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JCPenney could be convicted, even as malls run to save him

The company has struggled with serious problems for years.

JCPenney’s last profitable year was 2010, and since then its net losses have totaled nearly $ 5 billion.

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

Losses in the most recent quarter climbed to $ 398 million from $ 48 million a year ago, a 45% decline in revenue. And that was with most of its stores open for at least two-thirds of the quarter, suggesting that it was the lack of customer demand ̵

1; not Covid-related store closings – that punished sales and increased losses.

However, the pandemic doesn’t help. JCPenney is primarily dependent on apparel and accessories for its sales. With millions of people out of work and millions more working at home, many for the foreseeable future, the demand for these items has dropped dramatically.
Large competitors have captured more of that business during the current crisis. The fact that they sell food allowed Walmart (WMT) is Target (TGT) stores to stay open as essential retailers during home orders. Both have much stronger online sales than JCPenney.
“We certainly won’t see customers returning in droves,” said Mark Cohen, director of retail studies at Columbia Business School. “They’re not buying clothes and accessories that JCPenney depends on. And if they are, they’re unlikely to shop at JCPenney or the malls they are in. I know. Walmart (WMT) is Target (TGT) they have gained market share for clothing and accessories and are not giving it back. “

A plan to save JCPenney

The 118-year-old retailer, who filed for bankruptcy in May, announced a deal last week to sell its retail businesses to Brookfield Property Group and Simon Property Group (SPG), two major shopping center operators who were among its biggest creditors. The company’s real estate holdings will be grouped into a separate real estate investment fund which must be owned by its lenders.
The deal offers the company a much-needed lifeline to keep 690 stores open as it prepares to close another 149 stores ahead of the Christmas shopping season. It will also protect 70,000 of the 85,000 jobs it had at the time of filing for bankruptcy in May.

“Interest in our operations reflects the strength of our company and our loyal customer base,” said JCPenney CEO Jill Soltau. “As we continue to move through the sales process, our focus will remain on serving our customers and working smoothly with our supplier partners. We have been a trusted partner to all of our stakeholders since 1902 and look forward to continuing this track. record for decades to come under the JCPenney banner. “

Shopping center owners have decided to redeem JCPenney from bankruptcy
However, experts said the willingness of creditors to keep the company alive – rather than pushing for liquidation – was less a vote of confidence in JCPenney and more a sign of the retail housing market’s historic weakness. Closing a business would create huge vacancies in shopping malls where it is still a key tenant. Vacancies could last for years. The mall operators were willing to step forward to prevent this from happening.

“At the moment this is the best result they could have hoped for,” Cohen said. “This allows them to be in business and are supported by a partner who is aligned with them and wants them to stay in business too.”

What’s going well for the struggling dealer

JCPenney has some modest advantages over the competition that give it some hope of survival.

About half of its sales are for private labels, such as Liz Claiborne. JCPenney does not own the brands, but has the exclusive right to sell them, giving them a certain level of customer loyalty. And unlike Sears, JCPenney has good relationships with its suppliers, said Reshmi Basu, a retail bankruptcy expert at Debtwire, who tracks the finances of troubled companies.

It also used the bankruptcy process to get rid of roughly half of the nearly $ 5 billion in debt it had at the time of its filing, a level that many believed to be unsustainable for a company the size of JCPenney.

“Much of the excess debt that would eventually kill them has been shelved,” Cohen said.

Problems in the department store sector

But the entire department store segment has been losing customers and market share for years, not just for online retailers like Amazon (AMZN) and large chain stores, but also for discount clothing chains such as TJ Maxx (TJX) and Burlington, which grew as other retailers closed their stores.

Such market shifts and customer preferences were already weighing on JCPenney’s long-term survival chances. An uncertain Christmas shopping season in the face of continued Covid-19 concerns will not help its exit from bankruptcy, Basu said.

“It won’t be an easy Christmas,” he said. “What I hear from suppliers, many retailers don’t know what the demand will be. They don’t know what the impact of people working from home will be. They don’t know if there will be more money for stimulus. And above all they don’t know if there will be another increase. in Covid cases “.

This is a particularly serious problem for JCPenney, given its greater reliance on other high-selling retailers during the holidays.

Many businesses are able to use the bankruptcy process to get rid of debt and return to profitability. But the retail graveyard is filled with chain stores that have emerged from bankruptcy, only to continue to struggle and file for bankruptcy once again in a relatively short order. RadioShack, Payless Shoes, Gymboree, and American Apparel took this path until the decision to close the business.

So Cohen is giving JCPenney only a 20% to 25% chance of surviving for five years, even if the deal allows him to come out of bankruptcy.

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

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