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J.C. Penney files for bankruptcy, a crushing one as it was making progress to fix itself

The Plano-based department store retailer has fought off bankruptcy rumors in its long history but was able to avoid it until the pandemic. Penney’s plan is to close stores but still come out as a large company with new owners.

J.C. Penney made it through two world wars, the Depression, the Walmart effect, the Great Recession, the ascent of Amazon, the decline of malls and unprecedented self-inflicted wounds as it tried to reinvent the department store.

It took a crippling pandemic to get a company that was founded and flourished first in small-town America and then in its suburban malls into bankruptcy court.

The Plano-based chain, which has 846 department stores and 85,000 employees, filed for bankruptcy Friday in U.S. Bankruptcy Court in Corpus Christi.

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Penney said Friday that it’s exploring a sale of the company as part of the reorganization and will be closing stores in phases during the Chapter 11 process. It has secured $900 million in financing from its existing lenders, and that includes $450 million of new money to use during its reorganization. It also has $500 million in cash.

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The reorganization will wipe out billions of debt and “provide increased financial flexibility to help navigate through the coronavirus pandemic and better position Penney for the long-term," Penney said.

Penney made a $17 million interest payment earlier Friday. Penney said the lenders that hold about 70% of its first-lien debt have agreed to the restructuring.

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Penney turned 118 years old in April while all of its stores were temporarily closed by the coronavirus, making its already difficult turnaround led by CEO Jill Soltau weaker by the day. It reopened a few of its stores this month, but sales declines of 90% during what’s usually a strong spring season isn’t anywhere in anyone’s playbook.

“The coronavirus pandemic has created unprecedented challenges for our families, our loved ones, our communities and our country. As a result, the American retail industry has experienced a profoundly different new reality, requiring J.C. Penney to make difficult decisions in running our business to protect the safety of our associates and customers and the future of our company," Soltau said in a statement.

Penney follows other department stores, Dallas-based Neiman Marcus and Houston-based Stage Stores, into bankruptcy reorganizations. J.Crew also filed this month, and other apparel brands are expected to be forced into court-led reorganizations or liquidations. Penney is the largest retailer to file so far during the crisis.

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About 200 Penney’s stores don’t have Sephora shops, and those are likely to be among those to be closed first. The chain didn’t put the beauty brand into stores that were either too small or didn’t have as much traffic as other stores.

Penney has been trying to claw back from a failed activist investor-led attempt in 2011-13 to transform the business. That episode ballooned its debt while more than $5 billion in sales evaporated, and never returned. It had trimmed back debt of more than $5 billion to $3.7 billion, but that cost the chain $293 million in interest payments last year.

Last year and early this year, Penney was making progress under Soltau, who joined Penney in October 2018. She had reversed an unprofitable decision by her predecessor, Marvin Ellison, to put kitchen and laundry appliances in Penney stores, rebuilt the executive ranks and made progress in women’s apparel, turning around declining sales trends.

Soltau drastically reduced inventory and created a lab store to quickly study new ideas that could be taken to other stores, saying all along that the company had to become more nimble. Soltau took other prudent actions to put Penney in a better place. She and chief financial officer Bill Wafford started debt restructuring talks in mid-2019, well before refinancing deadlines.

The company skipped a couple of debt payments in April, which started a clock that would put it in default, but all along Penney was negotiating with its lenders. About $150 million of debt that’s due in June wasn’t expected to be an issue before the pandemic. Its term loan of $2.06 billion matures in 2023, and its next big debt maturity is $400 million in 2025. Other maturities start in 2036.

Penney paid store rents in April but not in May. Penney paid the May rent for its Plano headquarters and continued to negotiate with lenders.

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Heading into the pandemic, Penney had $1.8 billion in liquidity as of Feb. 2. That included $386 million in cash and $1.4 billion available on its revolver. It withdrew $1.25 billion of the revolver in March when it closed stores and furloughed employees.

While Penney still owns a lot of real estate, it has sold significant assets in recent years.

Mary Wagner, a visual merchandiser at J.C. Penney, prepares a curbside order on May 1 at the...
Mary Wagner, a visual merchandiser at J.C. Penney, prepares a curbside order on May 1 at the store in Fairview.(Ryan Michalesko / Staff Photographer)

As other department stores responded to consumer trends that had made them less relevant after mall anchor performance peaked in the 1990s, Penney was in a constant turnaround after activist investors came calling in 2011.

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The Johnson era

Pershing Square’s Bill Ackman and Vornado Realty’s Steven Roth, Penney’s landlord in Manhattan Mall, had teamed up and quietly accumulated 26% of Penney’s stock. They forced big changes, starting with hiring Ron Johnson as CEO. At the time, Johnson was considered a retail rock star for heading Apple stores with their genius bars and sales per square foot that rivaled fine jewelry stores.

Under Johnson, Penney stores were ripped apart. Dependable basic home goods were removed to install new shops displaying products that were foreign to Penney shoppers, such as expensive paper party products from Martha Stewart, serving pieces from designer Michael Graves and modern bedding from Jonathan Adler.

Happy Chic By Jonathan Adler was one of the shops added inside J.C. Penney stores during Ron...
Happy Chic By Jonathan Adler was one of the shops added inside J.C. Penney stores during Ron Johnson's tenure as CEO. This one was at Stonebriar Centre in Frisco in 2013. Other shops were from Bodum, Jonathan Adler, Michael Graves and Martha Stewart. (Lara Solt / Staff Photographer)
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Also removed were Penney’s $1 billion-a-year brands. St. John’s Bay was replaced with an unknown label from Canada. Percent-off coupons, something devoted shoppers counted on, were replaced with everyday low pricing, confusing shoppers.

