NEW YORK (AP) -- Shares of J.C. Penney are falling Friday, after a UBS analyst downgraded the stock to a "Sell' rating, amid a deteriorating earnings outlook.
THE SPARK: UBS analyst Michael Binetti downgraded Penney's stock on Friday from "Neutral." He wrote that a deteriorating earnings outlook and emerging signs of cash flow distress will require "significant changes to (Penney's) turnaround strategy."
He now expects revenue at stores open at least a year to fall 28 percent instead of 20 percent for the fourth quarter, which includes the critical holiday shopping period. The measure is a key indicator of a retailer's health.
Binetti also believes that Penney's stock will be trading at $13 in the next 12 months, down from his original target of $21.
THE BIG PICTURE: Under CEO Ron Johnson, who came on board in November 2011, J.C. Penney has been undergoing a major overhaul, from pricing to changing the products it sells. But the most controversial move has been eliminating hundreds of sales events in favor of everyday lower prices.
By keeping prices consistently low, the hope was to get shoppers to buy more often. However, the new pricing plan has backfired. Shoppers, accustomed to big "Sale" signs, have fled to rivals, resulting in three straight quarters of losses and steep revenue drops since the plan started.
The outlook for the fourth quarter is growing more bearish. Penney is expected to report a 9 cents-per-share loss on sales of $4.27 billion, according to FactSet. That would mean a 21 percent drop in total sales from a year ago. Revenue at stores open at least a year is expected to fall 25 percent for the quarter, according to FactSet. Penney is expected to report fourth-quarter figures next month.
The department store chain, based in Plano, Texas, has been making changes to the pricing strategy, but worries are mounting that Penney won't be able to finance a campaign to carve its stores into a 100 specialty boutiques.
THE ANALYSIS: Binetti says that any credible revised plan will require a significant cut to midterm earnings per share because of deeper required price discounts, mounting evidence that current cash flows will not be enough to finance the timetable of the new shops and increased expenses to attract shoppers.
SHARE ACTION: Shares were down 4 percent, or 77 cents per share, to $18.38 in afternoon day trading. The stock is down 46 percent since the beginning of last year.
Johnson's plan received a warm reception at first. Investors began pushing Penney's stock up after he announced the pricing plan in late January 2012: It rose nearly 25 percent to peak at $43 in the days after the plan was rolled out last February.