Mastery Wins: JC Penny's Crashes

Tard Town

JC Penny's released not-so-great quarterly earnings yesterday, and shares are down nearly 20%. Mastery called it.

Back in February, when shares were trading at $41 and change, we penned the article: Is JC Penny's new CEO really a good bet?

Here's what we said: We're not impressed. Our opinion is all the gimmicks in the world won't help JC Penny's in the short term. There is a big difference between selling genius products envisioned and built by Steve Jobs than selling Dockers and Levi's. And Martha Stewart and Ellen DeGeneres, really?

With a P/E of 54, JCP is extremely overpriced at these levels. Who knows, maybe Ron will turn things around a couple years down the road, but in the short term, JCP is ripe for a short. The April $40 Puts are trading at $1.90 right now - if JCP misses and guides down, shares could easily fall back to the low $30's. Just look at the trend of their earnings.

Wow, talk about nailing it. Here's more news from the earnings call:

J.C. Penney Is the New Sears: Ron Johnson Has Done Incalculable Damage, Davidowitz Says The Daily Ticker
J. C. Penney - OUCH!!! at Forbes
J.C. Penney Plummets 17% In Worst Day Since 1987's Black Monday at Forbes
JC Penney tumbles after poor sales at Financial Times

And here's an exceprt from the "Ron Johnson Has Done Incalculable Damage" piece:

J.C. Penney (JCP) shares tumbled Wednesday after the retailer reported a much wider-than-expected first-quarter loss, suspended its dividend and saw weakness across all core metrics.

In an apparent rebuke to new CEO Ron Johnson's strategy to change the company's focus from discounts to everyday low prices, total sales fell 20% while same-store sales declined 19% and gross margins fell to 37.6% from 40.5% as foot traffic in the stores dropped 10%.

"Our marketing isn't doing the work," Johnson said in a conference call. "We've got to get our pricing across. Coupons were a drug, they really drove traffic. [Customers] need to understand the value we're offering."

But it's Johnson, not J.C. Penney's customers, who has a problem understanding what the retailer needs, says Howard Davidowitz, a veteran retail banker and CEO of Davidowitz & Associates.

"He's caused incalculable damage," Davidowitz says of Johnson, who joined J.C. Penney last year after running Apple's (AAPL) retail operations. "The customers are everything. They don't know what the hell he's doing."

Mastery Bottom Line:

It's not game over for JCP, however, they suspended their dividend payments until futher notice. This does not bode well for the share price, and we expect JCP to trade under $20 in the next year.