Moody's Cuts JCPenney's (JCP) CFR, PDR from Ba1 to Ba3; Outlook Stable; Affirms SGL-1
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Moody's Investors Service today downgraded the long term ratings of J.C. Penney Company, Inc. (NYSE: JCP), including its Corporate Family Rating and Probability of Default Rating to Ba3 from Ba1. At the same time, Moody's affirmed the Speculative Grade Liquidity rating of SGL-1 which represents very good liquidity. The rating outlook is stable.
The following ratings were downgraded
For J.C. Penney Company, Inc.:
On August 10th, JCP announced second quarter results which were significantly worse than Moody's expectations of a -15% decline. JCP's second quarter sales results indicated an acceleration in the pace of decline to a -21.7% comparable store sales decline compared to -18.9% in the first quarter. In addition, EBIT also declined significantly in the second quarter to $(183) million compared to $81 million last year.
The Ba3 rating reflects JCP's continued very good liquidity from its $888 million in cash at July 28, 2012 and a $1.5 billion undrawn asset based revolving credit facility expiring April 2016. It also reflects that JCP's nearest debt maturity is not until 2015 when its $200 million 6.875% medium term notes mature. JCP's very good liquidity and lack of near dated debt maturities provide it with the flexibility to weather the sizable traffic declines as a result of the pricing strategy change. It also provides time to work through the disruption in the stores of the construction of the shops and to develop a catalyst to bring back customer traffic. Although Moody's believes that the new shops are compelling, Moody's does not expect the launch of these shops nor the changes to JCP's media strategy will do much to abate the sizable sales declines in the short term particularly as the stores face the disruption of additional shop construction into September. Moody's believes the sales declines primarily reflect the loss of a customer who was only in JCP as a result of its former heavily promotional strategy. In Moody's opinion, it is currently unclear as to how JCP will stimulate customer traffic going forward and how long it will take to bring the customer back.
The Ba3 rating balances the near term weakness in JCP's profitability and credit metrics against a longer term view that ultimately its shops concept and revitalized merchandise will drive higher gross margins increasing profitability such that credit metrics will improve back to levels supportive of a Ba3 level. Moody's notes that JCP debt to EBITDA at July 28, 2012 was 5.6 times, a level more indicative of a B rating and EBITA to interest expense was 1.0 time, a level more indicative of a Caa rating. Moody's anticipates that credit metrics will erode further from these levels but that the erosion will be temporary.
The stable outlook acknowledges Moody's belief that in 2013 JCP's gross margins should begin to increase driving an improvement in credit metrics back to levels indicative of a Ba3 level. The stable outlook also reflects JCP's financial flexibility to weather the disruption of the strategic changes given its very good liquidity and lack of a near dated debt maturities.
Moody's will continue to monitor JCP's performance closely. Moody's will focus on the performance of JCP's recently launched Arizona, Levi's, and Buffalo shops, particularly how the shop launches impact store traffic and overall sales. Moody's will also focus on the execution of the launch of the Liz Claiborne, JCP, and Izod shops later this fall along with their performance and impact of store traffic and sales. Finally Moody's will continue to assess the likely trajectory of JCP's credit metrics over the next twelve to eighteen months including the timing of when they would likely recover to levels indicative of a Ba3 rating.
Downward rating pressure would develop should the pace of sales decline or gross margin erosion accelerate meaningfully in the third and fourth quarters of 2012. Ratings could be downgraded should the sales declines not abate once JCP anniversaries the launch of its new pricing strategy in the first quarter of 2013 or should gross margins not begin to recover in the first quarter of 2013. Quantitatively ratings could be downgraded should it become likely that debt to EBITDA will remain sustained above 5.5 times over the longer term or EBITA to interest expense will remain sustained below 1.75 times.
Given the recent downgrade, it is unlikely that ratings will be upgraded over the near term. However, ratings could be upgraded should signs emerge that strategic changes implemented by JCP are gaining traction as evidenced by a meaningful improvement in gross margins to historic levels while maintaining stable to improving sales trends. Quantitatively, an upgrade would require operating performance to improve such that debt to EBITDA is likely to remain sustained below 4.5 times or EBITA to interest expense likely to remain sustained above 2.25 times.
J.C. Penney Company, Inc. is one of the U.S.'s largest department store operators with about 1,100 locations in the United States and Puerto Rico. It also operates a website, www.jcp.com. Revenues are about $14 billion.
The principal methodology used in rating J.C. Penney was the was the Global Retail Industry Methodology published in June 2011. Please see the Credit Policy page on Moodys.com for a copy of this methodology.
