Shares of J.C. Penney Co Inc (JCP.N) slid as much as 8 percent on Friday after UBS said holiday-quarter sales would likely be worse than it had expected and it questioned the retailer's ability to roll out 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 (PVH.N) Izod.
But customers, trained to respond to discounts, balked at the new pricing, leading to a dramatic deterioration in business. The company suffered a 26.1 percent drop in sales at stores open at least one year in its fiscal third quarter ended October 27.
UBS analyst Michael Binetti, in a research note, lowered his forecast for Penney's fiscal fourth quarter, which closes later this month and includes the holiday period. He now expects same-store sales to decline 28 percent, compared with an earlier projection for a 20 percent decline.
Penney is expected to report quarterly results in late February.
UBS downgraded its rating on Penney's stock to "sell" from "neutral" and set a price target of $13, down from $21.
Shares of Penney were down 4.6 percent to $18.26 in afternoon trading, after falling as low as $17.61 earlier.
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 that Binetti said would dent gross profit margin.
"A reversion to in-store discounting ... suggests that same-store sales plans are below plan," Binetti wrote in his note to clients.
Worsening sales numbers could hurt Penney's ability to roll out the next shops, which have been well received and so far have generated more sales per square foot.
"We believe JCP may have to slow the roll-out of new high productivity shops," he wrote.
Other analysts paint a less dire picture, saying Penney's holiday quarter was helped by advertising and inserts that emphasized deals to shoppers, as well as signs in stores.
"This at least helped stanch some of the hemorrhaging. It got people back in the stores," Craig Johnson, president of Customer Growth Partners, told Reuters.
His team regularly does store checks across the country, looking at many retailers, and Johnson believes things improved for Penney compared with previous quarters. CGP also forecasts a double-digit percentage drop in sales, but nothing as dramatic as Binetti's forecast.
So far the shops, which include space 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.
J.C. Penney declined to comment. In November it said 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 the 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 (KSS.N) 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.
(Reporting by Phil Wahba in New York; Editing by Tim Dobbyn and Leslie Adler)