As J.C. Penney Co. Inc. strips itself of its less-than-desirable assets, bidders for the midtier department store are liking what’s left behind.
The $11 billion company is closing scores of underperforming stores, reformulating contracts with overseas suppliers for better deals, and culling out weak categories.
In its efforts to reorganize, the company has also been developing a new business plan that requires its lenders’ approval before a July 31 deadline, a process overseen by the U.S. Bankruptcy Court for the Southern District of Texas in Dallas, where Penney’s filed for bankruptcy on May 15. The plan was originally due July 15, but got extended to this Friday, and could get extended again, according to sources.
“The judge in this case is very lenient,” said one retail source following the case. A second delay would support Penney’s efforts to remain an independent company, though the field of parties submitting bids to purchase the retailer has widened.
The next hearing in the Penney’s case is scheduled for Wednesday morning, where the retailer’s advisers are expected to inform U.S. Bankruptcy Judge David Jones of the latest developments in the case. As Penney’s advisers have told the court, if the retailer doesn’t get lenders’ approval for its business plan by their deadline, the bankruptcy process would toggle from a reorganization to a sale of some kind.
“The elimination of legacies has sparked greater interest in this company,” said one major supplier to Penney’s and other mass chains. “As they continue to shed these legacies — debt, bad leases, bad locations — a business reorganization plan becomes more viable and so does outside interest in the company. Real estate is one of Penney’s big assets. They’ve paid down mortgages. Penney’s definitely has assets of interest.”
“It’s a normal auction process that’s still in progress. You have Simon Property Group and Brookfield Properties bidding together, Hudson’s Bay and Sycamore Partners. Amazon is not in it,” said one real estate source close to one of the bidders.
But the supplier said Amazon is interested in certain Penney’s warehouses and retail sites that could be converted to distribution centers and Amazon Go stores, but stressed Amazon is not interested in buying the company in its entirety.
The latest player to enter the bidding is Hudson’s Bay Co., which operates Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay in Canada. The company has been in the business of buying and selling department stores, but is really attracted to them because of the hidden value in the retail real estate. Eighty percent of the value of HBC is in real estate, and only 20 percent in retail. HBC has bought and sold Lord & Taylor, Zellers in Canada and Galeria Kaufhof in Germany.
Real estate that Penney’s will retain is said to have been appraised at $3.7 billion. That’s more than twice the amount bidders appear to be willing to pay for the retailer. According to the New York Post, Sycamore, which owns Belk, Talbots and The Limited, offered $1.75 billion for Penney’s, and is the front-runner in the auction. HBC offered $1.7 billion. However, the real estate source close to one of the bidders suggested Penney’s is still up for grabs, and that Sycamore is not necessarily the front-runner in the bidding war. “This is still in progress,” the source said.
Of Penney’s 850 stores, 387 are owned, including 110 with ground leases, and about 150 are currently being liquidated. In addition, sources said Penney’s generally has very favorable terms of its leases. The company has essentially sought to use Chapter 11 to execute a reorganization
that would divide its real estate assets and its operating asset.
Mall operators Simon and Brookfield are keen on seeing Penney’s survive because of the vast amount of square footage it occupies by anchoring many shopping centers. They see the company as being undervalued.
Sycamore would consolidate Penney’s and Belk. The retailers share many of the same malls and customers. In some cases Penney’s could convert to Belk or vice versa. But it wouldn’t make sense to convert a Belk store to a Penney’s outside the Southwest. Belk is based in Charlotte, N.C., has many loyal customers in the South but has little or no name recognition beyond its trading area.
Authentic Brands Group, which is involved in licensing, brand management, retailing and entertainment, is also interested in buying Penney’s, most likely in conjunction with Simon and Brookfield consistent with past retail deals to acquire Forever 21 and Aéropostale.
Regarding the deadline on bids, “Indications are that it’s in about 10 days, in early August sometime,” said the supplier.
At this point, Penney’s new business reorganization plan remains under wraps. But sources believe it will outline a shift to lower price points and greater value to be more competitive with Target Corp. and Kohl’s Corp. Penney’s has been emphasizing a greater percentage of apparel, particularly casual apparel and activewear, in its assortment, while reducing traditional and career apparel and some nonapparel categories.
“Everybody understands that Penney’s should stay alive and is trying to stay alive,” said veteran retail analyst Walter Loeb. “From what I gathered, last month Penney’s had positive earnings. I believe Penney’s wants to do its own thing. But time is running out. There could be some answers about its future at the end of this week.”
An attorney for the creditors committee declined to comment on reports of potential bids.