Penney Shares Plunge on Report of Financing Woes

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    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.

    According to the New York Post's online report, published Wednesday, CIT made the decision after meeting with Penney officials to examine the company's books. The newspaper quoted unnamed sources.

    Officials at Penney couldn't be reached immediately. CIT's spokesman Matt Klein declined to comment, saying it doesn't comment on specific customers.

    Bob Carbonell, chief credit officer at Bernard Sands, a credit agency for the clothing industry, said 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.

    CIT is what the industry calls a "factor," which makes cash advances to the 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. Carbonell believes that Penney's suppliers are still digesting the news but he believes that they will continue to ship.

    "Relationships are extremely important to manufacturers," Carbonell said. "They may not want to jeopardize their relationships with Penney."

    Shares of Penney fell more than 10 percent, or $1.66, to close at $14.60, but added 19 cents in after-market trading.

    A credit clampdown would add to woes for Penney, which has been struggling to reverse disastrous results from a failed strategy by former CEO Ron Johnson to transform the retailer. That included getting rid of most sales and eliminating basic merchandise in a bid to get trendier and more affluent shoppers.

    Penney suffered a nearly billion-dollar loss and saw a 25 percent drop in revenue in the latest fiscal year. Sales declines and big losses continued into the first quarter. Johnson was ousted in April, in the middle of the first quarter, and the board brought back former CEO Mike Ullman, who has reintroduced frequent sales and is bringing back key merchandise.

    But analysts say that despite the moves, Penney's business has still been slow.