This story first appeared in the March 31, 2008 issue of WWD. Subscribe Today.

J.C. Penney Co. Inc.’s slashing of its first-quarter profit projections by a third after a disappointing Easter could be a warning for the overall retail sector that the proverbial wall is just ahead. While retailers have been dancing around the impact of the economic slowdown for the last few months, evidence is mounting that the second half might not be pretty.

Consumers are pulling back, the subprime mortgage crisis continues to unravel, confidence is low and employers across the country are cutting payrolls. All this means Penney’s probably won’t be the only retailer to disappoint when comparable-store sales are reported April 10 or when first-quarter results come out in May. Comp results will likely offer a telling glimpse at not only the first quarter, but the mood of retailers and perhaps how they plan to position themselves going forward.

“Consumer confidence is at a multiyear low,” said Myron “Mike” Ullman 3rd, chairman and chief executive. “J.C. Penney counts half of American families as its customers and they are feeling macroeconomic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets.”

Wall Street, at least, isn’t optimistic about the outlook, driving retailers’ shares down across the board on Friday. The S&P Retail Index fell 2.7 percent to 379.58.

Penney’s stock fell 7.5 percent to $37.48. Other department store players posting declines included Macy’s Inc., down 6 percent to $21.97; Kohl’s Corp., off 4.9 percent to $42.33, and Saks Inc., down 4 percent to $11.91. Decliners on the specialty store side included Chico’s FAS Inc., off 8.9 percent to $6.99, and Talbots Inc., down 8.7 percent to $10.22. Vendors also took a hit, especially those with close ties to Penney’s.

Polo Ralph Lauren Corp., which just launched its new American Living brand exclusively with Penney’s, saw its shares fall 5.5 percent to $57.62, while shares of Liz Claiborne Inc., which sells its Liz & Co. brand through Penney’s, fell 9.1 percent to $17.77.

Even though Penney’s hung the revision on macroeconomic woes, some company-specific issues might also have played a part.

The retailer, which declined to comment on the downward revision, has been tweaking its mix of late. American Living, supported by a Bruce Weber ad campaign, is the most prominent example. To weather the storm, Ullman said Penney’s would continue to focus on improving the customer experience in its 1,073 stores while positioning itself to take advantage of an eventual economic rebound.

“Though the company indicated the weakness was broad-based across categories and regions and we believe this is true, we think a particularly weak area may be the new American Living collection,” said Bank of America stock analyst Dana Cohen.

The line, which leans heavily on a classic Americana vibe, is more expensive than other offerings at the store at a time when shoppers are especially attuned to price, noted Cohen.

A recent study by AlixPartners found that shoppers generally are zeroing in on price more than any other time during the past decade.

Whatever specifically happened to Penney’s over the last month, plenty of retailers have been putting up warning flags, though not generally in as dramatic a fashion.

At Kohl’s, for instance, fourth-quarter profits fell 15 percent and ceo Larry Montgomery said: “We expect 2008 to be a challenging year from a macroeconomic perspective. We are planning conservatively in our sales expectations, inventory levels and expenses.” Target Corp. said fourth-quarter profits fell 8.2 percent and was planning for a “challenging” first half.

So far, Wal-Mart Stores Inc., seen as the low-price leader, seems to have held up pretty well, with a 4 percent rise in profits last quarter. Wal-Mart’s shares fell just 0.5 percent Friday to $52.12, but the company is by no means immune to the economic pressures hurting other retailers.

Even luxury retailers such as Saks, which saw profits shoot up 83.4 percent last quarter, were more cautious going forward, and apparently with good reason, given the menu of economic woes afflicting consumers.

Shoppers across the price spectrum each have their own woes, said Scott Hoyt, director of consumer economics at Moody’s Economy.com.

Just as low-income consumers are hit hardest by higher gasoline prices, middle-income shoppers are most impacted by the housing crisis and high-income consumers are nervously watching their stock portfolios.

“With a whole wave of factors hitting consumers, there’s no group of retailers that’s immune,” said Hoyt. “Find me a segment that isn’t doing worse now than they were doing a year or two ago.”

Chains with either operational concerns or a lot of debt, including Bon-Ton, Dillard’s, Sears and Neiman Marcus, are going to be especially pressured by a weakened consumer, said Monica Aggarwal, credit analyst at Fitch Ratings.

“This is not a J.C. Penney problem,” said Aggarwal. “The department stores overall are cautious. When 80 percent of your sales are discretionary between apparel and home, you’re going to have a cautious outlook in this environment. Everybody’s vulnerable. It’s just how they manage the expenses and the inventory.”

Most retailers reporting year-end results stressed that they planned to manage inventories carefully, though it is not clear how much they were able to adjust orders for the first quarter. Price promotions to move inventory that wasn’t selling dragged fourth-quarter profits down for many stores.

A survey by the Conference Board found that overall consumer confidence was at a five-year low in March. The sentiment among consumers regarding their expectations as they look six months ahead hit a 35-year low.

Additionally, the economy shed 63,000 jobs in February, the second straight month with a decline.

The Plano, Tex.-based Penney’s, which was already planning cautiously and is one of the stronger players in the market, slashed first-quarter earnings projections to 50 cents a share, down from the 75 to 80 cents the company predicted on Feb. 21.

The firm said turnover through Easter was well below expectations, and comparable-store sales for March are now slated to drop to a low-double digit range.

The economic stimulus package out of Washington might offer “some temporary benefit,” said Penney’s Ullman, though he expects the environment will continue to be difficult this year.

By late spring and early summer, consumers will start getting tax rebate checks of $600 for individuals, thanks to the stimulus package President Bush approved. It is unclear, though, if consumers will spend that money on apparel, hold on to it or spend it elsewhere, given concerns over rising food and gasoline prices and the weakening job market.