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Publication: "USA Today"
Publication title: "J.C. Penney's shares in free-fall after 1Q loss"
Publication Date: 5/16/2012
Brief Summary:

According to this article, the new J.C. Penney Company, Inc. (JCP - 28.01) CEO, Ron Johnson, thought he was onto something when he introduced the company's new pricing plan back in February. In a rigorous attempt to boost the ailing store into a true retail competitor, the former Apple Inc. (AAPL - 572.27) executive axed the need for gimmicks such as coupons and brief door-buster deals in favor of offering consistently low prices and month-long sales. However, this full-court press was met with consumer skepticism -- if not blatant hostility -- which was reflected in the retailer's weaker-than-expected first-quarter earnings. In fact, the disappointing results led the stock to notch its steepest percentage drop since 1972.

So where did JCP go wrong? As the author points out, it boils down to consumers believing they are getting a good deal. The article notes that, in addition to a lack of coupons, some former customers also cited the company's confusing commercials as another reason for flying the proverbial coop. Although Johnson acknowledged this unenthusiastic consumer response in a recent meeting with investors, he remained committed to the strategy and asked them to be patient as the new pricing structure takes root. Moving forward, the company plans to simplify its ads while clarifying the benefits of consistently low prices versus coupons. However, as one portfolio manager stated, the fact that other retailers are reporting positive results makes JCP's sharp decline that much more troublesome. "This only reinforces my skeptical feeling," he said. "I haven't seen anything that bad in a decent market."

Contrarian Takeaway:

JCP has been a technical underachiever in recent months, having swallowed a year-over-year loss of 22%, as well as a year-to-date decline of more than 20%. The equity has also lagged the broader S&P 500 Index (SPX) by about 25% during the 60 sessions. Thanks to an earnings-related bearish gap in mid-May, the stock is now trading well below its formerly supportive 200-day moving average.

Despite JCP's technical weakness, there is still plenty of optimism lingering toward the department store chain among the options crowd. The 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 1.36, confirming that calls bought to open have comfortably outnumbered puts during the past two weeks. This ratio ranks in the 70th annual percentile, indicating that traders have been scooping up bullish options over bearish at an accelerated clip. What's more, the equity sports a 50-day call/put volume ratio of 1.23, which arrives in the 79th percentile of its annual range -- signaling that speculators have been showing a healthier-than-usual appetite for calls over puts during the past few months.

Further reflecting this penchant for calls over puts is the fact that the front-month series of options is home to a host of call open interest. Specifically, the June 28, 29, and 30 strikes hold open interest of nearly 8,000 contracts, collectively. Moving forward, these areas could translate into layers of options-related resistance, creating a headwind for the security.

Meanwhile, Thomson Reuters pegs the stock's average 12-month price-target at lofty $33.29 -- representing a considerable premium of nearly 19% over Tuesday's closing price of $28.01. This leaves plenty of room for price-target cuts down the road, which could exacerbate JCP's technical woes.

Considering the equity's poor performance on the charts lately -- along with its dismal first-quarter earnings report -- Wall Street's pessimistic outlook of JCP certainly isn't unfounded. The retailer will need to revamp its efforts to win back the hearts of bargain shoppers in order to turn its business back in the right direction.

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