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JC Penney feeling the pain of its overhaul strategy

November 9, 2012: 11:54 AM ET

Click the chart to track shares of JC Penney.

JC Penney continues to struggle amid a massive overhaul effort.

Shares tumbled Friday, after the department store posted a $203 million loss for the third quarter.

JC Penney's (JCP) loss amounted to 93 cents a share for the quarter, more than thirteen times worse than what analysts were expecting. And sales at stores open at least a year declined more than 26% , the most since CEO Ron Johnson took the helm a year ago.

The company's total sales of $2.9 billion were also well below expectations, and customer traffic declined 12% during the quarter.

Related: J.C. Penney offers kids free haircuts

Within his first few months at the company, Johnson, who previously worked at Apple (AAPL) and spearheaded that company's retail store strategy and Genius Bar, made huge changes. He got rid of coupons and introduced a "Fair and Square" price plan that, after some revisions, boasts just two price levels: everyday low prices and clearance promotions.

During the course of the year, JC Penney has also been trying to implement its boutique 'store within in a store' floor plan, which will eventually carve out the entire department store into 100 brand name shops. While the company has continued to make progress there, JC Penney is also still operating within its old format.

"Today, JCP is really a tale of two companies," said Johnson, calling the old JC Penney a promotional department store and the new JCP a specialty department store. "By far the largest part of our store is the old JC Penney, which continues to struggle and experience significant challenges as evidenced by our third-quarter results.  However, the new JCP, centered around the shop concept, is gaining traction with customers every day and is surpassing our own expectations in terms of sales productivity, which continues to give us confidence in our long-term business model."

So far, the company has transformed about 11% of its 65,000 square feet in JC Penney department stores into JCP, said Johnson during a presentation of the company's financial results. And with that, JCP is generating twice as much in sales per square foot than the old JC Penney, he added.

During the third quarter alone, the company opened eight new shops, including Levi's, Izod. Liz Claiborne, The Original Arizona Jean Co. , and JCP brands, and converted 6 million square feet. Johnson said the company expects to complete its transformation of all 65,000 square feet by November 2015.

But as the makeover continues, JC Penney will still likely face big declines in its quarterly sales, which will add pressure to its bottom line, said Brian Sozzi, chief equities analyst at NBG Productions. Sozzi has a sell rating on JC Penney's stock, which has dropped more than 40% in 2012.

"The stores won't change overnight, and there's just no indication of improvement around the corner."

Sozzi is also concerned about Johnson's lack of adherence to JC Penney's pricing strategy.

While Johnson said the company is committed to its simplified price structure, JC Penney has continued to offer some promotions to draw old and new customers to its stores. Last month, the company sent clients a note from Johnson and included a "$10 off " promotion.

Critics panned the move, saying it countered Johnson's strategy for no coupons and is confusing to customers, but Johnson said the $10 was a "gift," adding that customers "might see it again."

Related: Toy stores fear Sandy effect on Black Friday

Johnson also said JC Penney will be running its "only sale of the year" on Black Friday, the highly-anticipated shopping event after Thanksgiving Day.

"Black Friday is an American tradition," said Johnson, "The sale is going to be a doozy. If you're going to do one, it might as well be a good one. You're going to see the lowest prices in the history of JC Penney."

Johnson said the company will also be offering complimentary family portraits during the holidays, in addition to its free haircuts for kids on Sundays.

But Sozzi said Johnson's flip-flopping is clearly a sign that the company is struggling to get customers into their stores.

"They've admitted to losing traffic," Sozzi said. "Customers come in for the promotions but don't come back again. They're not seeing JC Penney as the low price destination. They're trained to look for promotions and discounts."

JC Penney shares fell as much as 10% Friday, but pared back the losses. The stock was down about 6% midday.

"Part of the market is still willing to believe that Johnson's got some juice, and what's he's doing has credibility," said Sozzi. "They're hoping that there's still opportunity to drive better sales and earnings going forward. But the fact of the matter is, I'm not seeing any indications of that."

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Hibah Yousuf
Hibah Yousuf
Reporter, CNNMoney

Hibah Yousuf is a reporter at CNNMoney, where she covers stocks, bonds, commodities and currencies trading across the globe, as well as corporate earnings and other markets-related news. Prior to joining the site in 2009, she interned at Money Magazine.

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