By ANNE D’INNOCENZIO
By ANNE D’INNOCENZIO
Associated Press
NEW YORK — Wall Street doesn’t seem to like J.C. Penney’s new everyday low pricing any better than Main Street does.
The department store chain’s stock plunged nearly 20 percent on Wednesday— the biggest decline since the 1987 market crash. The drop comes a day after Penney said it would no longer pay out a dividend and blamed its first-quarter loss on poor reception by shoppers to its strategy of getting rid of hundreds of sales each year in favor of predictable low prices every day.
The pricing plan, which was rolled out on Feb. 1, aims to stop the cycle of heavy discounting and discourage customers from waiting for sales. But the reaction by investors and shoppers shows how difficult it will be for Penney to change the mindset of consumers who have been conditioned to expect blockbuster deals from Penney during the economic downturn.
It also puts more pressure on new CEO Ron Johnson, a former Apple executive who is trying to transform Penney from a has-been to a retail darling. The same investors that initially supported the man who masterminded both Apple’s successful retail stores and Target’s cheap chic strategy prior to that, now seem to be losing confidence in Johnson’s plan.
“The honeymoon is definitely over for Johnson,” said Brian Sozzi, chief equities analyst at NBG Productions, an independent research firm. “He sold the (pricing) story hard.”
Penney did not return calls seeking comment, but Johnson asked investors to be patient during a meeting with them on Tuesday. He acknowledged that Penney has a long way to go toward convincing shoppers not to wait for sales.
But he said he needed to make a bet on predictable pricing in order to turn around Penney, which has been struggling in recent years because of the economic downturn and increased competition. Going forward, he said the company will do more to better communicate the benefits of the new pricing strategy to shoppers in ads.
“Our first 90 days are little tougher than we expected,” Johnson told them. “We learned. Coupons are a drug. They really drove traffic.”
Penney has long said the pricing plan would take time to work. But Johnson has tempered his tone since January when he announced the strategy that was supposed to make pricing simpler. Unlike Wal-Mart’s iconic everyday low pricing, Penney’s strategy doesn’t try to undercut competitors, but rather focuses on offering customers predictable prices.
Penney rolled out a series of ads intended to familiarize customers with its three-tiered strategy. The plan features everyday prices that are about 40 percent less than a year ago, monthlong sales on select items and clearance events during the first and third Friday of each month.
But observers say the ads — which mimic rival Target’s whimsical style — are confusing. In one TV spot, for instance, a dog continuously jumps through a hula hoop that a young girl is holding. The text reads: “No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start.”
Wendy Ruud, a resident of Boca Raton, Fla., says she doesn’t understand the commercials. Furthermore, she has stopped shopping at Penney because she no longer gets coupons from the retailer.
“I haven’t really tried to educate myself” on the plan,” Rudd, 49, said. “But then I shouldn’t have to.”
The first sign that Penney’s new pricing plan wasn’t resonating with customers came last week when Macy’s CFO Karen Hoguet told analysts that sales were rising at Macy’s locations that share the same mall as Penney stores.
Then, on Tuesday, J.C. Penney Co. reported that it lost $163 million, or 75 cents a share, in the three months ended April 28, compared with a profit of $64 million, or 28 cents a share, in the year-ago period.
Revenue dropped 20 percent to $3.15 billion for the quarter as customer traffic slipped 10 percent. Meanwhile, revenue at stores opened at least a year — a figure used to measure a retailer’s health — was down 18.9 percent. That’s a much steeper fall than the 11.4 percent drop Wall Street was expecting.
Penney, based in Plano, Texas, also said it would discontinue its 20 cent per share quarterly dividend so that it could reap cash savings of $175 million to fund its transformation.
Investors, who had sent Penney shares soaring 24 percent to about $43 after Johnson announced the pricing plan in late January, had already pushed Penney’s shares down to around $34 since after it was rolled out in stores. On Wednesday, a day after Penney reported the disappointing results, its stock fell 19.7 percent, or $6.57 to close at $26.75— the largest percentage drop since Oct. 19, 1987 when shares slid 19.2 percent to $19.50.