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.
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.
"We would love to be their partner in rebuilding that segment of that market," said Nick Madden, executive vice president of Chris Madden Inc., and son of the namesake designer. He noted that the designer and Penney have been swapping informal emails since last week.
"It's nothing concrete, but we will see where those discussions take us," he added.
But there are plenty of signs of nervousness among the financial lenders, commonly called "factors," that make cash advances to suppliers based on the goods they sell to the merchant.
Michael Cipriani of Rosenthal & Rosenthal, a financial lender to clothing suppliers, said it will now slap a surcharge on its clients who sell to Penney after hearing that Penney would tap its credit line earlier than he expected. The company is following other financial lenders in recent weeks.
Bob Carbonell, executive vice president and chief credit officer at Bernard Sands, a credit agency for a variety of industries including clothing, said the company continues to recommend suppliers keep shipping to Penney.
Still, Carbonell is watching the situation closely. He noted that another horrendous quarterly financial report could have a "psychological impact" on the credit community. Penney is expected to release first-quarter results next month.
"Right now, the ball is in Mike Ullman's court," Carbonell said.
During a conference call last week, Levi Strauss & Co., a supplier to Penney, was asked by an analyst whether it dealing with Penney any differently. Levi's Chief Financial Officer Harmit Singh said he was keeping a "close eye," but he noted the retailer "has been paying the bills on time."
"J.C. Penney is a valued customer," Harmit added.
Penney's moves to increase its cash reserves comes in the middle of the company's overhaul of its home area. The new home section, which includes shops devoted to merchandise from names like Jonathan Adler and Michael Graves, is scheduled to roll out to 500 of its 1,100 stores by next month. The strategy was part of Johnson's vision to transform the stores into a mini-mall of specialty shops.
Penney's Chief Financial Officer Ken Hannah said in a statement that the drawing of the funds "provides more than its current funding needs to ensure our continued liquidity," but it is also looking to explore other ways to raise more money.
In early February, Penney amended its bank credit facility to increase its borrowing capacity to $1.85 billion, from $1.75 billion, but some analysts had expected that it wouldn't tap into the credit line until the middle of the year
Last November, Penney said it would end the latest fiscal year with $1 billion in cash. Penney wound up ending the year with $930 million in cash, which was better than analysts had feared but below the company's target. However, the figures looked better than they really were because Penney staggered some payments to vendors into the first quarter.
Deborah Weinswig, an analyst at Citi Investment Research, estimates that Penney may ultimately need to raise $1 billion in total cash in permanent financing this year to "buy time to stabilize the business." Penney needs a minimum cash balance on hand of $500 million to $750 million to run its business, she believes.
Fitch Ratings said in a release Monday the additional permanent funding would be needed to cover a projected free cash flow shortfall of $1.3 billion to $1.5 billion this year. Fitch says that Penney will need to tap into various sources of funding including equity infusion.
Shares of Penney fell 23 cents to $14.39. The stock has lost more than 65 percent of its value since February 2012, when investors were bullish about Johnson's plan.