Basically, Penney fired its customers who had shopped there for generations for pillows, towels and sheets, Pyrex bakeware, throw rugs, traditional quilts and family apparel in extended sizes.

In 2010, the year before Penney went into the failed experiment, it had $17.8 billion in annual sales, a profit of $533 million, cash of $2.6 billion and long-term debt of $3 billion. By 2013, annual sales had dived to $11.9 billion and it posted a loss of $1.4 billion. Cash had dropped to $1.5 billion and debt ballooned to $5.6 billion.

Martha Celebrations in J.C. Penney at Stonebriar Centre in Frisco on Monday, April 8, 2013.
Martha Celebrations in J.C. Penney at Stonebriar Centre in Frisco on Monday, April 8, 2013. (Lara Solt / Staff Photographer)

The chain was weakened in rapidly changing times in ways that many other retailers are experiencing now, as sales are lost during the pandemic, sales that will be hard to get back in an economic depression.

Even though Penney’s debt and current troubles weren’t created by the leveraged buyouts that crippled other retailers such as Neiman Marcus and J.Crew, the Johnson era had the same effect as funds were shifted to make interest payments instead of reinvesting in the business.

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Johnson also led with asset sales to raise cash. Small batches of stores, distribution centers and its mortgage-free campus headquarters in Plano were all sold. Since 2013, Penney has sold several hundred million dollars’ worth of real estate.

Penney recently appraised its real estate, including stores, warehouses, and leased and owned property. The value is $3.75 billion as an ongoing operating business and $2.04 billion if the business is closed.

In a perpetual fix

Penney’s sales have lagged behind, but few of America’s traditional retailers and brands that fill malls and shopping centers have been able to post anything but modest sales increases in recent years.

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Much of the industry — department stores particularly — have been in a secular decline since peaking in the 1990s. Many analysts thought Penney was a candidate for bankruptcy after it bought the Eckerd drugstore chain instead of reinvesting in its core department store business. Penney paid $3.3 billion for Eckerd in 1997 when it was struggling to compete as the fourth-largest U.S. drugstore chain. Penney put its own catalog desks in the drugstores.

Allen Questrom arrived as CEO in 2000 and sold off Eckerd in 2004 and put Penney on a solid footing. He was followed by Mike Ullman, who negotiated a successful deal to bring Sephora shops into Penney stores. Ullman later returned, after Johnson left, to stabilize the business, and he kept the company out of bankruptcy one more time.

This time Penney’s attempt to turn around and avoid bankruptcy had a markedly different backdrop.

In March, April and May, big box retailers were deemed essential and allowed to remain open while stores in malls were shut down. Even before the pandemic, those chains — Walmart, Best Buy, Home Depot, Target, Costco — were competing with Amazon and building their own powerful e-commerce businesses.

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Analysts are now speculating how Penney store closings will benefit others.

When Penney lost more than $5 billion in sales under Johnson, those dollars didn’t go to competitors Kohl’s and Macy’s. Some went to Target and Walmart, Citi said, and off-price retailers seemed to benefit.

But such exercises may be overshadowed by the bigger market share grab that’s coming.

Industry experts forecast massive permanent store closings ahead. Gordon Brothers forecast that 25,000 stores will close permanently this year. Wall Street firm UBS said coronavirus shopping habits are accelerating the shift to online shopping and will lead to 100,000 store closings by 2025.

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The aerial of J.C. Penney headquarters in Plano was shot on Feb. 28.
The aerial of J.C. Penney headquarters in Plano was shot on Feb. 28.(Vernon Bryant / Staff Photographer)

Its trip to Texas

Penney announced that it was moving to Texas from Manhattan in April 1987 and purchased 429 acres in Plano for $25 million from Electronic Data Systems, which was founded by H. Ross Perot in 1962.

It was part of a wave of high-profile corporate relocations to Dallas-Fort Worth that included American Airlines and Exxon Mobil.

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Penney paid for the land and a 1.85 million-square-foot corporate campus that cost about $200 million to build after selling its New York building. Penney sold its 45-story tower on the Avenue of the Americas and 52nd Street for $350 million and netted $139 million after taxes.

Penney moved into the Plano building in 1992, and its peak employment there was 5,750 people. The corporate staff has been cut over the years and is down to about 2,000.

Penney employees now share the impressive campus with workers from other companies that rent space there.

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Employees pop confetti as Johnathan Dagerath, left, and Michael Fountas, right, unveil the...
Employees pop confetti as Johnathan Dagerath, left, and Michael Fountas, right, unveil the James Cash Penney statue in its new spot in the north atrium of the J.C. Penney headquarters in Plano on March 1, 2019.(Shaban Athuman / Staff Photographer)

After other tenants moved in, the company moved the iconic statue of its founder, James Cash Penney. The 3,500-pound, 9-foot-4-inch bronze had been in the main building’s rotunda and was unveiled on March 1, 2019, in its new home in the north rotunda where all the Penney employees had been relocated. Panels were made for the occasion with the names of the 261 active employees who had worked in the building since Penney moved there in 1992.

Many of them took selfies with the statue.

James Cash Penney started the company in 1902 in Kemmerer, Wyo. That original store was still operating until the pandemic.

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Twitter: @MariaHalkias

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