Photo: J.C. Penney
J.C. Penney rescued. Will it now find success and save the mall, too?
J.C. Penney announced yesterday that it has reached an agreement in principle with two of its landlords on a near eleventh-hour deal that will help the company avoid liquidating its business, saving about 70,000 jobs in the process.
Simon Property Group and Brookfield Property Partners will pay $800 million for the retailer — $300 million in cash and $500 million in new term debt. The two will acquire “substantially all” of Penney’s operating and retail assets valued at $1.75 billion.
Penney will also get an additional $2 billion in revolving credit from Wells Fargo once the deal is done, which would leave the retailer with $1 billion in cash to go forward with.
As part of the plan, a group of equity and hedge funds identified as first lien lenders will acquire 161 of the Penney’s real estate assets and all of its owned distribution centers.
“We have determined that an agreement with Brookfield and Simon, as well as the formation of separate real estate investment trusts owned by our First Lien Lenders, is the best path forward to maximize value for our stakeholders, ensure we keep the most stores open and associates employed,” said Jill Soltau, Penney CEO, in a statement.
“As we continue to move through the sale process, our focus will remain on serving our customers and working seamlessly with our vendor partners,” said Ms. Soltau. “We have been a trusted partner to all of our stakeholders since 1902, and we expect to continue that track record for decades to come.”
The deal as announced by Penney seemed in danger less than two weeks ago. A lawyer representing the retailer before the bankruptcy court said that talks with the landlords had stalled as lenders to the retailer objected to what was viewed as a lowball price.
At the time, Joshua Sussberg of Kirkland & Ellis said, “Our lenders are no longer going to be held hostage. Time is not our friend [to avoid liquidation].”
This is not the first time that Simon and Brookfield have joined together to acquire a tenant retailer. The two, along with Authentic Brands Group, own Aeropostale and Forever 21.
- JCPenney Reaches Agreement in Principle with Brookfield Property Group and Simon Property Group to Acquire Retail and Operating Assets – J.C. Penney Company, Inc.
- Does J.C. Penney still have a future? – RetailWire
- Simon sees a big and profitable upside in acquiring retail tenants – RetailWire
- Is Forever 21 a wise investment for its new mall landlord owners? – RetailWire
- Why did mall landlords step in to save Aeropostale? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Do you think J.C. Penney will be in a more secure financial, if not competitive, position to run its business once the deal with Simon and Brookfield is complete? Will Penney’s new owners find success with the deal and will ownership help them stabilize their mall properties in the process?
Poll
BrainTrust
Dick Seesel
Principal, Retailing In Focus LLC
Jasmine Glasheen
Content Marketing Manager, Surefront
What I like about these deals by Simon and their partners is that their goals are aligned – mall operators need successful retailers. This is a contrast to the many private equity arrangements where the retail business is often left to fail while the PE companies extract the value.
Rescuing major retailers is also noble when you consider that J.C. Penney has 70,000 employees and if this deal preserves these jobs, great. But acquiring a retailer is one thing, making them sustainable and successful is another. Let’s not forget that J.C. Penney has been (along with most in the department store category) in a poor state for many years. And what appeared to be legitimate and multiple attempts to turn J.C. Penney around have simply not delivered results. So while I do like the idea of mall operators investing in retailers, the question for me is, What exactly will Simon and Brookfield do to help make J.C. Penney successful?
The deal with Simon and Brookfield certainly saves J.C. Penney from liquidation, although the pace of store closures may need to accelerate. But J.C. Penney needs more than a lifeline in order to regain share; it needs management stability and a viable strategy to differentiate itself from the competition.
If the new initiatives being tested in J.C. Penney’s Hurst, Texas store actually work, they need to be rolled out as quickly as possible to the other remaining stores. (And they finally need to catch up on their omnichannel business.) How much capital expense are the new owners willing to incur to make that happen, or are they simply happy to keep a key mall anchor alive?
You’re exactly right, Dick, and there’s so much more to unpack here. J.C. Penney will have to figure out modern approaches to pickup, will have to un-clutter stores (Ron Johnson had that right) and should reevaluate who their customer base really is. Oh, and the idea of equity firms being involved doesn’t give me the warm and fuzzies…!
There is no doubt that the deal puts J.C. Penney on more stable financial footing. However, all of the underlying issues that pushed the company to the brink remain unresolved. These must be tackled if J.C. Penney has any chance of a sustainable future – and that’s why the hard work really begins now. All that said, I believe that Simon and Brookfield will invest in J.C. Penney for the longer term and will be keen to ensure its success; they need the business to work to recoup their costs and to ensure that it remains a viable prospect in malls. Whether this all works out remains to be seen. I wish J.C. Penney well, but I remain skeptical about its future.
While it’s always great to see jobs saved, especially at that magnitude, I’m not overly optimistic about the long-term sustainability of J.C. Penney. The truth is that they failed for a variety of reasons: lack of a clear strategy, poor merchandising, an inability to capture modern shoppers, and more which led to confusion around just where their brand was trying to position itself. So while the Simon and Brookfield deal is likely a better approach than being bought up by a private equity firm, until J.C. Penney can address their core problems and align on a go-forward brand strategy, they will likely continue to experience the same big box retailer problems they have been dealing with for the past decade.
Sounds like some healthy financial first aid has been applied. Seventy-thousand jobs saved. But what brand relevance problems have been solved? What mall relevance problems have been solved? J.C. Penney lives to fight another day without the same level of debt they carried before, but all the fundamental retail issues that brought the company to this point still exist. In the brains of the accountants, this is huge. In the hearts and minds of the customer, not much has changed.
