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Why J.C. Penney's Shares Dropped

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of mall retailer J.C. Penney (NYSE: JCP  ) were going on sale today, falling 11% after the company revealed that the second half of the year isn't going to look so hot.

So what: Thus far, the efforts of former Apple executive Ron Johnson to revive J.C. Penney could be seen as a confirmation of the well-known Warren Buffett quote:

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Though Johnson came to Penney with big ideas, he's hit some serious bumps in the road in realizing his vision, and the company's performance -- not to mention the stock's performance -- has been abysmal. And it doesn't sound like it's going to get better quickly. Based on what the company said during a presentation yesterday, management expects that the second half of the year won't look much different than the ugly first half.

Now what: This drama reminds me of the trials of fellow mall-based retailer Sears Holdings (Nasdaq: SHLD  ) when Eddie Lampert took over. Investors had high hopes for Lampert, but those hopes fizzled as the retailer continued to struggle to compete.

What should be noted by investors, though, is that this is a much different situation than with Sears. With Sears, investors staked their hopes on the potential for some financial engineering by Lampert to wring a whole bunch of value out of a struggling retailer. To date, the fact that Sears is a struggling retailer seems to have the upper hand. With J.C. Penney, though, Johnson has recognized that the business needs to be revamped, and the explicit focus has been on making Penney a better retailer.

Obviously, these changes have been painful in the short term, and there's no guarantee that they'll work out in the long term -- particularly if investors lack the patience to see them play out. But if there's a prayer for Penney to turn around, a revamp along the lines of Johnson's seems to be the right move.

Want to keep up to date on J.C. Penney? Add it to your watchlist.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (2) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 20, 2012, at 7:48 PM, mr091468 wrote:

    The only way JCP can get customers back into their stores is to price their merchandise like Walmart. Otherwise, so long, JCP.

  • Report this Comment On September 20, 2012, at 9:23 PM, FutureMonkey wrote:

    There are more ways to attract customers than the lowest prices. I abhor the shopping experience at Walmart and there is no price low enough to get me through the door. Fresh, clean, comfortable, and smartly priced is what JCP is pursuing...the problem - that niche is dominated by Target. So, the real question, can Penny's steal market share from Target. Gotta get those loyal Target shoppers to even try JCP first, then better beat their expectations to keep them coming back. Tall order on both counts. But, I'd be willing to fly some CAPS points, not even considering real dollars at this time without a much deeper evaluation of balance sheet and downside risk.


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Related Tickers

10/21/2016 12:40 PM
JCP $8.84 Up +0.18 +2.02%
J.C. Penney CAPS Rating: *
SHLD $11.53 Down -0.36 -3.03%
Sears Holdings CAPS Rating: *