J.C. Penney Co. executives may be confident in the department-store chain's everyday pricing strategy, but investors are panicking.
The company's stock fell 13 percent on Monday — the biggest percentage decline among big companies in the S&P 500 for the day. Penney stock ended at $17.93, according to preliminary closing figures on the New York Stock Exchange, its lowest price since the middle of the recession in March 2009.
The drop follows Standard & Poor's Ratings move to lower Penney's credit rating deeper into junk status on Friday. 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 each year 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 with Monday's drop, the company's stock has lost more than half its value.
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. And CEO Ron Johnson, the mastermind behind Apple Inc. stores who took the top job a year ago, reiterated his confidence in the plan and said returning the company to growth is "Job. No. 1."
"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 that customers still aren't embracing the strategy Johnson rolled out on Feb. 1. The goal of his plan 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 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, the company reported its third consecutive quarterly loss that missed Wall Street estimates. Penney, based in Plano, Texas, said it lost 56 cents per share, or $123 million in the quarter ended Oct. 27. Revenue dropped 26.6 percent to $2.93 billion in the quarter. 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 26.1 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," said S&P's credit analyst David Kuntz in a statement.
Now analysts, many of who once used words like "revolutionary" to describe Johnson's plan, are having doubts. Michael Exstein, an analyst at Credit Suisse 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 were either acquired by private equity firms, went bankrupt or merged with the 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 holiday season on Monday, Flickinger said he has doubts that the company can compete with its peers.
The company said it will have its only sale of the year on the day after Thanksgiving Day known as Black Friday. But Penney 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 it's using a gimmick to lure customers in: Penney 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," said Burt Flickinger III of the retail consultancy Strategic Resource Group.
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