J C Penney Company Inc (NYSE:JCP) plummeted after analysts at Goldman Sachs downgraded their stock rating for the company from Neutral to Sell. The analysts also suggested a 26% downside risk to their $5.50 12-month price target for the stock.

The shares of J C Penney were trading $7.00 per share, down by more than 5% at the time of this writing around 11:00 A.M. in New York.

J C Penney Company Inc Tanks on Analysts' Downgrade

Reason behind the downgrade

In a note to investors, Goldman Sachs analyst Stephen Grambling and his team emphasized that some factors of the third-quarter financial results of the retailer raised concerns regarding the sustainability and timing of its revival.

Grambling and his fellow analysts observed that comps are converging with the industry although sales are still below 2011 level. The retailer’s e-commerce declined to 3% compared with its peers, which still have double digits growth.

The core customers of J C Penney Company Inc (NYSE:JCP) returned, but spending in key categories is not a potential sign of structural shifts online.  The analysts added that the retailer’s margin improvements are likely to decline next year since its inventory is now in the right volume.

J C Penney unlikely to achieve multi-year outlook

Grambling and his team emphasized that they are hopeful that the old strategy of J C Penney Company Inc (NYSE:JCP) will help in the recovery of a substantial amount of its lost sales.

However, the analysts believed that the recent competitive changes within the retail industry from off-price and online will prevent J C Penney’s management from achieving its multi-year outlook.

The analysts expected J C Penney Company Inc (NYSE:JCP) to suffer “earnings misses in the future and corresponding downward revisions to consensus estimates,” which will lead to a re-rating in the stock.

Furthermore, Grambling and his team said, “we do not believe potential strategic alternatives via store closings or monetization of non-core assets will unlock significant value for shareholders or provide meaningful downside protection to the stock.”

The analysts said their FY14 EBIT estimate for J C Penney Company Inc (NYSE:JCP) is 13% below consensus. Their FY15 and FY16 EBIT expectations for the retailer are 34% and 93% below consensus, respectively. Their estimates are also lower than the long-term outlook of the company’s management.