Pardon the analogy; J.C. Penney has been saved a near-certain death (liquidation) but what about quality of life? As I’ve written before, there is nothing about J.C. Penney that is relevant and unfortunately, the same can be said for many other value-oriented department stores. J.C. Penney has been a second tier department store for decades and even with less competition, it’s hard to make a bullish case. Even more so given the recession, which will likely linger for a long time.
I sincerely hope this works for J.C. Penney, but I somehow feel like I’ve been to this dance before. However, after watching Jill Soltau for a long time, I think this boat may very well float well.
I would hope that this will remedy the problems facing J.C. Penney. But somehow I sense there is more to solving the problem than throwing money at it. I hope we are not going through a rerun of Sears.
While the deal does provide J.C. Penney with solid financial footing, that only solves part of the issue. The changes that are being tested need to be reviewed quickly and rolled out to stores as quickly as they can schedule them. Otherwise no sales, no J.C. Penney.
Turning J.C. Penney around or even making it viable is not a realistic part of the strategy.
But financially it makes great sense. Take it out of Chapter 11 for the liabilities owed. Invest $1 billion that will be returned in rent and margin. Viola, you come up with a better bottom line than you predicted.
I honestly feel like we need to stop talking about J.C. Penney until they actually make some progress at retail, especially in terms of modernizing their business to meet the demands of the new customer.
No doubt this buys time for J. C. Penney. However the question still remains, what will J.C. Penney offer different to customers to have them return?
In the absence of any substantive strategic enhancements, J. C. Penney will join Sears as a place where Americans used to shop.
When I read this article title my first thought was “why?” I don’t foresee many demographics heading to the mall solely to visit J.C. Penney. However, if Brookfield and Simon chose to invest in the failing retailer, they must have data that proves it’s essential to mall visits. Still… I’d be more interested in saving Macy’s.
But don’t the two tasks go hand-in-hand? Few would go to a mall solely to go to Macy’s either, not to mention that they aren’t at death’s door — yet, anyway — so the first step to avoiding Macy’s being in Chapter 11 next year is getting JCP out this year. (At least to the extent that they’re often co-tentants.)
Happy to hear many great people at JCP have a bit of lifeline here, but it is simply that, a lifeline with an “extended” expiration date. Call it Sears 2.0; this is an equity/real estate play now, not much different than the Fast Eddie VC play at Sears to squeeze all value from the asset with little knowledge and respect for retail strategic thinking and competitive credibility. A “zombie” retailer regardless.
More secure than … liquidation? Well, yeah I guess so. Unfortunately, all the old problems, why they got to this point in the first place, are still there (more or less: one didn’t get past the second paragraph before that four letter word emerged, though I think the debt is much smaller than it was).
But surely the first step to recovering is not dying … I wish them well.
J.C. Penney now has an immediate and clear runway to reimagine and transform their department store operating model around the changing consumer behaviors. Only through these sorts of partnerships with Simon and Brookfield could J.C. Penney have avoided liquidating and joining the list of retailers that are completely out of business. For the Mall property owners, they will mitigate the mass vacancies that come with sustaining a retailer the size of J.C. Penney.
More of the same strategies will simply not resonate with the customer who has either moved on from J.C. Penney or has never shopped with the 118-year-old retailer. The good news is that via Simon and Brookfield’s collaboration, they have managed to save 90,000 jobs in an industry that has been so disrupted by the COVID-19 pandemic.
It will take the collective brain trust to turn this business around and make what is a short term lifeline into something sustainable.
We will look back at this deal three years from now and say it has been a slow death. The group that is buying them are great operators of malls. That does not make them great retailers.
It is a new world of retailing and it is going to take a new kind of thinking.
While this deal certainly stabilized J.C. Penney financially, there doesn’t appear to be anything be in terms of a brand strategy, merchandising, or anything that speaks to customers at the center of the strategy.
On the surface, this will “kick the can” down the road a few years, but I don’t see anything yet that tells us J.C. Penney isn’t the next Sears.
I hope Simon and Brookfield have a retail strategy in mind and not just a financial strategy for a return on their $800M. Clearly they see potential in the brand, given their current level of sales, but they will need to re-evaluate the product mix and invest in the remaining stores. If the Hurst, TX experiment is proving a winner, then they need to accelerate the conversion of their stores into that model. If it’s not currently a success, then they need management to develop a strategy that gives customers what they want. Then again, does J.C. Penney know who their target customer is?
No. Simon and Brookfield got $.50 on the dollar for Penney’s assets and then leveraged these out to keep the current operations running for a while. However, this will not save the mall model, nor will it save J.C. Penney. There is no success with an outdated mall model, especially in this age of the pandemic. Simon and Brookfield will leverage their real estate, sell it for more than it is currently worth, and keep their mall tenants alive as long as reasonably possible. However, this will be just another failing in the eventual closing of retail malls in America.
The saving of the jobs is fantastic.
Hey J.C. Penney, look into your past and morph your old, great catalog business into a Great Online Experience — omnichannel!
Tell us if you do BOPIS and if you do not, start ASAP. Also, buy online return in store. If this is available, advertise it! Modernize everything and anything working in Hurst, TX. Consider a rollout ASAP — at least to top stores.
I wish them the best, yet I am very afraid, as others have said, of Sears 2.0.