JCPenney could have been ruined, even as the mall races to save

The company has been struggling with serious problems for years.

JCPenney’s last profitable year was in 2010, and since then its net loss is about $ 5 billion.

Since the summer of 2011, JCPenney has recorded net profit in just five quarters, all in the holiday shopping season. Even before the current round of store closures, JCPenney had closed more than 20% of its stores since 2011, cutting staff by more than 40%.

In its most recent quarter, losses rose to $ 398 million from $ 48 million a year earlier, as revenue fell 45%. And most of its stores were open for at least two-thirds of the quarter, suggesting that it was a lack of customer demand – not Kovid-related store closings – that punished sales and eliminated losses.

Still, the epidemic is not helping. JCPenney mainly relies on clothes and accessories for its sales. With millions of people working out of the house and millions at home, for many the future, the demand for those goods has fallen sharply.
During the current crisis big box competitors occupy more of that business. The fact that they allowed to sell groceries Walmart (WMT) And aim (TGT) Stores to remain open as required retailers during orders to remain in the store. Both have far stronger online sales than JCPenney.
“We’re definitely not going back to the draw in customers,” said Mark Cohen, director of retail studies at Columbia Business School. “They are not shopping for clothes and accessories that depend on JCPNE. And if they are, they are unlikely to shop at JCPNE or the malls where they are located. I know that Walmart (WMT) And aim (TGT) Has gained market share for apparel and accessories, and they are not paying it back. “

A plan to save JCPenney

The 118-year-old retailer, which filed for bankruptcy in May, announced an agreement last week to sell its retail operations to Brookfield Property & Group Simon Property Group (SPG), Two major mall operators who were among its largest creditors. The company’s real estate holdings will be converted into a separate real estate investment trust, which is owned by its lenders.
The agreement gives the company a much-needed lifeline to open 690 stores, while it sets about closing another 149 stores before the holiday shopping season. This would protect 70,000 of the 85,000 jobs at the time of the May bankruptcy filing.

“Interest in our operations reflects our company’s strengths and our loyal customer base,” said JCPNTE CEO Jill Soltau. “As we continue to move through the sales process, our focus will be on serving our customers and working seamlessly with our vendor partners. We have been a trusted partner to all our stakeholders since 1902, And we hope to continue that track record. Decades to come under the banner of JCPNE. “

Mall owners set to buy JCPNE out of bankruptcy
However, experts said the creditors’ desire to keep the company alive – rather than insisting on liquidation – was a low vote of confidence in JCPENEE and a historical weakness in the retail real estate market. The closure of a company would create a large number of vacancies in the mall where it is still a major anchor tenant. Vacancies may remain for men. Mall operators were prepared to stop doing so.

“This is the best result they could have expected at the moment,” said Cohen. “It enables them in business and they are prepared by a partner who is aligned with them and wants them to remain in business as well.”

What is right for a distressed retailer

There are some minor advantages to the JCPenney competition that give it some hope to survive.

Nearly half of its sales are for private label brands, such as Liz Claiborne. JCPNY does not own the brand, but has the exclusive right to sell, which gives it a certain level of customer loyalty. And unlike Sears, JCPNE has a good relationship with its vendors, said Reshami Basu, a retail insolvency expert at Detty, who monitors the finances of troubled companies.

It has used the bankruptcy process to fund nearly half of the $ 5 billion it was running at the time of its filing, leading many to believe a company of the size of JCPenney was one Is the level.

Cohen said, “The excess of debt killed him; he was eventually pushed aside.”

Trouble in the department store sector

But customers and market share in the entire department store segment has been declining for years, not online retailers such as Adventuress (AMZN) And big box stores, but also discounts like clothing chains Tj maxx (TJX) And Burlington, which are growing while other retailers have closed stores.

Such changes and customer preference in the market were already based on JCPCeni’s likelihood of long-term survival. Basu said that the indefinite shopping season amid concerns of Kovid-19 would not help avoid bankruptcy.

“It’s not going to be an easy Christmas,” she said. “Am I hearing from vendors, a lot of retailers don’t know what the demand is going to be. They don’t know what the impact will be on people working from home. They don’t know what will happen. More incentives . And most of all he does not know that there will be another improvement in the affairs of Kovid. “

This is a particularly serious problem for JCPenney, given its greater reliance on strong holiday sales compared to other retailers.

Many businesses are able to use the bankruptcy process to shed debt and return to profitability. But the retail cemetery is replete with store chains that emerged from bankruptcy, only to continue struggling once again in relatively short order and to file for bankruptcy. RadioShack, Payless Shoes, Gymboree and American Apparel all followed that path on their decision to go out of business.

So Cohen is giving JCPenney a 20% to 25% chance of surviving only five years, even with the deal allowing it to emerge from bankruptcy.

“They will be able to leave the intensive care unit, but they will still be in the hospital until the IV drips,” he said.