J.C. Penney (OTC:JCPN.Q) enters a new phase after a judge approved the retailer's sale to two of its major landlords, Simon Property Group (NYSE:SPG) and Brookfield Asset Management (NYSE:BAM).

Although the department store chain struggled for years before the global pandemic, the COVID-19 outbreak was the coup de grace, forcing J.C. Penney to seek Chapter 11 protection in May. The mall operators, though, risked having yawning canyons of empty anchor stores in their properties if J.C. Penney was liquidated, so they bought the retailer to keep it going.

The chain emerges with 690 stores and about $1.5 billion in new financing available to it. Now, it and the new owners face a daunting challenge: convincing consumers who once abandoned the retailer it's worth coming back. That may be a tall order.

Black Friday lines at J.C. Penney

Image source: J.C. Penney.

The mall is a ghost town

J.C. Penney is in a difficult situation as it needs to hit a home run this Christmas. Foot traffic at shopping malls is in decline, and although Black Friday 2020 was never expected to rise to the level of prior years, it was still a disappointment, even with lowered expectations.

Analytics firm Placer.ai analyzed customer visit data from six top retailers and found average traffic was down 26% from last year. It then looked closely at nine malls around the country and found some serious year-over-year declines. Simon's Woodfield Mall in Illinois, for example, suffered the worst hit with traffic down 58.8%, followed by Destiny USA in New York City with a 58.7% drop.

While the examined malls tended to bounce back over the weekend -- Destiny, for example, saw traffic rise 14.7% on Sunday compared to the prior year -- Placer.ai said visits from customers would not play out as retailers normally experienced them.

Buying brands for pennies on the dollar

There is some potential for the retailer and its landlords to pull this recovery off. While Simon has partnered with Brookfield in other acquisitions, it set up a joint venture with brand licensing leader Authentic Brands Group (ABG) called SPARC Group to make a cottage industry out of acquiring distressed retailers. And Brookfield Asset Management has said it is willing to spend as much as $5 billion buying bankrupt businesses.

Together, Simon and ABG have purchased Aeropostale, Forever 21, Lucky Brands, and Brooks Brothers, and ABG has more than 50 other names in its portfolio. Placing product from these well-known banners on racks and shelves at J.C. Penney could help the department store attract new customers.

However, the new owners will have to tread carefully. As the company saw during the disastrous tenure of former CEO Ron Johnson, who tried to drag J.C. Penney kicking and screaming into the 21st century, the department store's customers are hesitant to embrace major changes to the in-store shopping experience.

Malls no longer the city center

It's why the task the mall operators have set up for themselves is so monumental, and it risks dragging down their overall performance. The purchase of J.C. Penney in particular, because of its size and scope, represents more of a challenge than reviving individual brands.

Simon Property Group recently announced it was effectively abandoning four malls it operated because of poor performance, engaging in a "friendly foreclosure" on two, no longer putting money into a third, and giving the title of the fourth over to its lender.

That explains why Simon didn't want J.C. Penney closing its doors permanently, as such a result could create a domino effect leading to other retailers in its malls shutting down. But as more consumers have embraced online shopping during the pandemic, this trend will create problems for the physical retail space, even if the individual tenants in shopping malls see their overall sales rise. Simon and Brookfield don't enjoy the fruits of those gains, which is why some mall owners are now trying to get a cut of the online sales stream.

A high mountain to climb

J.C. Penney was saved from the dustbin of history, and there is a chance that with new owners, a new sense of purpose, and an injection of cash and fresh merchandise, the retailer can succeed. Yet investors should see how this holiday season turns out before getting caught up in a tale of rebirth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.