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By Jeremy Glaser | 06-10-2010 12:36 PM

JC Penney Bonds on the Sale Rack

As JC Penney catches up to its peers, Morningstar's Joscelyn MacKay looks at the investment case for the firm's bonds.

Securities mentioned in this video
JCP JC Penney Co Inc

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. Several of JC Penney's bonds look attractively priced, and I am here with Credit Analyst Joscelyn MacKay to take a look at JC Penney and why the bonds look like they could be buys right now.

Joscelyn, thanks for joining me.

Joscelyn MacKay: Thanks for having me.

Glaser: So first off, how does JC Penney stack up against the rest of the department stores in terms of their credit quality?

MacKay: In terms of their credit quality, they are about middle of the road. I mean, I think we see a lot of weaker credits in the space, and then we look at a lot of stronger credits like Target.

From a price perspective, JC Penney really stands somewhere between a better department store like Macy's and a discounter, like Target. But in going forward, we see a lot of initiatives at the firm will really drive its earnings, including Liz Claiborne, Sephora, which is a continued rollout within their stores, and the Spanish brand MNG by MANGO. All of these really play into the fast fashion trend that continues to grow in the U.S. We really think it will help JC Penney improve its perception and it enhances product offering relative to a Macy's or a Sears.

Glaser: What does their financial position look like in terms of how much cash they have and how much debt they have?

MacKay: The Company does have a lot of debt on its books relative to some other, but it's been steadily reducing its debt. Since the fiscal year-end, the Company reduced its debt load by $300 million. Most of that was ahead of schedule. So we really think the Company is focusing on debt paydown. There was a lot of debt paydown prior to the downturn that really helped it enter the credit crunch in a very stable position.

Glaser: So what's our credit rating for JC Penney?

MacKay: We rate them a BBB minus, which is an investment grade credit rating.

Glaser: So we rate them investment grade, but are their bonds trading in those investment grade spreads right now?

MacKay: They trade a little bit wider than your average BBB minus credit. It is interesting that there is a very big disconnect between investment grade and below investment grade, and I definitely wouldn't say those bonds are only squarely below investment grade credit. But we still think there is some room to tighten. They've got some longer-dated bonds, one that was just issued 5.65% coupon due 2020 and one that's due 2018 with a coupon of 5.75%. Both of them trade wider than your average BBB minus.

Glaser: What are some of the risks involved in investing in these bonds?

MacKay: Some of the risks to JC Penney are ones that will really hit all retailers, competition, and maybe a double dip in the economy. Something that's a little bit unique to JC Penney is that they've really lagged their peers in getting into the off-mall locations. Competitors like Target and Kohl's are already there. So, they've got some room to catch up.

Glaser: Joscelyn, thanks for joining me today.

MacKay: Thanks for having me.

Glaser: For Morningstar.com, I am Jeremy Glaser.

 

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