J.C. Penney Slashes Holiday Forecast

The company sees heavy promotions amid inventory overruns.
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Updated from 8:27 a.m. EST

SAN FRANCISCO -- Shares of

J.C. Penney

(JCP) - Get Report

tumbled 6% Thursday after the department-store operator offered a particularly bleak view of the holiday selling season.

The retailer expects its fourth quarter to look much like its third quarter, with gross margins experiencing pressure as a result of higher-than-usual inventory levels. Penney also said the dismal picture may also carry into next year, on the basis of consumer confidence reports that point to more purse-tightening.

The stock recently were sliding $2.71 to $44.02.

For the fourth quarter, the Plano, Texas-based company now anticipates earnings of $1.65 to $1.80 a share, down from its prior guidance of $2.41. Analysts polled by Thomson Financial project earnings of $1.91 a share for the quarter.

Penney expects its department-store same-store sales, or sales at stores open at least a year, will fall on a low-single-digit basis.

"The combination of weak housing conditions, mortgage and credit market concerns and rising fuel prices has clearly led to a challenging macroeconomic environment for consumers," said Chairman and CEO Myron Ullman.

For the year, Penney lowered its earnings forecast to $4.63 to $4.78 from its earlier view of $5.50 a share. Wall Street targeted earnings of $5.39 a share.

The new outlook comes after third-quarter results fell significantly below Penney's original expectations. Like many retailers, the company saw weak sales in September and October as economic concerns and warmer-than-average temperatures left many of its goods on its shelves.

The higher levels of inventory contributed to a gross margin decline of 180 basis points in the third quarter. Much of that came from markdowns to get rid of elevated inventory levels, which were 10% higher than a year ago.

Penney said about half of the elevated inventory levels were the result of the early arrival of holiday merchandise because of a calendar shift. The company expects its gross margins will continue to be pressured as it tries manage inventory better going forward.

For the third quarter, Penney's profit totaled $261 million, or $1.17 a share, down from $287 million, or $1.26 a share, a year earlier. The results included tax credits that added 14 cents to earnings per share.

Excluding the tax gain, Penney's earnings were in line with its projection of $1 to $1.04 a share. The company slashed its forecast in October from its original target of $1.28 after September sales were much worse than anticipated.

Penney's third-quarter sales fell to $4.73 billion from $4.78 billion, while same-store sales dropped 3.5%. Originally, Penney expected a low-single-digit increase in same-store sales.

Sales in all regions of the country were below expectations, the company said. Internet sales increased 11.8%, but that was far below last year's increase of 27%.

Penney said it remains cautious about consumer spending through next year, although it still sees opportunity in key categories such as home furnishings. Penney executives pointed to

Macy's

(M) - Get Report

as an example of a company that managed to improve sales in that department despite the housing slump.