As J.C. Penney flounders, investors bail

NEW YORK J.C. Penney (JCP) executives may be confident in the department-store chain's everyday low pricing strategy, but its investors are panicking.

The company's stock fell more than 13 percent on Monday - the biggest percentage decline by far among big companies in the S&P 500 for the day. Penney stock lost nearly $3 on Monday to close at just under $18, its lowest price since March 2009 when the United States was in a recession.

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The drop follows Standard & Poor's Ratings move to lower Penney's credit rating deeper into junk status on Friday. And that came on the same day that the company reported its third consecutive quarter of big losses and sales declines since it decided earlier this year to get rid of hundreds of coupons and sales annually in favor of predictable low prices every day.

It's the latest sign that Wall Street isn't any happier with Penney's pricing than Main Street is. Investors had pushed Penney stock up 24 percent to about $43 after the company announced the pricing plan in late January. But customers haven't warmed to Penney's pricing, and investors have grown cold on the stock. With Monday's drop, Penney's stock has lost nearly half of its value this year.

Penney, which announced its plans for the holiday shopping season on Monday, did not immediately return calls seeking comment about its stock price. But during an investor meeting on Friday, executives assured investors that the company has enough money to continue with the strategy.

CEO Ron Johnson, the mastermind behind Apple (AAPL) stores who took the top job a year ago, also reiterated his confidence in the plan and said returning the company to growth is "Job. No. 1." And he touted the early success of the makeover Penney began this fall of 700 of its 1,100 stores with 10 sectioned-off shops inside each that feature different brands such as Levi's and Penney's new JCP line of casual clothes.

"The CEO was selling the hope, but now investors are looking at what the company will look like in the first half of the year," said Brian Sozzi, a chief equities analyst for research firm NBG Productions who follows the company. "Investors are digesting the reality."

The reality is a lot harsher than Johnson imagined when he rolled out his pricing plan on Feb. 1. The goal was to wean customers off of the deep discounts that they'd become addicted to, but that were eroding profits.

He got rid of the nearly 600 sales Penney offered at various times throughout the year for a three-tiered strategy that permanently lowered prices on all items in the store by 40 percent, offered monthlong deeper discounts on select merchandise and added periodic clearance events throughout the year.

But as Penney's coupons and sales disappeared, so did its customers. The company's losses and sales declines began to pile up. Johnson made some tweaks to the pricing plan - he got rid of the monthlong sales events in August. But that didn't help.

On Friday, Penney reported its third consecutive quarterly loss that missed Wall Street estimates. The company, based in Plano, Texas, said it lost 56 cents per share, or $123 million, in the quarter ended Oct. 27. Revenue dropped nearly 27 percent to $2.93 billion. Analysts had expected a loss of 15 cents a share on revenue of $3.27 billion.

Revenue at stores open at least a year - a key measure of a retailer's health - plummeted about 26 percent. That's higher than the 17.6 percent drop analysts had been expecting for the figure. Meanwhile, the number of customers coming into the store dropped 12 percent from the year-ago period.

On the news, Penney stock fell 5 percent, or $1.05, to close at $20.64 on Friday. That led Standard & Poor's to lower its corporate credit rating on Penney's credit, which was already in junk status, by two notches after the market closed.

S&P's credit analyst David Kuntz said in a statement that although he believes Penney's outlook is stable because liquidity will remain "adequate," the company's performance may weaken further over the next 12 months.

"Credit metrics have deteriorated substantially and we believe that they could erode further over the next few quarters," Kuntz said.

Now analysts, many of who once used words like "revolutionary" to describe Johnson's plan, are having doubts. Citi Group's (C) Deborah Weinswig, who had lauded Penney's pricing plan, on Monday slashed her fourth-quarter earnings estimate for the company to 30 cents from $1.30.

Michael Exstein, an analyst at Credit Suisse (CS) downgraded Penney's stock to "underperform" from "neutral" on Monday. Exstein cited a survey that Credit Suisse had done on Monday that showed that out of 17 retailers that suffered a total sales decline of between 15 percent and 25 percent, only four were able to recover the lost revenue. The remaining 13 either were acquired by private equity firms, filed for bankruptcy or merged with other public firms.

Exstein wrote that Penney "must find a way to significantly slow the sales decline within the next six months."

Burt Flickinger III of the retail consultancy Strategic Resource Group agrees that Penney has to improve sales, especially during the critical holiday shopping season in November December, a time when many retailers can get up to 40 percent of their revenue. But after Penney announced its plans for the shopping period on Monday, Flickinger said he has doubts that the company can compete with its peers.

Penney said it will have its only sale of the year on the day after Thanksgiving Day known as Black Friday, which is traditionally the busiest shopping day of the year. But the company also said it will open at 6 a.m., much later than some of its rivals that are opening on Thanksgiving Day or at midnight on Black Friday.

And some industry watchers were disappointed that Penney is using a gimmick to lure customers in. The company plans to give out more than 80 million buttons to customers from Black Friday to Christmas Eve. Each button will feature a unique code on the back, which can be entered on Penney's website for a chance to win a vacation.

"The holiday season could be catastrophic for Penney unless it becomes more competitive more quickly," Flickinger said.

Indeed, some Penney shoppers may already be lost to its competitors. Jeannine Soster, 48, of Mentor, Ohio, used to shop at Penney four times a week for her four children, ages 14 to 20. But since Penney got rid of discounts and coupons earlier this year, she hasn't bought anything there. She now goes to Old Navy and Wal-Mart for her children's clothing.

To make things worse, she decided to give Penney a second chance in September. That's when she stopped by her local Penney store hoping to get $6 T-shirts. But she found $20 versions instead.

"I used to be able to get sales and coupons," said Soster, who works in real estate. "I have no desire to go back to J.C. Penney unless they switch back."