Shares of J.C. Penney Company Inc (JCP)  pushed through early selling in Tuesday trading, ultimately finishing higher 1.08% to $3.28. 

Given the most recent report from Credit Suisse, the pressure on the stock isn't all that surprising. The analyst team is out with a slew of new ratings in the retail sector, giving a positive nod to many companies and outfits.

However, J.C. Penney wasn't one of them. They initiated the stock with an underperform rating and $2.50 price target. From Monday's closing price, the target implies 35% downside to the stock.

Here are several of their concerns:

Slowing Sales

"(1) Appliances (now in majority of chain, lapping 150 basis point+ comparable store sales lift in '17); (2) Beauty (Sephora in 75% of stores, Ulta (ULTA) adding 100 stores/year, Macy's (M) beauty revamp); and (3) Home (Amazon (AMZN) /Costco (COST) /off-price accelerating in category). Importantly, in addition to cash constraints to service debt (net debt=4.6x trailing-12-months EBITDA ex-gains), J.C. Penney will see almost no tax savings, leaving it disadvantaged as competitors such as Macy's/Kohl's (KSS) reinvest in growth initiatives or lower prices."

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Margin Pressures

"While high-gross margin categories could improve (women's apparel lapping mid-single digit percentage declines in '17), most growth will still be from low-gross margin categories (appliances, eCommerce). Importantly, we're particularly concerned that competitors will reinvest tax savings in lower prices. J.C. Penney's ~2% EBIT profit margin ex-gains in '17 leaves little room to lower margins to compete. In '18, we assume comparable store sales up 1.1%, gross margin up 40 basis points, and operating expenses down 2.7% year over year (which may be aggressive as industry credit income slows), resulting in $920 million in EBITDA (Street: $919 million). However, we think any investment in price by competitors could create incremental downside EBITDA risk for J.C. Penney."

This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.

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