J.C. Penney (JCPN.Q) initially resisted the department-store industry trend toward closing lots of stores. However, the company gave in after sales growth ground to a halt in 2016. Earlier this year, it announced plans to shutter 130 to 140 stores during the second quarter.
In mid-March, J.C. Penney released a list of 138 stores on the chopping block. Most of them were scheduled to close in June. However, in a surprising turn of events, J.C. Penney announced last week that it is postponing the liquidation and closing of these 138 stores by five to six weeks. Let's look at why the company has changed course.
Shoppers come out of the woodwork
Throughout much of the country, there are far too many department stores around relative to demand. However, most of the stores that J.C. Penney plans to close this year are smaller, rural locations. J.C. Penney is often the only department store in these areas.
As a result, many community leaders in these towns were devastated by the news of these impending closures. In some cases, local leaders have written to J.C. Penney's management asking them to reverse their decision. Meanwhile, they have been encouraging people to show their support for J.C. Penney by coming out to shop.
These community organizing efforts seem to have been at least somewhat effective. In the weeks after J.C. Penney published the list of 138 stores slated for closure, sales have perked up at those locations, according to a company spokesperson. Therefore J.C. Penney is postponing its store closures.
Originally, J.C. Penney had planned to begin liquidation sales for most of the affected stores today (April 17), with the stores closing for good about two months later. Instead, it now plans to start liquidation sales on May 22. July 31 is now set to be the last day of business.
Why not keep the stores open permanently?
Many people might be wondering why J.C. Penney still plans to close all of these stores, given that their performance has improved recently. The decision may seem particularly odd insofar as the company has previously stated that only four of its stores lose money.
However, in recent years, these stores have lagged the company average in terms of comparable-store sales growth. It's doubtful that the recent rebound in sales is sustainable. Store closing announcements often drive short-term sales gains as consumers look for bargains, but they don't negate the fundamental economic trends that led to the initial decision.
Furthermore, many of these stores are too small to accommodate J.C. Penney's sales growth initiatives such as appliance showrooms and Sephora cosmetics shops. CEO Marvin Ellison believes that J.C. Penney needs a more consistent brand standard across its stores. As a result, it makes sense to close stores that don't have enough room to be upgraded -- as well as those that aren't profitable enough to justify further investment.
It's all about cash flow
Ultimately, J.C. Penney's store closure decisions seem to be driven primarily by cash flow concerns. While the company has made a big comeback from the brink of bankruptcy over the past few years, its financial position remains shaky, and it needs every dollar it can get to help pay down debt.
As a result, while J.C. Penney needs to update its stores, it can't afford to invest heavily in locations that are only marginally profitable. This is driving the long-term decision to downsize.
However, in the short run, these stores are still producing positive cash flow -- especially after the recent uptick in sales. By keeping the stores open for an extra five or six weeks, J.C. Penney will be able to continue selling goods at normal promotional prices throughout the spring season, before transitioning to clearance mode around Memorial Day.
The postponement of these store closures is a small consolation for the employees who will be losing their jobs and for communities that may be losing their only department store. But in today's ultra-competitive retail market, retailers can't afford to be sentimental about their stores. Underperforming locations must be closed to free up investment dollars for chains' most promising stores.