J.C. Penney can ill afford this additional expense, which is equal to about 0.8% of annual sales at the current run rate. While the company made significant cost cuts under Ron Johnson’s leadership — totaling at least $900 million annually — these savings are gradually being offset by new costs. J.C. Penney is ramping up its marketing again, in order to convince customers to come back. Additionally, the company raised cash last year by selling REIT units that had previously provided steady cash flow for J.C. Penney Company, Inc. (NYSE:JCP). $100 million of incremental interest expense is just one more barrier to reaching breakeven.
Foolish bottom line
J.C. Penney absolutely needed the liquidity that will be provided by its new term loan. However, the price is very steep and will ultimately increase the company’s interest expense by $100 million annually. This raises the company’s breakeven point and will weigh down margins for the foreseeable future. With more and more lenders laying claim to their “piece” of J.C. Penney, shareholders are likely to lose out in the long run.
The article J.C. Penney Debt Offering Buys Time — but at a High Cost originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs.
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