J C Penney Company Inc (NYSE:JCP) is up nearly 5% today after J.P Morgan analyst Matthew Boss released some analysis that, despite holding his Neutral rating and $11 price target in place, explained how he thought the retailer could benefit from major restructuring next year.

“The JCP story stands at a pivotal crossroads with today’s mid-single-digit top-line pace of recovery questioned versus the 33% revenue drop the past 3 years,” Boss writes, before explaining why “Neutral-rated JCP sets up well for a long trade through year-end.”

Closing 100 J C Penney stores would add $150 million to EBITDA, says Boss

The core of Boss’s argument is that he thinks a large-scale restructuring with 100+ store closing is both likely and a smart move for J C Penney Company Inc (NYSE:JCP) as it works to bring its margins back toward peak 2006 levels. Looking at the 33 store closings in January 2014, Boss has modeled $2 million in cost savings and $1.5 million of bottom line EBITDA accretion for every store that was closed. By that math, closing 100 out of the 1060 store base would add $150 million to EBITDA and $3 to equity value, assuming an industry average 6.6x multiple.

“Importantly, with the fixed cost hurdle reduced (distribution / buying right sized in GPM w/ occupancy, rent & ad spend in SG&A), every incremental sales dollar would fall to the bottom line at a structurally higher margin into FY15,” says Boss, adding that even that could be a conservative estimate because the model doesn’t account for incremental sales that go to nearby locations or the J C Penney Company Inc (NYSE:JCP) website, or additional cost saving measures that become possible during a larger restructuring.

J C Penney Company store closing report 0814

Boss expects that something along these lines will be announced at this year’s analyst day slated for October but hasn’t included this restructuring option into his $11 price target (currently $10.73).

Ullman’s game plan underway, says Boss

Boss also seems to have a generally positive opinion of J C Penney Company Inc (NYSE:JCP) management, who has managed to get clearance back below 15% of sales and private label merchandise (which usually has better margins) close to 50% of sales after years of moving the opposite direction under the previous management. He doesn’t see how the retailer would return to previous peak performance without a major restructuring, but that only feeds into his opinion that the current management will do what’s necessary to improve EBITDA.

“The JCP roadmap is showing signs of stabilization with same-store sales returning to positive territory and margins roughly 800bps below 2006 prior peak,” Boss writes, adding that “CEO Ullman’s game-plan is under way.”