Can J.C. Penney Survive This Carnage?

The plan of J.C. Penney (NYSE:JCP) chief executive Ron Johnson to streamline the company’s operations was admirable. He envisioned a company that could offer everyday low prices while boosting its offerings through a range of small boutiques from names such as Levi Strauss and Sephora. But Johnson’s attempt to revitalize the chain and transform the business, from pricing to customer experience, has not materialized, and it looks increasingly like it never will.

Johnson’s changes to the company’s pricing structure, which eliminated coupons and massive sales in favor of lower prices, drove customers away instead of drawing them in. Sales have dropped 23 percent since he cut prices last February, and in its most recent quarter, the company reported a larger-than-expected loss of $123 million. J.C. Penney has now shed nearly $5 billion in market capitalization since February 1, 2012.

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Now that one year has passed since the new pricing structure was implemented, the company’s future looks grimmer than ever.

On Wednesday, the New York Post reported that the company will fire at least 10 percent of the 3,000 employees at its home office in Plano, Texas. Sources told the publication that what insiders are calling the “St. Valentine’s Day Massacre” was originally scheduled for last month, but the layoffs were pushed back as the company wanted to “throw the severance costs into this year because last year was already so bad.”

This highlights a huge problem J.C. Penney is facing: it is running out of cash…

The retailer finished the third quarter with $525 million in cash, half of what its reserves held a year earlier. Johnson’s transition to the boutique model has further exacerbated the company’s poor sales. Before he took over in late 2011, J.C. Penney primarily sold private-label goods. His transformation plan called for that part of the business to fall to 25 percent or less of the total. This change has concerned critics, as private labels were a profitable business with higher margins. “Private label is what made it possible to have those other brands in the store in the first place,” a supplier executive told the Post.

During a Wednesday interview with CNBC, Johnson did not confirm the rumors of layoffs, but he did address the company’s massive customer exodus. He said customers had not understood the “everyday low prices” system just yet and that the reference prices will eventually resonate with them. Analysts at Maxim agreed with Johnson’s acknowledgement that it had been a tough year for J.C. Penney. The research firm initiated the company’s coverage with a “sell” rating and a price target of $10.

Johnson now has to scramble to deliver the $900 million cost savings he promised to make by the end of this year.

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