Citi Downgrades JCPenney To Sell Anyway, Cuts Price Target From $20 To $11
Yesterday's NYPost story about JCP CIT-related credit problems may or may not have been a plant (by a persuasive billionaire nemesis - who knows...) but Citi's Deborah Weinswig isn't hanging around to find out either way, and moments ago slashed its JCP price target from $20 to $11, and cut its rating from Neutral to Sell.
Our Take — We do not believe that JCP has made progress in stabilizing the business in 2Q13, and we see no evidence of a turnaround in the works. We are downgrading to Sell from Neutral on our view that the timeline for recovery has been pushed out until 2014. We are no longer forecasting improvement in SSS trends (on a 2-year basis) for the rest of the year. We have been surprised that quick fixes (like bringing back coupons) have not led to stronger sales, and we don’t see anything that will change this in the near-term. Our revised target price is $11.
#1: Inability to Connect with the Customer — The problems start with sales. Product on the floor is not resonating with core customers, and it will likely take until 2014 to get the right mix of apparel basics and private label fashion. We also believe that JCP still faces issues with replenishment and in-stock levels. Our quarterly SSS forecasts are (-15)% for 2Q13, (-10)% for 3Q13, and (-5)% for 4Q13.
#2: Gross Margin Recovery Delayed — We think it will take steep markdowns to clear the new home inventory (in fact, JCP ran 40% off furniture purchases of $3,000+ in July). Promotional activity will also need to remain elevated to drive traffic. We now forecast a 27.5% gross margin in 2Q13 and 29.4% for the full year.
#3: Turnaround Unrealistic Without a Turnaround Team — We do not think it is realistic to expect business to improve without a full management team and turnaround plan in place. There have been 10 senior-level management departures since Ron Johnson left in April. JCP is operating with a “Swiss cheese” executive team, and we think the company has had a difficult time finding talent. We are also concerned that the merchandising and marketing teams are not on the same page.
Lowering Target Price to $11 — We are lowering our target price to $11, down from $20 previously. We arrive at our $11 target price based on a 0.5x EV/sales multiple (vs. JCP’s 10-year median of 0.43x) on our 2015 sales estimate of $12.8B.
Perhaps it is time for Bill Ackman to redirect attention and invest what little dry powder the Pershing Square has left in yet another 10% stake in a firm that will soon be shorted into smithereens.