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Retail's bloodbath creates buying opportunity for this department store: Analyst

Department stores' first-quarter bloodbath didn't spare any of the category's major players. Yet for one analyst, a subsequent pullback in the space is giving investors a chance to buy into J.C. Penney's turnaround story.

RW Baird analyst Mark Altschwager on Monday upgraded Penney shares to "outperform" from "neutral," saying the stock's 30 percent pullback from its March highs positions the "higher-risk" stock as a bigger opportunity. The retailer's shares rose slightly in early trading Monday, before reversing their gains to close down 2.5 percent at $7.39.

"We're not blind to secular pressures facing brick-and-mortar retail — especially department stores with large footprints," Altschwager told investors. "However, there is a credible turnaround story unfolding at J.C. Penney."

The department store last week reported a loss of 32 cents a share, beating analysts' forecasts by 6 cents. However, both its revenue and same-store sales results fell short of expectations, despite the retailer's easy comparisons.

Under the leadership of CEO Marvin Ellison, Penney has been trying to recover market share it lost during a failed turnaround strategy. Though it has made up some ground, its revenues were just $12.6 billion last year, compared with nearly $20 billion roughly a decade earlier.

The company's growth plans are further challenged by troubles in the department store space, which is losing share to off-price and online players. Last week, Macy's, Nordstrom, Kohl's and Dillard's all reported their worst comparable sales results since the Great Recession, making Penney the relative winner.

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Not everyone, however, is as confident in the chain's plan. Citi analyst Paul Lejuez told investors Monday that although Penney managed expenses well during the first quarter, "the market needs signs that the top-line turnaround is sustainable, and they didn't get that this quarter."

"With apparel weak, we can't blame them for trying new things in home," Lejuez said, referring to the company's strategic shift toward window treatments, appliances and other household goods. "But big picture, having a poorly positioned 1,000-plus store chain is why they have to do things like this."

"While these initiatives seem more logical, we don't believe they are enough to cure J.C. Penney's traffic problems," Lejuez said.