J.C. Penney Still in Trouble

Douglas A. McIntyre

J.C. Penney Co. Inc. (NYSE: JCP) management got a bit of good news. Moody’s adjusted its outlook on the company’s Corporate Family Rating from negative to stable. However, the overall rating of an extremely poor Caa1 means the credit rating agency believes prospects for the retailer remain extremely troubled. Although J.C. Penney has been out of the business headlines recently, its chances for recovery remain dim as the critical holiday sales season approaches.

In more detail, Moody’s researchers commented:

Although J.C. Penney sales and gross margins have notably improved in 2014, its profitability and credit metrics remain very weak. Further improvement in earnings is required for J.C. Penney to have a sustainable capital structure. J.C. Penney’s Caa1 Corporate Family Rating reflects our belief that J. C. Penney will continue to generate operating losses over the next twelve to eighteen months but that the level of operating losses will abate further. The rating also incorporates the significant weakness in J.C. Penney’s credit metrics.

They did, however, praise the amount of cash the retailer had to buy it time to post profits.

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A better marker of J.C. Penney’s prospects is its stock price. At first glance, the marker is good. Its share price is up 13% this year, which outperforms the S&P 500. Looking over a longer period, however, its stock price is down 60% in two years. During the same period, the S&P 500 is higher by more than 30%. Shares of troubled industry leader, Wal-Mart Stores Inc. (NYSE: WMT) are a bit better than flat.

J.C. Penney’s argument for recovery remains weak. Same-store sales rose 6% in the most recently reported quarter. That comes after two years of 20% or more declines. While revenue rose 5.1% for the same period, to $2.8 billion, J.C. Penney lost $172 million. The final quarter of the year, the one in which most retailers make the majority of their profits, has to be particularly strong for J.C. Penney to prove a real recovery.

One of J.C. Penney’s problems is that it does not exist in a vacuum. Strong rivals like Macy’s Inc. (NYSE: M) continue to do well, although its management expressed concern about the months ahead. Desperate rivals like Sears Holdings Corp. (NASDAQ: SHLD), which operates Sears and Kmart, almost certainly will resort of discounting to pick up holiday sales. J.C. Penney could find itself where it has been for years — trapped between two sets of retailers.

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