J. C. Penney (JCP) Turnaround in Doubt; UBS Downgrades to Sell

This morning shares of J. C. Penney (NYSE: JCP) dropped after UBS downgraded the company from Neutral to Sell. Analysts called attention to number of worrisome trends in earnings and gross margin. Worse still, UBS thinks JCP will have to make significant changes to CEO Ron Johnson's turnaround strategy, which hinges on in-store shops and everyday low pricing. If true it could spell major trouble for the stock as Wall Street slashes estimates.

"We believe a deteriorating earnings outlook & emerging signs of cash flow distress will require significant changes to JCP’s turnournd strategy. As investors start to focus on JCP’s changing strategy, we believe any credible revised plan will require significant cut to mid-term EPS power due to 1) deeper required price discounts; 2) mounting evidence that cash flows will not be sufficient to support new shop rollout timetable; and 3) increases SG&A to engage customers," said UBS.

UBS thinks Q4 comps and gross margin is at risk and trimmed estimates to -28 from -20 and gross margin to 30 from 33. Street EBITDA estimates will also need to be revised lower, said analysts.

UBS lowered its price target on J.C. Penny (NYSE: JCP) to $13 from $21.

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