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Deutsche Bank Upgrades J. C. Penney (JCP) to Buy with Price Target of $12

August 31, 2015 6:40 AM EDT
Get Alerts JCP Hot Sheet
Price: $0.18 --0%

Rating Summary:
    1 Buy, 21 Hold, 11 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 20 | Down: 14 | New: 22
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Deutsche Bank upgraded J. C. Penney (NYSE: JCP) from Hold to Buy with a price target of $12.00 (from $10.00). Analyst Paul Trussell called the stock a self help story and said its comp target looks achievable. He also noted the company has levers to expand margins.

"The company is already proficient in the art of retail under its seasoned merchandising team with what we think are the right brands and assortment. New CEO Marvin Ellison is now driving the next step of applying the science of retail to bring JCP up the curve in pricing and markdown optimization, supply chain, leveraging IT, and reducing corporate redundancies. While we maintain slightly conservative estimates ($1.18B in 2017 EBITDA) given a challenging competitive environment and tough compares, we see meaningful upside to the stock that can be achieved through a variety of comp and margin levers," said Trussell.

"While the goal remains MSD SSS growth, upside opportunities in margins allow for $1.2B in EBITDA to be attained with only moderate comp growth (2.5%-3.0%). Management is confident that JCP has the right assortment to cover the fashion pyramid, especially as relaunched private label offerings gain traction and inventory levels in key items are right-sized. Early reads on the improved footwear presentation (completed late July) and initial results from the center core pilot last spring (roll out next year) are encouraging. We were impressed with the InStyle salon on our recent store tour (salon customers shop 8x/year vs. <4x avg.), and Sephora continues to drive growth even 8 years after its launch (almost DD comp lift when added to rural/small towns vs. 200 bps historically). Cross-merchandising, buy online pick-up in store same day, and a revamped loyalty program are meaningful opportunities ahead," continued the analyst.

Trussell added, "Assuming ~3% comp in 2016 onwards, after 4%-5% planned this year, JCP needs ~635 bps margin expansion to reach $1.2B in EBITDA. We expect a return to historic GPM of ~38% vs. the conservative 36.5% target provided at the Analyst Day with more profitable clearance (100 bps opportunity from current levels), private brands (100 bps), and reduced shrink (40-50 bps). JCP is also streamlining advertising and taking a hard look at corporate overhead (we are modeling -1.3% SG&A dollar CAGR from 2014 to 2017)."

For an analyst ratings summary and ratings history on J. C. Penney click here. For more ratings news on J. C. Penney click here.

Shares of J. C. Penney closed at $8.94 yesterday.



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