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J.C. Penney’s Turnaround Is No Match for Covid-19

Andrea Felsted
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J.C. Penney’s Turnaround Is No Match for Covid-19

(Bloomberg Opinion) -- There is a sad inevitability about U.S. department store J.C. Penney potentially exploring bankruptcy protection. The 118-year-old retailer has enough cash to survive the coming months, but it is looking into a possible bankruptcy filing to restructure its finances, Reuters reported late Tuesday, citing people familiar with the talks. On Wednesday, J.C. Penney said it wouldn’t make a $12 million interest payment due April 15, opting instead to enter into a 30-day grace period as it evaluates its alternatives.

U.S. department stores are highly exposed to the unprecedented shutdown brought on by the coronavirus pandemic. With a quarter of a million shops closed across America, never before has consumerism been so constrained.

But J.C. Penney was struggling even before the outbreak of Covid-19. Department stores are becoming increasingly irrelevant in the face of online shopping. Once they were a one-stop shop for everything from clothing to cosmetics and cushions. Now Amazon is the go-to destination for everyday needs. That has left many brick-and-mortar retailers with too much space, and what they have is often unsuited to modern shopping.

J.C. Penney Chief Executive Officer Jill Soltau has been doing her best to address the chain’s lackluster product assortment and messy stores. There have been some encouraging signs, including a 23% reduction in stock compared with 2017, and progress in tackling the chain’s incessant markdowns. But such victories pale into insignificance when compared with the prolonged closure of the company’s 850 stores, and a continued struggle to gain traction in online sales.

Add in net debt of about $4 billion, and it is little wonder J.C. Penney is exploring options to shore up its balance sheet. It had already appointed consultant AlixPartners LLP to help it manage its borrowings, as my Bloomberg News colleagues reported earlier this week.

J.C. Penney drew down $1.25 billion of its $2.35 billion revolving credit facility in March, and said it was evaluating other financial options. But it has little income coming in, and $105 million of bonds falling due in about six weeks time.

Fitch said at the start of this month that while the retailer had enough liquidity to fund the buildup of stock for the 2020 holiday season, it could need additional sources of funding for Christmas 2021. Consequently, Fitch concluded J.C. Penney could seek a restructuring, possibly a debt-for-equity swap, over the next 12 months.

Other chains look better placed. Macy’s Inc., Kohl’s Corp. and Nordstrom Inc. all have sufficient liquidity to manage their operations through the downturn, Fitch noted. Nordstrom also generates 33% of its sales online, according to Bloomberg Intelligence. But a protracted lockdown will affect even the strongest names. Hence the reason retailers have furloughed hundreds of thousands of staff and some are even withholding rental payments.

When things do return to some semblance of normality, consumers may be reluctant to shop with the same gusto as before. There will also be a cost associated with reopening, including restocking stores, which will put extra strain on working capital.

If J.C. Penney does decide to seek bankruptcy protection, it might the first big American household retail name to do so amid the economic upheaval of coronavirus pandemic. It won’t be the last. Radical restructurings, and a raft of store closures even among the chains that come through the crisis, will undoubtedly reshape malls and main streets.

(Adds detail about missed interest payment in the first paragraph.  )

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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