Market Overview

JC Penney Continues to Tumble Following Earnings

Shares of J.C. Penney (NYSE: JCP) dropped on Monday, falling over 10 percent.

The price action may have been particularly worrisome; J.C. Penney's loss on Monday followed a trading session on Friday in which shares traded lower.

The retailer reported earnings Friday morning that disappointed investors. In the third quarter, J.C. Penney reported a loss of $0.93 per share -- analysts were expecting a loss of only $0.07 per share. Revenue also failed to meet expectations, coming in at $2.93 billion, less than the $3.27 billion analysts were looking for.

Even worse, the company burned through a tremendous amount of its cash. Same-store sales fell 26.1 percent while gross margin dropped from 37.4 percent to 32.5 percent.

Current CEO Ron Johnson took control of the company in the summer of 2011. At the time, many believed Johnson -- after successful stints at Target (NYSE: TGT) and Apple (NASDAQ: AAPL) -- would usher in a new era at the century-old retailer.

Unfortunately, things have not gone according to plan. Johnson's strategic shift to ditch coupons and abandon aggressive discounting may have confused J.C. Penney's core customer. Its marketing campaign has also failed to deliver, with Johnson opting to dismiss marketing heading Michael Francis back in June.

Credit Suisse downgraded J.C. Penney on Monday, lowering its rating from Neutral to Underperform. Analysts noted that the company's cash position was “dwindling” and stated that management must find a way to stem declining sales within the next six months. They added that the company's technological transformation -- touted by Johnson as a great opportunity -- could create a challenging internal environment.

Credit Suisse lowered its price target on the retailer to $15. If that proves accurate, shares still have a bit to fall, as J.C. Penney traded near $18.60 on Monday afternoon.

In terms of the options market, puts outpaced calls on Monday, suggesting that traders remain firmly bearish. Short interest is high in the name, hovering around 30 percent.

Adventurous traders might look for a short covering rally to propel shares higher in the short term. Hedge fund magnate Bill Ackman has a large stake in the company, and has defended his position in the past. A rousing public defense by Ackman might prompt a relief rally. Also, should Black Friday prove to popular this season, all retailers -- including J.C. Penney -- might see their shares move to the upside.

Those looking to invest long-term should realize the inherent risks. Johnson's strategy appears to be floundering. Perhaps, years from now, investors will look back and angrily curse themselves for not seeing the opportunity. Yet, at the present time, there appears to be little evidence to suggest that this will be the case.

Posted-In: Earnings News Downgrades Hedge Funds Price Target Management Intraday Update Analyst Ratings Best of Benzinga

 

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