Plano, Texas-based JC Penney joined the growing list of retailers filing bankruptcy after economic disruption from COVID-19 caused the company to miss debt payments. The retailer sought to restructure its $4 billion debt, but the market for junk paper has nearly evaporated amid the COVID -19 crisis.
Moody’s Investors Service recently cut Penney’s rating to Caa3, the lowest on the junk rating scale, and tagged it with a negative outlook.
“Although JC Penney 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 company (earnings), impede its turnaround strategy and weaken its leverage to unsustainably high levels,” Christina Boni, an analyst with Moody’s, said earlier this month.
The department store chain said it has commitments for $900 million in financing from its existing first lien lender to help fund operations through the bankruptcy. This includes $450 million of new loans that will be added to the $500 million the company had on hand at the time of the Chapter 11 bankruptcy filing late Friday (May 15).
“I want to assure you: JCPenney is NOT going out of business. JCPenney will continue to be one of the nation’s largest apparel and home retailers. Our expansive footprint will still include hundreds of stores across the U.S. and Puerto Rico, as well as our online flagship store, jcp.com,” CEO Jill Soltau noted in an email to customers late Friday.
Penney said it will open select stores and continue to offer contact-free curbside pickup service at all of the open stores in addition to e-commerce shopping options. Soltau said the company will continue to work toward a strategy to refocus on reestablishing the fundamentals of retail, re-envisioning its merchandise and innovating when necessary. Penney’s hinted at potential store closures but declined to give any comments on that matter to the media following the filing.
She said the pandemic has changed day-to-day life and created a profoundly different reality. Retailers have been hit especially hard by this economic environment, impacting the company’s ability to meet financial and operational objectives. She said this why the company must pursue a financial restructuring.
“We believe this process will give us the financial strength to weather the pandemic and evolve our business while also reducing our debt and increasing our flexibility to better position the company,” Soltau said in her letter to customers.
This bankruptcy filing was expected by analysts given the missed debt payments and severe financial strain the COVID-19 crisis has thrust upon the retail sector. Neiman Marcus, also based in Dallas, and Stage Stores of Houston have filed bankruptcy as losses escalated during the past two months of store closures. Analysts have said declining sales at JC Penney have persisted since 2016 and refinancing the debt won’t fix the problems. The company lost money in eight of the last nine years, totaling $4.45 billion, according to FactSet.
Jan Kniffen, a consultant with J. Rogers Kniffen Worldwide, told Talk Business & Politics on Friday, the JC Penney filing was imminent. He said the debt load was staggering and this will give the beleaguered department store a chance to restructure.
“I do think JC Penney will emerge a leaner operation and it will mean store closures in underperforming areas. Penney’s will continue to try and figure it out,” Kniffen said.
When asked about the impact on malls with some JC Penney stores potentially closing, Kniffen said the stores have historically been mall anchors, but with more shopping moving online, mall operators around the country have to rethink their proposition.
“The trend had been moving toward more experiential tenants and less purely retail stores and while that looked promising, that was until COVID-19,” he said. Now, everybody involved in people gatherings has been challenged with social distancing guidelines that could be around for many more months.”
The retailer dates back to 1913 and its founder James Penney who converted a chain of 34 stores into the JC Penney company. The company now has 850 stores with about $11 billion in sales last year.