JCPenney Is At A Crossroad And The Clock Is Ticking

Many suitors are knocking at JCPenney’s doors. Sycamore Partners, Authentic Brands, Hudson’s Bay and others. However, I feel that the company might want to try to refinance with lenders and try to continue as a freestanding company. The current deadline set by their bankruptcy filing is on July 31 (this Friday).

In the most recent filing with the Securities and Exchange Commission, the company reported a net income of $47 Million for the month ended July 4, 2020. That compared to a net loss of $25 Million in the previous year. However, net sales dropped 21% from $737 Million to $682 Million. That is not good, and reflects closed stores, weak customer traffic in open stores, and a general lack of fashion newness that would make a visit to a store mandatory.

JCPenney has until Friday, July 31, to finalize an agreement with first tier-lenders on its business plan. I hope they meet that deadline or at least be granted an additional extension to finish negotiations. If they can arrange for a binding agreement for exit financing, it is likely they will also be able to meet the deadline of having a financing agreement by August 30.

The New York Post has reported that Sycamore Partners has offered to buy the company for $1.75 Billion. It would merge 250 JCPenney stores with Berk Stores, which Sycamore Partners owns, and liquidate the rest of the stores.

I have spoken with Niko Celentano, the chairman of an ad hoc committee granted the right to review bankruptcy proceedings and come up with their thoughts about the future of the company. He indicated to me that he was representing shareholders at the negotiating table. He spoke about real estate valuation of the going concern to be about $3.7 Billion. He feels that the current value of JCPenney is over $8 Billion and that funded debt is about $5 Billion. He feels they are building cash now. According to the latest report, cash is at $1.3 Billion and inventory is valued at $2 Billion. Mr. Celentano values the dot-com business at $1.1 to $2.2 Billion.

Jill Soltau, CEO, is a solid merchant and Ron Tysoe (Chairman) is a strong financial man. I feel their leadership team, together with a cadre of strong specialists, can face the future with confidence and pull the company through these tough times. Team members are relatively new to their roles at JCPenney but all seasoned, experience leaders, and I believe in them. I say that knowing that the pandemic caused by coronavirus COVID-19 has added uncertainty to reopening stores and even means the possible reclosing of stores in Texas and Florida.

While we can expect 1,000 associates to lose their jobs during the restructuring – something I deeply regret, I would be much more concerned about the company ending up in the hands of new owners. I worry the direction of the company may be totally different, alienate current customers, and further blur the competitive positioning of the company. I also worry it would mean that so many more stores might be closed.