What happened
Shares of J.C. Penney (JCP +0.00%) were taking a dive today on reports that the ailing department store chain had hired advisors to pursue a debt restructuring, a move that could be a first step toward bankruptcy.
The stock was down 16.5% as of 11:37 a.m. EDT.
Image source: J.C. Penney.
So what
Reuters reported last night that the company has been talking to lawyers, investment bankers, and others who specialize in debt restructuring in a bid to manage its crushing interest payments and a $4 billion debt load that comes due over the next few years.
Making matters more urgent is the company's recent financial performance, as a long-hoped-for turnaround has proven elusive. In its first quarter, comparable sales fell 5.5%, and the company posted a net loss of $154 million or $0.48 a share. It lost $268 million in free cash flow but guided for positive FCF for the year, a sign the company shouldn't need more debt to fund operations at the moment. However, J.C. Penney also faces about $300 million in annual interest payments, which is significantly weighing on profitability.
Now what
J.C. Penney finished the first quarter with $1.75 billion in liquidity thanks to a revolving credit line, so the company is not about to run out of cash. However, getting the business back to a sustainable, or even profitable, point remains a challenge.
A debt restructuring could actually benefit the company if it could lower its interest rate or sell some assets to pay down its debt. However, considering the headwinds in the broader department store industry, investors seem to be viewing this as the next step in the company's slow walk toward bankruptcy. Shares fell below $1 on the news.
