You'll be hard-pressed to find an uglier quarterly report out of the retail sector than what J.C. Penney (JCP) delivered on Tuesday night.
Investors figured that new CEO Ron Johnson's "Fair and Square" pricing strategy wouldn't be a hit right away, but no one assumed that the recently remodeled department store chain would be this earnings season's biggest disaster.
- Sales plunged 20%, dragged down by a shocking 18.9% drop in comparable store sales. In other words, the average store generated nearly 19% less in revenue than it did during last year's fiscal first quarter.
- Analysts were already braced for a loss, but J.C. Penney's quarterly deficit of $0.25 a share was more than double the red ink that the pros were expecting.
- J.C. Penney is suspending its quarterly dividend. That's a huge red flag, indicating that the chain is desperately trying to preserve its money.
All's Fair and Square in Love and Retail
J.C. Penney's stock opened sharply lower on Wednesday after the report, providing a grim contrast to the sharp rise in the shares last year when Johnson was tapped as the retailer's new helmsman back in November.
Johnson came from Apple (AAPL), where he headed up the tech giant's entry into retail. He grew the Apple Store concept into a 300-unit empire raking in $15 billion in annual revenue. Before that he was an executive in the 1990s at "cheap chic" leader Target (TGT).
Apple? Target? Investors went wild when J.C. Penney landed Johnson, and they cheered again when he introduced the "Fair and Square" makeover that would replace the chain's history of frequent sales and perpetual markdowns on aging inventory with everyday low pricing.
I didn't buy it, arguing when the new strategy was implemented in February that J.C. Penney will never be great again. Apparently, I'm not the only one that's not buying it.
The move to simplify J.C. Penney's pricing is either alienating core customers or -- ironically -- complicating things for shoppers. Store traffic fell 6% during the week and a more problematic 10% over the weekend.
Pair the store traffic metric with the nearly 19% slide in comps and you get the double whammy of fewer shoppers and the average shopper spending less at the store.
On the Clock
Believers will argue that Johnson is just getting started.
He has a multiyear plan in place. By the time he's done, J.C. Penney will look far different than the sleepy retailer that it was before he arrived, and hopefully a lot different than the sinkhole that it was this past quarter.
The next major phase of Johnson's plan will kick in later this year, as 80 to 100 brand-specific areas -- or stores within the store, if you will -- pop up in a "Main Street" setting that Johnson envisions for J.C. Penney.
However, with the company $3 billion in debt and now apparently in capital preservation mode after nixing its dividend, Johnson may not have the luxury of time to see his four-year plan through. His halo has come off, and even the $900 million in savings that he was projecting over the next two years is in doubt.
The number of skeptics is growing as the share price sinks.
A Penney for Your Thoughts
Nobody seemed to question Johnson's vision when he arrived, but the first quarter of the department store chain under the "Fair and Square" pricing and its new minimalist logo aren't paying off.
It's now fashionable to be cynical.
After all, how is someone supposed to find what they want in a sea of 80 to 100 mini areas? What's the point of promoting everyday low pricing when there will still be month-long promotions, extra markdowns on the first and third Friday of the month, and a scheme of colored price tags to figure out?
Johnson had it easy at Apple, with its premium products and selective retail distribution. Apparel is everywhere, and there's no cult of J.C. Penney shoppers that will jump on anything that the retailer puts out.
There's no such thing as an iBlouse. There will never be an iBlouse.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.