Is COVID-19 responsible for the current troubles at J.C. Penney (JCPN.Q)? The short answer is no: The retailer was in trouble long before the current economic downturn.
However, the coronavirus is the final nail in the coffin that seems likely to force the retailer into bankruptcy. J.C. Penney has been plagued by heavy debt for years, which hindered its ability to allocate capital to investments and spending that could have updated a business model that hesitated for far too long before reacting to the threat of e-commerce.
The company announced on March 18 that it would be closing all of its approximately 850 stores in the wake of the coronavirus fallout, and it has extended the closures until it can reopen based on guidance from government officials. After reportedly furloughing 95,000 employees, including both hourly and corporate workers, one has to wonder whether we'll see the old-school retailer reopen at all.
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More troubling news
It recently came out that J.C. Penney failed to make a $12 million interest payment that was due on April 15. The company now has a 30-day grace period to make the payment, or it will default. A report from Reuters suggested that J.C. Penney is considering filing for bankruptcy in order to protect itself from some considerable liabilities, which sent the stock down 28% on Wednesday to just $0.23 per share.
To make matters worse, the company has another $105 million of senior notes due later this year. Significant annual interest expense -- $293 million in 2019 -- has long taken a toll on the company's finances, and while talks with lenders have been ongoing, it's hard to see how the company can get out from under its $3.78 billion debt load without bankruptcy.
The coronavirus is not to blame
J.C. Penney was ailing long before the outbreak. The deterioration of its health has been reminiscent of the slow death of Sears Holdings. Same-store sales have been in decline for years. The retailer hasn't turned a profit since fiscal 2016, when it eked out $1 million in net income from sales of $12.55 billion. What propped J.C. Penney up through this time was a large cash pile: The balance sheet had $887 million in cash at the end of fiscal 2016, which management has slowly eroded to just $386 million as of Feb. 1.
Last year's results included a 7.7% decline in comparable-store sales, with adjusted comps declining 5.6%. Operating losses were $8 million -- 33.3% worse than the prior year. Net losses were $268 million, marking a 5.1% increase in losses.
To say that the coronavirus is forcing J.C. Penney into Chapter 11 would be too narrow a view of a much broader story. J.C. Penney failed to adapt to changing times. In many ways, it also lacked the financial resources to make a meaningful attempt to change. Tied to the fate of shopping malls, the retailer is one of the main casualties in a changing retail landscape.
Establishing an online presence is essential, and just as it has been a challenge for peers like Macy's, it has been a struggle for J.C. Penney to make meaningful gains on that front. The rise of Amazon hit brick and mortar hard -- there's no other way to put it. The companies that didn't react quickly are now paying a heavy toll.
What's next?
The saga of management's attempts to negotiate with creditors is ongoing. Most recently, there have been reports that some lenders are open to a restructuring that would exclude bankruptcy, while others want to see a liquidation of assets. Even if the retailer finds a way to make a deal with its lenders, it's going to be very hard to restructure the company profitably. It's clear from the last five years that overall consumer demand has moved elsewhere.
The only investors that should still be interested in J.C. Penney are the lenders. With shares trading at a tragic $0.27 as of this writing, it's hard to believe this small-cap stock was once worth over $80 per share, and the company was once a dominant player in retail.
While J.C. Penney has gained a 30-day breather to negotiate its fate, the department store's long-term prospects remain bleak. CEO Jill Soltau may have had a turnaround plan for the retailer, but the company was just too far gone to handle an unexpected collapse in sales.
