As if J.C. Penney didn't have enough to worry about, in its third-quarter financial filings this week, the company disclosed a brand-new risk facing the struggling retailer: employee turnover.

It turns out the company's cost-cutting efforts may have been too successful. They have significantly reduced head count. But that threatens to weaken morale at a crucial time in the retailer's turnaround efforts.

J.C. Penney began the year with about 160,000 associates, the same number it reported at the beginning of 2011. But that was before a huge dip in sales took hold of the business. After booking flat comparable-sales growth in 2011, the company's first three quarters of 2012 have been absolutely brutal, with sales drops of 19%, 22%, and 26%, respectively. Companies have been cutting jobs throughout the recession and its aftermath, but few have had to manage as sharp a dive in revenue as J.C. Penney.


To try to bring costs more in line with that rapidly falling revenue, the retailer axed underperforming stores and brought down the head count at all levels of the business. For example, early retirement plans were offered to thousands of employees and about 4,000 people took the chance to voluntarily leave the business. J.C Penney says that just about all of the workforce reduction was completed in the third quarter of this year.

But that level of downsizing is bound to have a negative effect on a business. And in its most recent earnings release, J.C. Penney took a stab at laying out the potential downside to all those cost savings:

These reductions ... have resulted in a substantial amount of turnover of officers and line managers with specific knowledge relating to us, our operations and our industry that could be difficult to replace. We now operate with significantly fewer individuals who have assumed additional duties and responsibilities ... These workforce changes may negatively impact communication, morale, management cohesiveness and effective decision-making.

So the company brought down its labor-related costs, but at the risk of taking a big hit to morale and management effectiveness. If the company is going to meet its ambitious turnaround plans, CEO Ron Johnson will need the entire management team performing at an extremely high level. But that goal has been made all the more difficult by significant cuts in the employee base.

Investors wondering whether J.C. Penney is a buy today are invited to claim a copy of The Motley Fool's new must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof -- and as a bonus, you'll receive a full year of expert guidance and updates as key news develops. Simply click here now for instant access.

The article 1 New Risk Facing J.C. Penney originally appeared on Fool.com.

Fool contributor Demitrios Kalogeropoulos has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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