J.C. Penney’s Turnaround Is Failing and Investors Are Fleeing

Fortune.com - Wall Street has completely lost faith in J.C. Penney's (JCP, -10.02%) turnaround.

After the struggling department store chain on Friday reported a much worse than expected drop in sales for the first quarter, Penney shares, already near 40-year lows, plummeted 8% below $5 to hit a new all-time record.

Penney said on Friday that comparable sales, which include e-commerce but exclude recently closed or opened stores, fell 3.5% in the three months ended April 29, a much deeper drop than the 0.7% decline Wall Street analysts had been forecasting, according to Consensus Metrix. It was also Penney's biggest quarterly drop in years.

For a company that had been showing signs of coming back from near-death after an ill-advised attempt to be hip in 2013, reporting a fourth quarter of declines in the last five is disheartening.

So much for being the comeback kid in the department store world.

It's not that Penney has been sitting idly by. On the contrary, CEO Marvin Ellison has been moving quickly to try to keep Penney on track with moves such as bringing back appliances last year after 33 years, expanding the number of Sephora beauty shops within a Penney store, and introducing new plus-size apparel lines. What's more, giving in to reality, Penney is now finally closing 138 stores, the better to focus its resources on stores those with potential to survive the retail storm.

And that's precisely why investors are so bearish on the company. Those efforts, while apparently successful, show just damaged the rest of Penney's overall business is.

Ellison told analysts on a conference call that Penney's home section (at one point it was 21% of sales, now it's 13%) had seen sales growth. So the company is expanding its appliance area, aimed at taking advantage of Sears' ongoing implosion, and testing home services like heating, ventilation and air conditioning systems.

The retailer also touted its beauty business, lifted by its ongoing Sephora expansion as well as the remaking of its large salon business, one it says brings shoppers to stores.

But given how expensive appliances are, and how productive the beauty areas are by sales per square foot, it's fair to expect them to give a bigger kick to results. The dismal results suggest Penney's sales in apparel, its largest category, were catastrophic.

A case in point: athleisure. Executives said on a conference call with Wall Street that "the casualization of America continues" and pointed to the growth of activewear. But given that Penney launched its own line a few years ago, Xersion, and one it has featured prominently in stores, it shouldn't have seen apparel sales decimated by this trend.

To that end, Penney is upgrading its Nike (NKE, +0.17%) areas at 600 of its 1,000 stores, and adding women's gear to suddenly resurgent Adidas at 400.

Good moves, but it's worth remembering that Nike is also available at Macy's and Kohl's, both of which also sell Under Armour. (That brand gave Kohl's, struggling as mightily as Penney to keep shoppers, a shot in the arm last quarter.)

Given that Penney wants house brand items to eventually become 70% of sales, as outlined last year in a multi-year road map, it may want to rethink as its own brands are apparently not catching on.

Penney and those rooting for it can take some comfort in how abysmal results have been for its most immediate rivals, like Macy's, Kohl's, Sears and even Target.. And Penney did stick to its 2017 sales forecast, despite the weak start to the year.

But the travails of its rivals have not provided much of a boost to Penney or prevented it from entering another period of decline. (ontineReading