Standard & Poor’s debt analysts came up with Sears Holdings Corp., General Motors Co. and Ford Motor Co.
Penney’s nearly $1 billion loss and 25 percent sales decline last year leave it in mostly uncharted retail waters. And while Myron “Mike” Ullman 3rd, on his second tour as chief executive officer, is working to calm vendors and get Penney’s back on an even keel, lenders are nervous and watching closely for each new development — much like vendors were keeping ultraclose watch on Sears a year ago.
Factors have imposed a roughly 1 percent surcharge on the vendors financing shipments to Penney’s and some are beginning to grumble that the company isn’t communicating enough with its lenders. “The concern is they’re losing money, they don’t know how much money they’re going to lose in cash burn in the first quarter and we haven’t been able to get information from them,” said one financial source. “They’re not giving us a budget that says to us, every month this is what they’re going to burn [through].”
Other factors said they were satisfied with the retailer, for now.
Penney’s has some cushion, but not much. The company doesn’t have any debt coming due until 2015, but it does need to keep its vendors and lenders happy — or least happy enough so they still shop goods to them.
While that’s a common situation in retail, the speed of Penney’s decline — a quarter of its market share in one year — makes it a special case.
But Standard & Poor’s debt analysts David Kuntz and Ana Lai pointed to Sears’ situation as a good analogy for Penney’s broader problems.
Both retailers have been reshaped by activist investors, both have slumping sales and not enough cash flow to meet their needs and both have significant real estate holdings that could be sold. Penney’s owns 39 percent of its stores, while Sears owns 29 percent of its doors.
“We think longer-term success for both [Penney’s and Sears] remains uncertain,” wrote Kuntz and Lai in a report. “Either company could eventually pursue a financial restructuring, though this is not yet our base case for 2013. But as we have seen with [Ford and General Motors], shifts or reversals in consumer purchasing behavior can overwhelm operational progress by a retailer facing difficult times. Or like GM and Ford, either or both retailers could resolve to focus on what matters and execute a successful comeback plan.”
Penney’s Ullman has been working hard and cleaning house. The company said Thursday that chief operating officer Michael Kramer left the firm and will be paid a lump sum cash payment of $2.1 million. Chief talent officer Daniel Walker also left Penney’s. Both were brought in by former ceo Ron Johnson, who tried and failed to remake Penney’s.
The company has hired bankers to help it raise money and The Wall Street Journal reported that it was in talks with a syndicate of lenders — including Wells Fargo, TPG Specialty Lending Inc. and Gordon Brothers Group — for a five-year, $500 million loan. Wells Fargo and TPG declined to comment and Gordon Brothers and Penney’s did not respond to requests for comment.
“Although we do not expect to see positive same-store sales [at Penney’s] during the next six months, a meaningful deceleration of the steep declines could signal the start of some modest success,” S&P said. “The best-case scenario would be a stabilization of same-store sales later this year.”
Sears, now lead by investor-turned-ceo Edward S. Lampert, faces its own troubles, although the firm’s situation is moving in slow motion compared with Penney’s.
“Sears needs strong merchandising leadership not financial leadership,” S&P noted.
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