Analysis: Most ‘prudent’ way forward is for Penney to file for bankruptcy

News that J.C. Penney is in advanced talks with lenders about its bankruptcy options comes as no surprise.
 
For a long time, J.C. Penney’s road to reinvention has been the equivalent of climbing a steep mountain with nothing other than the burden of an enormous pile of debt. The coronavirus crisis has now effectively broken the retailer’s limbs making further progress all but impossible.
 
All retailers are finding the current environment challenging, but J.C. Penney has three distinct disadvantages.
 
First, despite recent attempts to revive it, the proposition remains incredibly weak and unappealing. This means that the transfer of trade from stores to online has been much weaker than for similar retailers, putting an enormous dent in the revenue J.C. Penney has been able to generate.
 
Second, it is unlikely that trade will come back quickly once the virus starts to abate. In our consumer survey about which retailers shoppers are most looking forward to visiting once the crisis is over, J.C. Penney comes out near the bottom and well below its department store peers such as Macy’s, Kohl’s, and Nordstrom. This only serves to underline how much work J.C. Penney must do to make itself relevant to consumers.
 
Third, while J.C. Penney has some good stores, it remains very exposed to weak malls. Some of the footfall that has deserted these centers during the crisis is unlikely to come back. This will push those malls into an even steeper negative spiral that will be unhelpful to the revenue and profits J.C. Penney can generate at those locations.
 
Even if J.C. Penney did manage to navigate all these obstacles, its ability to reinvent the firm would be even more hampered that it was before by the weak state of its finances. The very best it could hope for would be to inch painfully and unconvincingly forward.
 
Given these unfavorable dynamics, along with the company’s debt pile, we believe the most prudent way forward is to file for bankruptcy. Under the protection of Chapter 11, J.C. Penney can restructure and reassess its options. It would give Jill Soltau more room for maneuver and allow her to take some of the tough decisions, such as store closures, that are needed.
 
Once again, we stress that none of the current problems – from either before or during the crisis – are of Ms Soltau’s making. Indeed, we believe she is the right person for the tasks that lie ahead.
 
Before this crisis hit, J.C. Penney had a very narrow path to recovery. That path is now blocked. It needs to explore other options and chart a new way forward, or perhaps decide that the journey is finally over.