(Reuters) - J.C. Penney Co Inc (JCP.N) on Wednesday reported its sharpest sales drop since announcing a grand transformation plan 13 months ago, a plunge Chief Executive Ron Johnson is trying to stop by largely reversing his failed no-discounts strategy.
In the winter holiday season quarter, the most important for retailers, Penney's comparable sales fell 31.7 percent, steeper than the 27.8 percent drop Wall Street was anticipating.
The department store operator's shares were down 14.5 percent at $18.09 in after hours trading.
Johnson's master plan, unveiled in January 2012, originally called for eliminating most discounts and sales events in favor of "everyday low prices" and refashioning its stores by rolling out dozens of branded boutiques for hip brands by 2015.
While the first set of boutiques, including Levi's and Izod, have shown promising results since opening last summer, getting rid of the sales events and coupons that long-time Penney shoppers expected was disastrous, Johnson conceded.
So he unveiled an updated pricing strategy on Wednesday in which Penney will offer deals primarily on its own private brands, but stick to "everyday low prices" for most everything else, going further than its announcement last month that it would bring back a few sales events and give more coupons.
"We also made some big mistakes, and I take personal responsibility," Johnson said on a webcast. "We will offer sales each and every week as we move forward."
Sales at Sephora, Levi's and Izod boutiques within Penney stores have done well under "every day low prices," which means prices are set low from the start, rather than marked up then discounted.
The idea of the new promotional strategy is to reconnect with long-time Penney shoppers who have fled, Johnson said.
There were early signs of improvement: jewelry sales were up 36 percent this Valentine's Day thanks to a special sale the company held this year.
This spring, Penney expects to open another 20 boutiques, including shops for home products brands like Michael Graves and Jonathan Adler, and clothing like the popular Canadian brand Joe Fresh.
Joe Fresh items are already for sale on Penney's website. It is was already its top selling brand online and bringing in shoppers who don't typically go to Penney, Johnson said.
The boutiques, where sales have typically outperfomed the overall stores', are key to turning Penney around.
"We expect the ability to return to growth to be much, much greater when we complete the transformation of Joe Fresh and home," said Johnson.
"He's going to have to recover this year or he's done," said Ron Friedman, retail practice leader at the consulting firm Marcum LLP. "He's running out of time. He has to have it turned around by the third quarter."
Hedge fund manager William Ackman, whose Pershing Square Capital Management is Penney's top shareholder, has repeatedly professed his faith in Johnson's strategy and said it would take a few years to come to fruition.
Gross margin was 23.8 percent of sales, down 6.4 percentage points from a year earlier as the company had to slash prices at the end of the season to clear unsold merchandise.
Sales were down 28.4 percent to $3.9 billion in the fourth quarter.
Penney reported a net loss of $552 million, or $2.51 per share in the 14 weeks ended February 2, compared with a loss of $87 million, or $0.41 per share for a 13-week period a year earlier.
Excluding restructuring charges and non cash pension plan expenses, the company posted an adjusted loss of $1.95 per share, as net sales fell 27 percent to $3.88 billion.
The department store chain had $930 million in cash and cash equivalents at the end of the quarter. Analysts had been closely watching the cash figure to see if it dropped much below the $1 billion mark.
"Looks like they really did not burn that much cash," Morningstar analyst Paul Swinand said, pointing to the fact that operating cash flow for the year was roughly neutral.
The company was able to preserve cash by dramatically reducing inventory to lower reflect sales levels and deferring payment to some vendors.
Johnson said he still intended to fund the rollout of the stores transformation from cash generating from operations.
Reporting by Phil Wahba; Additional reporting by Dhanya Skariachan; Writing by Ben Berkowitz; Editing by Andre Grenon