As J.C. Penney Corp. reopens stores during the coronavirus pandemic and reportedly heads toward a potential bankruptcy filing this month, it is sparring with Sephora, which has stores within Penney’s locations.
Penney’s said it is trying to hold Sephora to their contract as the retailer reopens stores, while the beauty retailer has fired back that the department store chain is trying to “take advantage of an impending bankruptcy.”
In a dispute that moved to federal court in Texas this month, Penney’s sought a temporary restraining order against Sephora, arguing that the LVMH Moët Hennessy Louis Vuitton-owned company was trying to cut short their joint enterprise operating contract through which Sephora has stores within Penney’s locations.
“The company filed a temporary restraining order so Sephora could not prevent J.C. Penney from reopening Sephora inside J.C. Penney (SiJCP) locations,” a Penney’s representative said in a statement. “We remain committed to working together to drive sustainable, profitable growth, as SiJCP continues to be a beauty destination that serves millions of customers each year.”
A Sephora representative said that the company was trying to work things out with Penney’s amid the COVID-19 crisis and its effect on retail.
“It is no secret that J.C. Penney has experienced financial challenges in recent years and it now faces the additional strains affecting all retailers in the wake of COVID-19,” the Sephora representative said.
“Given this reality, our focus has been on finding an amicable agreement with J.C. Penney regarding the future of our partnership, and these discussions have been undertaken with a sense of urgency as there is a potential impact to our business, our people and our brand partners,” the representative said.
The French-based retailer also argued back in a court filing on Monday that it was not trying to immediately shut down its stores within J.C. Penney, and that it only expressed its right to serve a default notice to the U.S. company amid what it said was the department store’s move toward bankruptcy. Sephora said it raised the issue as part of the “good faith wind-down discussions that have been underway between the parties for weeks.”
If Sephora files a formal notice of default before Penney’s files for bankruptcy, it would trigger the termination provisions in their contract, including a 120-day wind-down period during which Penney’s can continue selling Sephora products, Sephora said.
If the bankruptcy starts before Sephora can file that notice, it could find itself frozen in place during Penney’s bankruptcy process, said David Wander, who chairs the bankruptcy financial restructuring and creditor rights department at Davidoff Hutcher & Citron LLP. Wander is not involved in the dispute, and commented generally.
“Sephora will be in a much better position if it can declare a default prior to a bankruptcy filing by [J.C. Penney],” Wander said. “Otherwise its contractual rights will be hostage to the bankruptcy process.”
Penney’s has argued, meanwhile, that Sephora was trying to extricate itself from their agreement. The joint enterprise agreement in dispute has been in effect for over a decade and doesn’t expire “for several years,” Penney’s said. Since 2006, there are more than 650 small Sephora stores within JCP locations, according to Sephora’s filing.
“Sephora has no basis to assert a knife-edge termination or demand a premature end to the parties’ contract,” Penney’s said in its complaint, which it had originally filed in state court in Texas on April 27.
Penney’s has now already reopened a few dozen locations, according to its web site, in about a dozen states in various stages of reopening including Texas, Colorado, Utah and Nebraska. Sephora locations are open in the Penney’s stores that are currently open, a Penney’s representative said.