Lejuez said his downgrade does not mean that J.C. Penney is failing to make progress. But to be worth its current valuation of $6.9 billion, the retailer would need to post steady comparable-store sales for the rest of the year, accelerate those sales in the next two years, achieve a much stronger gross margin, and limit its expenses.
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It would also require the discounter to recapture almost $2 billion in sales—a feat Lejuez doesn't think competitor Macy's will allow to happen.
"We believe if there were signs J.C. Penney was beginning to take back significant market share, Macy's would turn up the pressure," he wrote.
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Investors sent the department store's shares higher after it reported earnings on Thursday afternoon. Along with improved sales, analysts cheered the company's product mix, which eliminated all traces of former CEO Ron Johnson's more fashion-forward labels.
Penney's shares have moved 8.5 percent higher from Thursday's close.
Disclosure: Lejuez does not personally own J.C. Penney shares, but Wells Fargo plans to solicit investment banking business from the retailer in the next three months.
—By CNBC's Krystina Gustafson.