S&P Believes J.C. Penney’s Story, Raises Outlook

Retail

Published: March 4, 2014 8:15 am

In the dead of night, after markets closed on Monday, Standard & Poor’s issued a research update on J.C. Penney Co. Inc. (NYSE: JCP). Well, not exactly the dead of night, but in the late afternoon after markets had closed.

The ratings agency left the retailer’s credit rating at CCC+, but raised the outlook from “negative” to “stable” saying that “the revision reflects our view that performance has begun to stabilize and we forecast further modest gains over the next year.” S&P raised its liquidity assessment from “less than adequate” to “adequate,” but did have the presence of mind to add:

However, in our view, the capital structure is unsustainable, but the company does not have any meaningful maturities over the next 12 months.

In other words, J.C. Penney is still likely to bleed to death, only it will take a longer time. Here is more from the S&P update:

The ratings on Penney reflect Standard & Poor’s assessment that the company’s business risk profile is “vulnerable” and its financial risk profile is “highly leveraged”. Our business risk assessment incorporates our analysis that the department store industry is highly competitive, with large, well-established participants. Based on this environment, we believe further performance difficulties may cause the company to lose market share to other players, such as Macy’s, Kohl’s Corp., Sears, other department stores, or off-price retailers.

How a very small fourth-quarter same-store sales gain compared to a massive loss in the same period in 2012 translates into a “stable” outlook given J.C. Penney’s liquidity issues is a mystery. S&P even admits that liquidity is “adequate” only to meet the demands of this year. Then what?

The raised outlook statement is having the expected effect on J.C. Penney’s share price, which has jumped more than 7% in premarket trading Tuesday morning to $8.53. The stock’s 52-week range is $4.90 to $19.63.

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