J.C. Penney Stock Rating Cut at Citigroup, Oppenheimer

J.C. Penney Co. had its ratings cut at Citigroup Inc. and Oppenheimer & Co., leaving only one analyst bullish on the department-store company, as patience for its turnaround attempt evaporates.

Citigroup’s Deborah Weinswig wrote in a note today that a meeting with managers including Chief Executive Officer Ron Johnson at the Plano, Texas-based company’s headquarters prompted concerns that sales growth will take longer than expected to return. Oppenheimer’s Brian Nagel said that risks are building and could “disrupt or even derail” its recovery. Both analysts trimmed their ratings to the equivalent of a hold.

Johnson, the former Apple Inc. retail chief, is losing support for his overhaul of J.C. Penney after saying last week that annual revenue fell 25 percent to $13 billion, the lowest since at least 1987. Customers have been increasingly alienated by marketing missteps, a failed attempt to transition away from coupons and sales and Johnson’s plan to turn most of its stores into collections of boutiques.

“We are less convinced that the course-correcting strategies being implemented around pricing and marketing will drive meaningful sales improvement,” wrote Weinswig, the No. 2 analyst for the sector in Institutional Investor’s latest rankings. Still, potential asset sales, a private takeover and senior leadership changes may support the shares and limit further declines, wrote Weinswig, who’s based in New York.

Only one analyst, Christopher Graja of Argus Research Corp., now recommends buying J.C. Penney shares, according to data compiled by Bloomberg. There are 13 holds on the company and eight sell ratings.

J.C. Penney fell 3.5 percent to $14.43, near an almost four-year low, at the close in New York. The stock has dropped 27 percent this year, the second-worst performance in the Standard & Poor’s 500 Index after Cliffs Natural Resources Inc.

Board Pressure

J.C. Penney directors, including hedge fund manager Bill Ackman, whose Pershing Square Capital Management LP is its biggest shareholder, may push to oust Johnson or sell the company if the sales plunge can’t be reversed this year, the Wall Street Journal reported yesterday, citing people familiar with the matter.

Vornado Realty Trust, once J.C. Penney’s second-biggest shareholder, sold 10 million shares of the company at $16.03 each this week, the New York-based real estate investment trust said in a regulatory filing yesterday. That’s 6.1 percent of the retailer’s common stock. Vornado, whose chairman Steven Roth is on J.C. Penney’s board, lost more than $200 million on the investment.

Martha Fallout

Macy’s Inc. and Target Corp. will benefit the most from J.C. Penney’s lack of a coherent promotional strategy and the potential consequences of the company’s deal to sell Martha Stewart branded merchandise being canceled by a lawsuit, Weinswig said. J.C. Penney also will be hurt by construction on its home departments that won’t end until early May, she said.

The company will continue consuming cash and need to raise additional capital, said Nagel, who’s also based in New York.

“The market is unlikely to afford JCP any benefit of the doubt until clear evidence of a turn emerges,” he wrote.

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