Time flies. We’re just a month away from Black Friday and the start of the all-important holiday season. J C Penney Company Inc (NYSE:JCP) appeared to be on path for a strong holiday season. However, a startling announcement released Friday morning has JCP stock diving to fresh new lows. JCP stock plunged as low as $2.77 before managing a modest rebound as of this writing. And for once, Amazon.com, Inc. (NASDAQ:AMZN) isn’t to blame. JCPenney’s management owns this blunder.

What happened? There’s no way of sugarcoating it: The company’s new guidance stinks. JCPenney warned that it will lose twice as much money as it expected in the third quarter. Additionally, the pivotal winter quarter has lost steam, too. For the full year, the company now expects to make a measly EPS of .02 to .08. That’s virtually nothing and a massive drop from the .40 to .65 estimate it had previously offered.

JCPenney’s Explanation of the Decline

In its press release, JCPenney tried to spin the markedly lower results as a positive. CEO Marvin Ellison stated that:

“Based on the encouraging results from a third quarter reset in women’s apparel, which expanded our casual and contemporary offering, we made the strategic decision to accelerate a wider transformation of the entire women’s department by clearing slow-moving inventory primarily in women’s and other apparel categories.

Following this comprehensive reset, we saw an improvement in performance, particularly in our women’s division, confirming these actions were necessary to drive growth in our women’s apparel business.”

Let’s unpack that. JCP claims that it was necessary to dump much of its old inventory at apparently massive losses in order to bring in newer and fresher styles. In theory, there is nothing wrong with that. However, management apparently didn’t anticipate having to make this massive repositioning in inventory, otherwise the lowering of their earnings guidance would have evolved more smoothly.

In fact, I find Ellison’s comments pretty baffling. JCPenney has operated in this business for a century now. It isn’t some new startup. How does it manage to throw away virtually the whole year’s profits from not understanding the right mix of women’s apparel? Given JCPenney’s rather perilous balance sheet, management can’t afford many more of these errors before the creditors come calling.

Any Silver Lining for JCP Stock?

Beyond the headline slash to guidance, there’s more bad news in the JCPenney filing. It sees its cost of goods sold rising by 300 basis points. That implies a massive cut to its profit margins. This is coming, in part, JCP suggests, due to selling more appliances and more goods over the internet. So perhaps the drop in profit margins isn’t quite as bad as it looks. It still isn’t by any means good though.

JCP also revised its cash flow guidance for 2017 down to the $200 million to $300 million range. That’s by no means a positive development, but it’s much better than its earnings. At that level, the company still generates plenty of cash flow to take care of its debt obligations in the short term. It’s hardly enough to revitalize the business or the JCP stock price, but it avoids any talk of imminent bankruptcy.

The one possible outright positive is that JCPenney still expects positive same-store sales for the quarter, excluding the effect of the inventory clearance sales. If the company has found a better mix of products going forward, as it claims, same-store sales should rise. JCP estimates a less-than-1% gain this quarter and flattish results on that count for the year. If the company can hit on that, it would put itself on a better footing for 2018.

The Case for Buying JCP Stock Here

This quarter is going to be a disaster for JCPenney. It’s honestly indefensible how badly management underperformed compared to the plan it had sold to investors previously. That said, as fellow contributor Lawrence Meyers put it recently, JCPenney has failure built in. And that was even before JCP stock took its latest bruising on Friday.

While obviously the company’s guidance has come down, the rest of the bull case hasn’t disappeared. The stock is still highly shorted and was left for dead even when things looked brighter for the next couple of quarters. And JCP’s balance sheet, while heavily levered, doesn’t have much near-term debt coming due. The company still has time to operate its turnaround plan before the clock runs out.

Verdict on JCP Stock

With JCPenney stock at an even lower price now, the appeal of a speculative position builds. The potential reward is huge if 2018 sales come in flat, and the company can get back to .50 or so EPS, as had been previously expected for this year.

That said, I’m not a buyer of JCPenney stock even at this price. Management lost a great deal of credibility with this sudden and massive cut to guidance. How did they misread inventory and consumer preferences this badly? How do I know that they won’t make a similar mistake again next year? It’s too bad, because all the pieces of a successful turnaround appeared to have been in place. However, JCP stock is too risky until management reestablishes its credibility with a couple of stronger quarters, unless you have a strong stomach for volatility.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.