JC Penney shares dive on report of financing woes

On April 14th, 1902, James Cash Penney Jr. and two partners opened a dry goods store in Wyoming called "Golden Rule" - the first of what became the retail chain J.C. Penney.

NEW YORK J.C. Penney's (JCP) shares plunged Wednesday after a report that CIT, the largest lender in the clothing industry, has stopped providing financial support to small suppliers selling to Penney stores.

According to the New York Post's online report, published Wednesday, CIT made the decision after meeting with Penney officials to examine the company's financial statements. The newspaper quoted unnamed sources.

Officials at Penney and CIT didn't immediately return calls.

Shares of Penney fell more than 10 percent, or $1.66, to close at $14.60, but added 19 cents in after-market trading.

Penney has been struggling to reverse disastrous results from a failed strategy by former CEO Ron Johnson to transform the retailer. Johnson was ousted in April and the board brought back former CEO Mike Ullman, who has reintroduced frequent sales.

Bob Carbonell, chief credit officer at Bernard Sands, a credit agency for the clothing industry, said four of CIT's clothing clients told him that the lender is issuing a hold on approving financial support. That hold started Tuesday, he said. The orders are for shipments of goods starting later in August and beyond. That means that suppliers will have to ship at their own risk now, which may make them less likely or able to keep filling Penney's shelves.

CIT is what the industry calls a "factor," which makes cash advances to the suppliers based on the goods they sell to the merchant. If vendors and factors become wary of a store's creditworthiness, the retailer may have to pay suppliers cash upfront for goods, which could be a huge drain on liquidity. Carbonell believes that Penney's suppliers are still digesting the news but he believes that they will continue to ship.

"Relationships are extremely important to manufacturers," Carbonell said. "They may not want to jeopardize their relationships with Penney."

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