J.C. Penney Co., which has been struggling to turn around its operations for years, got a vote of no confidence on Monday from Moody’s which lowered the credit default rating on the department store chain to Caa3 and shifted to a negative outlook.
“Although J.C Penney liquidity is adequate, the widespread store closures as a result of the coronavirus pandemic and the continued suppression of consumer demand is expected to pressure J.C. Penney’s EBITDA, impede its turnaround strategy and weaken its leverage to unsustainably high levels” warned Moody’s vice president Christina Boni.
According to media reports, Moody’s expects the Dallas-based Penney’s will have significant cash flow deficits in fiscal 2020 as EBITDA (earnings before interest, taxes, depreciation and amortization) declines from the effect of COVID-19 on store traffic and continuing weak consumer demand. The ratings agency estimates that EBITDA could decline in excess of 80 percent in fiscal 2020 before slowly recovering in 2021. The reports indicated that Moody’s anticipates it will take well into 2022 before EBITDA reverts back to the approximately $600 million of EBITDA realized in 2019. As a result, J.C. Penney’s leverage is seen remaining at unsustainably high levels over the next two years.
While the chain’s liquidity is OK, the company has lacked sufficient capital of upgrade stores, technology and its web site. There have also been many management changes leading to changes in turnaround tactics over the last several years, as well as some merchandising mistakes in recent seasons including introducing appliances and subsequently discontinuing the category. Some analysts also believe that Penney’s hasn’t been aggressive enough bolstering its fashion assortments, though it has been making headway building up assortments of athletic and ath-leisure wear and special sizes. Penney’s moderate priced fashions and private labels do engender some loyalty in middle America.
Penney’s has about $2.8 billion in debt maturities due through 2020, and about $150 million in obligations due in June. Neiman Marcus Group is also in a tough spot and currently negotiating with creditors for relief, though some retail experts are predicting that NMG files for bankruptcy soon. One source said it could happen as soon as April 19 but that has not been confirmed by the company, which is also based in Dallas.