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J.C. Penney borrows $850 million: Is it enough?

J.C. Penney has pulled $850 million from its revolving credit line to be able to pay its vendors, increasingly skittish after J.C. Penney's failed attempts at a turnaround.

By Anne D'InnocenzioAssociated Press / April 15, 2013

J.C. Penney is hoping its former CEO can revive the retailer, after a risky turnaround strategy backfired and led to massive losses and steep sales declines. The company's board of directors ousted CEO Ron Johnson after only 17 months on the job and rehired Johnson's predecessor, Mike Ullman.

Mark Lennihan / AP

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NEW YORK

As J.C. Penney Co. burns through its cash after a disastrous turnaround plan and pulls $850 million dollars in credit — tapping almost half of its credit line — the flailing department store chain doesn't only have to calm its investors. It has to restore confidence among its several hundred suppliers whose constant flow of merchandise must continue if the retailer is to survive.

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Penney announced Monday that it would draw $850 million from its $1.85 billion revolving credit line to pay for replenishing inventory, particularly for its overhauled home area. Some analysts say the move shows that the Plano, Texas-based company is burning through cash faster than expected. Penney is also looking for alternative sources of funding.

It comes at a critical time. Penney is wrapping up back-to-school orders and is starting to order goods for the critical holiday shopping season. Normally, retailers order goods well in advance but don't pay for them until about 30 to 60 days until after goods are shipped. If vendors start demanding to be paid in advance, stores face a cash crunch when they order goods for busy shopping periods.

"Maintaining a seamless flow of merchandise is critical," said Marshal Cohen, chief retail industry analyst with market research firm The NPD Group. If shoppers see empty shelves, they'll go somewhere else, he says.

The concerns about the future of Penney are mounting a week after Penney fired its CEO, Ron Johnson, after 17 months on the job and rehired his predecessor Mike Ullman. Johnson spearheaded a costly turnaround plan that included getting rid of most discounts, bringing in hip brands and transforming the stores into collections of mini-boutiques.

The changes turned off shoppers, resulting in a nearly billion-dollar loss and a 25 percent drop in revenue to $12.98 billion for the fiscal year ended Feb. 2.

Cohen and others point to a string of retailers, including Circuit City and Linens 'n Things, that were forced into bankruptcy in part because nervous suppliers delayed shipments of goods or stopped them altogether.

Ullman, who was Penney's CEO for seven years until November 2011 before he was replaced by Johnson, is expected to be in New York this week meeting with vendors, according to Dan Hess, CEO of Merchant Forecast, an independent research firm that monitors the retail sector.

Analysts believe Ullman, who is known to have strong relationship with suppliers, will have a calming influence among them. In the stores, he's expected to bring back discounts and coupons and will be assessing other parts of Johnson's legacy. Ullman is also expected to add back some of the merchandise from store label brands like St. John's Bay in a bid to reclaim its middle-age shoppers who were turned off by its push to brightly colored, body-hugging designs.

"Ullman has always been an executive of high integrity," Hess said. He noted that suppliers will to be willing to take more risks than they would if Johnson were still at the helm.

Allen Schwartz, president of A.B.S. by Allen Schwartz, a supplier of dresses and sportswear for Penney, says he is more relieved now that Ullman is back.

"I feel more comfortable," he said.

Even Chris Madden, a traditional home furnishings brand that had been dropped under Johnson's regime, is looking to rekindle its partnership. The brand, which was stamped on a variety of home goods from pillows to furniture, had generated more than $1.5 billion in sales since it started selling to the chain in 2004.

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