Moody's Lifts Outlook on J.C. Penney (JCP) to Positive; Operating Performance Shows Signs of Improvement

Moody's Investors Service revised J.C. Penney Company, Inc.'s (NYSE: JCP) ("J.C. Penney) rating outlook to positive from stable. Moody's also affirmed the company's Caa1 Corporate Family Rating, and raised the company's Speculative Grade Liquidity rating to SGL-1 from SGL-2. All ratings affirmed are detailed below.

"The rating outlook revision to positive from stable reflects Moody's view that JC Penney's operating performance has shown signs of improvement as a result of better merchandising, cost controls, and integration of its online business" said Moody's Vice President Scott Tuhy. He added, "we have seen positive momentum building for the company to achieve $700 to $800 million of adjusted EBITDA, a level in which earnings would fully cover cash flow and interest". The upgrade in the Speculative Grade Liquidity rating primarily reflects the company's improved operating performance as we expect free cash flow to be near break-even levels and the company's meaningful cash balances are sufficient to cover expected seasonal working capital needs.

J.C. Penney Company, Inc.

The following ratings were affirmed:

Corporate Family Ratings at Caa1

Probability of Default Rating at Caa1-PD

The following rating was upgraded:

Speculative Grade Liquidity rating to SGL-1 from SGL-2

For J.C. Penney Corporation, Inc.

The following ratings were affirmed:

$1.85 billion asset based revolving credit facility due June 2019 at B1 (LGD2)

$500 million asset based "first in last out" term loan due June 2019 at B2 (LGD3)

$2.2 billion term loan due 2018 at B2 (LGD3)

Senior Unsecured Notes at Caa2 (LGD5)

Medium Term Notes Program at (P)Caa2

Senior Unsecured Shelf at (P)Caa2

RATINGS RATIONALE

J.C. Penney's Caa1 Corporate Family Rating reflects the company's weak credit metrics with adjusted debt to EBITDA at around 10 times and negative interest coverage for the twelve months ending May 2,2015. The rating also reflects the company's ongoing operating losses, with the company reporting an operating loss of $200 million for the twelve months ending May 2, 2015. The Caa1 CFR rating also reflects our expectation that the company's credit metrics will remain weak over the next twelve to eighteen months. We also expect J.C. Penney's operating performance to continue to gradually improve, and the rating reflects our view that further improvement in earnings is required for J.C. Penney to have a sustainable capital structure. J.C. Penney's Caa1 rating is supported by the company's very good liquidity and lack of near dated debt maturities which provides it with time to implement its turnaround efforts to grow sales, gross margins, and free cash flow. We estimate that J.C. Penney will likely be free cash flow breakeven to slightly negative in 2015, given J.C. Penney's reduced level of capital expenditures, better inventory management, and strengthened performance. We believe J.C. Penney's $1,04 billion in available cash at May 2, 2015 and its $1.85 billion asset based credit facility provide it with very good liquidity which supports the potential range of cash flow outcomes.

The positive rating outlook acknowledges J.C. Penney's continued progress with sales growth, margin expansion, and increasing momentum towards a sustainable capital structure evidenced by its recent upward guidance. While we still have concerns in the company achieving its long term targets, we believe the company has many levers to pull in the event its sales growth is softer than panned. The positive rating outlook also reflects the company's good liquidity and lack of near dated debt maturities which provides the company with the time to implement its turnaround efforts.

Given the significant weakness is credit metrics, an upgrade is unlikely at the present time. Over time, ratings could be upgraded should earnings improve such that it becomes likely that debt to EBITDA will remain below 7.25 times and EBITDA-Capital Expenditures to interest expense approaching 1.0 time while maintaining a good liquidity profile.

Ratings could be downgraded should J.C. Penney's liquidity erode, should its sales and earnings not continue to evidence signs improvement, or should the overall probability of default increase. The rating outlook could be revised to stable should the company's operating performance not meaningfully improve above current levels.

The principal methodology used in these ratings was Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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