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Why JCPenney’s High Debt Level Is a Key Risk Factor

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High debt levels

JCPenney’s (JCP) strategy under the leadership of former CEO, or chief executive officer, Ron Johnson pushed the company into losses due to falling sales and heavy investments in revamping stores. At the end of fiscal 2014, which ended January 31, 2015, JCPenney’s total long-term and short-term debt stood at $5.4 billion compared to $2.9 billion in fiscal 2012. In 2013, the company assumed a debt of $2.25 billion to finance working capital requirements and for general corporate purposes.

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Highly leveraged compared to peers

In fiscal 2014, JCPenney’s total debt-to-equity ratio was 2.8x, up from 1.8x in fiscal 2013. The debt-equity ratio indicates the proportion of debt and equity used to finance a company’s assets. A higher ratio indicates more financial leverage. This can be risky for a company like JCPenney, whose bottom line is still in the red.

JCPenney is highly leveraged compared to its peer group. In fiscal 2014, Kohl’s (KSS), Nordstrom (JWN), Macy’s (M), and Dillard’s (DDS) had a debt-equity ratio of 0.8x, 1.3x, 1.4x, and 0.4x, respectively.

Debt servicing ability

The debt-to-EBITDA[1. earnings before interest, taxes, depreciation and amortization] ratio reflects a company’s ability to repay its debt. A lower debt-to-EBITDA ratio indicates that a company has sufficient funds to service its debt. In fiscal 2014, JCPenney’s debt-to-EBITDA ratio was 12.6x, way higher than its rival department stores. The company’s net interest expense in fiscal 2014 was $406 million while the non-GAAP EBITDA was $323 million.

In fiscal 2014, the debt-to-EBITDA ratios of Kohl’s, Nordstrom, and Macy’s came in at 1.3x each. Dillard’s had a debt-to-EBITDA ratio of 0.5x. JCPenney, Kohl’s, Macy’s, and Dillard’s together constitute 0.7% of the iShares Russell Mid-cap Value Index (IWS).

As of September 4, 2015, JCPenney’s credit ratings were junk-rated:

  • Moody’s: Caa1 with a positive outlook
  • Fitch: B- with a stable outlook
  • Standard & Poor’s: CCC+ with a positive outlook
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