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J.C. Penney's Feet to the Fire

NEW YORK ( TheDeal) -- When J.C. Penney Co. (JCP - Get Report) selected Ron Johnson as its CEO in November 2011, investors expected the wunderkind former Apple Inc. store designer would work some of his magic at a retail chain desperately seeking a 21st century makeover.

It's now the second year of Johnson's tenure at J.C. Penney and industry watchers are not only taking bets on when he will be fired but whether the old-line retailer will join be relegated to the final markdown of retail history.

According to industry sources, vendors are tightening credit and private equity firms are already circling. J.C. Penney shares have lost 55% in the past 12 months months. Shares were gaining 1.4% to $15.67 on Monday.

If J.C. Penney can use its assets to buy time, and Johnson can pull off the much-hoped-for transformation of the dowdy retailer, backers such as Bill Ackman's Pershing Square Capital Management LP will have their "I told you so" day.

J.C. Penney's board is certainly keeping Johnson's feet to the fire, slashing his pay 97% in 2012 and refusing to award bonuses to its CEO and most top executives, according to regulatory filings.

Any sane board would take those steps after the dismal figures that were the fourth quarter 2012, which ended Feb. 2: a 28.4% decrease in sales to nearly $3.9 billion, with comparable store sales down 31.7% and Internet sales dropping 34.4% over the same time in the prior year. The company also had a net loss of $552 million for the quarter, while operating cash flow was $645 million compared to $953 million for the fourth quarter of 2011.

And industry observers are already predicting poor first-quarter results.

Former Morgan Stanley retail analyst Walter Loeb, who now writes for Forbes, predicted that first-quarter sales could decline another 22%.

Anthony Karabus, president of financial advisory firm Hilco Trading LLC's SD Retail Consulting practice, said that the transformation of J.C. Penney was needed and the concept of a store-within-a-store, which would help introduce new brands to attract a younger customer, is the right path.

The problem is that as J.C. Penney tried to modernize its image, it also alienated its older core customers by doing away with its popular coupon programs, Karabus said, and the influx of new customers wasn't happening fast enough to make up for the outflow of the old.

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