The only constant in life is change.
This fact is doubly true when it comes to the fickle world of
fashion and retail. Fadswill come and go as stores open and close.
Consumers are always looking for the next hot item.
It's a constant struggle for fashion retailers to stay one step
ahead of the curve and know what customers want before they even
know. Many retailers are constantly looking for the next fad --
which are good for business as they're fast sellers -- just to keep
customers happy (think mood rings or the Silly Bandz).
So it's no wonder that in this Internet era where consumers are
much more retail-savvy, traditional retailers are struggling for
And this well-known retailer, which has been operating for more
than 100 years, is a great example.
I'm talking about
JC Penney (
This once-leading retailer has been struggling to get out hole
for a long time.
In the third quarter of 2012, despite many
business-transformation measures implemented throughout the year,
the company still posted a loss of $123 million, after booking a
$186 millionprofit in the same period a year earlier.
Overall sales plunged almost 27% to $2.93 billion.Gross margin
dropped to 32.5% from 37.4% during the same time frame, and was
negatively affected by lower-than-expected sales. Adding to the
weakness, analysts predict the company has missed
estimates about the holiday shopping season, traditionally
considered a savior for retail.
The struggling retailer has fought back with hiring of a newCEO
-- the former
Apple (Nasdaq: AAPL)
retail chief no less -- Ron Johnson, implementing a "store within a
store" concept, and evenoffering free haircuts for kids.
Johnson had initially promised a "no discounting" policy, but
byBlack Friday he reversed the edict withwaves of 20-50% sales on
thousands of items, as The New York Post
Many analysts have jumped on thebearish bandwagon, estimating a
28% plunge in same-store sales for the fourth quarter of 2012,
despite all these changes. Even Johnson doesn't appear to be as
optimistic as he was when he first took the helm of the striving
retailer. "Winning over shoppers has been a bigger challenge than I
anticipated," he recently told Women's Wear Daily. And unlike
Apple's exclusive "hot" products, anyone can buy what JC Penney
I was in a JC Penney's last year and not only was the store was
empty, but it had a poor selection of the polo shirts I was looking
to purchase. To be sure, I have not seen the new "store within a
store" concept, but I know it will demand a dramatic change in
concept, price and product mix to regain the lost
These once-happy JC Penney customers are cheerfully shopping
elsewhere. It will take tremendous and well-implemented incentives
to win back thecritical mass of consumers the company
With this said, it's critical tonote that activist investor and
short-seller extraordinaire, Bill Ackman, isbullish on the company.
He says Johnson will be able to turn the struggling retailer around
within three years.
"If three years from now, Ron Johnson is still struggling to
turn around JC Penney, he's probably the wrong guy," Ackman
Despite Ackman'shedge fund Pershing Square having a long
position in theshares , those words don't sound so optimistic to me
-- at least for the short term. Three years is forever instock
market time, so I wonder if even Ackman will hang on to the shares
Taking a look at the technical picture, I think this stock is a
perfect short below the $22 level.
Risks to Consider:
The risk of going short is if the company announces a
surprisingturnaround in the fourth quarter of 2012 or in the
firstquarters of 2013. But keeping tight stops at $22 will mitigate
much of the short side risk.
Action to Take -->
If you own shares in this retailer, then it's time to dump the
stock. If you don't own it, then this could be a solid shorting
Shorting this stock now with stops at $22 makes sense. If shares
travel above the $22 level, then another look at the fundamental
picture is in order.