J.C. Penney Company, Inc. (NYSE:JCP)’s price target has been raised from $15 per share to $18 per share by analysts at JPMorgan. The firm’s Broadlines Retailing, Apparel & Footwear team issued a report to investors detailing the retail industry as a whole.
Reasoning Behind J.C. Penney Increases
Analysts Matthew R. Boss, Anne McCormick and Michael J Joyce said they raised their 2015 earnings before interest, taxes, depreciation and amortization estimate from $761 million to $924 million. As a result, their raised their price target to reflect 6.5 times that new value.
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They said this year is all about stabilization for the department store chain. Thus, they believe their increased price target for J.C. Penney Company, Inc. (NYSE:JCP) is “reasonable” because the exact timing of that stabilization is unknown.
The analysts lowered their 2013 earnings per share estimate to a loss of $3.81 from a loss of $3.71 based on higher interest expenses after the company raised its debt by $2.25 billion. They also adjusted their second quarter earnings per share estimate to a loss of 73 cents per share, their third quarter estimate to a loss of 77 cents per share and their fourth quarter estimate to a loss of 73 cents per share.
Potential Plan For A J.C. Penney Turnaround
The JPMorgan analysts said now that Ron Johnson is out as CEO and previous J.C. Penney Company, Inc. (NYSE:JCP) CEO Mike Ullman is back at the helm on an interim basis, they see a potential plan in place for the company’s recovery. They said “the first order of business will be stabilizing the ship.”
In their view, that includes a return to the chain’s previous business model involving coupons and promotions and also the reestablishment of high-low pricing. In addition they believe the company must stabilize its balance sheet by reducing its capital expenditures, which have been between $500 million and $600 million over the last three years.
One of the ways they see the chain cutting capital expenditures is by slowing down the pace of the shop-in-shops model.
Risks To J.C. Penney
The analysts said J.C. Penney Company, Inc. (NYSE:JCP) is especially susceptible to consumer spending, so the economic climate will play an important role in the chain’s ability to recover. In addition, more competition from Macy’s, Inc. (NYSE:M) and Kohl’s Corporation (NYSE:KSS) could result in excess inventory and greater markdowns, although there is also potential upside to their investment thesis.
“JCP’s turnaround is proving more challenging than anticipated, with uncertainty around the strategy driving volatility, but noting that a reversal in top-line trends could lead to material upside for current estimates,” they wrote.