Good Fitch report on JCP::
DERIVATION SUMMARY
J. C. Penney's 'B+' rating reflects the meaningful turnaround in the business over the last few years with EBITDA improving to $886 million in 2017 from $275 million in 2014, due to both sales growth and cost reductions. Fitch expects annual EBITDA to remain around $850 million annually over the 24 to 36 months and leverage is expected to be in the mid-5x given expectations for some debt paydown.
J. C. Penney has seen a material 30% decline in total sales since 2010 versus its investment-grade rated peers such as Macy's, Inc. and Kohl's Corporation (both rated BBB/Negative), which have had fairly stable top lines during this period. Both Kohl's and Macy's have a better developed omnichannel offering and profitability is higher at 10%+ EBITDA margins versus 8% at J.C. Penney. Finally, leverage for both Macy's and Kohl's is expected to trend in the mid-to-high 2x range versus the mid-5x for J.C. Penney.
Sears Holding Corporation's 'C' rating reflects multiyear top-line market share and EBITDA declines, which have led to concerns regarding long-term competitive viability. The company faces significant restructuring risk given the high cash burn since 2013, which necessitated significant liquidity infusion via asset sales or secured debt. The company recently launched a distressed debt exchange to address upcoming maturities. J. C. Penney has positioned itself to benefit from Sears' market share losses in the home and appliance segments.
LIQUIDITY
Strong Liquidity: J. C. Penney had cash and cash equivalents of $185 million as of Oct. 28, 2017, and $1.8 billion available under its $2.35 billion credit facility after accounting for $211 million for outstanding borrowings, $135 million in letters of credit and $200 million in minimum excess availability it must maintain. The company ended 2017 with total liquidity in excess of $2 billion.
FCF was approximately $60 million in 2017 compared to negative $93 million in 2016. In addition, the company generated $96 million in proceeds from sale of operating assets in 2016 and $154 million in 2017. Fitch expects FCF to be in the $100 million range annually.
