By  on August 21, 2013

It could have been worse.

That’s the early read from the financial community, which has been keeping tabs on what was potentially a liquidity crisis at J.C. Penney Co. Inc.

Given that the company reiterated its $1.5 billion estimate for year-end liquidity, in a combination of cash and its availability under its credit facility, the credit community seems content for now to continue OK-ing orders for shipment to Penney’s.

According to Bob Carbonell, executive vice president and chief credit officer for credit checking firm Bernard Sands, “We are telling clients to continue to deal with Penney’s on an order-by-order basis. It now remains to be seen how they do for the rest of the back-to-school selling season.”

The concern over Penney’s was precipitated at the end of July. As reported, factoring firm CIT had placed some orders on hold pending more information on those orders before making a final decision on approvals. That percolated some unfounded fear in the vendor community that the giant factoring firm had actually stopped approvals for shipment early next year. A source familiar with the situation and close to CIT has since confirmed that those rumors were false.

Now that Penney’s has posted second-quarter results, the overall sense is that there was nothing in the report that would warrant a change in credit support.

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“I think it’s the first time the company hit a liquidity number in years. Three months ago, the retailer said it would hit $1.5 billion in liquidity at the end of the year, and that’s what they did in their earnings report. I believe there is enough liquidity for the rest of the year,” Carbonell said.

Another credit analyst said, “There was no major red flag to chase people away. It was bad, but it could have been worse. While there was no major reason for optimism, there is some light at the end of the tunnel.”

A c-level executive at an apparel firm in charge of deciding credit risk for his company, who requested anonymity, said, “There was a lot of concern about whether they have enough cash in place. That is what people are responding to. With a plan in place, things are starting to look better. What they’re saying is they’re going back to their roots. I like it.”

One of the questions that remains concerns gross margins. For the quarter, gross margin fell to 29.6 percent from 33.2 percent. This c-level executive said it wouldn’t take much to even gain an improvement of 100 basis points, which would also be a sign of improvement for the retailer. “Penney’s can do that by loading up the inventory to drive sales. I feel pretty comfortable about the direction they’re heading in,” the executive said.

William Susman, founder of the boutique advisory and research firm Threadstone Partners, was more cautious, saying, “JCP is a capital-intensive turnaround with limited current liquidity. The vendor base has no choice but to sell them. However, they are out of the mall and in neverland if they believe they will make their margins.”

Penney’s chief executive officer Myron “Mike” Ullman 3rd said on a conference call with analysts, “Our private-brand penetration is central to restoring ourselves to historical gross margins and we believe this can be done during our turnaround.”

Penney’s chief financial officer Kenneth H. Hannah told Wall Street analysts that the margin rate was impacted by “unusually high markdowns and clearance merchandise sales, lower-than-expected sales in general and a return to promotional activities, including coupons and sales events as we return to a more competitive promotional pricing model.”

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Wells Fargo analyst Paul Lejuez rated Penney’s stock an “underperform,” in part due to inability to drive both traffic and conversion rate. He also said the retailer has been “burned by the effects of a failed turnaround strategy, which has created a hole that is just too deep.” Given the lower gross margins compared with a year ago, and the possibility that results don’t improve in the second half, he’s predicting a possible need for more working capital next year.

The issues raised in connection with gross margin and liquidity might be answered in the complete quarterly report that Penney’s will file with the Securities and Exchange Commission. The company has 45 days to file the report.

One lender in the factoring community said that report will answer more fully questions on the borrowing base.

So for right now, there’s no change in possible lending to vendors who ship to Penney’s. Once some lenders have a chance to go through the quarterly filing, the factoring community at least will have to make some decisions about future shipments to Penney’s.

According to a credit source, that’s because factors already operate on “paper-thin margins.” This source also speculated that perhaps what factors might do is add a surcharge to clients that wish to ship to Penney’s.

Some, such as CIT, already charge a 1 percent surcharge in connection with Penney’s orders.

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