Penney's stock offers 'very little value': Analyst


Investors who were "intrigued" by J.C. Penney's same-store sales gain last week should remain on the sidelines for now, Wells Fargo analyst Paul Lejuez wrote in a note to investors on Tuesday.

Despite posting a 6.2 percent same-store sales gain for the first quarter—its second straight quarter of positive comparable-store sales, following about two years of declines—the retailer's high level of debt means it offers "very little value" for investors," Lejuez said.

Gift cards are displayed for sale inside a J.C. Penney Co. store at the Collin Creek Mall in Plano, Texas.
Ben Torres | Bloomberg | Getty Images

He downgraded the department store's shares to "underperform" from "market perform," assigning the stock a target price between $5 and $6. J.C. Penney shares fell about 2 percent and were trading near $9 on Tuesday morning.

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"To put it simply, with comparisons as easy as they were, given their low level of gross margin, we believe comps should have been stronger," he wrote. "While the market tends to reward comp stories, for J.C. Penney, the sales productivity starting point is so low that even with its new-found comp momentum, they are likely losing a lot of money."

Good & bad for JC Penney

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.