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Earnings Preview: Penney expected to post weak 3Q

NEW YORK (AP) -- J.C. Penney is expected to report its third consecutive quarterly loss and slumping sales when it releases its third-quarter earnings report on Friday. That would reflect how shoppers are still turned off by a new pricing strategy rolled out Feb. 1.

WHAT TO WATCH FOR: Under its new CEO, former Apple Inc. retail chief Ron Johnson, J.C. Penney is overhauling everything from prices to items it stocks and the store experience. But the pricing strategy, which eliminated hundreds of sales in favor of everyday low prices, has been the riskiest. And shoppers, accustomed to big "sale" signs, have been going elsewhere. Analysts will want an update on how Penney trying to bring back shoppers, particularly during the critical holiday shopping season.

In fact, just six months after the midprice department store created the three-tier pricing approach, it made some adjustments to its pricing plan. Starting Aug. 1, it eliminated its month-long sales events and is sticking to everyday low prices, which are 40 percent lower than last year, and clearance sales. Penney has been also changing its advertising to better communicate the pricing plan to customers.

Since Aug. 1, Penney has been on a campaign to remake its stores. It's added 10 new "mini-shops" in its stores with the goal of installing 100 shops inside 700 of its 1,100 stores by late 2014. The remaining 400 stores are in small towns and won't feature the full makeover. Surrounding those shops will be extra-wide aisles that Johnson calls "streets." Along those pathways will be ice cream and coffee bars and wood tables with built-in iPad tablet computers shoppers can use. In the middle of it all, a Town Square will offer activities like Pilates. The goal is change stores into mini-malls, enticing shoppers to stay longer.

Johnson had said in September that he's encouraged by sales at the new shops, which are faring better than the rest of the stores. Analysts will want to get an update on Friday.

Analysts will also want to know how Penney's business is being affected by Superstorm Sandy, which slammed into the Northeast on Oct. 29. Analysts believe that shoppers who have had to buy cleanup supplies and do extra repairs in the aftermath of Sandy will be even more financially stretched and be even more cautious with their holiday spending.

In recent years, Penney has suffered because its core middle-income shoppers have been among the hardest hit by the weak economy. It's also lagged behind rivals like Macy's Inc. because it has failed to make its stores fun places to shop. But the big worry now is whether the new pricing plan and other changes will turn off shoppers while not attracting new ones. Analyst believe that Penney's revenue at stores open at least a year dropped 16.9 percent in the third quarter, according to FactSet. It's considered a key indicator of a retailer's health.

During the first quarter, the measure dropped 18.9 percent, while during the second quarter, it fell 21.7 percent.

Investors who initially sent Penney shares soaring 24 percent to about $43 after Johnson announced the pricing plan in late January, since have pushed them down more than 30 percent since the beginning of the year to around $23.

WHY IT MATTERS: Penney is a major department store chain and sells a variety of discretionary items at moderate prices. That makes it a barometer of middle-income shoppers' willingness to spend.

WHAT'S EXPECTED: Analysts expect a loss of 15 cents on revenue of $3.3 billion.

LAST YEAR'S QUARTER: The company reported 12 cents per share on revenue of $3.98 billion.