Dive Brief:

• Moody's on Friday downgraded J.C. Penney's corporate credit rating deeper into distressed territory, issuing the department store retailer a Caa1 rating, down from B3, according to a client note emailed to Retail Dive.
• Moody's Vice President Christina Boni said in a statement that Penney "continues its aggressive liquidation of inventory as it works to recapture customers in a very competitive environment" and would likely face more pressure on sales in 2019, keeping leverage levels high.
• Moody's analysts said Penney could be upgraded down the road if it maintains liquidity, consistently grows sales and operating earnings, and if the company reduces its debt-to-EBITDA ratio. The retailer could be downgraded further "if credit metrics were to weaken such that [the] company's liquidity profile were to erode."

Dive Insight:

While Penney has a hefty mound of debt on its books — with long-term debt of $3.8 billion and quarterly interest expenses of $73 million, as of Q1 — Boni and her team note the retailer still has ample liquidity as it tries to turn its performance around. Specifically, Penney has $171 million in cash and $1.6 billion available under revolving credit agreements, according to Moody's. That at least can potentially help the company buy time and keep it out of default in the short term. 

Still, the challenges are many and steep. Comps in Q1 fell 5.5% and net sales fell 5.6% as losses widened. Penney's stock price fell below a dollar since its Q1 earnings release, even as Penney CEO Jill Soltau, who joined last year from crafts retailer Joann after the sudden exit of Marvin Ellison, tried to calm investor fears. She noted the company's efforts to forge a long-term strategic plan, reduce inventory, retool its assortment — including through an exit of appliances — and fill out its management ranks.

As one analyst, GlobalData Retail's Managing Director Neal Saunders, put it at the time: "JC Penney is a very weak operator in one of the toughest sectors of a highly competitive retail market in an era of more subdued demand from highly fickle consumers. Put bluntly, the odds are firmly stacked in favor of failure."

In the recent years of a turnaround that never seems to end, Penney has frequently found itself with too much inventory, forced to discount it by necessity or as it tries to change gears — without seeming to get anywhere. And as it tries to reconnect with its customers, the tinkering with inventory levels isn't likely to end soon, as Boni and her team point out.

"The need to reduce inventory levels and connect more effectively with its core customer suggests that leverage levels will remain elevated as the company works with new leadership to define and execute its strategy to return to stabilizing its market position and improving profitability," Moody's analysts said.

They added that Penney is also constrained by "structural challenges" in the department store sector, including "market share losses to off-price retailers, and the cost of investments associated with managing consumer preferences for online shopping."