The only constant in life is change.

This fact is doubly true when it comes to the fickle world of fashion and retail. Fads will come and go as stores open and close. Consumers are always looking for the next hot item.

It’s a constant struggle for fashion retailers to stay one step ahead of the curve and know what customers want before they even know.

[ad#Google Adsense 336×280-IA]Many retailers are constantly looking for the next fad — which are good for business as they’re fast sellers — just to keep customers happy (think mood rings or the Silly Bandz).

So it’s no wonder that in this Internet era where consumers are much more retail-savvy, traditional retailers are struggling for survival.

And this well-known retailer, which has been operating for more than 100 years, is a great example.

I’m talking about JC Penney (NYSE: JCP).

This once-leading retailer has been struggling to get out hole for a long time.

In the third quarter of 2012, despite many business-transformation measures implemented throughout the year, the company still posted a loss of $123 million, after booking a $186 million profit in the same period a year earlier.

Overall sales plunged almost 27% to $2.93 billion. Gross margin dropped to 32.5% from 37.4% during the same time frame, and was negatively affected by lower-than-expected sales. Adding to the weakness, analysts predict the company has missed estimates about the holiday shopping season, traditionally considered a savior for retail.

The struggling retailer has fought back with hiring of a new CEO — the former Apple (Nasdaq: AAPL) retail chief no less — Ron Johnson, implementing a “store within a store” concept, and even offering free haircuts for kids.

Johnson had initially promised a “no discounting” policy, but by Black Friday he reversed the edict with waves of 20-50% sales on thousands of items, as The New York Post reported.

Many analysts have jumped on the bearish bandwagon, estimating a 28% plunge in same-store sales for the fourth quarter of 2012, despite all these changes. Even Johnson doesn’t appear to be as optimistic as he was when he first took the helm of the striving retailer. “Winning over shoppers has been a bigger challenge than I anticipated,” he recently told Women’s Wear Daily. And unlike Apple’s exclusive “hot” products, anyone can buy what JC Penney sells anywhere.

I was in a JC Penney’s last year and not only was the store was empty, but it had a poor selection of the polo shirts I was looking to purchase. To be sure, I have not seen the new “store within a store” concept, but I know it will demand a dramatic change in concept, price and product mix to regain the lost customers.

These once-happy JC Penney customers are cheerfully shopping elsewhere. It will take tremendous and well-implemented incentives to win back the critical mass of consumers the company needs.

With this said, it’s critical to note that activist investor and short-seller extraordinaire, Bill Ackman, is bullish on the company. He says Johnson will be able to turn the struggling retailer around within three years.

“If three years from now, Ron Johnson is still struggling to turn around JC Penney, he’s probably the wrong guy,” Ackman told Reuters.

Despite Ackman’s hedge fund Pershing Square having a long position in the shares, those words don’t sound so optimistic to me — at least for the short term. Three years is forever in stock market time, so I wonder if even Ackman will hang on to the shares that long.

Taking a look at the technical picture, I think this stock is a perfect short below the $22 level.


Risks to Consider: The risk of going short is if the company announces a surprising turnaround in the fourth quarter of 2012 or in the first quarters of 2013. But keeping tight stops at $22 will mitigate much of the short side risk.

Action to Take –> If you own shares in this retailer, then it’s time to dump the stock. If you don’t own it, then this could be a solid shorting opportunity.

Shorting this stock now with stops at $22 makes sense. If shares travel above the $22 level, then another look at the fundamental picture is in order.

— David Goodboy

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Source: StreetAuthority

David Goodboy does not personally hold positions in any securities mentioned in this article.  StreetAuthority LLC does not hold positions in any securities mentioned in this article.