Works in Progress: Sears and J.C. Penney

Clothes on hangers
Clothes on hangers

Shares of J.C. Penney Co. Inc. (NYSE: JCP) are down nearly 18% in the first few minutes of trading this morning following a disastrous quarterly earnings report delivered after markets closed last night. For the past 12 months, shares are down about 58%.

Sears Holdings Corp. (NASDAQ: SHLD) reported earnings this morning that were better than expected, and shares are also down, but by less than 1%. Sears stock is down about 32% over the past 12 months.

For the prior two years, shares of both retailers are down about the same amount, 49% at J.C. Penney and 43% at Sears. In those two years, Sears has spun off its Hometown stores and offered more public shares for its Canadian stores. The added benefit to Sears is that the spin-off has lowered its costs and the company has taken other steps to cut expenses.

J.C. Penney has taken a different route. The company jettisoned its coupons and weekly sales in favor of raising the retailer's image. That has driven costs higher and, to make matters worse, customers who shopped at Penney's loved the coupons and sales and have abandoned the store in droves as the image upgrade has not made up for the low prices they were used to and wanted.

Can J.C. Penney get its mojo back by returning to coupons and sales, as CEO Ron Johnson said last night the retailer would now do? Maybe, but if the store continues to invest in the image upgrade and to cut margins with sales and coupons, traffic to the store will have to double in order to pay all the bills. How likely is that? Not very.

Johnson as much as admitted that his planned makeover of J.C. Penney was a bust. Chances are he has just two or three more quarters to turn the company around. He is very unlikely to be able to do that. The worse news for J.C. Penney is that if they decide to change CEOs later this year or early next, what is the next poor devil going to promise? And how will he or she deliver? The 110-year-old retailer may simply not have the strength to recover.

Filed under: 24/7 Wall St. Wire, Retail, Services Tagged: JCP, SHLD