Penney shares fall as turnaround turns ugly
The market hates uncertainty, and JCP just delivered it in bulk.
Updated: 5:13 p.m. ET
By Dan Burrows
Shares in the midpriced department store chain were down 19.7% Wednesday to $26.75 after the company coughed up a wad of bad news as part of its first-quarter earnings release late Tuesday.
Not only did Penney post a much wider loss than Wall Street was expecting, but it came up short on revenue, too. Margins, meanwhile, have now contracted for five consecutive quarters.
And if that weren't enough to send traders scurrying for the exits, management withdrew its annual guidance. Penney admitted that, nope, it won't hit its profit forecast of $1.59 a share in 2012. All bets are off.
And it gets even worse: In a signal that the company needs to conserve cash, Penney pulled its dividend, which was yielding a healthy 2.3% before the sell-off. By discontinuing the dividend, the company will save about $175 million a year, which Penney said it will plow into its turnaround.
Bottom line? Customers accustomed to bargain hunting don't much care for the changes the former Apple impresario has wrought.
For the most recent quarter, Penney posted a loss of 25 cents a share. Analysts, on average, were looking for a loss of 10 cents a share, according to Thomson Reuters data. Sales dropped for the second quarter in a row, this time by 20% to $3.15 billion. Analysts were looking for sales of $3.41 billion, marking the fifth consecutive quarter in which Penney has punted top-line results.
"Sales and profitability have been tougher than anticipated during the first 13 weeks," Johnson said in a statement. No kidding. Sales at stores open at least a year, a key measure of a retailer's health, fell 18.9%.
Analysts were skeptical that Penney's plans to drop its usual parade of regular sales in favor of everyday low prices would confuse, anger and alienate customers -- and it looks like they were right. As Johnson said, Penney has "work to do to educate the customer on our pricing strategy."
The only thing that appears to be going right is the company's cost-cutting efforts, which are ahead of schedule.
"The company now expects savings to accelerate and exceed the run rate of approximately $900 million at the end of 2012, one year earlier than it had previously announced," Johnson said. Too bad you can't cut your way to growth.
Johnson has unleashed a wrenching, painful turnaround for the retailer -- one that is, to be fair, very much in its early stages. But whether Penney can lure traffic back to stores with a compelling value proposition on its wares is a huge question. It utterly failed to do so in the first quarter -- declining same-store sales, inventory write-downs and falling margins are ample evidence of that.
A while back, Johnson said to expect first-half earnings to be weak, with a rebound coming in the second half. But pulling the annual guidance throws even that into doubt. If this was his first report card, he's barely getting a passing grade, at least based on the market's reaction.
Getting a bead on Penney was tough enough heading into earnings -- Street estimates were all over the map. As Gilford Securities analyst Bernard Sosnick wrote to clients ahead of the report: "JCP is a guessing game about sales and earnings. It may be a day for 'Wow' or hoots of derision."
Well, it looks like the raspberries won and the guessing game has become only more opaque. The market hates uncertainty, and Penney just delivered it in bulk.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
More from InvestorPlace
The "new" Penney's is terrible. It looks like Target and charges like Macy's.
I loved J C Penneys the way it was. You can never find anything on-line anymore.
And if you happen to find something they never have but like one size in stock. I use
to do a lot of Christmas shopping there, don't know about it this year. Needs to go back
to the way it was.
Who didn't see this one coming....?!!! Of course JCP is losing money. They've tried the same sales model as Saturn. We see how that worked out. People truly want to feel as though they're getting the best price whether they really are or not. Fixed pricing doesn't work for non luxury items.
Coupons, sale flyers and haggling historically works. Unfortunately, JCP did what Coke did....Coke was smart enough to do a 180 back to their regular formula....
I hate the new setup, dont like new pricing system, PENNEY~S you stink.
Copyright © 2014 Microsoft. All rights reserved.
The solid report comes a month after the retailer closed all of its Canadian operations.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.