What To Do About J.C. Penney

Submitted by Investing Daily as part of our contributors program.

By: John Fraser

Almost a year ago, on June 14, 2011, shares of J.C. Penney (NYSE: JCP) leapt from $30.11 to $35.37, for a gain of 17.5% in a single day.

It was, to say the least, an uncharacteristic jump for the struggling retailer, as Investing Daily editor Jim Fink noted at the time:

“What could cause such a huge gain? My first thought was a takeover offer. Nope. How about a great earnings report? No, the company had already reported first-quarter earnings on May 16th, which actually had marked the $41 short-term top for the stock before its nauseating decline to below $30 last week.”

J.C. Penney Shareholders Hoped Apple’s Shine Would Rub Off

As it turned out, the main reason for the jump was that J.C. Penney had announced that it had hired Ron Johnson, the former head of Apple‘s (NasdaqGS: AAPL) retail stores, as its new CEO.

Johnson came with a strong retail pedigree: during his time at Apple, he was credited with inventing the Genius Bar and the stores’ open-concept layouts. Prior to that, he was a senior merchandising executive with Target Corp. (NYSE: TGT) for 16 years, where he played a role in giving the discount retailer a total makeover that gave it a fresh, modern feel.

Clearly, investors believed he was the one to breathe life into Penney’s tired department stores; that was reflected in the big share-price jump.

Unfortunately, what remained of those gains was given back after J.C. Penney reported disappointing quarterly earnings on Tuesday evening.

Sharp Losses, Dividend Cut Send J.C. Penney Shareholders Scurrying for the Exit

In the quarter ended April 20, 2012, the retail chain’s sales slumped 20.1%, to $3.15 billion, missing Wall Street’s forecast of $3.43 billion. Same-store sales dropped 18.9%.

J.C. Penney lost $163 million, or $0.75 a share, compared with a profit of $64 million, or $0.28 a share, a year ago. Excluding one-time items (such as writedowns of inventory related to Penney’s restructuring), the company lost $55 million, or $0.25 a share. That, too, was well short of expectations: the Street had been looking for losses of just $0.01 a share.

In light of the dismal results, the company also said that it is suspending its $0.20-a-share quarterly dividend. That will save it $175 million a year, which Penney plans to use to speed up its restructuring plan.

The disappointing earnings cut the company’s share price by 19.7% yesterday, to $26.75.

Poor Earnings Report Caps a Year of Big Changes at J.C. Penney

When Johnson joined J.C. Penney, he promised to turn the retailer into “America’s favorite store.” In his short time at the company, he has already brought in a number of significant changes.

One of the biggest was Penney’s $38.5-billion purchase of 16.6% of Martha Stewart Living Omnimedia (NYSE: MLO). Under that deal, Martha Stewart Living will start operating its own outlets inside Penney’s department stores, starting in February 2013.

More controversially, Johnson has moved away from Penney’s policy of having regular sales on merchandise to an everyday low prices approach, on the assumption that customers wouldn’t wait for a sale to come to the stores if they felt they were always getting a bargain.

Analysts starting to question Johnson’s strategy for J.C. Penney

Unfortunately, the lack of discount sales is prompting some bargain-hunting customers to pass Penney by entirely: traffic at the stores dipped 10% during the quarter. Even Johnson admitted that the company has “work to do to educate the customer on our pricing strategy.”

Many analysts agreed: “Consumers want deals, and they’re willing to wait for them,” C. Britt Beemer, chairman of consumer-research firm America’s Research Group, told The Seattle Times: “When you train customers to shop at big discounts, that customer is not going to change.”

Research service Zacks.com was more optimistic, saying that Penney is “gradually adding all the ingredients that a company needs to attract customers’ fancy.”

But the site also noted that “the company’s lackluster performance put it on the back foot while many of its peers have walked away with impressive numbers. So there remains a Herculean task for the company to identify its strengths and channelize those in the right direction to put itself back on the growth trajectory.”

Zacks currently has a short-term sell recommendation on the stock.

These two are well ahead of J.C. Penney

Whether or not Penney’s new approach works, the company continues to face tough competition in the retail space, particularly in the discount area, which offers more attractive investment options.

Two leading discounters whose stocks have outperformed Penney by a wide margin in the past year are Wal-Mart Stores (NYSE: WMT), the world’s biggest retailer, which revolutionized the concept of everyday low prices, and Target Corp. (NYSE: TGT).

Both pay attractive dividends that look safe. In addition, Target is set to gain from its first international expansion, into Canada, next year.

Article originally posted here.