Fitch Lwrs JC Penney's Sr. Debt `BBB-', CP `F3' On Rtg Watch Neg

Business Wire, Oct 6, 2000

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 6, 2000

J. C. Penney Co., Inc.'s (Penney) $5.7 billion senior debt and $2.0 billion senior debt shelf registration are lowered to `BBB-' from `BBB' by Fitch following the company's announcement that third quarter operating results and fiscal 2000 as well will be down significantly from expected levels.

At the same time the rating on J.C. Penney Funding Corp.'s 4(2) commercial paper program is lowered to `F3' from `F2'. The ratings are placed on Rating Watch Negative given the negative operating trends and the uncertainty regarding longer-term operating and strategic plans.

The rating actions reflect the continued weakness at Penney's department stores and Eckerd drugstore operations. Comparable store sales for the department stores have not improved as anticipated, but instead have decreased 3.0% in the first eight months of fiscal 2000. While some of the sales weakness can be attributed to the overall weak retail environment, the company's department stores are also suffering from the lagging effect of old merchandising strategies. Eckerd's sales and operating performance is also weaker than expected due to slow sales of high-margin front-end merchandise, coupled with increased promotions. Despite the closure of nearly 300 underperforming drugstores earlier in the year, the drugstores face ongoing operational difficulties. In an effort to improve performance, the department stores have centralized their buying operations and both business segments continue to refine many other operating strategies. However, Fitch does not expect benefits from the changes implemented to be evident until the second half of fiscal 2001.

In light of the current operating difficulties, Fitch expects that fiscal 2000 EBITDA (earnings before interest, taxes, depreciation and amortization) is likely to be down more than 20% from the $2.0 billion generated in fiscal 1999 and that profitability margins may deteriorate as well. As a result, bondholder protection measures remain weak for investment grade. Despite nearly $800 million in debt reduction in the first half of the year, leverage (total debt plus eight times rent expense as a multiple of EBITDA Rents) remains high at 5.1x as of July 29, 2000. Therefore, the rating action also reflects that any improvement in credit measures has been delayed well beyond year-end.

The Rating Watch Negative status reflects the uncertainty regarding the company's ability to restore operating performance to previous levels and what actions the company will implement to improve its financial posture. Fitch expects to meet with management to review any revised long-term strategic operating plans as outlined by the new CEOs of Penney and its Eckerd operation in response to the current environment.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Insurance, Corporates, Structured Finance, Sovereigns and Public Finance Markets worldwide.