2. Is the new management doing too much, too fast?

You bet, and this is the problem. Major overhauls at retailers are tough. And the new bosses at J.C. Penney are changing a lot. Everything from product -- they're putting fewer choices on shelves and bringing in more upscale brands -- to pricing, store layouts, information management systems and staffing levels.

Major makeovers are even tougher when you try to do them quickly. "They are tearing apart the entire company all at once," says Davidowitz. "I'm not saying their ideas are wrong. I'm saying the way they are doing this will lead to a complete unraveling of the company. It's going to be a mess. It typically takes years to make all those changes."

But even at a slow pace, total retail makeovers can fail badly. Back in 2007, new managers tried to overhaul the retailer Talbots (TLB) with a plan quite similar to the one for J.C. Penney now, points out Charles Grom, an analyst with Deutsche Bank. Bad move. Talbots stock fell from about $25 in early 2007, to about $2.40 now.

3. Will JC Penney customers trek to the stores without coupons?

Maybe not. And this is a big issue.

Last fall, Penney boldly announced plans to ditch coupons and most sales in favor of regular, monthlong sales on some seasonal items and some Friday clearance sales. Everything else is offered at "Fair and Square Every Day" prices. So far, that has changed only slightly.

Two big problems here.

First, shoppers love their coupons. Macy's (M) learned this six years ago when it cut back on coupons after buying May Department Stores. It reversed the decision after sales fell sharply. Nowadays, coupons are even more important than back when the economy was booming. "We are living in a world where family income is down 10% in the last four years," says Davidowitz. Morgan Stanley surveys confirm that coupons were the top reason customers shopped at J.C. Penney.

Recent comments by Penney CEO Johnson that customers just need to be better educated about the new pricing policies sparked a backlash in the blogosphere. "To say coupon users need to be educated is absolutely insulting. . . . This executive needs a reality check," a shopper using the handle Rocketmom60 recently posted at one couponing site.

The second problem is the pricing concept. "Everyone who has attempted it has failed, because there is no way to position it empirically in a customer's mind," says the former CEO from a national retail chain, who asked not to be identified. "What does 'everyday fair pricing' mean?"

J.C. Penney is showing signs of wising up here. But it needs to move decisively, or competitors will continue to steal business.

4. Is heavy cost-cutting a good thing?

Apparently there's a lot of fat at J.C. Penney. Ackman says Netflix (NFLX) streaming video recently accounted for 20% of Penney home-office bandwidth use during work hours, and the typical employee clicked on YouTube videos 1,000 times a month.

Besides layoffs, the company has room to cut inventory and reduce spending on advertising and technology. Big cuts would highlight an inherent cost advantage -- Penney owns a lot of its real estate, and it has a lot of long-term, low-cost leases.

Ackman estimates that $900 million in cuts, the company's target, would equal $2.50 a share in earnings, or $30 a share at a price-to-earnings ratio of 12.

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The problem is that a lot of the cuts have already been made. And the stock is still sluggish.

Morgan Stanley analyst Michelle Clark may have a good explanation. She thinks the aggressive cost cuts are hurting sales. "The scale of changes being made concerns us," says Clark.

Stocks mentioned in this article include: J.C. Penney (JCP) and Sears (SHLD).