Analyst says home unit adding to JC Penney's woes

Credit Suisse analyst Michael Exstein said Wednesday that he believes that J.C. Penney's recent revamp of its home department may have actually added to its challenges, rather than helping improve its business as the retailer had hoped.

THE OPINION: J.C. Penney Co. Inc. launched revamped home departments in 500 of its 1,100 stores in June.

The new stores feature splashy displays of products by designers and celebrities like Jonathan Adler, Michael Graves and Martha Stewart. The company hopes the new home products, which range from classic to modern styles, will appeal to the company's broad mix of shoppers. It also added more gift and furniture items than previously offered and it brought back its drapery business.

The retailer also said that it will run it as a promotional business, with plenty of sales planned, a change from the former CEO's attempt to get rid of most sales.

J.C. Penney's home department was once a mainstay of its business, but the company let the department's strength slip in recent years. The struggling retailer hopes the updated department will attract back customers after a bold attempt at remaking the department store chain failed.

While J.C. Penney invested heavily in the relaunch, Exstein believes that this launch may cause more harm than good.

The analyst said that he visited a number of the newly revamped stores and believes that gross margins will be lower than originally anticipated. That could cut into J.C. Penney's profitability.

A representative for J.C. Penney could not be reached immediately for comment.

Exstein said pricing on most of the home merchandise has been discounted by at least 30 percent, while clearance levels elsewhere in stores are up. He also noted that customer traffic is heaviest in clothing clearance areas and light elsewhere in stores, suggesting that shoppers are focused solely on the lowest prices and the changes have not gained traction.

The analyst lowered his earnings forecast for the second and third quarter and said that "while management is far more realistic than previous management about what it is attempting to do, the challenge remains daunting in the near term." He said that investor expectations for a rapid sales and profit recovery need to be tempered. Exstein has an "Underperform" rating and a $15 price target on the company's stock.

THE STOCK: Shares of the Plano, Texas company fell nearly 2 percent to $16.86 by midday amid a broader market uptick. The company's shares, which have been falling since early 2012, are at the lower end of their 52-week trading range of $13.55 to $32.55.