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Fitch downgrades J.C. Penney's IDR to B- with stable outlook

Fitch Ratings on Jan. 14 downgraded J. C. Penney Co. Inc.'s long-term issuer default rating to B-, less than five months after the agency downgraded the department store chain's rating to B, reflecting a "significant" erosion in the company's fiscal 2018 earnings.

The rating outlook for J.C. Penney is stable. Fitch also downgraded the company's senior unsecured notes to B- and its senior first-lien secured debt and senior second lien secured notes to BB-.

The downgrade reflects Fitch's expectation that J.C. Penney's EBITDA will decline to about $550 million to $600 million in 2018 from $886 million a year earlier. Fitch also forecast that the company's EBITDA will remain at that range over the next 24 to 36 months or potentially being constrained to between $500 million and $550 million in 2019.

The rating organization also expects comparable store sales to be down 3% in 2018 and between 2% to 3% in 2019, while free cash flow is expected to be negative $125 million to negative $150 million in 2018 and 2019.

Despite projected negative free cash flows in 2018 and 2019, Fitch noted that the company has enough liquidity to fund the business and upcoming maturities.

Fitch also said the earnings deterioration shows significant execution issues in J.C. Penney and revenue pressure on the company from store liquidation sales of bankrupt retailers in the space such as The Bon-Ton Stores Inc. and Sears Holdings Corp.

The rating agency added that the department store operator's direction and strategy are "unclear" following changes in its management team. This includes the previous management's plan to grab market share from struggling retailers in the home and appliances sector, areas that have turned into a "near-term drag" for J.C. Penney, given Sears' liquidation sales.

Fitch said a positive rating action for J.C. Penney could occur if comparable store sales stabilize and EBITDA is sustained to more than $700 million annually. Meanwhile, a negative action will occur if comparable store sales continue to be "materially negative" and EBITDA remains under $500 million.

The news comes almost a week after the Texas-based department store chain reaffirmed its fiscal year 2018 guidance despite a drop in comparable store sales.