J.C. Penney Buys Time With Financing

The troubled retailer calmed a lot of jittery nerves with a new $1.75 billion loan from Goldman Sachs, but it still has a ragged path going forward.

Exterior of J.C. Penney store.

J.C. Penney Co. Inc. calmed a lot of jittery nerves Monday with a new $1.75 billion loan from Goldman Sachs, but the troubled retailer still has a ragged path going forward.

This story first appeared in the April 30, 2013 issue of WWD.  Subscribe Today.

The five-year senior secured term loan facility was much larger than the $1 billion in funding many were expecting and will give Myron “Mike” Ullman 3rd, on his second tour as chief executive officer, more time to try to rebuild the company’s base.

Ullman is picking up the pieces after his successor, and predecessor, Ron Johnson, tried to transform the dowdy Penney’s into a trendier string of shops-in-shop selling goods at full price. The effort pushed the company to a loss of nearly $1 billion last year as sales fell 25 percent.

Penney’s already drew $850 million from its revolving credit facility this month. That’s a reserve retailers usually try not to tap into, but Penney’s is said to have burnt through $1 billion in cash in the first quarter as it rolled out its new home shops and made back payments to vendors.

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The loan from Goldman, which is backed by the company’s real estate and its other assets, with some carve outs, allows Penney’s to look toward the future.

“This loan facility is an important component of our strategic plan to strengthen the company’s financial position,” said chief financial officer Ken Hannah. “Together with our revolving credit facility, this will give us the financial strength we need to meet our current funding requirements and build toward a successful future.”

Under the terms of the commitment letter from Goldman, the money can go toward working capital requirements, general corporate purposes and to cover bonds coming due in 2023.

Deutsche Bank analyst Paul Trussell said the liquidity concerns around Penney’s are “off the table for now” and that focus is turning toward its operating fundamentals.

Just because Penney’s has secured more financing, it doesn’t mean vendors will get a break. Trussell expects the company to ask vendors for assistance with promotions and markdown costs. He also expects Penney’s to tweak its marketing, hold off on new shops and eventually close 10 percent of its 1,100 doors.

Now that the company has reassured the market of its immediate survival, it needs to pick a path for the future.

“Penney’s is Penney’s,” said Gary Wassner, president of factor Hilldun Corp. “It’s not going to be TJ Maxx, it’s not going to be Macy’s. They’re stuck in that lower middle area they have to find their customer. My confusion today is, ‘Who is the J.C. Penney customer?’ Until they determine that, I don’t know that there’ll be a tremendous amount of confidence in the market.

“It’s so unclear who they are,” Wassner said. “You can’t operate today if you don’t have a clear point of view, the Internet just strips you of any identity.”