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J.C. Penney Turnaround in Doubt as Sales Plummet

J.C. Penney, which is in the early stages of a multiyear turnaround, reported a 26 percent decline in third-quarter sales at stores open at least a year, a steeper drop than the 17.9 percent that Wall Street analysts were expecting.

Penney said its net loss had narrowed to $123 million, or 56 cents per share, in the third quarter ended Oct. 27 from $143 million, or 67 cents per share, a year earlier.

Excluding items, the retailer reported a loss of 93 cents per share, much wider than the 7 cents per share loss the Street was expecting.

Revenue dropped to $2.93 billion, compared to expectations of revenue of $3.27 billion.

Penney has eliminated most coupons and sales events and plans to transform about 700 of its 1,100 stores into a collection of 100 boutiques, such as Levi's Denim Bar, by 2015.

There have been signs that the first few shops, which also include Izod and Liz Claiborne, have won over customers, but they still only represent a small fraction of sales.

Penney customers, who are more price-sensitive than those at Macy's, have balked at the absence of coupons, and the sharp drop in visits by shoppers has decimated sales in the three quarters since the strategy was put in place in February.

In a statement, CEO Ron Johnson, who took the reins a year ago and is the architect of the turnaround, said this was a "tale of two companies," with the old Penney still struggling and the new stores "surpassing" his expectations.

Johnson told CNBC earlier this year that he was optimistic about transforming the company's stores into a collection of "shops," breaking away from their traditional department store image.

As part of this turnaround, J.C. Penney eliminated the use of discounts and coupons, but later decided to issue a coupon after the company's sales dropped. According to analysts, customer traffic fell as shoppers lacked a clear reason to come into stores in the absence of discounts and coupons.

With Black Fridayapproaching, J.C. Penney was hoping to boost retail sales going into the holiday season. (Read More: CNBC's Holiday Gadget Guide 2012)

But Walter Loeb, president of retail management consultant Loeb Associates, expressed concern about Penney's performance during the upcoming holiday shopping season.

"I expect a big drop in sales" Loeb said. "(Johnson) must generate traffic. I think he has to be more promotional."

Penney made some concessions during the latest quarter. Last month it offered a $10 "gift" coupon and recently held 30 percent off clearance promotions, but Loeb said it needed to do much more.

Brian S. Sozzi, chief equities analyst at NBG Productions, noted that J.C. Penney ran "an odd 30 percent off clearance sale online, completely counter to its new 'fair and square' marketing message. The signal was basic investing 101: too many excess goods amid a below plan sales quarter for a retailer in a big-time turnaround situation."

He added that J.C. Penney is the "only retailer I know where: (1) online sales are not growing; and (2) online sales are far removed from brick and mortar comps. Either way, the data says: J.C. Penney is not a top destination and is nowhere near becoming a top destination in peak seasonal shopping periods."

After the earnings announcement, the retailer's shares skidded 8 percent in pre-market trading. (Click here to get the latest quotes for J.C. Penney.)

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