Fitch Ratings upgraded J.C. Penney Co. Inc.’s issuer default status to a “B-” from a “CCC” as the retailer delivers comparable-store sales that are consistent, and with solid gross margin rates.
“J.C. Penney has demonstrated a meaningful turnaround in its business over the last seven quarters and Fitch expects the company to generate EBITDA of approximately $650 million in 2015, which adds back approximately $40 million in non-cash stock-based compensation, versus $277 million in 2014,” the rating firm said adding that outlook is based on 4 percent comps growth, and gross margin rates of about 36 percent.
“The upgrade reflects increased confidence in J.C. Penney’s ability to improve EBITDA to the $800 million range in 2016 and move towards $1 billion in 2017,” the Fitch analysts noted.
If J.C. Penney can hold these earnings levels, Fitch said free cash flow would move from being neutral now to a “positive $75 million in 2016 and approach almost $200 million in 2017.”
Regarding total liquidity, Fitch sees the retailer holding $2 billion at the end of the current fiscal year, “which will enable the company to address total unsecured debt maturities of $600 million through 2018.”
The retailer is considering amending and possibly extending its real estate term loan, which totals $2.2 billion and is due in May of 2018, and may result in improved terms and reduced collateral.
The ratings firm said the improved same-store sales at the retailer has resulted in higher margins via “improved clearance and promotional selling margin performance, improved performance in private brands and key value items, and better in-stock positions.”
“Fitch expects J.C. Penney to sustain comps growth in the 2 percent to 3 percent range in 2016/2017, as it invests in areas such as Sephora home, on building back its private brands and omnichannel, and on modestly improving gross margin beyond 2015,” the ratings firm said. “Underlying our comp assumptions is the expectation that overall apparel, accessories, footwear and home sales grow 2 percent to 3 percent annually, with growth in online sales accounting for over 50 percent of the growth.”
Fitch said J.C. Penney is operating in a landscape where “department store traffic trends remain soft and industry sales are expected to continue to decline 2 percent annually as volume continues to shift to off-mall channels, such as online, discount and off-price retailers.”