J.C. Penney shares tumble on new credit concerns

The struggling J.C. Penney Co.  JCP 0.69% may be making its best effort at a comeback, but investors remain skittish about the company’s credit.
Penney shares fell 10% Wednesday, leading S&P 500 decliners, after a New York Post article reported CIT, the largest commercial lender in the U.S. apparel industry, had abruptly stopped backing deliveries from small manufacturers to Penney stores.
The decision came after CIT met with Penney executives on Tuesday, the Post said in an article citing an unnamed source, adding that CIT likely grew concerned after taking a peek at Penney’s financials.
CIT declined to comment and  J.C. Penney officials didn’t immediately respond to a request seeking comment.
Penney’s returning Chief Executive Mike Ullman has been seeking to reverse a $4.3 billion sales drop and a major store overhaul engineered by his predecessor Ron Johnson last year that significantly sapped the company’s coffers. He’s had to pledge the company’s real estate assets as collateral among ways to shore up Penney’s liquidity.
While Ullman has managed to boost Penney’s back-to-school web traffic and bring back several private label brands, the company’s new home section, a critical piece of its turnaround, is widely believed to be failing sales expectations.
Less than 10% of Penney’s purchases are “factored” by commercial lenders led by CIT CIT 0.00% , which provides credit for vendors that sell to Penney and other retailers by factoring the receivable balances for a fee, Macquarie analyst Liz Dunn said. If factoring firms decide to stop providing this credit to vendors, Penney could be required to pay cash on delivery for goods, she said.
The analyst noted this isn’t unprecedented as CIT in early 2012 said it would stop providing credit to Sears Holdings Corp. SHLD -0.32%
“With the $821 million in cash on the balance sheet as of 1Q13 and the $2.25 billion term loan secured in 2Q13, we believe JCP has adequate liquidity in the near term,” Dunn said. “If negative comp store sales persist beyond this year, we believe operating losses will continue and liquidity may be inadequate.”
The analyst estimated Penney likely burned through $550 million in cash in the second quarter, after almost $1 billion in the first quarter Wall Street had estimated. If the company has to pay cash upfront, she estimated it would be about a $300 million drag on free cash flow.
Citigroup analyst Deborah Weinswig agreed there’s no near-term liquidity issue because of the company’s $2.25 billion term loan issued in May.
– Andria Cheng