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 in at least four decades, including the 1987 stock market crash. The drop came a day after Penney said it would stop paying dividends and blamed its large first-quarter loss on a poor reception from shoppers for its strategy of getting rid of hundreds of sales each year in favor of offering predictable low prices every day.
The plan, rolled out Feb. 1, aims to stop the cycle of heavy discounting -- and discourage customers from waiting for sales to shop. 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 who 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 to convince shoppers not to wait for sales.
But he said he needed to make this bet on predictable pricing because Penney has been struggling in recent years with the downturn and increased competition. Going forward, he said the company will do more to 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 to make pricing simpler. Unlike Wal-Mart's everyday low pricing, Penney's strategy doesn't try to undercut competitors but focuses on 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 lower than a year ago, monthlong sales on selected items and clearance events on the first and third Friday of each month.
But observers say Penney's latest ads -- which mimic rival Target's whimsical style -- are confusing. In one TV spot, 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. She has stopped shopping at Penney because it no longer sends her coupons.
"I haven't really tried to educate myself" on the plan, said Rudd, 49. "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 her company's stores that share malls with 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, a year earlier.
Revenue dropped 20 percent to $3.15 billion for the quarter as customer traffic slipped 10 percent. Meanwhile, revenue at stores open at least a year -- a comparison used to measure a retailer's health -- fell 18.9 percent. That's much steeper 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 to save $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, already had pushed Penney's shares down around $34.
On Wednesday, a day after Penney reported the disappointing results, its stock fell 19.7 percent, or $6.57, to close at $26.75.
That's the largest percentage drop since at least January 1972, when FactSet's daily stock price records begin. On Oct. 19, 1987, Penney's shares slid 19.2 percent to $19.50.
David Abella, a portfolio manager at money-management firm Rochdale Investment Management, said the stock price drop may have created a buying opportunity. But he says he's holding off because he finds Penney's 20 percent drop in sales worrisome when many other retailers' enjoyed much better results.
"This only reinforces my skeptical feeling," said Abella, who added that he may buy Penney stock if he sees signs that shoppers are warming to the new pricing plan. "I haven't ever seen anything that bad in a decent market."