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J.C. Penney Points to a Further Slowdown

Written By Brian Hicks

Posted April 17, 2008



slow down


Here is another real-time peek into what exactly is going on in retail sales and its cousin commercial real estate.

Between them, they are definitely pointing to a consumer led recession.

First up is the latest report out of J.C. Penney. Sales there have been so soft lately its CEO is having a hard time providing guidance on future sales.

From MarketWatch by Andria Cheng entitled: J.C. Penney scales back growth plans.

"Pointing to a tough economic environment that is clouding its outlook for the year, J. C. Penney Co. said it will open and renovate fewer stores and "de-emphasize" stock repurchases, using the savings instead to nurture opportunities such as its new American Living brand.

Penney plans to open 36 new stores this year, compared with 50 last year, a reduction that’ll save $200 million in capital spending this year, Chief Executive Mike Ullman said at the company’s two-day analyst meeting in New York that concluded Wednesday.

The number of store renovations will drop to 20 this year from 65 last year. Total capital spending will drop by about a fifth to $1 billion this year from $1.24 billion, Chief Financial Officer Bob Cavanaugh said at the meeting.

"I’ve been in business in 39 years," Ullman said. "I don’t think I’ve seen anything as unpredictable. Our entire business is soft because of lack of traffic. We can’t give much guidance because there’s no visibility."

(Emphasis mine)

J.C. Penney’s outlook, however, is far from anecdotal. In fact, according to a report released yesterday by the Fed, what Penney is experiencing is being felt largely across the board.

From the Fed Beige Book

"Consumer spending was characterized as softening across most of the country, with some Districts reporting year-over-year declines in retail and/or auto sales."

My comment: That’s leading to build up of inventory in some areas, especially in autos. Of course, it has always been the build up inventories that tends to exacerbate business conditions in other areas. Note for instance, the cancelling of orders in the report. Not good.

"Retail inventories were generally reported to be steady or rising. Automobile inventories were said to be accumulating in the Philadelphia and Atlanta Districts. Among non-auto retailers, despite weakness in sales, only a few reported any notable inventory accumulation; Atlanta cited some increase in inventories, while the Richmond and San Francisco Districts noted that some inventory accumulation has prompted retailers to cancel orders."

My comment: Moreover, inflation in raw materials has manufacturers ready to raise prices.

"Business contacts across all Districts continued to report increases in input costs and output prices. In particular, price increases were consistently reported for food products, fuel and energy products, and many raw materials. More specifically, increases in the price of chemicals, metals, plastics and other petroleum-based products were commonly cited. Most manufacturers have or are planning to increase prices in response to rising input costs"

My comment: Those growing consumer pressures meanwhile are leading to a softening in the commercial real estate markets as noted by the Fed.

"Commercial real estate markets were generally reported to be steady or softening in most areas. … sales of commercial properties were generally indicated to be sluggish, while prices were said to be under downward pressure. The Boston, Philadelphia, Minneapolis, Kansas City, Dallas, and San Francisco Districts all reported weakness in commercial real estate sales and prices."

(Emphasis mine)

So what does it all spell? ……A recession all the way

The only question now is how deep it will be and how long it will last.

So while the credit crunch may be waning here, a bumpy ride is still ahead.