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AG Edwards Downgrades J.C. Penney, Target, Abercrombie & Fitch

From Standard & Poor's Equity Research

AG Edwards downgraded J.C. Penney (JCP), Target (TGT), and Abercrombie & Fitch (ANF) to hold from buy.

Analyst Robert Buchanan says he is recommending only those retailers with positive historical trends and related bright prospects for inventory turnover. He notes J.C. Penney doesn't quite "fit the bill," with inventory turnover having slipped.

He says although J.C. Penney's management has recently articulated that its improvement plan is tied to reduced lead times on directly sourced product, he does not expect to see any material change flowing from that plan until early next year. He notes the downgrade on J.C. Penney is consistent with his reduced call on retailing group to underweight.

For Target, Buchanan says mounting concerns over the outlook for consumer spending and dull inventory turnover prospects, cause him to downgrade the stock. He says he is increasingly inclined to recommend shares of only those retailers with favorable historical trends for inventory turnover; He notes Target's inventory turnover has slipped from 6.4 to 5.7 during the past four years.

He thinks a weakening housing market, and prospects of high oil and gas prices, along with other negatives, will pressure Target's same-store sales. He cut his $3.10 fiscal year 2007 (January) EPS estimate to $3.06.

For Abercrombie & Fitch, Buchanan says he believes a slowing housing market and other pressures on consumer spending will result in flat comps for the retailer for the next few quarters. He notes parents of Abercrombie & Fitch shoppers fund many of the purchases, and those parents feel less flush now, so he believes they'll be prone to curtail the amount of spending power provided to Abercrombie & Fitch shoppers.

He's also concerned about Abercrombie & Fitch including its lightly colored, heavily distressed denim assortment for back-to-school, which strikes him as being at odds with prevailing theme of darker, cleaned-up looks this fall.

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