Sharks are starting to circle J.C. Penney Co. A group claiming majority ownership of a $326-million (U.S.) bond issue from the company alleges that the retailer breached the bonds' covenants when it used inventory to collateralize its credit facility. The retailer says the claim is invalid; bond experts have expressed skepticism as well. All the same, someone smells blood in the water.
Under chief executive officer Ron Johnson, J.C. Penney has eschewed sales and coupons, which were the company's mainstay, in favour of lower and more stable prices. Customers have been shocked right out of the stores: In the past three quarters same-store sales have been down 20 per cent or more.
The balance sheet has suffered, too: in the 12 months ending in October, net debt increased by $330-million, and would have risen by more than $600-million were it not for asset sales. Mr. Johnson has said that fourth-quarter results will feature a stronger balance sheet but, as the busy holiday quarter recedes, the cash burn will begin again if sales do not stabilize.
The financial stress helps explain why J.C. Penney is swimming away from its pricing plan, reintroducing some event-driven sales and coupons. Mr. Johnson has said the company intends to "self-fund" its transformation but recently declined to rule out drawing down on credit facilities.
J.C. Penney recently raised its credit line with GE Capital from to $1.75-billion from $1.5-billion – a move companies do not usually make unless they are considering using it. A drawdown would mean higher debt costs, a further drag on cash flow – increasing the pressure to get shoppers into the stores and risking credit rating downgrades. A vicious cycle could take hold.
If the new strategy does not gain traction by next Christmas, a new approach will be required. And Mr. Johnson will, in all likelihood, be thrown to the sharks.