JC Penney collapses into Chapter 11

US department-store giant JC Penney filed for Chapter 11 bankruptcy protection on Friday night. But while the company may have cited Covid-19 pandemic as the main reason, the company has been in dire straits for years. 

The company, which operates about 850 stores anchoring shopping malls all over the US, has the support of 70 per cent of its priority creditors for a reorganisation plan which includes securing $900 million of financing to enable it to continue trading. 

Neil Saunders, MD of GlobalData Retail, described the Chapter 11 move as “inevitable”. 

“Even before the pandemic, JC Penney’s road to reinvention was the equivalent of climbing a steep mountain with nothing other than the burden of an enormous pile of debt. The coronavirus crisis effectively broke the retailer’s limbs making further progress all but impossible.”

In a statement announcing the bankruptcy, JC Penney said it would reduce its store network but has not indicated by what scale. Most observers seem to believe heavy cuts are essential.

Saunders says the closure of underperforming stores should be an immediate priority. 

“JC Penney is exposed to a high number of weak malls and locations and it needs to quickly cut its losses. 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.”

Australian retail property consultant Michael Baker, one-time head of research with the US-based International Council of Shopping Centers, says JC Penney’s collapse will have a huge impact on US mall operators. 

“It anchors literally hundreds of mid-end US malls. Mall owners have welcomed getting back department store real estate because it can be redeveloped into restaurant and entertainment space, often with alfresco elements. But now, with coronavirus, there is probably going to be a question mark over that strategy.”

The challenge ahead for JC Penney is to restructure into a format and scale which is viable in a very different retail era to that when it flourished. Founded in 1902, until 1966 most of its stores were located in downtown high-street locations. Then the company locked its future into the shopping mall boom which saw thousands of centres opening all across the US, typically anchored by department stores, often by several. While in recent years JC Penney has opened some standalone stores and even experimented with a compact-store format, the company’s fortunes have become inextricably linked to the viability of shopping malls.  

‘It’s a dead retailer walking’

Michael Baker does not believe the company’s assurances it will emerge from bankruptcy reorganisation as a ‘stronger retailer’. 

“It will certainly close a lot more stores and when it does reemerge it will face the same old format obsolescence problems,” he told Inside Retail Asia. “It’s a dead retailer walking.”

Saunders is equally skeptical, although he does have some confidence in recently appointed CEO Jill Soltau. 

“Bankruptcy provides a narrow path forward. It gives JC Penney the financial means to weather the current downturn in demand and the scope to restructure its operations as the retail economy starts to normalise. But the process of reinventing the firm will not be easy. While management claims that significant progress had been made before the pandemic, we do not share this view. While some advancements were made, these were partial and completely insufficient to ensure a viable future for the company.”

Saunders says the reality is that JC Penney needs a complete overhaul in terms of its assortments, store designs, ways of marketing and connecting with shoppers, and its brand image. 

“In other words, a wholesale makeover is required to restore the company’s fortunes. In normal times, that process of reinvention would be challenging; accomplishing it in the midst and aftermath of a pandemic is more than a tall order.”

Saunders says while Soltau’s team might have made slow progress to date, the direction she has taken so far – which has focused on customers and their needs – has been correct. “Developments like the reimagined store format in Hurst, Texas showed some good forward thinking. However, no one should underestimate the challenges of moving these ideas forward to the entire chain.

Bankruptcy has only bought JC Penney time; it is a drug that is providing life support during a time of dire distress. Recovering is the difficult part, and it is still by no means certain that JC Penney will pull through or get back to full health.”

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