J.C. Penney Co. Inc. filed for bankruptcy protection on early Friday evening, an expected outcome for the department store chain that has seen steadily declining sales and has struggled to capture an increasingly online customer even before the coronavirus pandemic.
J.C. Penney also said Friday that it is exploring a possible sale of the company and that it will be closing stores, with details of the brick-and-mortar downsizing to be disclosed at a later date.
There has been speculation that Penney’s has been in discussions with major mall operators such as Simon Property Group and Brookfield, regarding a possible sale.
In its Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District in Corpus Christi, Tex., Penney’s said it entered into a restructuring agreement with lenders holding about 70 percent of Penney’s first lien debt to strengthen its financial position.
It’s a prearranged restructuring plan intended to eliminate several billions of dollars of debt and help navigate the company through the coronavirus pandemic.
The retailer’s bankruptcy filing was all but certain. It did pay a $17 million interest payment this week, apparently as an act of faith but still has another due this month.
Penney’s has $3.6 billion in long-term debt.
It’s expected that many stores, possibly hundreds, will be closed but the company did not provide a number on how many might shutter. However, the company did say that stores will close in phases throughout the Chapter 11 process, and the first phase, including specific store details and timing, will be revealed in the coming weeks.
Penney’s chief executive officer Jill Soltau said Friday that the company was making progress in its turnaround bid but COVID-19 forcing the closing of stores and Penney’s debt combined necessitated the bankruptcy filing.
“The coronavirus pandemic has created unprecedented challenges for our families, our loved ones, our communities, and our country,” Soltau said. “As a result, the American retail industry has experienced a profoundly different new reality, requiring J.C. Penney to make difficult decisions in running our business to protect the safety of our associates and customers and the future of our company. Until this pandemic struck, we had made significant progress rebuilding our company under our plan for renewal strategy — and our efforts had already begun to pay off. While we had been working in parallel on options to strengthen our balance sheet and extend our financial runway, the closure of our stores due to the pandemic necessitated a more fulsome review to include the elimination of outstanding debt.”
Soltau’s renewal strategy also involved resetting the stores into lifestyle departments, pumping up active, denim and special sizes, improved displays and better use of mannequins, and essentially making the most of the little resources that the financially strapped company has to update its stores. She’s also overhauled much of the executive team on both the operations and merchant sides of the business, and there has been some progress on improving gross margin, reducing inventory and cutting other costs.
Soltau sees much of the turnaround strategy as “reestablishing the fundamentals of retail, reenvisioning its merchandise offerings, rolling out innovations and continuing to gain customer feedback.”
She said the company had seen comparable store sales improvement in six of eight merchandise divisions in the second half of 2019 over the first half.
The Plano, Tex.-based Penney’s walked into the bankruptcy with about $500 million in cash on hand and a proposed $900 million in debtor-in-possession financing plan, half of which includes new money to fund its operations, and the other half of which, known as a “roll up,” would essentially go toward paying its secured pre-bankruptcy debt.
“As part of the DIP commitment from its existing lenders, Penney’s will explore additional opportunities to maximize value, including a third-party sale process,” the company said Friday.
The DIP proposal will be the subject of a first day hearing in the case that is scheduled for Saturday afternoon.
J.C. Penney owes some $650 million to its trade creditors, according to its first day filings. The top among them are Nike Inc., which is owed nearly $32.1 million, Alfred Dunner Inc., which is owed $14.2 million, and Byer California, which is owed $12.6 million. The other trade creditors listed in J.C. Penney’s list of top 50 creditors include Adidas Distributing, which is owed nearly $7.1 million, the Lee Co., which is owed $6.1 million, and Van Heusen Sportswear, which is owed $5.7 million.
On Friday, J.C. Penney filed the customary critical vendor motion seeking to at least partially repay the vendors that it considers to be essential to its business. It sought permission to pay its pre-bankruptcy trade claims up to $49.6 million, seeking about $15 million to pay them immediately in the interim.
Since the pandemic, the retailer has already “significantly delayed” paying its critical vendors putting pressure on them to appease those vendors to encourage them to continue shipping during the bankruptcy, according to a declaration accompanying the motion by James Mesterharm, a managing director at AlixPartners LLP, and restructuring advisor to J.C. Penney.
“As such, I believe that the critical vendors have already reached their limits, and if the debtors unduly delay payments for the critical vendor products and services, the critical vendors may cease to supply the critical vendor products and services altogether,” Mesterharm said in the filing.
In the coming days, Penney’s will also seek approval from the court to pay non-furloughed associate wages, provide certain benefits to all associates, and to pay vendor partners in the ordinary course for all goods and services provided on or after the Chapter 11 filing date.
“Implementing this financial restructuring plan through a court-supervised process is the best path to ensure that J.C, Penney will build on its over 100-year history to serve our customers for decades to come,” Soltau said in her statement. “We believe the RSA and the widespread support we have received from our asset-based lenders and first lien lenders will allow us to pursue a financial restructuring on an expedited timeframe. We are also encouraged by the level of support we have received from our vendor partners, landlords and other stakeholders, whose confidence in our business and our people is expected to contribute to a successful reorganization.
“We have a newly refreshed, highly experienced team of retail executives who remain focused on rebuilding our business and restoring financial strength to J.C. Penney. This team has continued to innovate even during these challenging times, implementing substantial improvements to our flagship e-commerce platform to increase efficiency and ensure our loyal customers continue to have access to the products they need through elevated shopping experiences. I would also like to thank all of our outstanding associates for their continued dedication to our company and their passion for meeting and exceeding our customers’ expectations. We are continuing to serve our customers as we move through this process with a commitment to working seamlessly with our vendor partners and landlords. We look forward to emerging from both Chapter 11 and this pandemic as a stronger retailer, continuing to implement our plan for renewal, and building capabilities focused on satisfying customers’ wants and needs,” Soltau concluded.
As of just earlier this week, the company did not have firm debtor-in-possession financing ready for its filing, highlighting the existential uncertainty that many traditional brick-and-mortar retailers are facing on the other side of the COVID-19 crisis. Retailers that go into Chapter 11 with prenegotiated plans with lenders or investors are likely to have better odds of survival through the process rather than sliding into liquidation.
Both J. Crew Group Inc. and Neiman Marcus Group filed for Chapter 11 last week with plans to restructure. Under J. Crew’s plan, its lenders would convert about $1.65 billion of its debt into equity, while Neiman Marcus entered the proceedings with a plan to slash some $4 billion in debt through a debt for equity swap.
In January, the retailer was warned by the New York Stock Exchange that it was falling below requirements to maintain an average closing share price of at least $1 over a consecutive 30 trading-day period. In February, it reported a net loss of $268 million for 2019, and reduced sales.
The bankruptcy process offers significant relief for insolvent companies — by essentially slashing unsecured debt, and restraining creditors from enforcing payments — but it also imposes obligations to start paying bills while in bankruptcy.
A number of retailers who have filed for bankruptcy protection during the pandemic, including J. Crew and True Religion, have asked to delay rent payments for the 60 days of their bankruptcy, citing dramatic sales declines while stores are closed.