Morgan Stanley (NYSE:MS) retained its ‘underweight’ tag on J.C. Penney Company, Inc. (NYSE:JCP) as the retailer faces multiple challenges including cash flow concerns and market share losses.

J.C. Penney

Kimberly C. Greenberger and the team at Morgan Stanley (NYSE:MS) remain skeptical of any quick turnaround of the retailer, following poor quarterly results.

J.C. Penney Company, Inc. (NYSE:JCP) posted far worse than expected second quarter results logging a net loss of $2.66 per share. However, the department store chain highlighted major areas of progress in its restructuring efforts.

Sales and margin recovery slower

Kimberly C. Greenberger and team at Morgan Stanley (NYSE:MS) however feel the pace of sales and growth recovery at the department store will be slower than that implied in consensus estimates for 2H13 and 2014. Besides, the analysts feel J.C. Penney Company, Inc. (NYSE:JCP) would recover over half of its 2012 lost sales by 2017, with GM recovery to deliver a steady 37 percent in 2017.

J.C. Penney’s depletion of cash

Morgan Stanley analysts anticipate sales of the retail major to grow by 5 percent annually while controlling the SG & A expense at only 1.5 percent. The analysts feel even in this optimistic scenario, the retailer would face continued depletion of cash every year till 2016. In view of this, the analysts feel J.C. Penney Company, Inc. (NYSE:JCP)’s stock is overvalued and hence reiterated their Underweight rating.

The analysts also believe that J.C. Penney Company, Inc. (NYSE:JCP) management is confident of ending 2013 with about $1.2 billion in cash, considering historical quarterly working capital fluctuations, the retailer could deplete its cash reserves by the end of 3Q2014.

Earlier, Citi analysts indicated J.C. Penney Company, Inc. (NYSE:JCP) could face a net liquidity gap of $761 million in 2014 against a surplus of $853 million in 2013.

J.C. Penney faces multiple compression points

According to Morgan Stanley analysts, the retail major faces multiple compression points such as growing market share losses, lower quality EPS composition, reduced earnings growth expectations besides cash flow concerns.

However, the analysts complement J.C. Penney Company, Inc. (NYSE:JCP) management’s key turn-around strategies, particularly  its improved assortments with a better balance of private and national brands, strengthening its marketing and messaging, and bringing back a tiered JCP Rewards Program effective October to boost sales.