JCPenney buckles under debt load and files for bankruptcy

JCPenney has become the fourth household-name retailer to file for bankruptcy in the US within the space of two weeks after the coronavirus shutdown proved too much and the long-struggling department store group buckled under its heavy debt load.

The mass-market chain, which has more than 800 stores and employs about 90,000 people, on Friday joined its upscale peer Neiman Marcus, clothing company J Crew and footwear brand Aldo in seeking court protection from creditors in the midst of the pandemic.

The Texas-based group said it planned to use the Chapter 11 restructuring to wipe “several billions” of dollars from its debt burden. Before the bankruptcy, its liabilities including long-term debt and lease obligations totalled $7.2bn compared with equity of $829m.

Jill Soltau, chief executive, said in a statement that JCPenney had “made significant progress” in efforts to revive its fortunes before the pandemic struck. Store closures forced by the outbreak had prompted “a more fulsome review to include the elimination of outstanding debt”, however.

The retailer said it would “explore additional opportunities to maximise value, including a third-party sale process” during the restructuring.

JCPenney traces its roots to 1902 when James Cash Penney opened a dry goods store in a Wyoming farming town and went on to become a powerhouse of American retailing, with a reputation for selling quality goods from refrigerators to blouses at affordable prices.

Its recent struggles have come to epitomise the financial problems facing department stores and the shopping malls they anchor. Like-for-like sales at the company have declined in 11 of the past 16 quarters, according to S&P Capital IQ data.

Restrictions to curb the spread of Covid-19 made what was an already challenging environment impossible for JCPenney to navigate.

Its long-awaited filing came as economic data on Friday laid bare the scale of the recent collapse in non-essential consumer spending at bricks and mortar stores. US retail sales overall fell 16.4 per cent in April, the most on record. Department store sales plunged 47 per cent from a year ago.

Lenders to JCPenney had agreed to provide $900m in so-called debtor-in-possession financing to support it through the bankruptcy. Those that hold about 70 per cent of its first-lien debt were supporting the arrangement, the company said. 

Like its peer Sears, which filed for bankruptcy about 18 months ago, JCPenney’s difficulties began long before the advent of ecommerce. The company was hit by the rise of big box stores such as Walmart and Target, and came close to, but ultimately avoided, bankruptcy in 1999.

It made repeated efforts to recover, and took recent emergency measures to improve its cash position. The company has put much of its workforce on unpaid leave, drawn down funds from a revolving credit facility and extended payment terms for suppliers.

In common with Neiman Marcus, J Crew and other retailers that have been unable to weather the pandemic, JCPenney had been saddled with high debts. Aldo, the Montreal-based footwear retailer, also filed for court protection from creditors last week in Canada as well as chapter 15 relief, which is used for foreign debtors, in Delaware.

John Varvatos, a smaller menswear brand, sought Chapter 11 bankruptcy protection last week. The company said it planned to use the process to sell itself to Lion Capital, an existing investor.

Kirkland & Ellis is serving as legal adviser to JCPenney, Lazard financial adviser and AlixPartners restructuring adviser.

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