J. C. Penney Company Inc. ( JCP - Analyst Report ) seems to be in an unfavorable position as the soft economic environment continues to take its toll on the performance of this retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishing, as evident from its third consecutive quarter of lower-than-expected bottom-line results.

The company’s dismal performance for the third straight quarter compelled us to take a bearish stance on the stock, and therefore we went on to downgrade our recommendation to Underperform with a price target of $26.00. Earlier, we had a Neutral view on the stock.

Missing Zacks Consensus Estimates

We observe that despite a well-diversified supplier base, J. C. Penney has been struggling against other retail chains. The company’s earnings lagged the Zacks Consensus Estimates by 54.2% and 127.3% in the second and first quarters of 2012, respectively, and by 68.7% in the fourth quarter of 2011.

J. C. Penney’s second-quarter 2012 results failed to meet expectations. The company posted adjusted loss of 37 cents per share compared with earnings of 19 cents in the year-ago quarter. The Zacks Consensus Estimate for the quarter was of a loss of 24 cents. Following disappointing results, the company stated that it will not achieve its earlier guidance of $2.16 per share for fiscal 2012.

The quarterly sales of $3,022 million marked a sharp decline of 22.6% from the prior-year quarter, and fell short of the Zacks Consensus Estimate of $3,172 million. Total sales were adversely affected by the discontinuation of the catalog outlet business. Internet sales via jcp.com slumped 32.6% to $220 million in the quarter.

Comparable-store sales declined 21.7% during the quarter compared with an increase of 1.5% in the prior-year period, reflecting lower marketing activities. The company needs to be more vocal regarding its pricing mechanism and better align its marketing efforts to attract buyers. Traffic plummeted 12% during the quarter, following a decline of 10% in the first quarter of 2012.

Downhill Estimate Revision

Following J. C. Penney’s disappointing second quarter results, the Zacks Consensus Estimates have been portraying a downward trend.

The Zacks Consensus Estimate for the third quarter of 2012 dropped by 36 cents to a loss of 9 cents a share in the last 60 days. For the fourth quarter, the Estimate fell 55 cents to $1.00. For fiscal 2012 and 2013, the Zacks Consensus Estimates slid $1.26 and 89 cents to 6 cents and $1.53, respectively, in the last 60 days.

Management Sticks to Transition

J. C. Penney is in a transitory phase, trying to remould itself from the way it had operated before Ron Johnson took charge, and striving to become America’s favorite store. In order to uplift itself, J. C. Penney announced an array of measures, which include new pricing strategy, fresh logo, strategic merchandise initiatives, cost reduction and enhancement of customers’ shopping experience. The company intends to enable WiFi network and mobile POS in all the stores. The company aims to reduce costs by over $900 million by the end of fiscal 2012.

Closing Comment

We believe that soft results for three quarters in a row have dashed the hopes at least for the near term. Moreover, an erratic consumer behavior and a sluggish economic recovery still remain matters of concern.

The above analysis supports our unbiased view, and advocates our bearish stand on the stock, which is well defined through our Zacks #5 Rank that translates into a short-term Strong Sell rating. J. C. Penney, which competes with Macy’s Inc. ( M - Analyst Report ) and Kohl’s Corporation ( KSS - Analyst Report ) , currently operates approximately 1,100 department stores in the United States and Puerto Rico.