J.C. Penney

The other shoe is about to drop. 

A trio of high-profile, but struggling retailers — including J. Crew Group, Neiman Marcus Group and J.C. Penney Co. Inc. — are all said to be preparing to file for Chapter 11 bankruptcy protection by mid-May.  

Together the three companies bring in sales of more than $18 billion annually and represent a wide swath of the industry — from value-priced broadline retailing to mall-based specialty stores to refined department store luxury. 

All of them have been on the industry’s watch list for months, but each had plans to turn around their fortunes that appear to have been overwhelmed by the now six-week shutdown of the consumer economy that was forced by COVID-19.

J. Crew was betting on a spin-off and initial public offering for its successful Madewell division to satiate the company’s debt holders. But the plan missed its window as markets tanked and multiple reports Thursday said a filing could come as soon as this week. A spokesman declined to comment.  

Neiman Marcus missed an interest payment mid-month and has been on the cusp of filing for bankruptcy. It is reported to be working with multiple lender groups as it looks to secure the debtor-in-possession financing that would see it through Chapter 11. 

J.C. Penney also missed an interest payment and has been exploring its options during a 30-day grace period. And while one source close to the situation said no decision has been made and that options other than bankruptcy remain on the table, another source familiar with the process said a filing could come May 14 or 15. 

Even strong retailers tend to live hand-to-mouth, using their sales to cover their expenses and the industry has proven ill-equipped to handle a complete shutdown. It has responded by furloughing workers, canceling orders from suppliers and pushing off their landlords. Those actions have rippled up and down the supply chain, hurting companies of all kinds. 

The question now for companies that came into the crisis in a heavily indebted or otherwise weakened position is: Even if they could survive through the immediate shutdown, would they be strong enough to survive the dire consumer landscape on the other side?

The U.S. economy was thrown into reverse in the first quarter, with gross domestic product falling 4.8 percent even though that included just a few weeks of real disruption in late March. The second-quarter contraction is expected to be one for the record books, topping 30 percent. 

Thirty million people have applied for unemployment since the shutdown started and it’s not clear just when they will go back to work and start to spend. 

Washington has raced to ease the pain and Federal Reserve chair Jerome Powell said this week the central bank would keep taking aggressive actions to support the economy.

“The next phases are more uncertain, highly uncertain, but we will go through a phase starting fairly soon where we begin to reopen the economy, and probably the economic activity will pick up, as consumer spending picks up,” Powell said. “Consumer spending has gone down quite a lot. It will begin to pick up as people start to return to their normal patterns of spending.”

It’s a toxic brew that could lead to an especially harrowing trip through bankruptcy, which even in the best of times leads to cutbacks and store closings as the court tries to create a company that can stand on its own while often wiping out equity holders. 

In today’s climate it’s not clear just how long bankruptcy would last, whether landlords will be forced to essentially float rent payments for some time and stores destined to be closed for good could be liquidated.

J. Crew, J.C. Penney and Neiman Marcus are just the leading edge of what could be a massive wave of business failures. Ascena Retail Group Inc., Lord & Taylor and Academy also came into the crisis on debt watch lists.

And now, every retailer and brand is under the microscope, and their future prospects are being examined down to every last cent.

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