sales increases in August.

Wal-Mart reported a 5.7% in same-store sales and an 11.6% total gain in August sales, with sales for its Sam's Clubs up 8% to $2 billion from $1.9 billion. Meanwhile, Sears reported a same-store increase of 5.6%, citing strong sales in its appliances, electronics, and lawn and garden products. Total sales at Sears rose 6.9%.

Shares of Wal-Mart fell $1, or 2%, to close at $47.44 Thursday. Sears shares fell 44 cents, or 1%, to $31.19.

Kmart (KM Quote - Cramer on KM - Stock Picks) reported that same-store sales rose 2.8%; total sales rose 4.6%. Shares of Kmart closed down 6 cents at $7.

Federated Department Stores (FD Quote - Cramer on FD - Stock Picks) reported its total sales were up 1.4% from last August, to $1.27 billion for the four weeks ended Aug. 26, from $1.25 billion in the comparable period last year. Same-store sales increased 1.1%.

Shares of Federated ended the day up 50 cents, or 2%, at $27.63.

And The Limited(LTD Quote - Cramer on LTD - Stock Picks) reported that same-store sales rose 6%. Its total sales, excluding those from Galyan and Too in 1999, rose 8%. Shares closed up 6 cents, or about a half-percent, at $20 Thursday.