May 15, 2020

J.C. Penney files for Chapter 11 bankruptcy

[USA Today, Getty Images]

J.C. Penney plans on some permanent store closings.

J.C. Penney, reeling from a one-two punch of the department store industry’s struggles and the coronavirus pandemic, filed for Chapter 11 bankruptcy protection on Friday.

The company, which had racked up an unsustainable amount of debt in recent years, plans to close an unspecified number of stores permanently in a bid to survive bankruptcy. The retailer had 845 stores at the end of 2019, according to real estate data source CoStar Portfolio Strategy.

The bankruptcy filing comes after several years of declining sales and strategic missteps as J.C. Penney careened from one reinvention strategy to another.

Nothing seemed to work. J.C. Penney lost money in eight of the last nine years, totaling $4.45 billion, according to FactSet.

Having racked up the second-most debt of any distressed retailer at $4.2 billion – ranking behind only luxury department store chain Neiman Marcus, according to Moody’s Investor Service – J.C. Penney engaged in talks with creditors in recent weeks in hopes of avoiding bankruptcy.

But those talks faltered as it became clear that the retailer’s prospects looked increasingly grim.

J.C. Penney said Friday in a statement that it had secured support from some of its financial creditors for a bankruptcy restructuring plan that would eliminate billions of dollars of debt. That plan would require approval from a bankruptcy judge, who could decide instead to force the retailer to go out of business if that’s in the best interest of the company’s creditors.

“Implementing this financial restructuring plan through a court-supervised process is the best path to ensure that JCPenney will build on its over 100-year history to serve our customers for decades to come,” CEO Jill Soltau said in statement. 

The company declined to say how many stores would close permanently as part of its restructuring plan.

For J.C. Penney, which was once a regular shopping destination for the American middle class, bankruptcy marks a fall from grace that could spell the end.

“If you go back to the ‘80s, J.C. Penney at that point in time was a family retailer that sold a lot of interesting products from fashion to homewares (and) was a destination for a lot of consumers to go and do their shopping,” said Neil Saunders, managing director of GlobalData Retail.

But “J.C. Penney has been losing shoppers, it’s been losing market share and it’s been losing sales over a very long period of time because the products it provides and the way in which it provides them has just become increasingly irrelevant to consumers,” Saunders added.

With the success of discount chains like Walmart and Target, declining foot traffic to malls and the emergence of off-price retailers like T.J. Maxx and Marshall’s, J.C. Penney stores “look old-fashioned” and the company’s online experience is insufficient, Saunders said.

“It’s not been really able to reinvent itself as a brand,” he said.

The coronavirus has deepened the ongoing troubles for department stores, which have had a difficult time adjusting to the rise of digital threats and nimble physical competitors that offer affordable fast-fashion apparel.

For J.C. Penney, the pressures of the coronavirus, which temporarily shuttered all of the chain’s stores, turned out to be the proverbial last straw.

To be sure, bankruptcy is designed to give struggling companies a second chance, so J.C. Penney could survive as a smaller, nimbler retailer with financial sustainability.

Sara Palomares, right, and an unidentified woman leave the J.C. Penney store in Irving, Texas, on Jan. 25, 2001.

But numerous retailers have failed to survive the process in recent years. Toys R Us, Charlotte Russe, Bon-Ton Stores, Barney’s and Gymboree are among the retailers that have closed their U.S. stores or liquidated altogether in bankruptcy.

Camilla Yanushevsky, a retail stock analyst for CFRA Research, said she believes the company has reached the end of its rope.

“I don’t think that J.C. Penney is going to be one of those companies that emerges,” she said. “At the end of the day, I think they’ll be liquidating their assets to get some cash back to creditors.”

Saunders said he expects J.C. Penney to survive Chapter 11 but doubts that the company will emerge as a “robust business.” Rather, he expects “we’ll see a bouncing along the bottom” until the end finally comes.

