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 Monday 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 he replaced Ron Johnson three weeks ago and started by drawing $850 million from Penney’s credit line on April 15. He’s also reversing Johnson’s avoidance of promotions and is raising some prices more than 50 percent while reducing some later to give the appearance of a discount, according to a study Monday from JP Morgan 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. 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, Fuhrmansaid.
J.C. Penney shares rose 19 cents to close Monday at $17.19.
One major aspect of Johnson’s overhaul was to switch to everyday low prices, which would save money by cutting the work-ers 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, said Matthew Boss, an analyst for JPMorgan.
J.C. Penney last week increased prices on brands such as Liz Claiborne, said Boss, citing the JPMorgan study. In one example, a pair of Dockers pants was 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.
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, and that could make the transition more difficult.
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 fiscal year ended Feb. 2, the first year that has happened since at least 1987, according to data compiled by Bloomberg. The retailer’s operations generated $820 million in cash the previous year.
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 revolving debt loan 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.
Business, Pages 23 on 04/30/2013