A J.C. Penney store in New York
J.C. Penney is being accused by employees of misleading customers into thinking they are receiving bigger deals than they really are. IBTimes

(Reuters) - J.C. Penney Co Inc (JCP.N) issued a tepid holiday sales forecast compared to its rivals and said it expects further decline in gross margin, showing how much work lies ahead as new CEO and former Apple Inc (AAPL.O) executive Ron Johnson tries to turn around the department store chain.

Penney, whose shares were down 2 percent in early trading, forecast sales at stores open at least a year, or same-store sales, would be flat to up slightly over the holiday quarter. In contrast, Kohl's Corp (KSS.N) last week forecast a rise of 2 to 4 percent, while Macy's expects an increase of 4 to 4.5 percent.

During each month of the third quarter, Penney's same-store sales fell and missed Wall Street forecasts. Executive Chairman and ex-CEO Myron Ullman blamed shoppers' limited discretionary spending capability.

In all, same-store sales were down 1.6 percent for the quarter. Penney had forecast a rise of 2 to 3 percent.

Johnson, who oversaw the successful launch and expansion of Apple's retail stores, took the helm at Penney on November 1.

Kohl's, which caters to a similar clientele, reported same-store sales gains in the third quarter, showing the importance of high-profile exclusive merchandise, like its new lines by entertainers Jennifer Lopez and Marc Anthony.

They didn't have anything new, Morningstar analyst Paul Swinand said of Penney. Their core customer is in a tough spot.

Kohl's stores are newer, and fewer are located in malls, where shopper traffic still lags, Swinand added.

Penney did not have a big new launch like Kohl's new lines or Macy's Inc (M.N) temporary collection with designer Karl Lagerfeld, but during the quarter it did buy the Liz Claiborne brand outright after having the department store license for over a year. Penney has said the Claiborne brand is selling well.

After Kohl's August sales disappointed Wall Street, that chain said it would lower prices on its most inexpensive items, adding to the pressure on Penney.

Penney's gross margin, which gauges the profitability of items sold, fell 1.6 points to 37.4 percent in the third quarter as the company faced tepid shopper demand. Penney said it expects gross margin to fall slightly in the current quarter.

The retailer reported a third-quarter net loss of $143 million, or 67 cents per share, compared with a profit of $44 million, or 19 cents per share, a year earlier. Excluding charges such as management transition expenses, Penney had a profit of 11 cents per share.

Penney expects fourth-quarter adjusted earnings of $1.05 to $1.15 per share.

(Reporting by Phil Wahba in New York; editing by Maureen Bavdek and John Wallace)