UPDATE 2-CIT cuts off credit to some J.C. Penney vendors -source

Wed Jul 31, 2013 8:02pm EDT

By Dhanya Skariachan and Phil Wahba

NEW YORK, July 31 (Reuters) - Commercial lender CIT Group abruptly stopped funding some future shipments to J.C. Penney Co, a source familiar with the situation said Wednesday, in a move that could disrupt the retailer's holiday shipments and hamper sales.

CIT met with Penney officials on Tuesday and is in talks with the department store chain to resolve the issue, the source said.

Finance companies such as CIT, known in the industry as factors, provide short-term loans to suppliers while they are waiting to be paid by those receiving their goods or services.

The news sent Penney shares down more than 10 percent on Wednesday and created another setback for Chief Executive Mike Ullman, who has been trying to rebuild the company since returning in April.

His predecessor, Ron Johnson, had tried to remake Penney into a more fashionable department store, but shoppers rejected the concept and sales fell 25 percent last fiscal year.

Ullman, who was brought back to succeed Johnson, has largely restored Penney's original strategy focused on deep discounts and coupons.

Penney recently lined up a five-year $2.25 billion financing package to shore up its liquidity, but analysts had said sales growth was likely to return only at the end of the year.

Penney did not respond to several requests for comment about Wednesday's news, and CIT declined to comment.

CIT, which months ago added a 1 percent surcharge on invoices to Penney vendors, may want detailed financial data ahead of the department store chain's quarterly earnings on Aug. 20, said the industry source, who was not authorized to speak publicly about the matter and declined to be named.

Wall Street analysts expect Penney to report that same-store sales declined 6.7 percent in the second quarter, while the larger sector is expected to report a 3.1 percent average increase, according to Thomson Reuters.

CIT's move could disrupt holiday deliveries if Penney suppliers end up sending smaller shipments, or less merchandise, said Mark Cohen, former chief executive of Sears Canada who is a professor of marketing at Columbia University in New York.

Penney will inevitably take a hit at a time its gross profit margin is already under enormous pressure since it reverted to its original pricing strategy in April, Cohen said.

"They may have to pay substantially more for the merchandise one way or another," Cohen said.

CIT, run by Wall Street executive John Thain, temporarily halted loans to Sears Holdings Corp suppliers in January 2012 after the company posted dismal holiday results. It resumed funding a few months later after Sears provided assurances about its finances.

The decline in Penney's stock on Wednesday is the latest blow to activist investor William Ackman, whose Pershing Square Capital Management owns an 18 percent stake in Penney.

Ackman's fund took another hit on Wednesday when Herbalife Ltd shares rose 9.1 percent. Ackman has made a $1 billion bet that the nutritional supplements company is a pyramid scheme and that its shares would fall.

The investor unveiled on Wednesday a $2.2 billion stake, his biggest bet ever, on Air Products & Chemicals Inc.

Penney shares closed down $1.66 at $14.60 Wednesday. They have fallen 35 percent from $22.51 over the last year.

The New York Post first reported about Penney's latest credit problems on Wednesday.

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