NEW YORK — Standard & Poor’s still believes in J.C. Penney Co.’s turnaround, but less-than-stellar prospects for this year led the ratings agency on Thursday to downgrade the retailer’s debt to “junk” status.
S&P lowered Penney’s corporate credit rating into the non-investment realm with a “BB-plus” rating and a negative outlook. Previously, the firm had been rated “BBB-minus.”
The markets reacted by trading down shares of the firm 59 cents, or 3.4 percent, to close at $16.61 on the New York Stock Exchange.
S&P debt analyst Gerald Hirschberg, in a statement, noted Penney’s plan to centralize distribution and improve merchandising and marketing in its department stores should succeed and that the Eckerd drugstore division can be more profitable.
“But the time horizon for success has been lengthened because of the extremely competitive retail environment and very difficult economic conditions,” he said.
Penney’s previous rating depended, in part, on steady improvement in earnings and credit ratios, which Hirschberg said will likely be much more difficult to achieve.
During the first quarter ended April 26, as reported, the firm’s earnings fell 29.1 percent to $61 million, or 20 cents a diluted share, on a 3 percent drop in sales to $7.49 billion.
Allen Questrom, chairman and chief executive officer, said in a statement at the time that the quarter “represented one of the most difficult retailing environments in recent memory.” He added, though, that the firm could make its projected earnings of $1.50 to $1.70 a diluted share for the year if the retail environment improved.
Hirschberg also noted that the firm’s plans to step up its capital spending this year, while necessary, will detract from its financial flexibility. “Liquidity is expected to remain very adequate, reflecting the combination of cash balances and bank line availability,” said the analyst, who noted maturities for the next three years of $1.2 billion were not particularly heavy.
“Although Standard & Poor’s believes J.C. Penney’s prospects remain favorable for further improvement at the department store business and at Eckerd, the [negative rating] outlook reflects the possibility that gains could continue to be hindered by intense competition, the poor economy, and a generally difficult retailing environment,” added Hirschberg.