NEW YORK -(Dow Jones)- J.C. Penney Co. (JCP) is the first major retailer to say consumer spending fell severely in the first quarter, but it looks like it won't be the last.

The century-old retailer, which says half of U.S. families make up its customer base, not only slashed earnings and comparable-store sales guidance, but said it sees difficult conditions continuing for the rest of the year.

Industry representatives say Penney won't be an isolated case, given the way the economy is going, and there is no immediate relief in site.

Those likely to be hurt the most are department stores like Dillard's Inc. ( DDS), Kohl's Corp. (KSS) and potentially Macy's Inc. (M) and Sears Holdings Corp. (SHLD), analysts say.

"The magnitude of the (comparable-sales) declines at Penney was worse (than expected) and does imply that department store top-lines could be facing more near-term core sales pressure than initially thought," said Goldman Sachs retail analyst Adrianne Shapira.

In industry jargon, department stores are stuck between "diamonds and dollars." Many high-end customers are striving to maintain their loyalty to retailers like Tiffany & Co. (TIF) and others are going downstream to discounters like "dollar" stores.

Nonetheless, even high-end retailers are feeling some strain. Merrill Lynch downgraded Tiffany Friday to sell from neutral due to poor economic conditions.

Penney's suppliers are certainly being pinched. The company's biggest product line, American Living, was just recently launched and is made by a unit of Polo Ralph Lauren Corp. (RL). A spokesman for Polo Ralph Lauren didn't return a call for comment. A Penney spokesman declined to comment on the performance of any of the store's merchandise.

Penney's also carries Nike Inc. (NKE) sneakers, Philips-Van Heusen Corp. (PVH) men's wear and Carter's Inc. (CRI) children wear, among other lines.

Investors will get their next inkling of what categories are doing well and which are doing poorly on April 10, when Penney releases same-store sales results for March.

The plight of retailers is a generally broad one, but department stores in particular are going to have to do some serious strategic thinking.

"They would probably consider themselves in competition right now with Wal- Mart (WMT) and Target (TGT)," with the discounters standing to do well, said Scott Krugman, spokesman for the National Retail Federation, the industry's primary trade group.

But there is also "a level of weakness that's very concerning for the retail industry," Krugman said. "Without a doubt this is one of the most challenging periods we've seen since the last recession in 2001."

And, yes, "the potential is there for other retailers to make similar announcements down the line," Krugman said. "The chatter we are hearing from retailers is that it's very challenging."

But Krugman's sense is that "we will not see a cataclysmic event overall."

To avoid catastrophe, retailers can be expected to be conservative about hiring, vigilant about the amount of inventory they bring in and aggressive when it comes to pricing, analysts said.

The Standard & Poor's Retailing Index was off 1.6% Friday. Penney was the third-worst performer, declining 6.7%

-By Karen Talley, Dow Jones Newswires; 201-938-5106; karen.talley@dowjones.com

  (END) Dow Jones Newswires
  03-28-08 1237ET
  Copyright (c) 2008 Dow Jones & Company, Inc.