American shopping icon

Featured in classic movies like “Back to the Future” and recent TV shows like “Stranger Things,” J.C. Penney was synonymous with the American shopping mall experience for many years.

But its fall from grace started around the time that Americans began embracing online retail for apparel purchases. When mall foot traffic began to drop off, J.C. Penney encountered turbulence.

While some of its moves, such as its decision to launch Sephora beauty shops within its stores, paid off, the company also made a series of costly strategic mistakes as it tried to adjust to the digital age.

Under the leadership of former CEO Ron Johnson, the company suffered a significant setback. Johnson, who was ousted in 2013, ditched sales and coupons that J.C. Penney customers cherished. He also spent heavily to rework stores with a vision honed during his time as an Apple executive. Customers recoiled at those changes, analysts later said, and the company revived discounts after Johnson was gone.

In recent years, the company was also unable to take advantage as competitors crumbled. It was not without trying. For example, J.C. Penney started selling appliances under CEO Marvin Ellison in a bid to take advantage of the decline of longtime rival Sears, which slid into bankruptcy in October 2018.

But that plan also flopped, and Ellison’s successor, Soltau, scrapped appliances in favor of a renewed emphasis on the company’s core merchandise – namely, women’s apparel.

“We are very focused on the all-in shopping enthusiasts,” Soltau told investors in a conference call Feb. 27. “These are customers who love to shop. They live life to the fullest. They are the most interested in their personal style.”

While analysts generally applauded Soltau’s vision for remaking J.C. Penney, they said she was hamstrung by the company’s financial shortcomings.

Soltau “clearly understood the industry” with key moves like investments in private-label brands, Yanushevsky said. “She understood that people are looking for a bargain.”

“She inherited a lot of these problems,” Saunders said. “The problem is that in order to change J.C. Penney in the way that she wants to, you need to have quite a lot of financial muscle, and you need to have a lot of time to enact those changes – and J.C. Penney has neither of those things on its side.”

Why J.C. Penney didn’t resort to massive store closures

In contrast to the parent company of Sears, which closed more than 3,500 stores in the last two decades, J.C. Penney chose not to close stores in droves over the years.

From the end of 2009 to the end of 2019, J.C. Penney went from 1,047 stores to 845, according to CoStar.

That strategy helped the company avoid the type of revenue freefall that happened at Sears, whose stores fell into disrepair as the company failed to reinvent itself.

But while Sears was too aggressive with closures, J.C. Penney might not have gone far enough. Saunders said J.C. Penney “should’ve been slightly more aggressive with store closures” since some locations “are never going to be able to work.”

“But you can understand and appreciate why they didn’t shut more than Sears,” Saunders said.

When the coronavirus hit, numerous retailers that don’t sell essential goods were suddenly engulfed in a financial crisis.

“This has inevitably squashed sales at department stores,” Saunders said.

And there’s little hope of a sharp rebound for the sector as the pandemic subsides.

“I think it will take people a long time to want to go back department stores,” Saunders said.

Still, competitors like Macy’s and Kohl’s are better positioned to weather the crisis in part due to decisions they made in the years leading up to the pandemic. They have managed to invest enough in their operations to keep customers coming back in recent years, Yanushevsky said. For example, Macy’s has offered an off-price experience through its Backstage brand, while Kohl’s has trumpeted a returns partnership with Amazon.

J.C. Penney, on the other hand, hasn’t had a cohesive strategy for years. The company suffered from constant turnover in the executive ranks, including Johnson’s turbulent tenure and Ellison’s surprising exit in 2018 to become CEO of Lowe’s.

“There have been so many organizational shakeups within J.C. Penney that they haven’t had that long-term stability and vision,” Yanushevsky said.

When J.C. Penney missed a key interest payment in mid-April, it was a clear-cut sign that the company had entered a period of serious distress.

Pulling off a comeback amid these circumstances would be a “Herculean task,” Saunders said.

By Nathan Bomey

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