Dive Brief:
- Analysts last week punished J.C. Penney on a weak second quarter and uncertainty over its turnaround prospects this year. Moody's Investors Service on Friday downgraded the retailer's corporate credit rating from B2 to B3, the last stop before a C-level rating, according to a note emailed to Retail Dive.
- S&P Global soon followed suit, downgrading Penney's credit rating Friday from B to B- and issuing a negative outlook. In doing so, S&P analysts cited "heightened risk that operating performance will not stabilize over the next 12 months due to further operational setbacks, and uncertainty around the company's strategy and path forward under new leadership."
- Bond traders also dinged the retailer last week, sending prices on some of Penney's high-yield bond to distressed levels for the first time, according to LeveragedLoan.com, which is owned by S&P. Citi, meanwhile, pegged Penney's bottom price target for its stock at 50 cents a share, according to Seeking Alpha.
Dive Insight:
Penney's string of disappointing quarters is especially troublesome given the relative good spirits elsewhere in retail. That even applies to the heavily challenged department store sector, where Macy's, Kohl's, Nordstrom and Neiman Marcus, among others, have posted relatively strong sales trends, while J.C. Penney has sputtered.
The retailer's situation is not nearly so dire as Sears', but it shares many of the same problems, including a high debt load (just shy of $4 billion in Penney's case), as well as an attachment to poorly performing malls and the vagaries of a changing, and shrinking, shopper base.
Penney has some things going for it. The company's comparable sales, while they are well below those of its better-performing peers, have not seen anything like the decimation of Sears' comps. But the retailer is still trying to get its assortment and inventory levels right, even after much effort and some dramatic tweaks in past quarters.
S&P's downgrade of Penney "reflects continued weak operating results, compounded by persistently ineffective inventory management that has been a primary contributor to margin pressure and, in our view, indicates increasing execution risk," analysts said in a press release. "JCP has continued to significantly underperform our expectations despite a leaner store fleet (JCP closed 141 stores in fiscal 2017) and repeated efforts in previous quarters to right-size inventory."
Just as troubling as Penney's past performance is the outlook for the year. Executives last week lowered their expectations for 2018, now expecting flat comps and a loss of up to $1 per share. With a CEO vacuum following the departure of Marvin Ellison to Lowe's, and inventory liquidation and reassessment that could last through the year, S&P analysts said there is "heightened" risk that the retailer's performance might not "materially improve over the next 12 months due to further operational setbacks and uncertainty around the company's strategy and path forward under new leadership."
Moody's Vice President Christina Boni also said that the "decision to aggressively liquidate additional inventory for the remainder of this year will be a significant headwind to its operating performance" and added that getting the right leadership in at the CEO spot is "critical" to the company's way forward.
The downgrades could make borrowing more expensive for Penney, adding more pressure to its debt pile, which is already large enough to narrow the margin for error and to challenge the company's ability to invest in its future.
