J.C. Penney Co.’s plan to fund its turnaround with cash from operations is in jeopardy as the department store chain’s biggest quarterly loss since 2004 boosts the chances it will need alternative sources of capital.
While Chief Financial Officer Ken Hannah said this week that the retailer was committed to financing its plan to make its stores more attractive with operating cash, a 32 percent decline in the fourth quarter from a year earlier helped drag its balance below a $1 billion target. That may lead Plano, Texas-based J.C. Penney to tap a $1.85 billion credit facility or issue debt or preferred shares, according to bond-research firm CreditSights Inc.
Creditors are fleeing J.C. Penney, whose debt rating Standard & Poor’s cut Thursday to a grade that indicates vulnerability to nonpayment, as Chief Executive Officer Ron Johnson struggles to shift course after reporting the lowest annual sales in more than two decades. Deteriorating operations have left the retailer with financial instruments called credit-default swaps that have converged with those linked to Sears Holdings Corp. and about a year before it runs out of cash at its current spending rate.
“It’s not profitable, and there’s not much in the way of near-term impetus that’s going to turn that around,” James Goldstein, a senior analyst at CreditSights in New York who rates J.C. Penney bonds “underperform,” said. “That means they’ll likely plug the hole with some sort of financing.”
The company, which spent $810 million on capital expenditures in the fiscal year ended Feb. 2, has adjusted cash of about $850 million, Hannah said on a Feb. 27 conference call to discuss fourth-quarter earnings. That means it can operate without financing for about 12 months, based on a free cash flow deficit of $822 million for the past year, according to data compiled by Bloomberg News.
Joey Thomas, a spokesman for the company, didn’t immediately respond to a request for comment about J.C. Penney’s finances.
“There might need to be some interim borrowing under the credit facility as cash should not really be allowed to go too much lower than it is now,” said Carol Levenson, director of research at Chicago-based Gimme Credit LLC. Gimme Credit rates J.C. Penney’s debt “deteriorating.”
J.C. Penney’s $400 million of 5.65 percent, senior unsecured bonds due June 2020, which traded as high as 102 cents on the dollar a year ago, dropped to a record-low 81 Thursday, giving it a yield of 9.31 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Johnson, the former Apple Inc. retail chief who joined as CEO in November 2011, has reversed his everyday low pricing strategy in recent months by adding sales, promotions and new price displays. Johnson has said his transformation of the firm, presented to investors in January 2012, would take four years.
J.C. Penney seeks to attract more fashion-conscious consumers by partnering with Canadian retailer Joe Fresh and making shop-in-shops with designers such as Nanette Lepore and Marchesa’s Georgina Chapman.
Investor confidence is waning after the company lost $4.3 billion in sales last year, bringing revenue to $13 billion, the lowest since at least 1987.
Its net loss in the quarter ended Feb. 2 widened to $552 million from $87 million a year earlier.
S&P responded by lowering J.C. Penney’s ratings to CCC+ with a negative outlook, calling the company’s liquidity position “less than adequate” based on the view that it “will need to draw substantially on its revolver to fund operations, or seek additional financing to continue its transformation.”
The company is graded B3 by Moody’s Investors Service, one level higher than S&P. Sears has the same ratings.
J.C. Penney’s market value has declined almost $3 billion since Johnson, recruited by its largest shareholder Bill Ackman, took the helm.
“We’ve never seen retailing results as bad as those presented by J.C. Penney,” Levenson wrote in a report Feb. 27.