J.C. Penney: Likely To Get Worse

After reporting disastrous financial results last night, J.C. Penney‘s (JCP) shares are down more than 16% today, trading at close to $18. The stock is down 57% in the past year; over the same period, Macy’s (M) is up about 9% and Nordstrom (JWN) has gained 1%.

But if you thought a 32% decline in same-store sales and a huge price drop were something like a bottom for Penney, think again.

Steven Azarbad, portfolio manager at hedge fund firm Maglan Capital, thinks even today’s decline fails to reflect just how badly Penney has fared in investor’s eyes.

“It�s a $15 stock that is actually seeing support today from its shorts. They�re covering, but once that stops or they take new shorts, it�s going down some more.�

Forty-three percent of Penney’s float is held by short sellers. Maglan took a short position on the stock two or three weeks ago, added Azarbad.

To put Penney’s poor performance in some context, the last time a major retailer saw a similar same-store sales decline in a quarter was nearly four years ago, when Abercrombie & Fitch (ANF) reported a 32% drop in June 2009, according to Thomson Reuters.

Azarbad explained why he thinks there’s little appetite for Penney’s stock.

�There�s very little from yesterday for people to get hold of as a good story: They didn�t mention February sales numbers, which suggests there isn�t something good to say, and they�re stretching their vendors. At some point this year they�re going to have to borrow money,� he said. �I think the next couple of quarters are make-or-break, but it�s crazy that this is all self-inflicted damage to the company.�

That last part is a reference to CEO Ron Johnson’s plan for the company he took over in late 2011. Famed for his successes with Target (TGT) and Apple (AAPL), Johnson tore up J.C. Penney’s playbook, wanting to streamline the approach to sales and discounts. All he’s done, it seems, is turn off the existing customer base while failing to attract a new crowd.

JPMorgan analyst Matthew Boss also struck a gloomy view about Penney’s near term outlook in a note published this morning:

In Q&A [on last night's conference call] CEO Johnson would not confirm a return to growth in FY13, commenting that the customer will dictate the timeline, but launch of new shops (particularly Joe Fresh and Home in May) will aid the transition (reining back specific FY13 return to growth comments made on 11/09). On recent trends, management spoke to flat YOY traffic on Valentine�s Day and President�s Day weekend, with strong conversion early in the year despite inventories down YOY�something we will be monitoring in stores closely.

Boss cut his price target for the stock to $15 from $18. As MarketWatch’s Andria Cheng wrote today, time may be running for Johnson.