Moody's Says 'JCP Change in CEO Will Not Solve Near Term Earnings'

Moody's notes that in from of Department store chain, J.C. Penney

recently announced that Mike Ullman has rejoined the company as Chief Executive Officer effective immediately. He succeeds Ron Johnson who is stepping down and leaving the company. Mike Ullman was formerly the CEO of JCP from 2004 to 2011. We view this announcement as having many credit negative implications. It adds to the lack of visibility of future performance and raises Moody's concerns that liquidity may have contracted in the first quarter more than anticipated. It also creates a heightened uncertainty around JCP's go forward strategy (both short and long term). Thus, we believe this announcement will not solve JCP's near term earnings pressures. In fact, we are concerned that JCP's return to coupons and a more promotional selling strategy may negatively impact first and second quarter operating margins while the company works to reprice its private label merchandise. Furthermore, it does raise concerns regarding corporate governance and how activist shareholders may impact strategy. We had presumed that Ron Johnson would have been given enough time to complete the rollout of the home shops before the board of directors would make any decision regarding his future role. Thus, the CEO change at this time appears abrupt and is likely a signal that JCP's performance so far in 2013 is weaker than anticipated. In addition, JCP's performance under Mike Ullman was lackluster with JCP generally underperforming its peers. However, this announcement did not prompt a change to the B3 Corporate Family Rating. We do view positively that Mike Ullman is already familiar with JCP, will provide continuity to a management team who has undergone numerous significant changes, and is better than a prolonged empty CEO seat while the board searches for a replacement. In his prior tenure as CEO he had a more conservative management approach than that displayed during Ron Johnson's term. In addition, his relationship with vendors should provide a calming influence. Under Mike Ullman's leadership, JCP did launch the first of its two specialty shops, Sephora and MNG by Mango. The existing B3 Corporate Family Rating presumes that there will be no material change in the shop strategy. JCP's B3 Corporate Family Rating continues to reflect the near term significant weakness in JCP's operating performance and credit metrics. The rating is supported by our opinion that JCP's near term liquidity remains adequate, albeit likely contracting. The rating also acknowledges the lack of near dated debt maturities. JCP's nearest debt maturity is not until 2015 when its $200 million 6.875% medium term notes mature.