JC Penney faces a tricky rescue

A familiar band of fixers may be coming to JC Penney’s rescue. Can they do it again?
Major mall operators Simon Property Group Inc. and Brookfield Property Partners LP, along with Authentic Brands Group LLC, are in talks to buy the bankrupt department store chain, Bloomberg News reported. This coalition has taken similar action before, rescuing teen clothing retailer Aeropostale several years ago and, more recently, buying fast-fashion mainstay Forever 21 out of bankruptcy. However, JC Penney should approach such an arrangement with caution, because it’s going to be uniquely difficult to make this one a win-win situation.
Covid-19, of course, has turned the commercial real estate and retail worlds upside down. Thanks to an
accelerated post-pandemic pace of e-commerce adoption, analysts at UBS now forecast that the US will see about 100,000 store closures by 2025. Against that backdrop, Simon and Brookfield have even more incentive than usual to do whatever it takes to simply preserve occupancy of their shopping centers. JC Penney may not currently be paying its landlords huge sums since anchor tenants typically enjoy relatively low rents, but mall operators generally want to keep the lights on at as many stores as possible to keep their centres feeling vibrant and bustling. JC Penney has already pledged to shutter more than 150 of its 800-plus stores. The chain likely needs to close many more than that to become a healthy business. But doing so could be at odds with what’s good for Simon and Brookfield at this perilous moment.
Plus, JC Penney isn’t just any mall retailer: it’s an anchor tenant, meaning it has huge footprints with their own entrances. Those boxes could be significantly harder to fill than, say, Aeropostale-sized stores, even in the best of economic times. But, as Bloomberg Intelligence analyst Lindsay Dutch points out, the kinds of tenants that might be good fits for one-time JC Penney stores — hotels, gyms, or even offices — might be harder to
line up now that we’re in a recession and the pandemic is making every one of
those businesses rethink their formats.
The result could be that Simon and Brookfield get control over what replaces empty JC Penney stores, which is helpful to protecting their overall mall profiles. But in the meantime, JC Penney may suffer brand damage if some of its locations are allowed to limp along with little investment for a long time while it undertakes that process.
There would be some upsides to this potential buyout for JC Penney: The group’s rescue of Aeropostale is widely perceived as a success. And Brookfield had earlier pledged to put $5 billion toward helping retailers recover from the devastating effects of stay-at-home orders and a recession, a sign that JC Penney would be getting a partial owner that is deeply invested in saving not just the struggling retailer, but the entire mall ecosystem.
Meanwhile, the CEO of Authentic Brands, Jamie Salter, told CNBC recently, “I think there is a play for JC Penney.”

—Bloomberg