Erinn Murphy Slashes Price Target on JC Penney Company Inc (JCP); Investors Run for the Hills

Q3 preannounce signals margin degradation as clearance activity heightens, says Piper Jaffray's Erinn Murphy

JC Penney Company Inc (NYSE:JCP) shares tumbled nearly 15% in Friday’s trading session as Wall Street came down hard on the struggling department store chain. The reason? JC Penney handily guided third-quarter to be below consensus estimates and significantly lowered its FY18 EPS guidance from $0.40-$0.65 to $0.02-$0.08.

JC Penney CEO Marvin R. Ellison explained, “In the third quarter, we took the necessary steps to accelerate inventory liquidation primarily across all apparel divisions, which increases available funding to invest in new and trending merchandise categories […] We realize the inventory liquidation favorably impacted sales during the months of September and October; however, we expect to deliver a positive low single-digit sales comp for this period, excluding the benefit of clearance sales.  Although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the Company as we transition into the fourth quarter and fiscal 2018.  In addition, based on the way our business is growing, including continued comp sales growth penetration in major appliances and omnichannel in the third quarter, we are taking a renewed approach to aligning our expense structure to match the mix of our growth initiatives.”

In reaction, Piper Jaffray analyst Erinn Murphy slashed her price target for JC Penney shares by 25% to $3.00, while reiterating a Neutral rating on the stock. (To watch Murphy’s track record, click here)

Murphy commented, “While management spoke to an improved sales trend–particularly in women’s throughout Q3, they did indicate this was at the expense of gross margin as they cleared inventory to make way for newer women’s product. This just-announced reset in women’s, the drag of appliances on GM & e-com are causing the company to be well-below on GM vs. prior. Even with reset, we believe implied Q4 expectations are still likely too high. Recall our view that Q4 will likely miss across the dept. store group this year.”

“We are lowering our go-forward sales and 2H gross margin estimates. We note Q4 SG&A $ will be materially higher Y/Y due to incentive comp expense,” the analyst added.

Wall Street backs Murphy’s caution here, as TipRanks analytics reveal JCP as a Hold. Based on 10 analysts polled in the last 3 months, 9 maintaind a Hold on JC Penney stock, while 1 issued a Sell. However, the 12-month average price target stands at $4.75, marking a 51% upside from where the stock is currently trading.


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