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JCP Compared to Sears in S&P Report

Flattering turnaround comparisons indicate that analysts may still see a bright future for JCPenney, assuming the company can stanch its cash bleed and win back its customers. Standard & Poor’s debt analysts compared the retailer to such once-gloomy firms as General Motors Co., Ford Motors, and Sears Holdings Corp.

The company’s decline last year – losing almost $1 billion and 25% of its sales – put it in dangerous waters, but since the departure of Ron Johnson, returning CEO Mike Ullman has worked to improve vendor relations and shore up the company’s fundamentals.

The firm took a hit recently, as lenders added an extra point to vendors financing shipments, and some factors have complained that the company isn’t being clear with its debtors. “The concern is they’re losing money, they don’t know how much money they’re going to lose in cash burn in the first quarter and we haven’t been able to get information from them,” said one financial source to WWD. “They’re not giving us a budget that says to us, every month this is what they’re going to burn [through].”

This is similar to Sears’s position last year, when rumors flew that the company might default on its obligations and Sears Holdings Chairman Edward Lampert had to step in and offer extended guarantees on the debt.

Penney’s has pulled $850 million from its revolving credit line to avoid a cash crunch and keep store renovation plans on track. It also scored a minor victory in its lawsuit against Macy’s, when an appeals court judge ruled that the company can continue to sell millions of dollars in unbranded Martha Stewart Omnimedia merchandise, as long as it does so under its own labels.

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None of the company’s debt comes due until 2015, giving it one year to show significant improvement, if it has the cash to keep going. The company does have to keep good relationships with vendors, though, and ongoing rumors make some factors reluctant to keep ties with what many see to be a slowly sinking ship.

Sears and JCPenney struggle with similar problems. Their demographic customer base is shrinking, sales are slumping, cash flow is insufficient, and they have lots of potentially salable real estate. At Sears, Edward Lampert and other activist investors are pushing a reinvention plan. At JCPenney, Bill Ackman and Steve Roth pushed the aggressive turnaround plan led by Ron Johnson, only to back off support, leaving Johnson to flounder. Sears owns 29% of its stores and JCPenney owns 39%.

“We think longer-term success for both [Penney’s and Sears] remains uncertain. Either company could eventually pursue a financial restructuring, though this is not yet our base case for 2013. But as we have seen with [Ford and General Motors], shifts or reversals in consumer purchasing behavior can overwhelm operational progress by a retailer facing difficult times. Or like GM and Ford, either or both retailers could resolve to focus on what matters and execute a successful comeback plan,” S&P analysts David Kuntz and Ana Lai wrote in a report.

JCPenney said Thursday that Chief Operating Officer Michael Kramer (another Apple veteran) will be leaving the company, along with Chief Talent Officer David Walker. The moves are not surprising, as Kramer and Walker both sought to remake JCPenney’s corporate culture, which CEO Ullman was largely responsible for, and which Kramer at one point called “pathetic.”

The company is also seeking a $1 billion capital raise, and is in talks with lenders including Wells Fargo, TGP Specialty Lending Inc., and Gordon Brothers Group for a $500 million loan.

“Although we do not expect to see positive same-store sales [at Penney’s] during the next six months, a meaningful deceleration of the steep declines could signal the start of some modest success,” said S&P. “The best-case scenario would be a stabilization of same-store sales later this year.”

Sears is struggling with a different set of problems now, as changes have slowed to a crawl and the firm has struggled with a clear merchandizing picture.