Will You Give A Penny For J. C. Penney?

JC Penney (“JCP”) filed for bankruptcy on Friday, 15 May 2020. James Cash Penney (“JC”) founded the departmental store in 1902. JC believed prices should be low, set and marked, not haggling that was common practice at that time.

Source: www.pymnts.com  

JCP stores dotted main streets of rural towns in the U.S., dominated by farmers. It went public in 1929. By the 1970s JCP was the mainstay across the U.S. Reuters had reported, sometime earlier, that JCP was returning to its roots – a seller of affordable apparel for middle class families. The current CEO had jettisoned the appliance business and furniture offerings. But it still had 850 locations.

But why did it fail?

JCP had USD900 million debts with existing lenders and that included USD450 million in fresh funds. JCP also claimed it had additional USD500 million in cash before the bankruptcy filing. Even before the corona virus outbreak, JCP was struggling with nearly USD4 billion debt. JCP is facing USD105 million debt payment in June and USD300 million of annual interest expense. On the horizon, it has more than USD2 billion of debt coming due in 2023.

Every year for the last five years revenue declined, dropping from USD12.63 billion in 2015 to USD10.72 billion in 2019. EBITDA was only USD538 million in 2019. Cash flow last year was USD145 million, just enough to stay afloat.

The e-commerce revolution that took root in the 21^st century eroded JCP’s business. The company also faced fierce competition from discount chains including Marshalls and TJ Maxx. Then it had a failed transformation attempt – the launch of expensively renovated JCP locations and the elimination of popular retail coupons.

Who loses?

One thing is clear, shareholders are wiped-out by these developments.

What next?

Under one plan, JCP would emerge as two separate companies – an operating company (New JCP) and a REIT. The REIT will hold some of the real estate assets of the business while operating company will lease and operate those properties.

Another option is for Amazon to buyout JCP. It may make sense for Amazon to use JCP’s locations.

So what are the key takeaways?

·       Changing landscape requires agility;

·       Cash flow keeps a company afloat;

·       Too much debt and the company is working for bankers; and

·       Shareholders can lose everything!

Covid or no Covid, companies like JCP will not survive unless shareholders/management are agile to market behaviour/economic conditions.

References:

1. JC Penney files for bankruptcy, Starbiz, Monday, 12 May 2020

2. J.C. Penney: Shareholders Wipe-Out by Daniel Jones, Seeking Alpha, 20 May 2020