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Factors Have Given Up on J.C. Penney for Now—Here’s What That Means

Retailers can theoretically save cash by pushing payments to vendors out beyond the usual 30- or 60-day invoice agreements—but that kind of short-term thinking can just as easily come back to haunt store operators like J.C. Penney.

Factors have given up on checking the troubled department store chain, which means they’re not approving any orders, financial sources said.

Vendors still wishing to ship to the retailer do so at their own risk.

A secured form of lending, factoring offers fashion firms early access to working capital. Factors lend to apparel vendors based on receivables in exchange for a small fee. Receivables represent money owed from retailers for products and services that a vendor has already delivered. Factors take ownership of the receivables, which serve as collateral for the cash lent out and a guarantee of payment from retailers.

Vendors work with factors in order to get the cash they need to run their business, and the risk that a retailer may not pay gets shifted off to the factor.

It’s that risk that has fashion factors tearing their hair out.

When factors approve an order, they are usually using a standard 30-day to 60-day window. That time frame offers some visibility into the future of a retailer’s finances, and consequently the ability to get paid, sources said. But when a retailer stretches out payment beyond that window, factors need to make their best guestimates on what a retailer’s business may look like, all with an eye toward the possibility of getting paid on future receivables it will own if it approves orders.

A strong retailer with sufficient cash stores on the books, such as The TJX Cos. Inc., might be granted some leeway, even if a factor doesn’t like having to wait a little longer to get paid. A retailer that’s a little shakier—such as Macy’s Inc., which some analysts predict only has enough cash to operate for six months maximum—could get a pass on some new orders on an order-by-order basis. For example, right now factors are approving Macy’s drop-ship orders, essentially orders for e-commerce fulfillment—among the only bright spots in non-essential retail. A supply chain management tool, drop shipping allows vendors to retain control of their product and ship directly to end customers when retailers forward them shopper orders.

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The problem occurs when a retailer is on far shakier ground, and that’s the case with Penney’s.

Given the temporary store closures due to the COVID-19 crisis, most firms–even the retailers themselves–don’t really know when stores will open or even whether consumers will be in the mood to start buying fashion apparel again. That lack of visibility, stretching months into a murky future, is giving some factors more than a little indigestion.

Because a lot can still happen over the next quarter or two, factors start to worry about credit deterioration over the longer haul. That concern often results in a lack of confidence for the underperforming retailers.

And it’s not just the factors that are concerned about Penney’s uncertain future. Vendors last month were debating whether to take on the chain’s new orders, cuationed by advisors to either hold up or cancel orders that were placed but not yet greenlit for production.

This week, credit rating firm Moody’s Investors Service downgraded Penney’s corporate family rating as it reportedly has taken the first steps toward exploring debt deal options. While most credit analysts had expected sufficient liquidity through to the end of the year before the coronavirus outbreak, the widespread store closures since have damaged its turnaround efforts. Furthermore, the lack of cash flow from the brick-and-mortar component of its business is adding pressure to its high debt leverage. Moody’s said it expects Penney’s to have significant cash-flow deficits in fiscal 2020 because of COVID-19.

Last month, the retailer furloughed the majority of its store employees and a significant number of its corporate associates at headquarters. It operates about 850 stores, and more than 80,000 store associates were put on furlough. It is believed to be working with a number of advisors to deal with its debt load, such as AlixPartners, Kirkland & Ellis and Lazard Ltd., according to a Bloomberg report.

A spokeswoman for the retailer said Penney’s “has been engaged in discussions with its lenders since mid-2019 to evaluate options to strengthen its balance sheet and maximize its financial flexibility, a process that has become even more important as our stores have also closed due to the pandemic.”

Over that time frame, “the company successfully met or exceeded guidance on all five financial objectives for 2019 and saw comparable store sales improvement in six of eight merchandise divisions in the second half of 2019 over the first half,” the spokeswoman added. “We remain focused on our Plan for Renewal, and look forward to when we reopen our doors.”

Under the leadership of CEO Jill Soltau, Penney’s had planned to host an Investor Day presentation with Wall Street analysts on April 7 to showcase its three-year outlook, but that was postponed when social distancing took hold.

Discussions are still ongoing with those advisors, one person familiar with those talks told Sourcing Journal Wednesday. And while the focus is on exploring a “myriad” of options to figure out the best next step for the retailer, nothing has been decided, the source said. Talks to restructure debt could segue way into a discussion that includes a bankruptcy filing if they can’t get creditors to agree on new debt terms, although bankruptcy as a separate option is also on the table. Currently, all options are still on the table, as are talks with certain vendors, the source noted.

“A bankruptcy is not inevitable,” the source said.