J.C. PENNEY COMPANY, INC. recently filed for insolvency, becoming the latest American major retailer to succumb to the global coronavirus pandemic. The 118-year old company, which was already finding it difficult tomaintain its market position, secured a restructuring support agreement with creditors of roughly accounting for 70% of its first lien debt. The arrangement will ease its debt burden and strengthen its financial position.
The Zacks Rank #3 (Hold) company’s cash balance is worth $500 million and it obtained financing commitments amounting to $900 million from its existing first lien lenders, which consist of $450 million of fresh financing. It will seek authorization to access $900 million in debtor-in-possession (DIP) financing — a financing provided to a company that has filed for bankruptcy — following which, it expects to meet its operational and restructuring needs along with sufficient cash flow generation from its ongoing business operations.
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To boost store optimization and efficiently handle business on the current tough operating landscape, the company will also reduce its store footprint and close stores in a phased manner throughout the legal process, details of which are expected to be disclosed in the weeks going forward.
The troubled retail giant is now in early stages of talks with JP Morgan, Wells Fargo and Bank of America to keep its operations funded while it goes through bankruptcy court proceedings. J. C. Penney is the fourth player to join other retailers, namely J. Crew, Neiman Marcus and Stage Stores, in pandemic-hastened bankruptcy cases just this month.
The Behemoth’s Long Battle
For a long period, the department store chain has been recording depressed sales, thanks to the immense competition from online retailers and discount chains. To revive its business, the company has time and again resorted to a slew of management reshuffles and store reinventions. In the last decade, it was brought under the leadership of four different CEOs, each employing different strategies including clearance sales and introduction of household appliances that failed to win customers back. Like many department stores, the company’s business tumbled as consumer preference shifted to online purchases from big discounters, such as Walmart Inc. (WMT - Free Report) , Target Corporation (TGT - Free Report) and Costco Wholesale Corporation (COST - Free Report) .Further adding to its woes, the outbreak of novel coronavirus plunged this Texas-based company into complete bankruptcy.
Retail Sector Fallout
The coronavirus mess has not spared any sector, especially the retail space. Highlighting the dramatic decline in consumer spending activity, U.S. retail sales witnessed a record decline for the second consecutive month in April and came below analysts’ expectations.
Companies like Macy’s (M - Free Report) , Nordstrom (JWN - Free Report) and Kohl’s (KSS - Free Report) had to shutter stores to curb the spread of the virus. J. C. Penney too closed its stores and decided to temporarily furlough most of its hourly store associates. Although the company is still operating online, it will barely compensate for the lost store sales. It only recently reopened a few of its stores and aims to strategically resume business in other stores nationwide.
With consumers avoiding crowded places and limiting their visits to the brick and mortar stores due to quarantines and stay-at-home orders, online retail is seeing a spurt in sales, benefitting companies like Amazon (AMZN - Free Report) and Walmart among others. However, they continue to face challenges of product sourcing and making timely deliveries.
Disruption in the global supply chain is another concern, which may hurt companies that are more reliant on China for sourcing, either directly or indirectly. It is negatively impacting the supply of inputs for several manufacturers and retailers globally as China is a huge source of components and finished goods. Prolonged disturbance might ultimately lead to suspension of operations in the absence of key inputs.
For biggies like Walmart and Target, the virus could have a dual effect. Although they might grapple with supply-chain issues and reduction in casual purchases, they are also large sources of essentials that consumers are currently stockpiling. Their strong procurement strategy, superior inventory control and various supply bases give their business a competitive edge over its peers who deal in smaller businesses that are unable to cope with a reasonable level of product availability when demand skyrockets.
The Luxury retail is also not left unscathed. Plagued by the pandemic, many luxury brands like Burberry, Tapestry, Capri and LVMH were forced to shut stores as they depend heavily on Chinese shoppers. Luxury brands’ supply chain has also been materially disrupted as more than 40% of their global luxury items is produced in Italy, a country which is one of the worst hit by the COVID-19.
Many stores that closed down because of lockdown and stay-at-home orders have begun to reopen but it would take a while for shoppers before venturing out and spending freely again. Digital sales will increase as customers will avoid physical retail. More retail store closures are expected to take place once the crisis is over, widening the gap between well-established retailers and struggling chains.
In the short term, retailers selling essentials might see a spike in sales but many others may face an irreparable financial loss. Although most retailers are expecting a downside in their 2020 revenue figures, players that are more adaptable to changing circumstances will be able to withstand the current market volatility and convert their disadvantages into an opportunity to gain a decent market share. There might be a slump in consumer demand if the economy falters or enters into a recession phase. Purchasing power of many consumers might change permanently post the pandemic.
In the long run, companies should re-think their business strategies. Innovative business strategies, de-centralized supply-chain management and a strong online presence will help companies pull through. While there are many uncertainties dogging the future, retailers that still strived to stick to their ground amid the prevalent adversities will ultimately emerge as winners.
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