NEW YORK -- J.C. Penney's shares plunged Wednesday after a report that CIT, the largest lender in the clothing industry, has stopped providing financial support to small and large suppliers selling to Penney stores -- for now.
According to the New York Post's online report Wednesday, CIT made the decision after meeting with Penney officials to examine the company's books. The newspaper quoted unnamed sources.
Officials at J.C. Penney (JCP) couldn't be immediately reached. CIT's spokesman Matt Klein declined to comment, saying the company doesn't comment on specific customers.
Bob Carbonell, chief credit officer at Bernard Sands, a credit agency for the clothing industry, told The Associated Press that four of CIT's clothing clients told him that the lender is issuing a hold on approving financial support. That hold started Tuesday, he said. The orders are for shipments of goods starting later in August and beyond. That means that suppliers will have to ship at their own risk now, which may make them less likely or able to keep filling Penney's shelves.
The move fuels a new round of worries about Penney's financial situation. Penney is trying to reverse its fortunes after disastrous results under a failed transformation plan implemented by its former CEO Ron Johnson. Johnson was ousted in April after 17 months on the job. The board brought back former CEO Mike Ullman, who has reintroduced frequent sales and is bringing back key merchandise under store names like St. John's Bay.
CIT Group Inc. (CIT) is what the industry calls a "factor," which makes cash advances to suppliers based on the goods they sell to the merchant. If vendors and factors become wary of a store's creditworthiness, the retailer may have to pay suppliers cash upfront for goods, which could be a huge drain on liquidity. If suppliers stop shipping goods, it can be a death knell for a retailer. Carbonell believes that Penney's suppliers are still digesting the news but he thinks that they will continue to ship.
"Relationships are extremely important to manufacturers," Carbonell said. "They may not want to jeopardize their relationships with Penney." Carbonell said that he is advising his apparel clients to continue to ship to Penney on an "order-to-order basis."
CIT's reported steps follow its moves in April to slap a 1 percent surcharge to suppliers for Penney's orders.
Shares of Penney fell more than 10 percent, or $1.66, to close at $14.60. They slipped another 27 cents, or 2 percent, to $14.33 in after-market trading.
Penney suffered a nearly billion-dollar loss and saw a 25 percent drop in revenue in its latest fiscal year as shoppers rejected the changes that Johnson implemented. That included getting rid of most sales and eliminating basic merchandise in a bid to attract trendier and more affluent shoppers. Sales declines and big losses continued into the first quarter. Johnson was ousted in April, in the middle of the first quarter,
Analysts have said that they have seen more traffic in the stores as a result of Ullman's moves to restore some of the merchandise and sales, but business is still slow. In fact, Penney's relaunched home department, a Johnson project, has failed to attract the needed traffic and sales.
As part of Johnson's strategy, the home area was relaunched in 500 stores and featured new names like Michael Graves and Jonathan Adler. Some experts believe the trendy merchandise isn't resonating with Penney shoppers. And to underscore Penney's difficulties in the home area, Penney's senior vice president and general merchandise manager of home abruptly left the company this past month.
In a report issued Wednesday, Citi Research analyst Deborah Weinswig said that while Penney's performance continues to deteriorate in the second quarter, the company did issue a $2.25 billion term loan in May, which "removed near-term liquidity concerns in our view."
The company is expected to release its second-quarter earnings report Aug. 20.