J.C. Penney’s CEO Using Loan to Price Hikes in Turnaround

J.C. Penney Co. Chief Executive Officer Myron Ullman received a $1.75 billion loan commitment from Goldman Sachs Group Inc. and has been raising some prices as he works to stanch the retailer’s cash drain.

The five-year term loan will be secured by real estate and an interest in other assets of the retailer, Plano, Texas-based J.C. Penney said today in a statement. The proceeds will be used for working capital and to discharge the company’s 7.125 percent notes due in 2023.

Ullman has focused on shoring up the company’s finances since replacing Ron Johnson three weeks ago and started by drawing $850 million from its credit line on April 15. He’s also reversing Johnson’s avoidance of promotions and is raising some prices more than 50 percent while dropping some back down later to give the appearance of a discount, according to a study today from JPMorgan Chase & Co.

The loan takes “liquidity concerns off the table for at least two or three years,” Alex Fuhrman, an analyst for Piper Jaffray Cos. in New York, wrote in a note today. While the prospects of a default before the company’s next debt payment in 2015 are now remote, the loan won’t mitigate the cash consumption Piper Jaffray expects to reach $1 billion in the first quarter, Fuhrman said.

Shares Rise

J.C. Penney rose 1.1 percent to $17.19 at the close in New York. The shares had dropped 14 percent this year through April 26, compared with an 11 percent gain for the Standard & Poor’s 500 Index.

The retailer’s $285 million of 7.95 percent notes due April 2017 rose 1.8 cents on the dollar to 98.5 cents at 9:03 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds yield 8.4 percent.

One major aspect of Johnson’s overhaul was switching to everyday low prices, which would save money by cutting the workers and infrastructure related to weekly promotions while making pricing less confusing for shoppers. That didn’t work, and the company started bringing back coupons in February, a practice that has accelerated under Ullman, Matthew Boss, an analyst for JPMorgan, said in a note today.

J.C. Penney last week increased prices on brands such as Liz Claiborne, Boss said, citing a study JPMorgan conducted. In one example, a pair of Dockers pants were marked up to $58 from $35, a 66 percent increase. The pants were then discounted back to $35. Prices on some items were raised and weren’t later reduced, such as a private-label dress that was increased to $35 from $30.

Negative Reactions

While consumers liked the return to coupons, the recent price increases have received negative reactions on social media such as J.C. Penney’s Facebook page, Boss said. That could make the transition more difficult, said Boss, who has a neutral rating on J.C. Penney’s shares, the equivalent of a hold.

The company hasn’t started a new pricing strategy under Ullman, said Daphne Avila, a spokeswoman for J.C. Penney. The retailer is raising prices mostly on private-label merchandise that started last month under Johnson. Some merchandise, like Joe Fresh apparel, will maintain everyday low prices while other items will have price tags increased, so they can be discounted for sales events to drive foot traffic into the stores, she said.

“What we learned is that customers prefer to see the discount at the cash register rather than being built into the price,” Avila said.

Discounting Boost

A return to more discounting would help boost sales, according to a survey released today by Langer Research Associates. If the company became more promotional and returned products Johnson removed, 54 percent of former J.C. Penney customers said they would probably come back. Plus, 62 percent of the current shoppers would buy more, the study showed.

Johnson, the former Apple Inc. retail chief, also had planned to transform most of J.C. Penney’s stores into collections of branded boutiques. Amid the costly renovations and plunging sales, the department-store 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. The retailer’s operations generated $820 million in cash the previous year.

Home Renovations

The company still is in the midst of remodeling home departments in about 500 stores that account for about 15 percent of its selling square footage. The opening of some of these sections has been postponed because of construction delays, and a media event to unveil them was pushed back three weeks to June 6. At the same time, four senior executives who led the renovations left the company last week.

The company in February increased the size of its revolver to $1.85 billion from $1.5 billion and got permission to expand it to as much as $2.25 billion. J.C. Penney hasn’t disclosed the terms of the loan, including the interest rate.

The loan “is a real vote of confidence for Ullman,” said Paul Swinand, an analyst for Morningstar Inc. in Chicago. Now he needs to focus on getting the older customers who left during Johnson’s tenure to come back into the store, he said.

(Updates with customer pricing survey in 11th paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE