J.C. Penney To Shed 29% of Stores Amid Retail Reckoning
- May 19, 2020
J.C. Penney plans to close 242 unproductive stores, or more than a quarter of its 846 locations, the century-old American retailer disclosed on Monday after filing for bankruptcy last week. According to a presentation filed with the U.S. Securities and Exchange Commission, the company expects to close 192 stores during the current fiscal year, which ends in February 2021, and another 50 in the next fiscal year.
The 604 remaining stores represent the most profitable and highest sales-generating stores in the network, leaving the troubled department store chain with a leaner and more resilient fleet. The company said it would enhance its e-commerce offerings and fulfillment options as part of its adaptation to changing times, noting that it rolled out contact-free curbside pickup in early March in response to the pandemic.
An intriguing twist emerged on Monday in a report that Amazon may be considering acquiring at least part of the chain. An unidentified source told WWD that a dialogue between the two companies is under way and added that Amazon may view J.C Penney as part of its strategy to grow its apparel business.
J.C. Penney’s planned right-sizing represents the latest blow to the department store sector, already struggling with slumping sales and large debt burdens before coronavirus plunged American retailers into crisis. The Plano, Texas-based company last Friday became the fourth major retailer to file for bankruptcy in May, after J.Crew Group, Nieman Marcus Group and Stage Stores.
“Ultimately, the future is one with far fewer department stores,” said Neil Saunders, managing director of GlobalData Retail, in an email to Commercial Property Executive.
The response to coronavirus forced nearly all department store operators to close their doors temporarily in March. Although tens of thousands of stores have now begun to reopen across the U.S., many with severe restrictions, the prolonged shutdown has intensified the financial woes of many department store operators as they emerge from the crisis with fewer customers and piles of unsold inventory.
More than half of the department stores anchoring U.S. malls are expected to close permanently by the end of next year, according to an April report by Green Street Advisors.
J.C. Penney’s tentative bankruptcy plan would allow the company to shed billions of dollars in debt and includes a proposal to create both a new operating company and a real estate investment trust that would hold and collect rent from some of the retailer’s properties, according to court papers cited by Bloomberg. The company can sell up to a 35 percent stake in the new REIT with its first-lien lenders’ permission in order to generate cash.
Analysts at investment bank Cowen estimate that J.C. Penney’s portfolio of unencumbered owned real estate and ground-leased real estate could be worth $910 million, according to a report in MarketWatch.
In a note, GlobalData Retail argued that J.C. Penney is exposed to a large number of weak malls and locations and that it needs to close underperforming space quickly. The company will emerge from the downsizing leaner and better able to continue a much-needed overhaul of its product assortment, store designs and marketing and branding, according to the analysis.
The research and consulting agency pointed to a reimagined store concept in Hurst, Texas, as an example of the company’s positive direction under chief executive Jill Soltau. Opened in late 2019, the two-level department store features an uncluttered layout with 11 lounges, as well as food and beverage offerings, a barber shop, salon and spa. The store also allows shoppers to use a phone app to make appointments, reserve clothes and arrange curbside pickup of merchandise that was ordered online.
“Americans have fallen out of love with department stores, but that’s only because so many department stores stopped putting effort into the relationship,” noted Saunders. “Many of those struggling failed to evolve, failed to invest in their stores or propositions, and failed to understand the changing nature of what shoppers wanted.”
J.C. Penney’s proposed store closures add to a growing list of anticipated closures at other retailers that serve as mall anchor tenants, including 125 store closures announced by Macy’s in February and Nordstrom’s recent announcement that it will shutter 16 of its 116 full-line stores.
Monica Aggarwal, managing director and lead on J.C. Penney at Fitch Group, observed that this could have a major impact on the affected malls, “particularly if reduced traffic and co-tenancy clauses combine to trigger further tenant departures.”
Given the ongoing shifts to online shopping and “off-mall” discount formats, the wave of closures could accelerate the reshaping of the mall landscape, she added.
“Over time, industry leaders, both in the mall and off-mall channel that continue to invest in omnichannel capabilities could stand to benefit as unproductive apparel and accessories stores and malls in the U.S. are rightsized,” Aggarwal said.