J.C. Penney's credit profile may erode in coming months if US consumers limit their holiday shopping, but the retailer's bonds are still poised to perform better than those of its closest peers.
The department-store chain reported a mammoth 9 percent drop in quarterly profit on Thursday and offered a grim fourth-quarter forecast, adding fuel to fears of a sluggish holiday shopping season.
The cost to insure Penney's bonds with credit default swaps rose about 1.5 basis points on Friday to roughly 151 basis points, meaning it costs $151,000 annually to protect $10 million of Penney's debt for five years.
Penney's debt protection costs are about 22 basis points wider, or 17 percent higher, since Wednesday's close. The mid-tier retailer's 5.75 percent notes due in 2018 are trading at a yield spread of 230 basis points over relatively safe Treasury bonds, compared to 202 basis points before the earnings news on November 13, according to MarketAxess.
Penney's bonds may nevertheless fare much better than the investment-grade retail sector as a group, which includes Kohl's Corp and Macy's Inc. "We continue to believe Penney's bonds will outperform those of its peers," wrote Carol Levenson, an analyst at Gimme Credit in New York, on Friday.
Analyst James Goldstein at research firm CreditSights agreed. Penney is "a strong operator in the space, and we expect it to continue to succeed relative to its peers." To be sure, both research firms lowered their ratings on Penney after the recent results.
J.C. Penney has been riding a wave of optimism this year, opening new stores and rolling out successful new brands. Credit-rating firms Moody's Investors Service and Standard & Poor's both had a positive outlook on the company, which had emerged from junk status last year.
But Standard & Poor's on Thursday lowered its outlook on Penney to stable from positive, indicating a rating upgrade is not likely in the next two years. Moody's and S&P rate Penney's unsecured debt "Baa3" and "BBB-minus," respectively, their lowest investment grade.