BofA Downgrades Stage Stores To Underperform, Sees 28% Downside

With declining confidence that the company's turnaround initiatives, lower price driven tailwind at the pump and Texas' diversifies economy being sufficient to offset the weak economic growth of the energy sector, Heather Balsky of Bank of America Merrill Lynch downgraded the rating on Stage Stores Inc SSI from Buy to Underperform, while lowering the price target from $24 to $12.

Balsky believes, however, that the company is "taking the right steps to drive a long-term comp turnaround," while expecting macro headwinds to "mute the benefit near-term." Some of the key strategies undertaken by Stage Stores include IT and omnichannel investments, store remodels, updated assortments and a loyalty program.

Although the company has also launched an aggressive closure initiative, expecting to shut down 90 underperforming stores over the next few year, Balsky expressed concern that the adverse impact of additional layoffs in energy producing states is not yet fully reflected in the company's updated comp guidance.

In fact, continued layoffs through FY2016 could put pressure on growth. Stage Stores has already announced its Q2 EPS and FY2015 guidance meaningfully below expectations. The Q2 EPS miss was driven by lower than expected comp and gross margin.

The 2015 and 2016 EPS estimates have been lowered.