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Announcement:

Moody's says J.C. Penney's rocky start to its strategic turnaround is a credit negative

Global Credit Research - 16 May 2012

New York, May 16, 2012 -- Department store chain J.C. Penney (Ba1 stable) announced a 20.1% sales decline and a 18.9% comparable store sales decline for the first quarter of 2012. While we expected J.C. Penney's first quarter sales to decline, this level of decline was worse than anticipated and clearly signals that the strategic turnaround got off to a difficult start.

Although we view this as a credit negative announcement, J.C. Penney's Ba1 Corporate Family Rating and stable outlook are currently unaffected. Our Ba1 Corporate Family Rating acknowledges that we expect J.C. Penney's 2012 and 2013 operating performance will be soft. While sales fell more than anticipated, we continue to forecast that J. C. Penney's debt to EBITDA will not rise above 4.25 times nor EBITA to interest expense fall below 2.25 times on a sustainable basis, levels we sight as prompting downward rating pressure. In fact, we anticipate that J.C. Penney's debt to EBITDA will likely be below 4.0 times and EBITA to interest expense will be above 2.25 times at February 2, 2013. Furthermore, the company continues to have sizable cash balances ($839 million at April 28, 2012) and a $1.5 billion asset based revolving credit facility. We note that J.C. Penney's elimination of its corporate dividend will further bolster its liquidity.

J. C. Penney launched the first stages of its strategic turnaround at the beginning of the first quarter which included a new pricing and promotion strategy along with a new media campaign. These changes drove a sizable reduction in store traffic, the largest driver of the sales decline. J.C. Penney attributes this to its media campaign not clearly explaining its new pricing strategy to consumers and has implemented some immediate changes to its media campaign.

Although we believe the changes to J.C. Penney's media campaign better explain its pricing strategy, we are concerned about J.C. Penney's performance over the near term. We anticipate monitoring J.C. Penney's ongoing performance closely for signs of improvement. Ratings could be negatively impacted should we not see signs of improvement in J.C. Penney's store traffic and reported sales.

Ratings could be downgraded should J.C. Penney's operating performance fall beyond our expectations or debt increase such that it becomes likely that debt to EBITDA would remain above 4.25 times and EBITA to interest expense would remain below 2.25 times.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.

J.C. Penney 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 $16.5 billion.

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.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's says J.C. Penney's rocky start to its strategic turnaround is a credit negative
No Related Data.

 

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