JC Penney shares slide as UBS sees worse holiday sales

J.C. Penney Co Inc slid as much as 8 percent on Friday after UBS published a research note saying holiday quarter sales have likely been worse than expected and questioned the retailer's ability to roll out its new shops on schedule.

Penney, which operates 1,100 department stores, last January announced a bold turnaround plan that called for the elimination of most coupons and sales events, along with the eventual transformation of each of its 700 largest stores into a collection of 100 shops for brands like Levi's and PVH Corp's Izod.

But customers, trained for decades to respond to discounts, balked at the new pricing, leading to a dramatic deterioration in business, including a 26.1 percent drop last quarter in Penney's sales at stores open at least a year.

UBS analyst Michael Binetti lowered his forecast for Penney's fiscal fourth quarter, which is still underway and includes the holiday period, and expects same-store sales to decline 28 percent, from an earlier projection of a 20 percent decline.

Penney is expected to report quarterly sales and earnings numbers in late February.

UBS downgraded Penney stock to sell from neutral and set a price target of $13, down from $21.

Shares of Penney were down 5.5 percent to $18.10 in noon trading on the New York Stock Exchange. They fell as low as $17.61 earlier in the day.

Pressured to improve its performance, Penney did relent on its no-discounts approach last month, with signs in stores clearly showing markdowns, and offered shoppers "gift" coupons, moves Binetti said would dent gross profit margin.

"A reversion to in-store discounting in (the fourth quarter) suggests that same-store sales plans are below plan," Binetti wrote in his note to clients.

Worsening sales numbers could hurt its ability to carry out the roll-out of the next shops, which have been well received and so far proved to generate more sales per square foot.

"We believe JCP may have to slow the roll-out of new high productivity shops," he wrote.

So far the shops, which also include spaces for the new 'jcp' private brand, account for only 11 percent of the selling space at the stores being transformed.

The company will open shops for homegoods designer Jonathan Adler and fashion retailer Joe Fresh among others this spring.

The retailer, which declined to comment, said in November it would have $1 billion in cash on hand at year-end and could self-fund its transformation. But its sales performance casts doubt on that, Binetti said.

Still, J.C. Penney Chief Executive Ron Johnson told trade publication Women's Wear Daily this week that Penney's transformation was on track and would be completed in 2015 as planned.

Concerns about Penney have grown as evidence mounted that the holiday season proved to be difficult, with many retailers forced to offer deeper than expected discounts.

Kohl's Corp last week lowered its holiday quarter profit forecast because of the need to clear unsold merchandise and Macy's Inc (M.N) lowered its quarterly sales and profit forecasts.