By Tonya Garcia, MarketWatch
J.C. Penney Co. Inc. will have to shutter a quarter of its nearly 850 store locations, among other measures, if it’s going to successfully emerge from chapter 11 bankruptcy, Cowen analysts say.
J.C. Penney filed for bankruptcy protection late Friday after first announcing that it paid a $17 million interest payment. The news came after bankruptcy filings from Neiman Marcus, J. Crew and Stage Stores Inc.
J.C. Penney had a day in court over the weekend. It seeks to cut its debt, spin off a real estate division and come back in a stronger position.
“We are pleased to have received approval of these motions, which will enable us to continue implementing our ‘Plan for Renewal’ and operating our business to serve the needs of our loyal customers,” said Jill Soltau, Penney’s chief executive, in a statement.
“We thank the court for convening on a weekend to ensure that J.C.Penney can hit the ground running on Monday with approval of our first day motions, and we are appreciative of the widespread support we have received from our asset-based lenders and first lien lenders and noteholders as we manage through the current environment.”
Sales at the department store retailer, which totaled $10.7 billion last fiscal year, have fallen each year since 2015.
Cowen analysts estimate that J.C. Penney’s unencumbered “lit” owned real estate (which doesn’t have a lien) and ground leased real estate could be worth $910 million. The company has already announced store closures and says the details about what it calls the “first phase of closures” will come in the next few weeks.
Cowen says J.C. Penney needs to focus on its digital capabilities and on designing clothing that suits new, younger consumers while maintaining its appeal with an older and more loyal crowd.
Cowen rates Penney stock market perform with a $1 price target.
GlobalData Retail is recommending a much bigger overhaul that includes store designs and even the image of the 100-plus-year-old brand. But it has to start by getting away from underperforming malls.
“J.C. Penney is exposed to a high number of weak malls and locations and it needs to quickly cut its losses,” Neil Saunders, GlobalData’s managing director, said in a note. “It will emerge a much smaller company, but this makes the process of reinvention much easier and will allow capital investments to flow to locations where they can generate the best return.”
Still GlobalData notes that trying to turn around an ailing business amid a pandemic is a big ask. The recent retail bankruptcies, along with the ones that could be down the line, are also a challenge for the weak malls that Saunders refers to. Retail accounts for 18% of loan defaults for the year so far, according to Eric Rosenthal, senior director at Fitch. That’s the most of any sector.
“Historically, landlords would look to be opportunistic about recapturing unproductive department store boxes to re-tenant with more productive users/uses,” wrote KeyBanc Capital Markets analysts led by Todd Thomas.
“Today, however, REITs and other institutional owners are more cash-strapped than ever, with April and May collections significantly challenged given mandated store and property closures. The lack of available funding has implications not only for landlords, but for J.C. Penney and other tenants that might ordinarily look to sell what was once valuable anchor-owned real estate to the REITs (or other investors) in order to raise capital.”
Euromonitor International points out that J.C. Penney was actually ahead of the curve in its initial adoption of e-commerce, though it didn’t capitalize on the head start. It also launched its partnership with beauty retailer Sephora in 2007, a partnership that was reaffirmed recently after Sephora threatened to pull out.
“Yet, the general malaise affecting the U.S. department stores channel and strategic missteps have led to J.C. Penney’s downward trajectory,” Euromonitor’s Bob Hoyler wrote.
“J.C. Penney has not been able to survive on its e-commerce sales alone during the pandemic, so the forced store closures represent months of revenue that will simply never be recouped.”
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