UPDATE: Citi Initiates Coverage on J.C. Penney with Neutral Rating, $6.50 Price Target

Coverage was initiated on JC Penny Co. Inc

with a Neutral rating and $6.50 price target of $6.50 at Citigroup Wednesday morning. Oliver Chen, analyst at Citi, believes JC Penny, “has a number of initiatives in place to bring customers back to stores and improve margins” such as restoring private label brands, home department improvements, and return to promotional selling. What is concerning to Chen is “merchandise execution risk and potential liquidity concerns.” Specifically, “Cash & revolver availability $1.7bn in 3Q (incl. 3Q cash of $1.2bn) & fiscal 2013 liquidity ended in excess of $2bn. We forecast JCP's liquidity profile could slightly worsen by YE14 to $1.6-$1.7bn given that we model FCF use of $350mm on rev. growth of +4-5% & capex $300mm (vs. avg $800mm).” In summary, Chen is encouraged by JC Penny's products and same-store sales improvement, but the overhanging liquidity concerns are too big of a question mark and justify a Neutral rating at best on the stock. Shares of JC Penney are trading down about 1 percent to $6.05 at last check.