J.C. Penney (JCP) continues to be beaten with the ugly stick by Wall Street ratings agencies, as it should be.
On Monday, Moody’s downgraded the company’s credit rating to Caa3 from Caa1. A Caa rating, per Moody’s, is assigned to companies with very high credit risk. Moody’s also slashed its rating outlook on J.C. Penney to negative from stable.
J.C. Penney’s already battered stock fell another 6% to 32 cents on the news. Shares of J.C. Penney have crashed 72% year-to-date as coronavirus-related store closures call into question how long the debt-laden, money-losing retailer could hang on.
“Although J.C. Penney liquidity is adequate, the widespread store closures as a result of the coronavirus pandemic and the continued suppression of consumer demand is expected to pressure J.C. Penney's EBITDA [earnings before interest, taxes, depreciation and amortization], impede its turnaround strategy and weaken its leverage to unsustainably high levels,” Moody's vice president Christina Boni said in a statement.
J.C. Penney’s near-term business is bleak, Boni believes.
Boni expects J.C. Penney to have “significant” cash flow deficits this year and EBITDA declines as the coronavirus hammers store traffic. Moody’s thinks J.C. Penney’s EBITDA could plunge in excess of 80% this year before slowly recovering in 2021. J.C. Penney won’t see a return to 2019 levels of EBITDA ($600 million or so) until “well into” 2022, per Boni’s analysis.
Warns Boni, “As a result, J.C. Penney's leverage will remain at unsustainably high levels over the next two years. In addition, the company's work to define and execute its strategy to return to stabilizing its market position and improving profitability will be difficult in the current operating environment.”
Just last week Fitch lowered its outlooks for most of the major names in the department store sector, citing challenges stemming from the coronavirus. In particular to J.C. Penney, Fitch voiced concerns about the retailer’s liquidity position moving forward.
The actions from the major ratings agencies come at a God awful time for J.C. Penney. After years of stumbles, J.C. Penney entered 2020 trying to execute on a turnaround plan under CEO Jill Soltau. That plan could effectively be tossed in the trash, however, as all of J.C. Penney stores are closed and thousands of workers are furloughed.
It’s unclear when J.C. Penney’s stores will reopen, starving it of the cash it badly needs to survive. Remember, bills from landlords and suppliers (among other creditors) are still coming due. All the ratings agencies have done is made it far costlier for J.C. Penney to raise any form of capital this year. That will only hurt its chances of survival.
“I think it will be really difficult to survive,” Ron Johnson, founder of Enjoy and former J.C. Penney CEO, recently said on Yahoo Finance’s The First Trade about the outlook for department stores. “I think it will be hard for B and C malls to survive.”