Fitch Ratings Affirms JC Penney At 'BB'; Outlook Revised to Negative

Business Wire, July 1, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--July 1, 2003

Fitch Ratings has affirmed the 'BB ' rating on J.C. Penney Co., Inc.'s (Penney) $1.5 billion secured bank facility, the 'BB' rating on Penney's senior unsecured notes, and the 'B ' rating on the company's convertible subordinated notes. In addition, the 'B' commercial paper rating of J.C. Penney Funding Corp. is withdrawn. The Rating Outlook has been revised to Negative from Stable. Approximately $5.8 billion of debt is affected by the rating actions.

The affirmations reflect the progress Penney has made over the past two years in turning around its department store and Eckerd drugstore businesses as well as the company's strong liquidity position, offset by continued high financial leverage. Despite the progress made to-date, the Negative Outlook reflects current operating weakness in both business segments, as comparable store sales declined 3.2% at the department stores and 1.1% at Eckerd in the first four months of 2003. Sales weakness, which is expected to persist over the balance of 2003, is slowing the pace of margin improvement.

The department stores are faced with a soft apparel environment, and are now lapping two years of positive sales, making the comparisons more difficult. This segment is now halfway through a 5-year turnaround plan, with further progress expected in improving the appeal of its merchandise offerings, reducing costs and smoothing the flow of goods to its stores. Eckerd's comparable store sales continue to lag its competitors despite a major effort to reconfigure and remodel its stores. Penney management plans to review its strategic options for Eckerd at the end of the year, with the possibility that it will sell or spin-off this business at some point.

Penney's liquidity is strong, with $2.6 billion of cash at April 26, 2003. Penney has sufficient cash in place to cover peak seasonal working capital needs of $1.2 billion, debt maturities in 2003 and 2004 of $630 million, and projected negative free cash flow of $500 million over the 2003-2005 period. Negative free cash flow arises from higher capital expenditures to fund faster growth at Eckerd and ongoing investments at the department stores.

Though Penney's credit measures have improved over the past two years, they remain weak for the rating category. EBITDAR (before restructuring and other charges) coverage of interest plus rents increased to 2.0 times(x) in the twelve months ended April 26, 2003 from 1.7x in 2001 and leverage, as measured by lease-adjusted debt to EBITDAR, improved to 5.1x from 5.9x over the same time period. Fitch expects these measures will gradually strengthen over the medium term as profitability and cash flow improve.