By Dhanya Skariachan and Phil Wahba
NEW YORK, July 31 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
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
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.