JCPenney's earnings drop, and its holiday sales outlook is uncertain

NEW YORK — Department store chain JCPenney reported a 78 percent drop in its third-quarter earnings because of a big expense for its pension plan, and its revenue slipped from a year earlier.

It came the same day that niche retailer Abercrombie & Fitch also reported a drop in earnings.

JCPenney upgraded its annual profit and sales outlook for the year, however, because it is selling more items at full price or on planned promotions, but the outlook for holiday shopping remains uncertain.

After retailers used unprecedented price-cutting in a desperate attempt to liquidate mounds of inventory last Christmas, Myron Ullman III, chairman and chief executive, told investors during a conference call Friday that the big question this holiday season is, "What's the customer's reaction going to be to less clearance?"

Given high unemployment and tight credit, consumers will "shop for the most part on a very tight family budget," Ullman said.

The company expects sales at stores open at least a year, a key measure of a retailer's health, to fall between 4 percent and 6 percent in the quarter that includes the holidays, less than the 10.8 percent drop it suffered in the period in 2008.

JCPenney expects to earn 70 cents to 85 cents per share for the period, compared with 95 cents a year ago, on revenue 3 percent to 5 percent lower than a year ago.

The retailer said it earned $27 million, or 11 cents per share in the third quarter. That compares with $124 million, or 56 cents per share, a year earlier.

The third-quarter results included a charge of $73 million, or 19 cents per share, to write down the value of the company's pension-plan assets. Excluding that impact, adjusted income from continuing operations was $72 million, or 30 cents per share.

That's down from $103 million, or 46 cents per share, in last year's third quarter, excluding a pension plan benefit.

Revenue fell 3.2 percent to $4.18 billion, the same amount forecast on average by analysts surveyed by Thomson Reuters. Sales at stores open at least a year, a key metric for retailers, fell 4.6 percent in the quarter.

Department store chains have been challenged as shoppers worry about job security and cope with tight credit, but some consumers are beginning to treat themselves to small indulgences.

At Abercrombie & Fitch, third-quarter profit fell 39 percent, but that was less than expected. Revenue fell 15 percent.

Abercrombie & Fitch's sales have slumped, and it has lost market share to lower-priced competitors such as Aeropostale Inc. as it kept prices high and invested abroad during the recession.

In recent quarters it has bowed to the recession and begun marking down items, but CEO Mike Jeffries said Friday that the company plans to add lower-priced inventory in the first quarter, rather than relying on markdowns that he said might hurt its image.

"We are aspirational brands for our customer but are reacting to the current environment and trying to improve the domestic sales trend," said Jeffries. "Domestically, as you all know, we are seeing that the customer is extremely deal-driven, price-conscious, and we are aware of that."

Profit for the three months that ended Oct. 31 fell to $38.8 million, or 44 cents per share, or 30 cents per share excluding one-time items.

That beat the average expectation of analysts surveyed by Thomson Reuters for adjusted earnings of 20 cents per share.

Revenue fell to $765.4 million, squeaking past analyst expectations of $764.5 million. Expenses fell 16 percent.

Sales in stores open at least a year, a key measure of a retailer's health, dropped 22 percent.