On Jun. 23, J.C. Penney Company (NYSE: JCP ) announced that it officially closed a new credit facility that management believes will prove beneficial for business. In response to the press release, shares of the retailer fell more than 3%, but could the development aid the company's turnaround efforts and send it back into the big leagues with Macy's (NYSE: M ) and Dillard's (NYSE: DDS ) ?
J.C. Penney has a big lifeline!
According to its press release, J.C. Penney finally closed a $2.35 billion credit facility with its lenders. Of this amount, $1.85 billion is set up as a revolving line of credit and is slated to replace a previous $1.85 billion revolving line of credit that the business initially took out on Feb. 8, 2013. Although its interest rate on this loan has not yet been disclosed, J.C. Penney's management team claimed that it has better terms than the LIBOR +3% rate agreed upon for its old facility.
In addition to replacing its older credit facility, the deal will grant J.C. Penney the right to tap into a $500 million term loan. The company plans to use the loan to pay down a portion of its previous credit facility, which should leave around $651 million in debt stemming from that afterward if management does not use the new revolving line of credit to pay off the loan balance. This scenario seems likely due to the business's claim that it will use the line of credit for working capital (such as inventory) and general corporate purposes.
This move will greatly improve the retailer's liquidity by around $100 million, but the picture includes some downside. While J.C. Penney will be able to update its inventory and operate with less fear of an immediate default, the chances of long-term problems occurring down the road are greater if its turnaround doesn't occur fast enough.
According to its last quarterly report, the company already held long-term debt totaling $4.89 billion. If it taps all of its credit facility, the business's indebtedness could rise to as much as $6.74 billion, which would make its interest payments an issue if management cannot return the business to profitability.
J.C. Penney has a lot of catching up to do!
The past few years have been very hard for J.C. Penney. Between 2009 and 2013, the company saw its revenue fall a jaw-dropping 32% from $17.6 billion to $11.9 billion while its net income of $251 million turned into a net loss of $1.4 billion. Both Macy's and Dillard's outpaced the business over this time-frame.
Between 2009 and 2013, Dillard's saw its revenue inch up over 7% from $6.2 billion to $6.7 billion. This growth came despite flat aggregate comparable-store sales over the period and a 4% decline in store count as the company reduced its number of locations from 309 to 296.
From a profit standpoint, Dillard's did even better, with its net income soaring 373% from $68.5 million to $323.7 million as higher revenue and lower costs helped the retailer's bottom line. During this five-year time-frame, Dillard's saw its cost of goods sold fall from 65.9% of sales to 63.1%, while its selling, general, and administrative expenses dropped from 27.3% of sales to 24.8%.
Macy's results have been even more impressive during this time horizon. Between 2009 and 2013, the retailer's revenue jumped 19% from $23.5 billion to $27.9 billion. One of the biggest drivers behind this increase in revenue was Macy's aggregate comparable-store sales growth of 10%, somewhat offset by a 1% decline in store count from 850 locations to 840.
Looking at profits, Macy's beat out even Dillard's. Over the past five years, Macy's saw its net income skyrocket 352% from $329 million to $1.5 billion. In part, this stemmed from the retailer's rise in revenue, but the biggest contributor appears to be a gradual decline in costs for the business. As management has emphasized closing underperforming stores, Macy's saw its selling, general, and administrative expenses drop from 34.3% of sales to 30.2%, while its interest expense fell from 2.4% of sales to 1.4%.
Right now, J.C. Penney is struggling and Mr. Market knows that better than anybody. In an attempt to improve its financial position, the retailer courted and eventually got approved for a round of financing that makes its interest payments to lenders less burdensome. While this is good and indicative of a potential turnaround, the fact that management added even more to its hefty burden should be a sign that the situation isn't as clear-cut as it might appear.
In the long run, J.C. Penney's move has the potential to deliver stronger returns to shareholders if its turnaround succeeds, but undoubtedly the business is risky. For the Foolish investor who's not comfortable with this kind of risk, a better move might be to invest in Macy's or Dillard's, but for those who are confident that J.C. Penney has what it takes to recover, now might be the opportune moment to buy into its shares.
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