There have been financial reports suggesting Penney’s debt is “untenable,” and the company’s stock and debt prices keep dropping. External forces exacerbate the situation, like recent retail bankruptcies such as Sears Holdings, as well as potential increased tariffs.
According to Cowen research, Penney’s sources 30 percent of its merchandise from China, while Macy’s is at 25 percent and Kohl’s and Nordstrom are each at 20 percent. Soltau recently said that Penney’s has been “proactive developing contingencies for sourcing our private brands for the better part of the last several years and meaningfully diversifying our country of origin. This has allowed us to significantly reduce our exposure to China, which is already lower than industry averages.”
Since the disastrous, short-lived tenure of Ron Johnson — he ran Penney’s from November 2011 to April 2013 — subsequent teams led by Myron Ullman III and Ellison have worked to stabilize the business, though clear signs of a turnaround are still lacking.
Ellison, who ran Penney’s from 2015 to 2018, exuded leadership and had some fresh ideas. In retrospect, they were the wrong ones. The appliances he brought in looked good on the selling floors but consumers wouldn’t go to Penney’s first for a new refrigerator or washing machine. Ellison, a retail operations executive rather than a merchant, was also criticized for not moving fast enough to improve the apparel side of the business, though additional activewear, casual and special sizes were merchandised, and toys were added to the assortment.
Debt watchdogs have kept a close eye on the company, marking its tenuous financial positioning.
Standard & Poor’s cut its rating on the retailer to “CCC-plus” in March, indicating that the firm’s debt is “vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions.”
S&P analyst Andrew Bove, in his downgrade, illustrated the challenge Penney’s faces beyond financing. “Prior poor inventory management, underinvestment in omnichannel capabilities, and years of inconsistent brand messaging have created an unappealing shopping experience that has translated to persistent traffic declines. Management must avoid self-inflicted operational missteps and successfully create an industry niche for J.C. Penney within the next two to three years to be a viable business in the long term if it is to repay its debt obligations in full.”
Stock investors, more reactive than debt investors by nature, have become increasingly skeptical of the company, hitting its market capitalization hard. Shares of Penney’s dropped 16.6 percent to 90 cents Friday on the report of a debt restructuring, leaving it with a market capitalization of just $285.5 million. That’s less than one-tenth of the $3.5 billion the company’s stock was worth in August 2016.
Sales at the Plano, Tex.-based department store chain reached $11.66 billion in 2018, versus $12.55 billion in 2017 and are projected dipping under $11 billion for 2019. During the Johnson debacle, Penney’s lost about a third of its volume.
“Soltau inherited a big debt and a losing market share, but she is starting to get the cost structure down, and I believe the store is starting to gain some traction on the top line,” said Craig Johnson, president of Customer Growth Partners. “It helps to have a team in place and it’s a good crew of people. Restructuring the debt is a sound move, too, but the company should have have been working on it sooner.
“I give Penney’s a shot at the future but it’s not a slam dunk or a layup,” he added. “Penney’s is still a great brand. People in Middle America still like the brand, but it’s in serious straits.”