Myron Ullman is just a few days into his return as chief executive officer of money-losing department store J.C. Penney Co. (JCP) and he’s already come to one important conclusion: the chain needs cash.
J.C. Penney Co. hired Blackstone Group LP (BX) to help it raise at least $1 billion, said people with knowledge of the situation, as the retailer tries to recover from its worst annual loss in more than 25 years.
The third-largest U.S. department-store chain is exploring a range of options to raise the money, including selling a stake to some private-equity firms, said the people, who asked not to be identified because the process is private. The Plano, Texas- based company also is interviewing other outside advisers to help it preserve cash, said one of the people.
J.C. Penney ousted CEO Ron Johnson this week after a dismal first year on the job and reinstated his predecessor, Ullman. Sales in the year ended Feb. 2 plunged 25 percent to $13 billion, the lowest since at least 1987. Ullman, 66, served as J.C. Penney’s chairman and CEO for about seven years before Johnson, 54, took over in November 2011.
Hiring outside advisers “suggests a little bit of a level of desperation,” Liz Dunn, an analyst at Macquarie Group in New York, said in an interview. “They have said repeatedly they have adequate liquidity.”
Chief Financial Officer Kenneth Hannah told analysts on a Feb. 27 conference call to discuss fourth-quarter results that the company had plenty of liquidity and would fund Johnson’s transformation of the 110-year-old chain with cash from operations.
J.C. Penney declined 1.6 percent to $14.62 at the close in New York. The shares have dropped 7.9 percent since Ullman came back. The stock fell 50 percent from Nov. 1, 2011, the day Johnson started, through his last day on April 8.
A representative for Blackstone declined to comment yesterday. J.C. Penney said it couldn’t confirm whether it’s hired Blackstone to raise capital. Daphne Avila, a spokeswoman for the retailer, did say in an e-mailed statement that the company had hired advisers to best position the chain from a financial standpoint during Johnson’s transformation, which J.C. Penney hadn’t previously disclosed.
Johnson, the much-heralded former head of Apple Inc.’s retail division, attempted to overhaul almost every aspect of the chain. He reduced promotions in favor of everyday low prices, cut the workforce by more than 40,000 employees and invested in renovating about 700 of the chain’s 1,100 stores with boutiques dedicated to such brands as Levi’s and Izod in an attempt to attract younger and wealthier shoppers.
It didn’t work, and current customers fled while new ones didn’t visit. As a result, J.C. Penney posted a net loss of $985 million last year. By the time the company’s board replaced Johnson on April 8, the chain was in an “urgent cash situation,” Michael Binetti, an analyst for UBS AG in New York, wrote in an April 9 note to clients.
The chain’s operations consumed $10 million in cash in the year ended Feb. 2, the first year they’ve done so since at least 1987, according to data compiled by Bloomberg. J.C. Penney produced $820 million in cash from operations the previous year.
That led the company to delay payments to major vendors and push out payable days in recent weeks, Binetti said, citing vendor contacts. Binetti recommends selling J.C. Penney shares.
The move to hire Blackstone may have been driven partly by Ullman wanting to reassure vendors that J.C. Penney will be able to keep paying them, said Dunn, who has a neutral rating on J.C. Penney shares.
Creditors have been fleeing J.C. Penney, whose debt rating Standard & Poor’s cut Feb. 28 to a grade that indicates vulnerability to nonpayment. The company’s cash position also had declined to $930 million in the quarter ended Feb. 2 from $1.51 billion a year earlier.
Standard & Poor’s said in a February note lowering J.C. Penney’s debt rating that the retailer may have to borrow from a $1.85 billion revolving credit line to fund operations or seek more financing for its transformation.
Part of the reason Ullman may be seeking to raise capital is that the company is spending to finish renovating the home goods sections of 500 stores, Dunn said. Binetti said in his note that this project represented 15 percent of the company’s selling square footage.
The Wall Street Journal reported earlier yesterday that J.C. Penney hired Blackstone to raise capital.
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