J.C. Penney (JCP) IDRs Downgraded to B- at Fitch
Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) on J.C. Penney Co., Inc. (NYSE: JCP) and J.C. Penney Corporation, Inc. to 'B-' from 'B'. The Rating Outlook is Negative.
The rating downgrades reflect Fitch's concerns that there is a lack of visibility in terms of the company's ability to stabilize its business in 2013 and beyond after a precipitous decline in revenues leading to negative EBITDA of $270 million in 2012 (this figure excludes noncash pension expense, stock-based compensation, and restructuring charges). J.C. Penney will need to tap into additional funding to cover a projected FCF shortfall of $1.3 billion - $1.5 billion in 2013, which could begin to strain its existing sources of liquidity.
J.C. Penney's 25.2% decline in comparable store sales (comps) in 2012 reflects the challenges of moving toward a more everyday value strategy with significantly reduced promotions. The jury remains out on whether J.C. Penney has done some irrevocable damage or whether it can begin to stabilize its core revenue base and sustainably improve profitability of its business beginning the first quarter of 2013. It remains unclear whether the new shops and merchandise offerings can offset any continued declines in the non-shops business, which currently accounts for 92% of its square footage, in the second-half 2013.
Fitch expects that sales trends could remain in the negative low single digit range in 2013, with gross margin in the mid-30 percentage range relative to 32.5% for 2012. (This is still well below the 39% - 40% range the company should realize if inventory is appropriately aligned to sales expectations.) This would result in EBITDA of $150 million - $200 million, well below the minimum $1.2 billion - $1.3 billion levels needed to be FCF neutral.
The rating downgrades reflect Fitch's concerns that there is a lack of visibility in terms of the company's ability to stabilize its business in 2013 and beyond after a precipitous decline in revenues leading to negative EBITDA of $270 million in 2012 (this figure excludes noncash pension expense, stock-based compensation, and restructuring charges). J.C. Penney will need to tap into additional funding to cover a projected FCF shortfall of $1.3 billion - $1.5 billion in 2013, which could begin to strain its existing sources of liquidity.
J.C. Penney's 25.2% decline in comparable store sales (comps) in 2012 reflects the challenges of moving toward a more everyday value strategy with significantly reduced promotions. The jury remains out on whether J.C. Penney has done some irrevocable damage or whether it can begin to stabilize its core revenue base and sustainably improve profitability of its business beginning the first quarter of 2013. It remains unclear whether the new shops and merchandise offerings can offset any continued declines in the non-shops business, which currently accounts for 92% of its square footage, in the second-half 2013.
Fitch expects that sales trends could remain in the negative low single digit range in 2013, with gross margin in the mid-30 percentage range relative to 32.5% for 2012. (This is still well below the 39% - 40% range the company should realize if inventory is appropriately aligned to sales expectations.) This would result in EBITDA of $150 million - $200 million, well below the minimum $1.2 billion - $1.3 billion levels needed to be FCF neutral.