Cowen's Chen Starts JC Penney Coverage, But Needs More Before Getting Excited

Cowen's Oliver Chen initiated coverage with a Market Perform rating for J C Penney Company Inc JCP and a price target of $8. He mentioned that while an impressive turnaround seems to be in progress, the risks are “too large to ignore.”

JC Penney seems to be making the right changes to drive improved comps and margins, with private label improvements, merchandise category changes, and cost controls.

“JCP’s partnership with Sephora to have shop-in-shops within stores is a key traffic driver given the sticky, repeat purchase aspect of beauty as well as a growth driver as Sephora grows to 60-80% of JCP locations vs. ~50% currently,” analyst Oliver Chen wrote.

In terms of omni-channel, JC Penney’s ecommerce penetration is in the low teens, below that of its peers, which averages mid-to-high teens. Moreover, the company has been late in adopting convenience features, such as buy online and pickup in store, while also having a weaker mobile strategy.

Importantly, Management is focused on expanding the e-commerce business, “which should be light from a capex standpoint given an extensive DC network in place that supported much higher revenue volumes and a legacy catalog business,” Chen noted.

While CEO Marvin Ellison has JC Penney improving product and controlling costs, the risks include “shifting consumer preference away from dept. stores, high leverage & lack of conviction in sustainable growth & margin expansion,” the analyst commented.