J C Penney Company Inc Stock Slips Despite Upgrade

J C Penney Company Inc Stock Slips Despite Upgrade
By J.C. Penney (Brand New design website See article here) [Public domain], via Wikimedia Commons

J C Penney has earned a surprising vote of confidence on its turnaround efforts.  Sterne Agee CRT analyst Charles Grom, who has been following the struggling retailer for a long time, upgraded its stock from Neutral to Buy after some conversations he had with CEO Marvin Ellison. He set a price target of $13 per share for J C Penney shares.

More confidence on J C Penney’s turnaround

J C Penney management recently set a target of $1.2 billion in EBITDA, but Grom actually thinks that number could be a floor instead of a ceiling. The analyst thinks Ellison “has the right demeanor, discipline, and business acumen” to fix all of the department store chain’s problems. The company has been struggling for at least the last five years, and some would indeed argue that the problems have been going on for the last 15 years when Allen Questrom left.

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Grom also acknowledged that J C Penney faces deeper problems as well because the department store industry as a whole is struggling, but he expects “significant” improvements in EBITDA because of what he calls management’s “‘self-help’ initiatives.”

Estimates may be conservative

The analyst even suggested that J C Penney could surprise to the upside in a few areas, like growth in the low-single digits for comparable store sales. He noted that the retailer’s sales per square foot is around $116 based on an average of last year and this year. That’s much lower than where it was a decade ago at $185. It’s also much low than that of its peers, as Macy’s is at $187 and Kohl’s is at $190.

He added that the target suggests a gross margin of 36.5%, which he also thinks will have upside. Further, he noted that J C Penney delivered more than $2 billion in EBITDA in the years before the Great Recession between 2005 and 2007. As a result, he thinks if the department store chain is able to successfully execute on raking in more revenue per shopper, there’s a good chance it can outperform expectations.

Year to date, J C Penney stock has increased by more than 40%, but in spite of this, Grom still sees it as having one of the highest relative strength index readings in his coverage group, coming in at 60. However, he also noted that sentiment on the retailer among their clients is still mixed and short interest remains at about 30%, which is the highest in the sector. Only 24% of sell-side analysts have a Buy rating on the stock.

As of this writing, shares of J C Penney were down 0.74% at $9.36 per share

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