J.C. Penney Co. Inc. is taking steps to enhance its liquidity — and further boost vendors’ confidence about its turnaround plan.
This story first appeared in the September 23, 2013 issue of WWD. Subscribe Today.
Credit sources said while the retailer’s liquidity is OK for now, many are advising their vendor clients only to work with Penney’s one month at a time.
One reason centers on the uncertainty over what kind of holiday selling season Penney’s will have. It also remains unclear what the resolution will be for its home departments given that a New York State court judge still hasn’t issued a ruling in the lawsuit by Macy’s Inc. involving the agreement between Martha Stewart Living Omnimedia and Penney’s.
The idea that Penney’s might need to tap into its asset base for additional funding was raised last month when the retailer reported it lost $586 million in the second quarter. Management said it expects to end the year with $1.5 billion in liquidity, comprised of $1.2 billion in cash and the balance consisting of the availability on its revolver.
Paul Lejuez, senior analyst at Wells Fargo, who has an “underperform” rating on the stock, said: “If results don’t improve significantly in the second half, the company may need additional liquidity next year to fund working capital.”
He pointed out that Penney’s is “selling product at lower margins than a year ago, and they still can’t drive traffic or conversion — both were down — which tells us many of the customers they lost are gone for good.”
Citigroup broadlines analyst Deborah Weinswig has a “sell” rating on the stock, noting, “We believe near-term sales trends have been more challenging than expected. The return to couponing and increased marketing have failed to drive traffic.” She also noted that while liquidity is “not a near-term concern, [it] could become an issue if results continue to be pressured.”
On Friday, Bloomberg reported that Goldman Sachs Group Inc. is advising Penney’s on additional fund-raising options, including borrowing against its real estate holdings.
A spokeswoman for Goldman declined comment.
Additional liquidity to fund working capital needs, while it would buy chief executive officer Myron “Mike” Ullman 3rd more time to effect a turnaround, isn’t necessarily the cure-all for Penney’s troubles.
At the end of fiscal-year 2012, the retailer owned 429 of its 1,104 department stores, including those doors with ground leases. Ground leases are those long-term sites in which Penney’s is allowed to develop and improve the property, but those improvements revert to the landlord when the lease expires. A sale of any company-owned locations could trigger some restrictions, such as that pertaining to sale-leasebacks.
According to Weinswig, Penney’s “is not permitted to conduct sale-leaseback transactions on property totaling more than 12.5 percent of net tangible assets,” based on the terms of its asset-based credit facility.
Moreover, some of Penney’s real estate has already been pledged as collateral earlier this year when the retailer inked a new $1.75 billion loan from Goldman Sachs.
In the past two months, management at Penney’s has had its hands full while it attempts to push forward on turnaround initiatives. There was fighting among board members between Pershing Square Capital Management’s William Ackman and the rest of the board, which was steadfast in its support of Ullman’s efforts. Ackman subsequently sold all his 39.1 million shares in Penney’s, equal to 17.7 percent, in a block trade with Citi at a loss of at least $450 million. Following Ackman’s resignation of his board seat, there was another board resignation by Steve Roth, ceo of Vornado Realty Trust.
On Thursday, Vornado sold its 13.4 million shares in Penney’s, equal to 6.1 percent, in a block trade to Citigroup, for a total of $174.2 million.
Shares of Penney’s fell 1.4 percent Friday to close at $12.96 in trading on the New York Stock Exchange. More than 42.7 million shares traded hands as the Vornado shares hit the open market, compared with a three-month average trading volume of 17.9 million shares. That higher-than-usual three-month average trading volume also reflects in part the sale of Ackman’s shares.
Ackman teamed up with Roth in 2010 to shake up Penney’s. When Ackman sold his shares, sources suggested he was concerned that Penney’s would issue more stock to raise money and dilute his stake in the company.
Ackman helped install Apple retail wiz Ron Johnson as ceo of the firm and vocally supported him through most of Johnson’s failed reinvention of the chain.
While Ackman and Roth sold their shares, Penney’s earlier this month saw two institutional investors up their stakes in the retailer. Glenview Capital Management now holds a 9.1 percent stake in Penney’s, or 20.1 million shares. That makes Glenview the largest institutional stakeholder of Penney’s stock.
Close behind is George Soros of Soros Fund Management. Soros, also at 9.1 percent, holds 19.98 million shares.
Other top holders include Richard Perry’s Perry Corp., which owns 8.6 percent, or 19 million shares, of Penney’s. Following Perry Corp. is J. Kyle Bass’ Hayman Capital Management, which has a 5.2 percent holding, or 11.4 million shares.