J.C. Penney Digs Deeper Sales Hole

Amazons revenue continues to grow and JC penny and Sears revenue continue to decline. Banks credit to retailers suppliers of goods and services will be difficult to secure as previous credit models are no longer valid. Aivars Lode avantce

J.C. Penney Digs Deeper Sales Hole

By DANA MATTIOLI and KAREN TALLEY

J.C. Penney Co.'s JCP -4.84% sales last quarter went from bad to worse.

The department-store chain, in the middle of a long and painful turnaround under former Apple Inc. AAPL +1.73% retail executive Ron Johnson, said its sales fell 27% in the three months ended Oct. 27, a sign the company continues to stumble as the key holiday-selling season approaches.

The drop was worse than Wall Street analysts had feared, and shares in the Plano, Texas-based company fell as much as 10% on Friday before rebounding to finish down nearly 5% at $20.62 on the day.

• Corporate Intelligence: J.C. Penney Needs To Boom, Just To Get Back To Square One

Penney's sales over the first nine months of its fiscal year have fallen by $2.7 billion, nearly equivalent to the annual revenue of store chain Saks Inc. SKS +0.50%

Penney reported a third-quarter loss of $123 million, or 56 cents a share—narrower than the $143 million a year earlier as the company cut costs and spent less on restructuring.

Mr. Johnson, who joined Penney as CEO a year ago from Apple's vaunted retail operations, said the company wouldn't diverge from the strategy he laid out last January of sharply limiting discounts in favor of broadly lower everyday prices.

But the strategy has hurt customer visits and sales, while new products and in-store boutiques have failed to draw enough shoppers to offset the decline. Same-store sales slid 26% in the quarter, while Internet sales fell 37% to $214 million.

Some of the company's tweaks to that strategy have hurt as well. In August, Mr. Johnson eliminated discounts that Penney had called "monthlong values," or long-running sales on popular seasonal items. It turns out the promotions were popular with Penney's customers, who spent more than $1 billion on such items during the first half of the year. Eliminating monthlong values cost Penney $20 million a week in the third quarter, Chief Financial Officer Ken Hannah said.

Analysts at Deutsche Bank DBK.XE -2.32% recently called Penney's no-promotion pricing strategy confusing to customers, noting that the company advertised 30% off clearance items in an email last month. Deutsche Bank also pointed to a recent in-store $10 coupon, free haircuts for kids and an offer for free family photos this month, saying Penney is "backtracking on its no promotion strategy, confusing customers, and we, therefore, remain skeptical of near-term improvement in business trends."

Enlarge Image

J.C. Penney said its sales fell 27% in the three months ended Oct. 27.

Mr. Johnson told analysts on Friday that the $10 "gift" wasn't a coupon and said the company would likely send out similar offers in the future. He also said Penney would take part in the biggest sales day of the year: Black Friday.

"We'll run a sale, and it will be a doozy," he said. Penney has cut prices 40% on average since Mr. Johnson joined.

In more evidence that Penney's transformation and subsequent tweaks have proven confusing to shoppers, some regular customers say they haven't noticed that coupons disappeared.

"I still receive coupons in the mail," said Carmen Torres while shopping at Penney's Manhattan store on Friday. Ms. Torres pulled a $10 "reward card" from her purse, and says she has received similar offers in the mail in recent months.

Another shopper, 32-year-old Theolia Henry, was browsing a clearance rack of blouses. "It reminds me of Macy's M -0.21% but it is cheaper," she said.

Mr. Johnson has been emphasizing brand names in boutiques within Penney's stores. The retailer's game plan involves 100 shops-within-a-store at J.C. Penney, where everything from Martha Stewart merchandise to Levi's jeans are available in separate boutiques. In September, Penney unveiled plans to open more than 500 boutiques this fall with Walt Disney Co. DIS -5.96% products exclusive to the retailer.

Write to Dana Mattioli at dana.mattioli@wsj.com and Karen Talley at karen.talley@dowjones.com