Short J.C. Penney on Price Change News

J.C. Penney JCP announced a dramatic shift in its pricing initiatives today under the new leadership of former Apple AAPL executive Ron Johnson. The company revealed that it is getting rid of hundreds of sales that it offers each year and is instead transitioning into a strategy of "Every Day" low prices. The new strategy will feature a straightforward, three-tier pricing model. First, sale prices, which have accounted for an unusually significant portion of the company's revenue, around 72% last year, will now become every day prices. Using sales data from last year, Penney will cut prices on all of its merchandise by at least 40% versus last year's regular prices. While this seems drastic, most of the company's revenues have been driven by promotional pricing in the past anyways. In addition to the shift to every day low pricing, Penney will also feature "Monthly Value" discounts and clearance "Best Price" deals which will be run during the first and third Friday of each month to correspond with when many consumers receive their paychecks. The new pricing initiative is a major transition for the company which has relied on constant promotions and sales to push inventory out the door. Last year, Penney offered a whopping 590 sales events. Furthermore, the company has relied on a strategy of pushing up retail prices and then running constant sales to make it appear as if consumers are getting great bargains. Although the previous strategy was gimmicky, to say the least, the new pricing initiative could have a tough time catching on with consumers who are used to steep discounts off of ticketed prices. While Penney's pricing shift may in fact result in better overall values for the chain's customers, investors worry about shopper's reaction. "The big question on investors' minds will be how customers react to a single price point versus a perceived discount under the old strategy," says Citi Investment Research analyst Deborah L. Weinswig. Charles Grom, a retail analyst at J.P. Morgan, offered up similar sentiments. He noted that Macy's M cut back on coupons several years ago and was subsequently forced to ramp promotional activity back up after sales fell. Grom said, "Shopper fatigue has been building for several years with the advent of the Internet and the ability for shoppers to compare prices. If (Johnson) can try to pull this off, it will be impressive. But it's hard for retailers to change the image of the company. He has a lot of wood to chop." The bottom line is that this is a major transition for the chain, and even if it is ultimately a smashing success, the stock could be under pressure in the near-term. Investors will not only be weighing the significant risks of the new strategy, but also likely concluding that there is little chance of the initiative being an overnight success. While Penney's management is clearly thinking about the long-term, investors may be inclined to sell in the short-term. Both Goldman Sachs GS and Morgan Stanley MS are taking this view. Yesterday, Morgan Stanley reiterated its Sell rating on the stock and $27.00 price target on JCP. In the wake of today's announcement, JCP initially gapped higher, but was immediately sold off. At last check, the shares were down 2.20% to $33.84. Goldman Sachs GS is also out with a note today advising clients to hedge their long positions in the name as they see 16% downside in the name. The firm is advising that their clients buy the $34 strike puts in JCP if they have a long position in the stock. J.C. Penney is expected to issue financial guidance tomorrow on the second day of an ongoing analyst presentation event where it initially unveiled the new pricing strategy. Goldman Sachs is telling clients that "In an effort to lower execution risk, we expect the new management team to give conservative financial guidance." Given this risk along with the steep inherent risks of the company's new pricing strategy, it is likely that JCP could see continued downside over the next couple of weeks.