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J.C. Penney (NYSE:JCP) has struggled mightily in 2012 as new CEO Ron Johnson has implemented his strategy of improving merchandise selection and presentation while doing away with coupons and most sales. In the first half of the year, sales plummeted by more than 20% year over year. A large percentage of formerly loyal J.C. Penney customers stopped shopping there because of the elimination of discounts. Price-conscious shoppers have given more of their business to chains like Macy's (NYSE:M) (which achieved a 3.7% increase in comparable store sales in the first half of the fiscal year) and off-price retailer TJX (NYSE:TJX) (which saw an 8% gain in comp store sales in the first half).

J.C. Penney's management has already made some adjustments to marketing and pricing in an attempt to improve performance going forward. However, the company's latest move represents an even more shocking departure from the strategy. On Thursday morning, CEO Ron Johnson sent a mass e-mail to customers touting new products and the no-coupon policy. At the bottom of the e-mail Johnson offered customers a $10 "gift card" good towards any purchase of $10 or more through November 4. This offer seems awfully similar to the $10 off a purchase of $10 coupons that used to be a staple of J.C. Penney's promotional strategy under the previous management team.

While a J.C. Penney spokesperson stated that the offer was a gift and not a coupon, Deutsche Bank (NYSE:DB) analyst Charles Grom agrees that the difference is purely semantic. Presumably, management's goal is not only to drive near-term sales, but also to bring customers into the store to see the recent improvements for themselves. The success of this move will be measured by whether customers who take advantage of the gift offer return again in the future (without the incentive of a coupon or sale).

However, there is a significant risk that having received one "gift card", most customers will hold out for another one before returning to the store. I believe that most people will see right through the coupon/gift card distinction. This could force J.C. Penney to offer more coupons during the holiday shopping season in order to drive traffic. All of J.C. Penney's primary competitors in the mid-range department store sector (Macy's, Kohl's (NYSE:KSS), and Dillard's (NYSE:DDS)) are certain to offer coupons and discounts this holiday season.

As I discussed at greater length in an earlier article, J.C. Penney is likely to miss current analyst targets for revenue and earnings for Q4 (and possibly also for Q3). The announcement of this gift card offer reinforces my belief that the company will continue to underperform. If J.C. Penney is forced to use more special gift card/coupon offers to drive traffic, margins will inevitably fall well below targets. Additionally, weak sales will prevent J.C. Penney from hitting its cash flow target, forcing further asset sales or a reduction in investment.

With J.C. Penney trading more than 8% higher on Thursday on news of this promotion and bullish comments from the CEO of Levi Strauss, there is currently an opportunity to sell into strength. While some of the store-in-store concepts (such as the Levi's denim bar) are driving increased sales of those brands, so far these pockets of success have done nothing to slow J.C. Penney's downward slide. It is possible that results will improve dramatically once stores reach a "tipping point" of having 30 or 40 shops. However, it is equally likely that brands with a "shop" format have been cannibalizing sales from other brands that J.C. Penney has discontinued or de-promoted. If the latter is the case, any recovery in sales would be painfully slow.

While I closed my short position below $24 last week (due to the quick drop in stock price), I will now consider re-opening that position if the stock continues to trend higher. My price target for JCP remains $20.

Source: Return Of The Coupon: Another Big J.C. Penney Gamble Bound To Fail?