JC Penney Continues to Struggle

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JC Penney Continues to Struggle
J.C. Penney Company, Inc. (NYSE:JCP) may continue to see its struggles linger as analyst Michael Exstein of Credit Suisse Group AG (ADR) (NYSE:CS) cut his second quarter and full year forecasts.  Exstein doubled his loss estimate for the second quarter from $0.19 to $0.38 a share.  Additionally, full year estimates were cut to $1.07 a share from $1.16 a share.  According to Benzinga, Exstein had this to say about his estimate cuts: "A combination of poor messaging, tampering with the merchandise flow, and a slowing of the overall retail environment seem to have contributed to the current state of business."

JC Penney recently announced a string of job cuts back in April to its headquarters staff.  However, as the ailing retail giant continues to struggle during a difficult economy, management was forced to cut another 350 jobs from its headquarters.

JC Penney CEO Ron Johnson has only been at the retailer since November of last year and with him, he brought a new pricing strategy that was supposed to put JC Penney back on top.  However, the pricing plan is being labeled a failure after the company announced that they would be going back to a more traditional policy on sales, on July 3rd.

Johnson’s “no sales” strategy basically was the act of focusing on providing customers with the lowest prices and ignore sales all together.  While in theory this sounds ideal, it has blown up in the retailer’s face.  When you consistently provide the lowest price possible to customers with no regard to sales, this spells disaster as deep discounting hurts your bottom line.

Performance wise, JC Penney is down 42% year to date and it appears that the company could be seeing a lower share price by year’s end if management doesn’t get together and stop the bleeding.

The company’s first quarter earnings release was terrible and really showed investors that the retailer is not on the right path.  The company reported a loss of $0.25 a share on revenue of -$55 million.  During the first quarter same store sales fell 18.9% with total sales diving 20.1%.  Additionally, sales from its website jcp.com came in 27.9% lower than during the same period last year.

As you can see, JC Penney is struggling and having a hard time moving back to its traditional policies.  While there have been no strong calls for CEO Johnson to step down, expect that to change if JC Penney’s second quarter looks a lot like its first quarter. Rising inventory, decreasing sales and profit margins is not what you want to see and clearly it has showed some weaknesses of the current CEO.

The bottom line here is that it’s a rough economic environment out there, especially for retailers because consumer confidence is low right now.  That aside, JC Penney’s new sales strategy is terrible and does not work.  We already know that second quarter earnings are going to be terrible, now we all must wait and see how they respond to the earnings.

Disclosure: No positions

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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