In a research note this morning, Credit Suisse analyst Christian Buss upgraded Nordstrom (JWN) and Burlington Stores (BURL) to Outperform, a buy-equivalent rating, and downgraded J.C. Penney (JCP) and Kohl's (KSS) to Underperform, a sell-equivalent rating, following an analysis of the relative long-term competitive position across his broadlines universe.

SHIFT TO ECOMMERCE, LOWER-RETURN CHANNELS: According to Buss' analysis of industry growth, eCommerce should grow from 15%-20% of industry sales to 35%- 40%, while deep-value retail will grow from 20% of industry sales to well over 30%. The analyst told investors that the transition to eCommerce and deep-value has already disrupted store productivity, eroded profitability, and shifted the marginal productivity of capital investments. Historically high ROIC investments in mall and strip center real estate assets are shifting toward significantly lower ROIC technology investments with rapid depreciation cycles, he argued, adding that store closures appear to be inevitable. Macy's (M), Urban Outfitters (URBN), and Nordstrom look to be leading the way on this front, he contended. Moreover, the analyst pointed out that eCommerce investment is the baseline requirement to maintain market share, and said he believes that one of the few offsets to deflationary pressure is the investment in brands that consumers actively seek out.

BUY NORDSTROM, BURLINGTON STORES: Credit Suisse's Buss upgraded Nordstrom to Outperform from Neutral, calling it one of the "best franchises in the retail sector" and saying it has been making "appropriate investments" in speed of execution, eCommerce, and brand access that should lead to outsized earnings growth relative to peers. Further, the analyst told investors that he sees the company as differentiated from other mall anchors due to its position not based on promotion as well as its ability to attract emerging brands and its outstanding customer service. Also this morning, Buss upgraded Burlington Stores to Outperform, saying it is a "self-help story" in a fundamentally well positioned group, with levers to pull in more attractive merchandising and underpenetrated categories. The analyst noted that the company is also focused on speeding up the inventory turn and converting large format stores to smaller ones which he applauds.

SELL J.C. PENNEY, KOHL'S: Conversely, Buss downgraded J.C. Penney to Underperform from Neutral, as limited top-line opportunities delay a turnaround. The analyst pointed out that the company is focused on paying down debt using free cash flow, assets sales, and refinancing, which could potentially lead to lower leverage going forward. The issue of positive revenue growth remains a "major concern" for a meaningful and sustained improvement in cash flow and profitability, he argued, adding that he is expecting limited top-line growth given net closings of stores and stagnant apparel and accessories merchandising categories. Additionally, Buss downgraded Kohl's to Underperform as operating income is facing pressure from increasing penetration of eCommerce sales and deterioration in store margins. The analyst also noted that strategic alternatives, including a leveraged buyout to a private equity firm, seem unlikely given declining cash flow and no easy cost reduction opportunities.

WHAT'S NOTABLE: The ratings reshuffling in the department store sector come alongside news this morning from another major retailer, Target (TGT), which lowered its earnings and comparable store sales forecasts for the fourth quarter after its holiday period sales were softer than expected.

PRICE ACTION: In morning trading, shares of Nordstrom and J.C. Penney have dropped over 2% to $43.43 and $6.76, respectively, while Kohl's stock has slipped over 3% to $40.07. Shares of Burlington Stores are fractionally down to $83.43.