JC Penney’s CEO Using Loan to Price Increases in Turnaround (1 – Businessweek

J.C. Penney Co. (JCP) 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 today in a statement. The proceeds will be used
for working capital (JCP) and to discharge the company’s 7.125 percent
notes due in 2023.

Ullman has focused on shoring up the company’s finances
since replacing Ron Johnson three weeks ago and started by
drawing $850 million from its credit line on April 15. He’s also
reversing Johnson’s avoidance of promotions and is raising some
prices more than 50 percent while dropping some back down later
to give the appearance of a discount, according to a study today
from JPMorgan 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 today. 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, Fuhrman said.

Shares Rise

J.C. Penney rose 1.1 percent to $17.19 at the close in New
York. The shares (JCP) had dropped 14 percent this year through April
26, compared with an 11 percent gain for the Standard & Poor’s
500 Index.

The retailer’s $285 million of 7.95 percent notes due April
2017 rose 1.8 cents on the dollar to 98.5 cents at 9:03 a.m. in
New York, according to Trace, the bond-price reporting system of
the Financial Industry Regulatory Authority. The bonds yield 8.4
percent.

One major aspect of Johnson’s overhaul was switching to
everyday low prices, which would save money by cutting the
workers 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, Matthew Boss, an
analyst for JPMorgan, said in a note today.

J.C. Penney last week increased prices on brands such as
Liz Claiborne, Boss said, citing a study JPMorgan conducted. In
one example, a pair of Dockers pants were 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.

Negative Reactions

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. That could make
the transition more difficult, said Boss, who has a neutral
rating on J.C. Penney’s shares, the equivalent of a hold.

The company hasn’t started a new pricing strategy under
Ullman, said Daphne Avila, a spokeswoman for J.C. Penney. The
retailer is raising prices mostly on private-label merchandise
that started last month under Johnson. Some merchandise, like
Joe Fresh apparel, will maintain everyday low prices while other
items will have price tags increased, so they can be discounted
for sales events to drive foot traffic into the stores, she
said.

“What we learned is that customers prefer to see the
discount at the cash register rather than being built into the
price,” Avila said.

Discounting Boost

A return to more discounting would help boost sales,
according to a survey released today by Langer Research
Associates. If the company became more promotional and returned
products Johnson removed, 54 percent of former J.C. Penney
customers said they would probably come back. Plus, 62 percent
of the current shoppers would buy more, the study showed.

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 (JCP) in the year ended Feb. 2, the first
year they’ve done so since at least 1987, according to data
compiled by Bloomberg. The retailer’s operations generated $820
million in cash the previous year.

Home Renovations

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 revolver
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. (MORN) 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.

To contact the reporter on this story:
Matt Townsend in New York at
mtownsend9@bloomberg.net

To contact the editor responsible for this story:
Robin Ajello at
rajello@bloomberg.net