With its Chapter 11 filing on Friday, J. C. Penney Company Inc. became the largest retailer in the United States to file for bankruptcy amid the coronavirus pandemic.
The department store chain, which was founded 118 years ago, operates 846 stores across the country and employs more than 90,000 workers. Its assets range from $1 billion to $10 billion — the same as its estimated liabilities — and its roster of vendors includes major industry players like Nike, Adidas and New Balance.
According to experts, JCPenney’s bankruptcy is expected to cause a ripple effect throughout the retail sector, and as it undergoes restructuring, its future — whether that means a successful reorganization, sale of its assets or liquidation — is on the line.
“There are a whole lot of different things going on here,” said Jon Pasternak, bankruptcy partner at Davidoff Hutcher & Citron LLP. “[We could] see a massive conversion to equity, [if] they’re going to split off the real estate and what they’re ultimately going to do with the business, which hasn’t made a single penny — no pun intended — in years.”
Here, FN breaks down how JCPenney’s bankruptcy could change the face of retail as we know it.
Mall Owners Will Feel It
On Monday, JCPenney informed the Securities and Exchange Commission of its plans to shutter 242 doors, or about 29% of its brick-and-mortar fleet. It anticipates closing 192 units by February 2021, or the end of the current fiscal year. An additional 50 locations will shut down the following fiscal year. At that point, JCPenney expects to have about 604 stores left. (It has not yet revealed which outposts will be permanently closed.)
As the COVID-19 health crisis continues to keep many stores closed, tensions between retail tenants and mall owners regarding rent concessions have escalated over the past few weeks. Although JCPenney is believed to be honoring its rent payments leading up to its bankruptcy filing, landlords who have long relied on the chain as an anchor tenant might soon be left with huge, vacant spaces they would have to fill in order maintain a healthy, inviting business appearance.
But finding a tenant that can occupy a JCPenney-sized hole is a challenge in itself: Not many retailers today can replace the hundreds of thousands of square footage of a traditional JCPenney store. Plus, because mall owners tend to use these boldface retailers to lure in shoppers who could then patronize other, smaller merchants, the permanent closure of an anchor retailer could have a trickle-down effect. For one, smaller tenants could use the exodus of a main attraction as leverage to renegotiate their rents and leases.
Big Brands Lose Distribution Opportunities
Court documents indicate that JCPenney has more than $1 billion in unsecured senior notes, for which Wilmington Trust serves as trustee. After that, its largest creditor is Nike, with an owed balance of more than $32 million. The retailer also owes more than $7 million to Adidas, $5.7 million to Van Heusen Sportswear and nearly $4 million to Footwear Unlimited, parent to Baretraps and Andrew Geller. Additionally, New Balance has an unsecured claim of $3.2 million.
While the Chapter 11 filing allows JCPenney to rework its finances and offers some monetary relief as it navigates reorganization, the situation is more complicated for its creditors: The bankruptcy code enforces an automatic stay that prevents creditors from taking action against the debtor during proceedings. Although most unsecured creditors are expected to be paid after the debtor’s plan receives court approval, the timing for payment varies widely and it’s possible they may not get the total amount owed.
What’s more, these creditors — some of which rely on the department store as a main distribution channel — could suffer a dent to their top lines if JCPenney liquidates its assets.
“If [bankrupt firms] don’t find buyers, often that leads to liquidation, which would be one of the largest liquidations going into the fourth quarter,” explained Mary Ann Domuracki, managing director at investment bank MMG Advisors. “Worst case scenario: If JCPenney starts liquidating inventory at cents on the dollar, those vendors will have to lower their sales expectations.”
The Way Is Cleared for Amazon’s Dominion
Rumors of an Amazon purchase of JCPenney’s assets emerged shortly after the department store chain filed for bankruptcy. Experts have suggested that the online behemoth could buy the Plano, Texas-based company’s real estate in a relatively inexpensive deal and end up converting its freestanding stores into distribution centers — a move that could further assert Amazon’s dominance in both e-commerce and brick-and-mortar channels.
Experts also added that Seattle-based giant could use JCPenney’s properties to expand its apparel and accessories offerings in suburban markets. These locations could also provide Amazon more flexibility with its last-mile delivery and pickup or drop-off services.