Does the world of retail really need J.C. Penney?
As the department store chain filed for bankruptcy protection Friday evening, some question if the company still has a place in American retail. Or if it could ever bounce back from the fatal blow it has been dealt during the coronavirus pandemic, which forced its roughly 850 stores shut temporarily.
"You have this issue of the middle collapsing," said Steve Dennis, founder of retail group SageBerry Consulting and a Neiman Marcus strategy executive from 2004 to 2008. "I think conceptually there is only a place for one department store in the mall."
Penney, which was born in 1913 catering to farmers in rural America, built an iconic brand name for itself, serving as a staple shop in many homes, especially catering to women with families. But Walmart and Target grew, stealing market share outside of the mall. Then, the internet exploded, with Amazon at the helm. Penney was late to adapt and invest in its stores.
The Covid-19 crisis only exacerbated many of the challenges it was already facing, including an overhang of debt.
Penney's annual net sales contracted 8.1% to $10.7 billion in 2019. That followed a 7.1% drop in 2018, a sales decline of 0.1% in 2017, and a drop of 0.4% in 2016, according to annual filings.
Some thought Penney would reap the rewards of Sears' demise. Sears, another American retail icon, has been shuttering stores for years and filed for bankruptcy in October 2018. But still, Penney finds itself in a sales slump, battling TJ Maxx, Target, Macy's and others — in apparel, appliances and home goods.
"I don't think there is a place for J.C. Penney anymore," said Robin Lewis, founder and CEO of The Robin Report and a consultant to retail companies. "Even if we didn't have this virus ... we have been over-stored for half a century in this country."
This past holiday season, sales online and at Penney stores open for at least 12 months were down 7.5%. Overall department store sales decreased 1.8% from Nov. 1 through Dec. 24, according to Mastercard Spending Pulse. The drop happened even as holiday retail sales overall grew 4.1%, the National Retail Federation said.
And as retail sales tumbled 16.4% last month, their worst month-over-month drop ever recorded, department stores were down 28.9%, according to fresh data from the U.S. Census Bureau. Year-over-year, department store sales were down 47%, amounting to $6.1 billion, compared with $11.5 billion in April 2019.
A look back in time shows just how much department stores' dominance in retail has waned.
In 1992, department store operators accounted for 14.3% of overall retail sales, excluding gas and car dealer sales, according to data from the Commerce Department. That share was a paltry 3.7% as of the end of last year.
America will emerge from the coronavirus pandemic with fewer department stores, as Nordstrom has already said it plans to close 16 of them. Additional closings by other chains are expected. But it could also mean entire companies, such as Penney, vanish.
"There's way too much space chasing too few dollars," Dennis said. "Nobody can consistently make money."
Penney said in its Chapter 11 filing that it has commitments for $900 million in financing from its existing first-lien lenders to fund its bankruptcy, which includes $450 million of new money. It had approximately $500 million in cash on hand as of the Chapter 11 filing date.
Penney added that in bankruptcy proceedings it will "reduce its store footprint" in phases. It said it plans to disclose specific store details and timing in the coming weeks.
"Until this pandemic struck, we had made significant progress rebuilding our company," Chief Executive Jill Soltau said in a statement.
Another former department store executive sees a scenario where Penney dissolves — along with others including Lord & Taylor, Neiman Marcus and Dillard's — and only Macy's, Nordstrom and Kohl's are left standing.
"They are just like Sears, there is no path forward," Jan Kniffen, a consultant to investors in retail companies and a former executive at The May Department Stores, parts of which were folded into Macy's, said about Penney. "I think a lot of stores will reopen long enough to go broke again."
CNBC previously reported that Penney has been working on a plan that would contemplate closing 180 to 200 stores while in bankruptcy.
Penney is not alone in this scenario, either.
High-end department store chain Neiman Marcus, the rural chain Stage Stores and apparel maker J.Crew have each filed for bankruptcy protection during the pandemic. Stage plans to liquidate its more than 700 stores if it can't find a buyer. It operates under brand names such as Gordmans, Bealls and Goody's.
Home-goods company Pier 1 Imports and sporting-goods retailer Modell's had filed for Chapter 11 protection before the Covid-19 virus slammed the U.S. economy and forced nonessential retailers' stores shut, subsequently putting their going-out-of-business sales on hold. Modell's has been in the process of liquidating its entire store base. Pier 1 was planning to emerge with a smaller footprint.
"Anything that has any chance of working would take many years and a lot of investment," Dennis said. "In these bankruptcies, I think a lot of them aren't going to make it because investors are saying ... this is too much of a long shot."
—CNBC's Lauren Hirsch contributed to this reporting.
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May 16, 2020 at 09:12PM
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As JC Penney goes bankrupt, some question if it should continue to operate - CNBC
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