Bankruptcy looms for JCPenney, Neiman Marcus as COVID-19 threatens retail sector

Dallas-based retailers JCPenney and Neiman Marcus are treading some heavy water amid the coronavirus outbreak with stores closed and much of their business shuttered.

The two retailers skipped recent debt payments in an effort to save cash and they are working with advisors for guidance during the crisis.

JCPenney officials said the company chose to skip a roughly $12 million interest payment on senior notes due on April 15. The retailer said it is entering into a 30-day grace period “in order to evaluate certain strategic alternatives, none of which have been implemented at this time,” according to a filing with the U.S. Securities and Exchange Commission.

The retailer has been trying to restructure its debt load of $4 billion, most of which is long-term. Earlier this week Moody’s Investors Service cut JCPenney’s rating to Caa3, the lowest on the junk rating scale, and tagged it with a negative outlook.

“Although JCPenney liquidity is adequate, the widespread store closures as a result of the coronavirus pandemic and the continued suppression of consumer demand is expected to pressure JCPenney’s [earnings], impede its turnaround strategy and weaken its leverage to unsustainably high levels,” said Christina Boni, an analyst with Moody’s.

In the filing, JCPenney said it’s asking creditors for breathing room and consideration for a debt restructure outside of bankruptcy court proceedings. The company has been engaged in conversations with lenders since mid-2019 to evaluate options to strengthen its balance sheet.

JCPenney CEO Jill Soltau has been trying to refocus the company on its core business of selling mid-priced apparel and accessories. The retailer has exited the appliance and in-store sales of furniture to focus more on apparel.

The 118-year-old retailer has about 850 stores. S&P Global Ratings also ranks JCPenney as a distressed retailer with a credit rating of CCC and a negative outlook.

“The Coronavirus [COVID-19] pandemic has created unprecedented challenges for department store retailers across the industry and has resulted in extensive store closings,” JCPenney spokeswoman Brooke Buchanan said in a statement. “JCPenney has been engaged in discussions with its lenders since mid-2019 to evaluate options to strengthen its balance sheet and maximize its financial flexibility, a process that has become even more important as our stores have also closed due to the pandemic.

“Since that time, the company successfully met or exceeded guidance on all five financial objectives for 2019 and saw comparable-store sales improvement in six of eight merchandise divisions in the second half of 2019 over the first half. We remain focused on our plan for renewal, and look forward to when we reopen our doors.”

Upscale department store Neiman Marcus also has debt concerns, having skipped a bond payment due this week to creditors. Analysts expect Neiman Marcus will have no choice but to file bankruptcy to refinance more than $5.6 billion in debt.

This luxury retailer is also working with advisors for financial guidance as its 40 stores have been shuttered and the majority of its 14,000 employees furloughed.

Walter Loeb, a retail analyst for department stores, said Neiman Marcus has another loan of $115 million due April 25, on the heels of the interest it recently missed on a $5.6 billion line of credit. Loeb said Hudson’s Bay CEO Richard Baker is reportedly interested in some type of merger that would allow Neiman Marcus to sell some assets to avoid bankruptcy.

Loeb said the highly leveraged retailers are not eligible to participate in the CARES Act loans because their debt rating is below investment grade. The National Retail Federation is asking regulators to help retailers in that category to try and secure federal aid during the pandemic that has hastened their demise. That list of retailers not making the cut for federal assistance includes Bed Bath & Beyond, Macy’s and Arkansas-based Dillard’s, who recently had debt ratings cut by Fitch Ratings.

Mark Cohen, director of retail studies at Columbia Business School, said there will be a large number of retailers who will not make it to the other side of COVID-19. He said those retailers who typically defaulted on their debt payments in the past have been a harbinger for future bankruptcy.

During a Coresight Research webinar on Friday (April 17), Cohen predicted COVID-19 will create retail extinction for a number of players who already were in weak positions before the crisis unfolded. He said there is likely to be enormous wreckage in the retail sector over the next six months. He said the 3,000 store closures Coresight Research reports currently could hit the 30,000 mark in one day if the country remains closed for most commerce.

“When normalcy returns, and that could take 18 months, those retailers who were strong going into COVID-19 will be stronger and those who were distressed will emerge weaker or be completely gone,” Cohen said.

Jan Kniffen of J. Rogers Kniffen Worldwide said during the webinar he expects normalcy will take about nine quarters for retailers. He said the few who have the cash to store away the spring merchandise until next year will likely do so, but the majority of retailers will be forced to deeply discount inventory to unprecedented levels to move it late in the cycle. He said most retailers will need to sell what they have to generate cash to help to cover expenses. He said retail reopening could start slowly in June in areas with low exposure but for areas like New York City or New Jersey, it will take much longer.

Kniffen said Macy’s, Nordstrom, Dillard’s and Kohl’s will all likely survive the crisis, but many will operate fewer stores and still face some challenging quarters into 2022.