J.C. Penney Draws $850 Million Credit

J.C. Penney Draws $850 Million Credit
A customer leaves a J.C. Penney store, Tuesday, April 9, 2013, in New York. J.C. Penney is hoping its former CEO can revive the retailer after a risky turnaround strategy backfired. (AP Photo/Mark Lennihan)
Tara MacIsaac
4/16/2013
Updated:
4/16/2013

J.C. Penney $850 million: Suppliers are wary of doing business with the troubled retail chain as it draws $850 million from its line of credit earlier than expected. 

J.C. Penney drew $850 million from its credit facility to restock inventory and complete the overhaul of its home department in 500 stores, the company announced Monday.

While some analysts say the company is tapping its credit line earlier than expected, a company press release states: “Consistent with its previously stated plans, the company has drawn $850 million out of its $1.85 billion committed revolving credit facility.”

In one lengthy sentence, J.C. Penney lists off 32 risk factors that could jeopardize its recovery.

“Those risks and uncertainties include, but are not limited to,” begins the sentence; the listed factors range from “the impact of changes designed to transform our business” to “ the impact of holiday spending patterns and weather conditions.”

It also mentions “changes in our arrangements with our suppliers and vendors.” The company must calm investor and supplier fears.

Last week, Chief Executive Officer (CEO) Ron Johnson was fired and his predecessor, Mike Ullman, was reinstated. Ulman led the company for seven years, and analysts say he could have a calming influence on suppliers, as he has a good relationship with many of them.

A dress and sportswear supplier, Allen Schwartz, president of A.B.S. by Allen Schwartz, expressed his relief at Ullman’s return: “I feel more comfortable.”

Chris Madden, a traditional home furnishings brand dropped by Johnson, is looking forward to working with Ullman.

Ullman stepped down in November 2011 as J.C. Penney struggled to keep up its sales. Johnson’s reforms proved unpopular, however, among the store’s core customers, resulting in a 25 percent drop in revenue for the fiscal year that ended February 2.

Its middle-age shoppers were turned off by Johnson’s push toward brightly colored, body-hugging designs. He also got rid of most discounts and transformed the stores into collections of mini-boutiques. Ullman is expected to reverse many of the trendy changes.

Credit Ratings

Another risk factor listed by J.C. Penney is “changes in credit ratings.”

Fitch Ratings released a statement expressing its concerns, but noting the $850 million draw will not impact J.C. Penney’s rating.

“While the draw itself has no immediate credit impact, we will continue to closely monitor the company’s liquidity position,” reads the statement posted on the Wall Street Journal website. “Our primary concern remains with the company’s ability to secure the $1 billion or so needed in permanent financing in 2013 to fund operations and peak seasonal working capital needs.”

Michael Cipriani of Rosenthal & Rosenthal, a financial lender to clothing suppliers, said it will now slap a surcharge on its clients who sell to J.C. Penney after hearing the company has tapped its credit line earlier than he expected. Cipriani is not alone. Other financial lenders have imposed similar measures in recent weeks.

During a conference call last week, Levi Strauss & Co. Chief Financial Officer Harmit Singh said he was keeping a “close eye,” on the retailer, but noted J.C. Penney “has been paying the bills on time.”

“J.C. Penney is a valued customer,” Harmit averred. 

Keeping Shelves Stocked

It’s time for the retail industry to start ordering inventory in preparation for the September back-to-school rush, and for the holiday seasons. Usually, retailers order early and pay later, but if suppliers demand cash in advance given J.C. Penney’s uncertainties, it could mean greater troubles for the company.

“Maintaining a seamless flow of merchandise is critical,” said Marshal Cohen, chief retail industry analyst with market research firm The NPD Group.

J.C. Penney listed among its risk factors “maintaining an appropriate mix and level of inventory.” The $850 million draw is partially allotted to keeping inventory levels steady.

The Associated Press contributed to this report.