Fitch DOWNGRADES J.C. Penney's IDR to 'B'; Outlook Negative,Remain in the Negative Low Single Digit Range in 2013
Fitch Downgrades J.C. Penney's IDR to 'B'; Outlook Negative
NEW YORK, Nov 13, 2012 -- Fitch Ratings has downgraded its Issuer Default Ratings (IDRs) on J.C. Penney Co., Inc. and J.C. Penney Corporation, Inc. to 'B' from 'BB-'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this press release.
The rating downgrades reflect dismal third quarter performance, where sales declines continued to accelerate, and Fitch's concern that top line will likely get worse during the critical holiday season when promotional events tend to pick up to drive traffic. For 2013, there is a lack of visibility in terms of the company's ability to stabilize its core business, which currently accounts for 90% of its footprint. It remains unclear whether the new shops and merchandise offering can offset any continued declines in the existing business in second half 2013.
J.C. Penney continues to struggle in terms of moving toward a more everyday value strategy with significantly reduced promotions. The recent revisions around the promotional stance and messaging further pressured volume and comps declined 26.1% in the third quarter versus an average of 20% in the first half of the year. Gross margins declined approximately 500 basis points to a record low of 32.5%. Fitch expects gross margin could be in the mid-20% range for the fourth quarter on comp decline of 25%-30% given heightened clearance markdowns.
As a result, Fitch expects 2012 adjusted EBITDA could turn negative in the $100-$200 million range, a steep drop from $1.3 billion in 2011. (These figures exclude non-cash pension expense, stock-based compensation and restructuring charges).
Fitch expects that sales trends could remain in the negative low single digit range in 2013 and gross margin in the mid-30s percent range (still below the normalized 39-40% range the company should realize if inventory is appropriately aligned to sales expectations). This would result in EBITDA of $250-$300 million range next year. Sales declines in the mid-single digits range with gross margin in the mid-30s percent range could result in negative EBITDA. However, stabilization in sales trends and gross margin in the 39-40% range could see EBITDA improve to the $850 million to $950 million. First quarter 2013 results will provide a first glimpse at where underlying sales start leveling off.
Free cash flow is expected to remain materially negative in 2013 and 2014 and based on current projected EBITDA levels, Fitch expects the company will have to start drawing down on its revolver to fund annual capital expenditures of $800 million and peak seasonal working capital needs.
The company has no debt maturities prior to October 2015 (and maturities between 2015 and 2018 are $200 million - $300 million annually), but it could explore various financing options to shore up liquidity and fund its investments in the new shops. J.C. Penney's pension fund remains well funded, and Fitch does not expect the company will need to make any cash contributions in 2012 and 2013.
For issuers with IDRs at 'B+' and below, Fitch performs a recovery analysis for each class of obligations of the issuer. The issue ratings are derived from the IDR and the relevant Recovery Rating and notching, based on Fitch's recovery analysis that places a liquidation value under a distressed scenario of approximately $5.0 billion as of Oct. 27, 2012 for J.C. Penney.
Look at what the bonds are saying and the preferred---there always right----------------------------says there in really dire straights----im a buyer at $3. bucks if no banko immenant at that time///////////////