J.C. Penney 'Not Out Of Woods,' But No Longer A Sell: Evercore ISI

In a report published Wednesday, Evercore analyst Matt McGinley upgraded the rating on

from Sell to Hold, following the recent pullback, the stock offers a more balanced risk/reward profile. "While the challenges in recovering sales, margin, and FCF remain large, JCP appears to continue to make progress in merchandising at the same time the expiration of the lock-up on the term loan provides more flexibility to modify the capital structure," according to the Evercore report. If the term loan is extended or renewed, the analyst believes that the company would be ale to reduce its interest expense by $22 million to $44 million annually. More importantly, it would help the company remove its stores as collateral. "If JCP were to sell stores and pay down debt, it could materially alter the capital structure," analyst McGinley stated, while adding that merchandise resets might not be too difficult and it would allow JC Penny to align its merchandise to the market, ", rather than struggling to compete with old product." However, the analyst expressed concern regarding the company's competitive position, which is likely to be negatively affected by the continued growth of off-price and fast fashion. "While we think there is always an opportunity for asset optimization, it may be difficult for JCP to cut costs to recover EBITDA in a way that would not impact revenue," analyst McGinley added. The company expects to bring down its SG&A during 2015-2017, while continuing to grow comps at 5-6 percent. The analyst believes that this could be a challenge, given the inflation in wages and healthcare, along with the rising IT security costs. "Not out of the woods in terms of profit or competition, but JCP is putting up a good fight," the Evercore report said.