J.C. Penney Company, Inc. (NYSE:JCP) has released optimistic guidance for 2014, but not everyone thinks that the retailer’s gross margin targets are realistic, and it may have to make painful cutbacks if it’s going to keep liquidity flat for 2014.

At a minimum, J.C. Penney Company, Inc. (NYSE:JCP) needs to cover $380 million in interest expenses and $250 million in capex, a total of $630 million, if it’s going to break even on free cash flow this year, but Citi analysts Jenna Giannelli and Lauren Smith say that would require gross margins of 38% or better, compared to less than 30% last year, in addition to hitting same-store sales growth targets to cover those costs solely with EBITDA.

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SG&A, capex costs are already at recent lows

That’s not impossible, but it means planning for a banner year instead of gradual improvement (let alone more setbacks). The other option would be to make additional cuts to selling, general, and admin expenses (SG&A) or to capex, but both figures are already quite low.

“We are concerned that any further SG&A cuts could become detrimental to the business,” write Giannelli and Smith. “We acknowledge and commend the efforts to cut nearly $1bn in costs in a short time frame, but worry for the ability to keep marketing plentiful and fresh and in store customer experience/satisfaction high.”

SG&A is up as a percentage of sales, 34% in 2013 compared to its own 27% average, but has been falling steadily on a per-store basis for the last decade, meaning that it is deploying its SG&A expenses more widely and getting worse results back. J.C. Penney Company, Inc. (NYSE:JCP) will close 33 underperforming stores by this May to help alleviate the problem, but it could still be difficult to take SG&A much lower.

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Similarly, J.C. Penney Company, Inc. (NYSE:JCP) is already forecasting its lowest level of capex per store since 2001. The current low water mark of $290,000 per store corresponds to $310 million in capex, but J.C. Penney has forecast just $250 million. It’s already well below its long-term average, $580,000 per store, and cutting any more threatens to undermine J.C. Penney’s efforts.

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J.C. Penney should be safe for the next few years

Giannelli and Smith don’t think that J.C. Penney Company, Inc. (NYSE:JCP) is in any immediate danger, and they increase their rating on the company’s 2015 and 2016 maturities from Sell to Neutral because of improved liquidity, but they remain pessimistic in the long-term rating any maturities from 2017 as Sell and rating J.C. Penney stock as Underweight.