Kroll Bond Rating Agency Comments on JCPenney Q4 Earnings
NEW YORK--(BUSINESS WIRE)--JCPenney does not expect to make any big announcements concerning further store closures, noting that 33 on the closure list last month were the clear laggards, according to comments on this afternoon’s Q4 2013 earnings call. Despite rumors in the market that another closure list would come sooner rather than later, the company is “happy with its current portfolio” of real estate and made a point to note that its smaller stores in smaller markets are among the company’s most profitable, according to executives.
JCPenney reported improved same store sales year-over-year and now believes free cash flow territory is on the horizon. The company expects to maintain $2 billion in total liquidity, well above the $1 billion threshold needed to operate the business. Same store sales were up 2.0% from last year, with holiday sales up 3.1% for the November/December period. Also notable, sales on the company’s website grew 26.3% for the quarter. Gross margins improved 460bps.
A barrage of negative same store sale updates over the past year has triggered a subsequent battering of the company’s equity, debt and credit default swap levels. The credit’s CDS and bond curves have inverted in recent months, with shorter term instruments signaling a higher risk of default.
The company reiterated on the call today the lack any near term liquidity triggers. In 2013, the company refinanced its asset-based lending facility (ABL), issued equity and pushed out maturities, with the nearest not hitting until 2018. The company has $1.2 billion in cash and having spent $1.8 billion in CapEx over the last two years, they have reduced their spending needs, and can “live on a diet” going forward.
In addition, JCPenney has several financing options to alleviate its negative cash flow situation. The company currently has $500mn of incremental secured financing it can tap. The company also has a slate of non-core assets including Firestone and some mall joint venture partnerships, that could raise up to $200 million in proceeds. Lastly, the retailer still has nearly $900 million of unencumbered real estate (103 stores) it could pledge to a new ABL or sell via sale leaseback transactions.
KBRA will continue to monitor store closing announcements and their potential impact on our outstanding credit ratings. KBRA did not have any exposure to the 33 stores on the initial list. Our current KBRA-rated exposure to the retailer is 56 loans across 34 deals totaling $6.4 billion in balance.
Several of the locations on last month’s list are entertaining interest from replacement tenants, including a location in Wisconsin called Wausau Center, according to local press reports.
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).