Fitch: J.C. Penney Turnaround Is Possible But Ambitious
Fitch Ratings depicted a troubling outlook for J.C. Penney’s (NYSE:JCP) finances. On October 2, the ratings firm downgraded J.C. Penney’s issuer default ratings from B- to CCC because the retailer had burned through much more cash in 2013 than expected.
Fitch is concerned that the projected free cash flow shortfall in 2014 “will require additional external funding,” even though more than $3 billion worth of liquidity has been injected so far this year. The firm now projects that J.C. Penney will burn between $2.8 billion and $3 billion in 2013, $1 billion more than its mid-May projections. That higher cash burn rate reflects Ebitda of -$1 billion to -$1.2 billion compared to earlier projections of -$0.5 billion and higher-than-expected use of working capital.
Beyond 2013, Fitch estimates that J.C. Penney will have to generate a minimum of $750 million to $875 million in Ebitda to fund both ongoing capital expenditures and interest expenses. To generate that sum, the company will have to earn between $13.4 billion and $13.6 billion in sales, or about 14 percent to 16 percent above 2013′s projections, and realize gross margins of approximately 40 percent. “This scenario appears highly ambitious, given the significant execution risk,” Fitch concluded.
As shares of J.C. Penney’s beleaguered stock plummeted nearly 60 percent over the past three months, the word most often following any mention of the century-old department store chain is bankruptcy — or at least a whisper of bankruptcy.