Goldman Sachs Downgrades J. C. Penney (JCP) to Sell; Analyst Warns of Stalling Turnaround

Goldman Sachs downgraded J. C. Penney (NYSE: JCP) from Neutral to Sell with a price target of $5.50. Analyst Stephen Grambling thinks its "stalling" turnaround will drive downward revisions and re-rating.

" In our view, several aspects of JCP’s 3Q release raise concerns about the sustainability and timing of the company’s turnaround, including (1) comps are converging with the industry even as sales are still 30% below 2011 levels, (2) e-commerce deteriorated to 3% growth vs. peers still in the double digits, and (3) core customers are back, yet spending in key categories is not, a potential sign of structural shifts online. Furthermore, margin improvements are likely to wane in 2015 now that inventory has been rightsized," said Grambling.

"While we were hopeful that JCP’s return to its “old” strategy would recover a sizeable portion of lost sales, recent results lead us to believe competitive changes in the industry from off-price and online will prevent management from achieving its multi-year outlook. We expect future earnings misses and corresponding downward revisions to consensus estimates to drive a re-rating in the shares, which currently trade at 7.7X 2016E consensus EV/EBITDA vs. peers currently trading at 7X NTM EV/EBITDA. In addition, we do not believe potential strategic alternatives via store closings or monetization of non-core assets will unlock significant value for shareholders or provide meaningful downside protection to the stock," added the analyst.

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 $7.39 yesterday.

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