The following ratings were downgraded
For J.C. Penney Company, Inc.:
- Corporate Family Rating to Ba3 from Ba1
- Probability of Default Rating to Ba3 from Ba1
- Senior unsecured to Ba3 (LGD 4, 59%) from Ba1 (LGD 4, 63%)
- Senior unsecured shelf to (P) Ba3 from (P) Ba1
- Speculative Grade Liquidity rating at SGL-1
On August 10th, JCP announced second quarter results which were significantly worse than Moody's expectations of a -15% decline. JCP's second quarter sales results indicated an acceleration in the pace of decline to a -21.7% comparable store sales decline compared to -18.9% in the first quarter. In addition, EBIT also declined significantly in the second quarter to $(183) million compared to $81 million last year.
The Ba3 rating reflects JCP's continued very good liquidity from its $888 million in cash at July 28, 2012 and a $1.5 billion undrawn asset based revolving credit facility expiring April 2016. It also reflects that JCP's nearest debt maturity is not until 2015 when its $200 million 6.875% medium term notes mature. JCP's very good liquidity and lack of near dated debt maturities provide it with the flexibility to weather the sizable traffic declines as a result of the pricing strategy change. It also provides time to work through the disruption in the stores of the construction of the shops and to develop a catalyst to bring back customer traffic. Although Moody's believes that the new shops are compelling, Moody's does not expect the launch of these shops nor the changes to JCP's media strategy will do much to abate the sizable sales declines in the short term particularly as the stores face the disruption of additional shop construction into September. Moody's believes the sales declines primarily reflect the loss of a customer who was only in JCP as a result of its former heavily promotional strategy. In Moody's opinion, it is currently unclear as to how JCP will stimulate customer traffic going forward and how long it will take to bring the customer back.
The Ba3 rating balances the near term weakness in JCP's profitability and credit metrics against a longer term view that ultimately its shops concept and revitalized merchandise will drive higher gross margins increasing profitability such that credit metrics will improve back to levels supportive of a Ba3 level. Moody's notes that JCP debt to EBITDA at July 28, 2012 was 5.6 times, a level more indicative of a B rating and EBITA to interest expense was 1.0 time, a level more indicative of a Caa rating. Moody's anticipates that credit metrics will erode further from these levels but that the erosion will be temporary.
The stable outlook acknowledges Moody's belief that in 2013 JCP's gross margins should begin to increase driving an improvement in credit metrics back to levels indicative of a Ba3 level. The stable outlook also reflects JCP's financial flexibility to weather the disruption of the strategic changes given its very good liquidity and lack of a near dated debt maturities.
Moody's will continue to monitor JCP's performance closely. Moody's will focus on the performance of JCP's recently launched Arizona, Levi's, and Buffalo shops, particularly how the shop launches impact store traffic and overall sales. Moody's will also focus on the execution of the launch of the Liz Claiborne, JCP, and Izod shops later this fall along with their performance and impact of store traffic and sales. Finally Moody's will continue to assess the likely trajectory of JCP's credit metrics over the next twelve to eighteen months including the timing of when they would likely recover to levels indicative of a Ba3 rating.
Downward rating pressure would develop should the pace of sales decline or gross margin erosion accelerate meaningfully in the third and fourth quarters of 2012. Ratings could be downgraded should the sales declines not abate once JCP anniversaries the launch of its new pricing strategy in the first quarter of 2013 or should gross margins not begin to recover in the first quarter of 2013. Quantitatively ratings could be downgraded should it become likely that debt to EBITDA will remain sustained above 5.5 times over the longer term or EBITA to interest expense will remain sustained below 1.75 times.
Given the recent downgrade, it is unlikely that ratings will be upgraded over the near term. However, ratings could be upgraded should signs emerge that strategic changes implemented by JCP are gaining traction as evidenced by a meaningful improvement in gross margins to historic levels while maintaining stable to improving sales trends. Quantitatively, an upgrade would require operating performance to improve such that debt to EBITDA is likely to remain sustained below 4.5 times or EBITA to interest expense likely to remain sustained above 2.25 times.
J.C. Penney Company, Inc. is one of the U.S.'s largest department store operators with about 1,100 locations in the United States and Puerto Rico. It also operates a website, www.jcp.com. Revenues are about $14 billion.
The principal methodology used in rating J.C. Penney was the was the Global Retail Industry Methodology published in June 2011. Please see the Credit Policy page on Moodys.com for a copy of this methodology.
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