The Concerning Mixed Message JC Penney Is Sending To Consumers Resulted In A Downgrade

Despite a more than 60-percent decline since the start of 2017, shares of J C Penney Company Inc (NYSE: JCP) could see a further decline of more than 50 percent, according to Citi analysts. The firm's Paul Lejuez downgraded JC Penney's stock rating from Neutral to Sell with a price target slashed from $3.00 to $1.50.

JC Penney's concerning third-quarter preannouncement last week made it clear that the department-store chain continues to face many difficulties, Lejuez wrote in the downgrade note. In fact, the company hasn't "gained traction in any cohesive way," and the likelihood of any improvements in an already difficult environment is unlikely.

For the most part, the company's strategy of focusing on home goods and appliances for the past year and a half has boosted comps by 200 to 300 basis points, the analyst said. However, this also implies that the rest of the business has weakened over the same time period. Also, big-ticket appliance sales come with a weaker margins profile and also sends a mixed message to apparel, accessories and footwear consumers, which accounted for 80 percent of sales in 2016.

"Do women think of buying clothes at the same place they buy a fridge?" the analyst wrote.

Finally, JC Penney's management team is likely to focus on cutting its expense base in fiscal 2018 and beyond, but this is the wrong move. Instead, management may need to be spending more on its business to win back customers and any cuts to spending will likely add to ongoing top-line challenges.

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