UBS Reviews JC Penney's Earnings, Maintains Sell Rating

In a report published Thursday, UBS analyst Michael Binetti reviewed J C Penney Company Inc JCP's first quarter results which were released on Wednesday.

According to Binetti, sales is the only line that will "definitely bolster confidence" in the long-term EBITDA recovery. The analyst added that JC Penney reported a first quarter same-stores sales gain of 3.4 percent which was below the company's guidance. Moreover, the company's full year same-store sales guidance growth of 4 to 5 percent is "well below" its 5.4 percent three-year target just 18 months into the turnaround.

Binetti also noted that JC Penney's traffic remains negative, and he sees further risk to long-term gains in conversion and ticket from the value-driven consumer. In addition, the analyst also sees risks to the company's 2017 $1.2 billion EBITDA target as the company has to consistently show progress towards the objectives.

JC Penney also faces "significant" financial leverage, according to Binetti. The company has a $415 million annual interest payment, the company has a "significantly" higher financial leverage versus its peers that could eventually limit growth investments or cause "outsized" P&L pressure in the event of a slowdown in the economy.

Finally, now that JC Penney has provided EBITDA targets for the first time ($600 million in fiscal 2015 and $900 million in fiscal 2016), shares should trade more like a department store than a recovery story. With that said, even assuming a $900 million EBITDA in 2016, a 7x multiple (in line with peers including Macy's Inc. M and Kohl's Corporation KSS) implies shares are valued at only $7.

Shares remain Sell rated with a price target raised to $7 from a previous $5.