J.C. Penney Struggles With Major Debt, Mulls Options

Though it has appeared on "most likely to fail" lists from time to time, department store retailer J.C. Penney Co. has soldiered on, weathering the retail storm better than Sears Holdings, though admittedly that is a fairly low bar. Yet J.C. Penney is struggling, not only with poor sales, but also a Sisyphean debt load.

The company is weighed down by about $4B in debt coming due in the next few years, and a credit rating in junk territory. Now J.C. Penney has hired advisers to explore the possibility of debt restructuring, Reuters reports, citing people familiar with the matter.

The retailer’s bond yields ballooned in recent weeks, which is often a sign of trouble ahead for a company. In June, markets were pricing in a 96% chance it will default within five years, according to IHS Markit. That is up from 87% about a month earlier, Barron's reports.

The company also experienced a bumpy spring this year after a clerical mistake widened spreads on JCP credit default swaps when it was discovered loans collateralized by 61 properties were parked under the wrong JCP business entity. Then Moody's Investors Service predicted more store closures for the Plano, Texas-based retailer. 

The retailer experienced a weak first quarter as well. Net loss for the quarter ended May 4 was $154M or 48 cents/share. Comparable store sales decreased 5.5% for the first quarter, year over year. The exit of the major appliance and in-store furniture categories in the first quarter had a combined negative impact of 20 basis points on comp sales, according to the company.

"We are working to reestablish the fundamentals of retail operations at J.C. Penney and at the same time we are building capabilities to satisfy the wants and expectations of our customers," J.C. Penney CEO Jill Soltau said during the company's quarterly earnings call in May. "As a reminder, we have very manageable near-term debt maturities, with $50M of unsecured debt in October this year, and $110M of unsecured debt maturing in June of 2020. We remain confident we can fund these near-term maturities from free cash flow."

Soltau, who has led the company since October, also said the trade war between the United States and China hasn't had a deleterious impact on J.C. Penney — yet.

"Looking ahead, we do anticipate a more meaningful impact on both our private and national brands if the potential fourth tranche of tariffs does go into effect on all Chinese imports," she said.

Earlier this year, J.C. Penney said it would close 27 locations during 2019. The company, which has about 800 locations, hasn't announced any more closures since then, but there will probably be more in 2020, CNBC reports.

Department stores aren't the only kind of retail suffering from the current retail climate. Ascena Retail Group recently announced the closure of 53 more Dressbarn stores by the end of August.

The move continues the winding down of Dressbarn, which was announced in May, though without a detailed timetable. Ascena anticipates that all of the 650 stores will be closed by the end of this year.