J.C. Penney's shares in free-fall after 1Q loss

By ANNE D'INNOCENZIO | May 16, 2012 | 5:46 PM EDT

FILE - In this Friday, Oct. 23, 2009 file photo, shoppers visit a J.C. Penney store in New York. J.C. Penney's stock plunged 18 percent on Wednesday, May 16, 2012 — the biggest drop by percentage since the market crash in 1987. The decline comes a day after the retailer reported a larger-than-expected first-quarter loss largely because customers were turned off by its new everyday low pricing strategy. (AP Photo/Mark Lennihan, File)

NEW YORK (AP) — Wall Street doesn't seem to like J.C. Penney's new everyday low pricing any better than Main Street does.

The department store chain's stock plunged nearly 20 percent on Wednesday— the biggest decline since the 1987 market crash. The drop comes a day after Penney said it would no longer pay out a dividend and blamed its larger-than-expected first-quarter loss on poor reception by shoppers to its strategy of getting rid of hundreds of big sales each year and offering predictable low prices every day.

The pricing plan, which was rolled out on Feb. 1, aims to stop the cycle of heavy discounting and discourage customers from waiting for sales. But the reaction by investors and shoppers shows how difficult it will be for Penney to change the mindset of consumers who have been conditioned to expect blockbuster deals from Penney during the economic downturn.

It also puts more pressure on new CEO Ron Johnson, a former Apple executive who is trying to transform Penney from a has-been to a retail darling. The same investors who initially supported the man who masterminded both Apple's successful retail stores and Target's cheap chic strategy before that now seem to be losing confidence in Johnson's plan.

"The honeymoon is definitely over for Johnson," said Brian Sozzi, chief equities analyst at NBG Productions, an independent research firm. "He sold the (pricing) story hard."

Penney did not return calls seeking comment, but Johnson on asked investors to be patient during a meeting with them on Tuesday. He acknowledged that Penney has a long way to go toward convincing shoppers not to wait for sales.

But he said he needed to make a bet on predictable pricing in order to turnaround Penney, which has been struggling in recent years because of the economic downturn and increased competition. Going forward, he said the company will do more to better communicate the benefits of the new pricing strategy to shoppers.

"Our first 90 days are little tougher than we expected," Johnson told them. "We learned. Coupons are a drug. They really drove traffic."

Penney has long said the pricing plan would take time to work. But Johnson has tempered his tone since January when he announced the plan that was supposed to make pricing simpler. Unlike Wal-Mart's iconic everyday low pricing, Penney's strategy doesn't try to undercut competitors, but rather focuses on offering customers predictable prices.

The company has ads intended to familiarize customers with its three-tiered strategy. The plan features everyday prices that are about 40 percent less than a year ago, monthlong sales on select items and clearance events during the first and third Friday of each month.

But observers say the ads — which mimic rival Target's whimsical style — are confusing. In one TV spot, for instance, a dog continuously jumps through a hula hoop that a young girl is holding. The text reads: "No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start."

Wendy Ruud, a resident of Boca Raton, Fla., says she doesn't understand the ads. Furthermore, she has stopped shopping at Penney because she no longer gets coupons from the retailer. "I haven't really tried to educate myself" on the plan," Rudd, 49, said. "But then I shouldn't have to."

The first sign that Penney's new pricing plan wasn't resonating with customers came last week when Macy's CFO Karen Hoguet told analysts that sales were rising at Macy's locations that share the same mall as Penney stores. Then, on Tuesday, J.C. Penney Co. reported that it lost $163 million, or 75 cents a share, in the three months ended April 28, compared with a profit of $64 million, or 28 cents a share, in the year-ago period.

Revenue dropped 20 percent to $3.15 billion for the quarter as customer traffic slipped 10 percent. Meanwhile, revenue at stores opened at least a year — a figure used to measure a retailer's health — was down 18.9 percent. That's a much steeper fall than the 11.4 percent drop Wall Street was expecting.

Penney, based in Plano, Texas, also said it would discontinue its 20 cent per share quarterly dividend so that it could reap cash savings of $175 million to fund its transformation.

Investors, who had sent Penney shares soaring 24 percent to about $43 after Johnson announced the pricing plan in late January, had already been sent Penney's shares down to around $34 since after the pricing plan was rolled out. Then, on Wednesday, the day after Penney reported the disappointing results, its stock fell 19.7 percent, or $6.57 to close at $26.75— the largest percentage drop since Oct. 19, 1987 when shares slid 19.2 percent to $19.50.

David Abella, a portfolio manager at money management firm Rochdale Investment Management, could see this as a buying opportunity because the Penney's shares are cheaper now. But he says he's holding off on buying Penney's shares because he's worried about the company's 20 percent drop in sales at a time when many other retailers have enjoyed better results.

"This only reinforces my skeptical feeling," said Abella, who added that he could buy Penney stock if he sees signs that shoppers are starting to warm up to the new pricing plan . "I haven't ever seen anything that bad in a decent market."

Penney now is looking to shore up confidence. The company plans to tweak its ads to better spell out the pricing, including how much lower the everyday prices are from last year.

The retailer also said starting in the fall, 47 percent of its merchandise will be new — the result of moves to dump some brands while redesigning others. It also announced a slew of new brands that will have exclusive collections at Penney, including Betsey Johnson and Michael Graves.

Those changes are in addition to ones Penney previously announced. Penney also reiterated its plans to add about 100 shops within each of its stores by 2015 that will either focus on one brand or a variety of labels. The company also is planning to add areas in its stores called Town Squares to offer services and advice.

Analysts say those moves will go a long way toward drawing shoppers in and restoring confidence. "They really have to fix the merchandise," said Craig Johnson, president of retail consultant Customer Growth Partners, who attended Tuesday's meeting.