J.C. Penney Rating Cut Three Levels by Moody’s

J.C. Penney Co. (JCP)’s junk-grade credit rating was cut three levels by Moody’s Investors Service because of concern the department-store chain’s overhaul will cause deeper sales declines and consume more cash than expected.

The rating was cut to B3, six levels below investment grade, from Ba3 with a negative outlook and may be lowered again if J.C. Penney’s sales declines accelerate, Margaret Taylor, a Moody’s analyst in New York, wrote in a note today. Standard & Poor’s and Fitch Ratings also downgraded the Plano, Texas-based retailer after it reported a wider third-quarter loss than analysts estimated this month.

J.C. Penney’s sales have fallen by more than 20 percent for three straight quarters as Chief Executive Officer Ron Johnson’s turnaround plan struggles to take hold. Comparable-store sales dropped 26.1 percent in the third quarter as he transforms most of the company’s stores into collections of 100 branded shops and reduces coupons and sale events by marketing items at an “everyday low price.”

Moody’s, which projected a 20 percent decline in third- quarter sales, anticipates “fourth-quarter gross margins will severely decline as a result of the need to actively clear excess inventory,” Taylor wrote today. “This, when combined with continued sizable sale declines in the fourth quarter, will lead to earnings and credit metric bottoming out at levels significantly weaker than expected.”

J.C. Penney doesn’t comment on agency ratings and speculation, Joey Thomas, a spokesman, said today in an e-mail.

J.C. Penney’s credit metrics will fall to levels indicative of a Ca grade for its fiscal 2012, she wrote. The company also will likely draw down cash balances in 2013 for new shops, requiring use of its $1.5 billion revolving credit line, she wrote.

‘Adequate Liquidity’

The retailer, with about $2.87 billion of long-term debt, doesn’t have a bond maturity until 2015, according to data compiled by Bloomberg. That, along with the company’s “adequate liquidity,” will offer it flexibility to develop a strategy to make up for drops in sales and gross margins as it rolls out its “compelling” new shop concept, Taylor wrote.

The company’s $400 million of 5.65 percent notes due in June 2020 traded at 84.5 cents on the dollar to yield 8.48 percent as of 11:44 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. J.C. Penney’s shares rose 2.9 percent to $17.24 at the close in New York.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Robin Ajello in New York at rajello@bloomberg.net.

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