Is JCPenney Really Saved From Extinction?

Good news

 JCPenney
JCP
finally has signed an asset purchase agreement with Simon Property Group
SPG
and Brookfield Asset Management. The company also signed agreements with a majority of the company’s DIP (Debtor-in-Possession) lenders and First Lien Lenders. That is good news, since it will enable the company to move ahead and plan exit from the chapter XI bankruptcy proceedings. Judge David Jones proved to be a very patient but persistent judge to preside over a drawn-out process and now finally see the light at the end of a very long tunnel. It looks like JCPenney has avoided liquidation and the majority of jobs have been saved.

Jill Soltau, CEO of JCPenney, will be able to operate the company under the new ownership and expects to lead the business in advance of the holiday season. She says that her team remains laser focused on implementing their plan for renewal by offering compelling merchandise, driving traffic, and delivering an engaging experience to achieve true growth and build a results-minded culture. I wish I could share her optimism that such results will be seen after the hard-fought battles in court.

As I see it, after exit from bankruptcy:

1.   JCPenney’s retail and operating assets (OpCo) will have been acquired by Simon and Brookfield for a combination of cash and new term loan debt.

2.   There will be two separate property holding companies (PropCos) comprised of 160 of the company’s real estate assets and all of its owned distribution centers; they will be owned by the company’s DIP and First Lien Lenders.

3.   In order to reduce its indebtedness, the company entered into a restructuring support agreement with First Lien Lenders.

Bad News

Those of you who have read my past blogs know that I think highly of CEO Soltau. However, I believe her view of the retail calendar is antiquated. The pandemic caused by COVID-19 has motivated retailers to start their holiday promotions early. Sales for the holidays have been underway since the second week of October and it’s now a challenge of catch up. Competitors are aggressive and the war for sales is being waged with a vengeance. Some retailers, including JCPenney. are selling “Black Friday” merchandise now after Amazon
AMZN
ran a strong Prime event earlier in October that Walmart
WMT
, Target
TGT
, JCPenney and others found time to participate in. I think all retailers will reap some benefit early in this month, but it is unclear how that will carry through into December since comparisons will be much tougher. Customers are still very cautious about shopping in stores and would rather shop remotely. This will continue to drive more business online. Also, most stores are closed for Thanksgiving, eliminating this shopping day in stores.

Bottom line, the legal teams have saved JCPenney’s immediate future, but there are problems still ahead. Among them are:

1.   Second-Lien and unsecured noteholders and common shareholders are not going to see a recovery of their investment. They are not happy.

2.   The company will continue to have a certain amount of debt.

3.   September comparable sales are estimated to be down by around -33%. That does not include stores that are being liquidated, so it is does not provide a strong foundation for future growth.

4.   The total number of stores that will continue to operate has not been announced by management. It seems that this is still an unresolved issue and a review in progress.

5.   While merchandise has been bought for the holiday season, I am not sure how soon it will arrive in distribution centers and how quickly it can get to stores. Every day without fresh goods puts JCPenney at a further disadvantage to competition.

6.   With the recent resurgence of COVID-19 in many parts of the U.S., I believe that October might report another shortfall of sales in the stores that will continue to operate.

7.   I still hope for a quick exit from bankruptcy, but a bid by a group of first-tier lenders has not been resolved. Their counter-bid for OpCo could delay any final resolution.

There is a puzzling scenario ahead. When the bankruptcy proceedings began, about 75,000 associates worked for the company. Since that time, the company has whittled the staff down to about 60,000 hard-working associates. With the further reduction of stores, more carefully considered cuts must be made in order to have a tight, lean, but savvy organization. Management must address the need for a tight organization prepared to generate positive cash flow in the coming years to regain supplier and investor confidence.

Conclusion

While I believe that JCPenney has strong management that will work well as a team, I believe the challenges are great. The company must resolve its issues as soon as possible, exit out of bankruptcy proceedings before the end of November, and promote strongly and effectively to regain customer confidence.