Nov. 15 (Bloomberg) -- J.C. Penney Co., the third-largest U.S. department-store company, reported its first profit decline in three quarters and slashed an earnings forecast, prompting investor disappointment over holiday sales.

The stock dropped to the lowest in more than two years on New York Stock Exchange composite trading.

Consumer spending rose less than forecast in September as house prices fell and fuel expenses climbed, the Commerce Department said two weeks ago. Seven out of 10 retailers reported October sales below analysts' estimates after record high temperatures in the Northeast curbed sales of jackets and sweaters. J.C. Penney cut its fourth-quarter profit prediction by as much as a third.

``We were disappointed to see sales weaken dramatically in September and October,'' Chief Executive Officer Myron Ullman said today in a statement, citing higher housing and fuel costs for consumers and ``unseasonable'' weather.

Sales of home goods such as window coverings and cold- weather gear dragged down results, J.C. Penney said. Women's clothing sold well, along with fine jewelry and shoes, it said.

Net income in the third quarter through Nov. 3 shrank 9.1 percent to $261 million, or $1.17 a share, from $287 million, or $1.26, a year earlier, the company said in the statement.

Lower sales will cut profit in the current quarter, with sales at stores open at least a year declining in the ``low- single digits'' on a percentage basis, the company said.

For the third quarter, comparable-store sales fell 3.5 percent, the first quarterly decline since 2003.

Sales at those locations rose 3.7 percent in 2006.

Lower Forecasts

Several U.S. retailers have lowered their forecasts as consumer spending slowed. Yesterday, Macy's Inc., owner of its namesake chain, cut its fourth-quarter sales guidance. Today, Williams-Sonoma Inc., the biggest U.S. gourmet-cookware chain, said profit this period will be at the low end of its prediction.

J.C. Penney said today it expects fourth-quarter profit of $1.65 to $1.80 a share, down from a forecast of $2.41. The period accounted for 41 percent of total earnings last year.

``The size of the revision is really amazing,'' said Charles Knott, chief investment officer at Knott Capital Management, with $1 billion in assets. A decline in home values ``has become more evident to the middle class,'' he said. ``It's starting to impact their psyche.''

Knott, based in Exton, Pennsylvania, follows J.C. Penney and other retailers closely and doesn't own the stocks on concern consumer spending will slow.

J.C. Penney fell $2.40, or 5.1 percent, to $44.33 at 4 p.m. in New York, the lowest value since February 2005. The shares lost 43 percent this year, compared with a drop of 29 percent for both Kohl's Corp., the fourth-largest department-store chain, and Sears Holdings Corp., the biggest.

Third-Quarter Results

Third-quarter net income included 14 cents a share in tax credits, J.C. Penney said. Sixteen analysts estimated profit of $1.01, on average, in a Bloomberg survey. J.C. Penney had cut its third-quarter forecast last month to $1 to $1.04, from an earlier prediction of $1.28.

Third-quarter sales decreased 1.1 percent to $4.73 billion from $4.78 billion, the company said Nov. 8.

Besides women's clothing sales, ``everything else is so weak,'' said Lauri Brunner, an analyst at Thrivent Investment Management in Minneapolis, with $70.6 billion in assets including J.C. Penney share. ``It kind of shows what a tough environment it is.''

While Brunner called J.C. Penney ``the best operator'' among department stores, she said the retailer and its peers are opening too many new stores.

Wal-Mart Prices

Wal-Mart Stores Inc., the world's largest retailer, made earlier and more numerous price cuts on holiday items this year, starting with toys in October.

``Wal-Mart surprised the world by moving the Christmas shopping back from Black Friday to about the Halloween season,'' Knott said. ``The discounts that they offered really drove the people into those stores.''

Third-quarter gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 39.73 from 41.52 a year earlier as J.C. Penney made more markdowns. Selling, general and administrative expenses fell to 28.5 percent of sales from 28.8 percent a year ago.

J.C. Penney ``will continue to compete vigorously,'' Ullman said on a conference call, adding that prices for items from China are rising. It won't reduce space allocated for home-goods products. After opening 50 locations this year, the retailer is committed to opening the remaining 200 stores it plans by 2012, he said.

The retailer is ``very pleased'' with the performance of its new stores, Ullman said during the call. Locations not based in malls are seeing more customer visits, he added.

J.C. Penney says its typical customer is 35 to 54 years old, with annual household income of $40,000 to $100,000.

Kohl's reports third-quarter results later today.

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: November 15, 2007 16:20 EST