US retailer JC Penney files for bankruptcy protection

Department store chain has reached agreement with creditors for $900m in financing to continue operations

JC Penney said it had $500m of cash on hand as well alongside the fresh funding being provided by creditors. Reuters

US department store JC Penney filed for bankruptcy protection on Friday with plans to permanently close some stores and also explore a possible sale, making it the latest brick-and-mortar retailer to crumble as prolonged store closures in response to the Covid-19 pandemic drive a final stake through long-troubled businesses.

The retailer, best known for selling family apparel, cosmetics and jewellery at roughly 850 stores, said it reached an agreement with existing lenders for $900 million (Dh3.3 billion) of debtor-in-possession financing to aid operations while it navigates bankruptcy proceedings in federal court in Corpus Christi, Texas.

The loan consists of $450m in fresh financing, the company said. The balance is made up of existing debt being "rolled up" to be given the same legal status as the new funding, according to sources. The retailer said it had an additional $500m in cash on hand before the bankruptcy filing.

While JC Penney plans to reorganise and emerge from bankruptcy proceedings after eliminating several billion dollars of debt, it will also explore a sale as part of the terms of its new financing, the company said.

The company will begin closing some stores permanently in phases and will disclose further details in coming weeks, it said on Friday. It is understood that it is looking to close about  200 stores, although this figure could change depending on terms agreed with creditors.

The bankruptcy filing caps a long decline for the 118-year-old department store chain, which once operated more than 1,600 locations that became fixtures in US malls. The company at one point employed nearly 200,000 people.

Even before the coronavirus outbreak, JC Penney was struggling with nearly $4 billion of debt and pressure from both discount retailers and e-commerce companies.

Larger retailers such as Walmart and Target have squeezed smaller rivals by offering bargain-price apparel, including online.

The coronavirus outbreak, which has resulted in more than 80,000 deaths in the United States, is now forcing a financial reckoning among an array of retailers that had to temporarily close their doors under states' orders. Other retailers already grappling with customers' abandonment of traditional stores for online shopping have also resorted to bankruptcy filings.

Earlier this month, both luxury department store chain Neiman Marcus Group and clothing retailer J Crew Group filed for bankruptcy protection after alternative attempts to rework their finances failed. Stage Stores, a US department store chain selling mid-priced apparel at hundreds of stores in mostly rural areas, said earlier this week it would liquidate unless it finds a buyer.

Like other retailers, JC Penney has started reopening its stores in stages as many states have begun to loosen coronavirus restrictions. But with US unemployment now at the highest level since the Great Depression of the 1930s, there are serious concerns that consumer spending will remain dampened for a prolonged stretch.

Against that backdrop, JC Penney faced a looming $105 million debt payment in June and $300 million of annual interest expenses. Adding to pressure was an unprecedented span of lost sales and uncertainty whether shoppers concerned about their health would return to stores.

JC Penney negotiated with creditors earlier this year for more financial breathing room, hoping to give its new chief executive, Jill Soltau, additional time to forge a turnaround focused on the company's roots as a seller of affordable apparel for middle-class families. The talks did not bear fruit.

The coronavirus crisis forced JC Penney to prepare for a bankruptcy filing to address its strained finances, which on the horizon included more than $2bn of debt coming due in 2023.

In March, the company drew down $1.25bn from its credit line. It later skipped debt payments, triggering grace periods to make good before defaulting that expired this week. The company made one of those overdue payments before filing for bankruptcy.

Under one plan being discussed, JC Penney would emerge from bankruptcy as two separate companies, sources said. One would own some of the company's real estate and serve as a landlord to the other entity that would operate the retailer's business, they said. Creditors, many of them Wall Street hedge funds, would control the businesses in exchange for forgiving debt, they said.

The company earlier this month resolved a legal dispute with Sephora, the French beauty chain owned by LVMH that had threatened to end its agreement to sell cosmetics inside JC Penney stores.

Days before seeking bankruptcy protection, JC Penney paid nearly $10m in bonuses to top executives. The company said it was "taking necessary steps to retain our talented management team", which made strides on the company's turnaround plan before the Covid-19 pandemic.

James Cash Penney founded the eponymous retailer with partners in 1902. Averse to the haggling that was common at the time, he believed prices should be low, set and marked, an attitude that served as a precursor to modern shopping, according to the JC Penney Museum in Hamilton, Missouri, the founder's hometown.

The company's first store, opened in Wyoming, was called "The Golden Rule", a reference to what the retailer viewed as its standard for customer service, according to its website.

JC Penney stores initially dotted Main Streets in rural towns dominated by farmers. After expanding to operate more than 30 stores, it went public in 1929.

By the 1970s, JC Penney had become a mainstay across the United States. In the following decade, it acquired a bank, and later pharmacies before eventually divesting both businesses.

The e-commerce revolution that took root in the 21st century rocked nearly every corner of the traditional retail landscape and eroded JC Penney's business much as it did those of its rivals. In recent years, JC Penney has closed hundreds of stores and cut thousands of jobs.

The company has also faced fierce competition from discount chains including TJX Company's Marshalls and TJ Maxx chains.

JC Penney suffered a significant setback after a failed transformation attempt spearheaded by former chief executive Ron Johnson, the one-time pioneer of Apple's retail stores. Johnson launched expensive renovations of JC Penney stores and eliminated discount coupons, resulting in a customer backlash that led to plunging sales. He was replaced in 2013.

Ms Soltau took the reins in late 2018 after a revolving door of executives, and attempted to return JC Penney to its roots as a seller of affordable apparel for middle-class families. She jettisoned the company's appliance business and mostly abandoned its furniture offerings.