BMO Upgrades JC Penney, 'Less Concerned' About Liquidity

In a report published Friday, BMO Capital Markets upgraded the rating on J C Penney Company Inc JCP from Underperform to Market Perform, while raising the price target to $8, citing "growing confidence" in the company being able to achieve its 2017 EBITDA target of $1.2 billion and abating liquidity concerns.

In the report BMO Capital Markets noted the positives for the company as:

1. Significant gross margin rate improvement between 2012 and 2014 - from 31.31 percent to 34.76 percent. The 1Q15 results "give us growing confidence the company can reach its targeted GM rate increase of 100bp to 150bp in 2015 (BMO 35.98%) with potential for further improvement beyond 2015 to 37%-39%"
2. Continued SG&A expense savings - Expectation for 2015 raised from $50-$100 million to $100 million
3. Potential improvement in the home category into 2016 and beyond as management has "shifted the inventory mix to soft home from hard home, making the merchandise and related promotions more relevant to the JCP customer"
4. J C Penney reiterated its forecast to be cash flow breakeven in 2015, despite an increase in sales and gross margin guidance.

"We are less concerned about the unchanged forecast than others as we see needed investments in inventory to achieve sales growth targets. Importantly, our cash flow work does not point at present to liquidity challenges that could create another step down in the stock. Indeed, we see operating cash flow rising from an estimated $224 million in 2015 to $689 million in 2017," the analysts added.