Approximately $2.9 Billion of Debt Securities Affected
New York, August 10, 2012 -- Moody's Investors Service today downgraded the long term ratings
of J.C. Penney Company, Inc. ("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.:
Corporate Family Rating to Ba3 from Ba1
Probability of Default Rating to Ba3 from Ba1
For J.C. Penney Corporation, Inc.:
Senior unsecured to Ba3 (LGD 4, 59%) from Ba1 (LGD 4,
63%)
Senior unsecured shelf to (P) Ba3 from (P) Ba1
The following rating is affirmed
Speculative Grade Liquidity rating at SGL-1
The downgrade to Ba3 acknowledges Moody's belief that JCP will continue
to face sizable double digit sales declines for the remainder of 2012
until it anniversaries the launch of its new pricing strategy.
The downgrade also acknowledges Moody's belief that JCP will face
gross margin pressure in the third quarter as it works through the clearance
of the second quarter excess inventory. As a result, Moody's
no longer believes that JCP's credit metrics will return to levels
indicative of a Ba1 rating over the next twelve to eighteen months.
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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London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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Margaret Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades J.C. Penney to Ba3, outlook stable
