J.C. Penney Company, Inc. (NYSE:JCP) shares rose more than 8% during the regular trading day on Wednesday after the company reported promising fourth-quarter guidance. Now analysts are weighing in on the company’s third-quarter earnings results, which were also released on Wednesday. Baird and UBS analysts both note that those results were mixed and have kept their respective Neutral and Sell ratings on the retail chain.

Analysts “encouraged” by J.C. Penney’s results

Baird analysts Mark R. Altschwager, Blair M. Pircon and Jacob R. Zitter note the company’s improving comparable store sales trends and gross margins, which are signs that J.C. Penney Company, Inc. (NYSE:JCP) is stabilizing. The company’s October comparable sales were positive, and so far November’s comparable sales are positive as well. They’re starting to feel a bit better about liquidity at the retail chain and said they could “become more constructive” on the company if its business trends continue to improve. They note that the company could be challenged by a difficult holiday shopping season this year.

The Baird analysts noted sequentially better sales, conversion and gross margins, citing three main drivers: re-stocking basics and private brands, reinstating promotional events and better marketing. The retail chain posted -10% comparable store sales in August, -4% in September and 1% in October.

Other areas of strength at J.C. Penney

UBS analysts Michael Binetti and Steven Strycula highlighted other strong areas in J.C. Penney Company, Inc. (NYSE:JCP)’s results. The company ended the quarter with $1.2 billion in cash and paid back $200 million of its revolving debt. Cash burn during the quarter was $898 million. The company also said it plans to see positive same store sales year over year for the December quarter and end this year with more than $2 billion in liquidity.

Analysts remain watchful on J.C. Penney

But in spite of these promising results, analysts at both firms remain watchful about J.C. Penney Company, Inc. (NYSE:JCP), focusing on different issues. The analysts at Baird want to see positive traffic, which management has admitted is more difficult than gains in conversion because it takes longer for customers to notice that they’re back. Also inventory will continue to hang over the retail chain’s results through spring 2014. This puts a limit on gross margins. Also the home department isn’t expected to be corrected until the spring.

The Baird analysts said the company needs to show “meaningful improvement by 2015” so that it will stop losing money. They’re expecting about $780 million in negative cash flow for next year, although with this year’s liquidity being so high, they think the chain “could survive another tough year without further diluting equity holders.” They also said it’s possible the company’s free cash flow could reach the break-even level in 2015. Baird analysts raised their price target for J.C. Penney Company, Inc. (NYSE:JCP) from $9 to $10 per share.

UBS analysts point to the 11% increase in inventories as the main risk to the company. Also gross margins remained lower than last year’s third-quarter results. They also remained concerned about the company’s guidance. They left their price target unchanged at $7 a share.

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