JC Penney: Too Big to Fail

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I\’m no Andrew Sorkin, who given the chance, could probably make another blockbuster book, Too Big to Fail: JCP the Sequel. However, he would probably have to give the story a massive spin. While the notion of \”too big to fail\” might peak interest in the retail world, it most certainly doesn\’t contain the kind of drama, suspense, the edge of crisis and sheer magnitude of a potential economic collapse of Great Depression proportions, as Sorkin was able to brilliantly narrate in his famous book. So, I will take a shot with a mere article-sized account of why JC Penney is too big to fail for their likely new owners.

Chapter 11

Brookfield Property Partners L.P. (\”Brookfield\”) and Simon Property Group (\”Simon\”) will probably win the dubious JCP prize of a really old (from all perspectives), stale and dying brand. Then they will have to figure out what to do with it. Another serious and higher bidder at one point, was Sycamore Partners, which I predicted would win. Very briefly, my prediction was based on my opinion that the Simon/Brookfield interest is primarily to save their butts (which, in fact is true, at least short term). I also pointed out that Sycamore better understood the business of retailing and had an actual plan, including synergies with the Belk brand that is also under their ownership. Anyway, it was not to be, although too bad, because I think Sycamore might have saved Penney.

Magical Thinking

It just ain\’t gonna happen under Simon and Brookfield. They will likely do some abracadabra financial engineering … life support stuff. I have no idea what that magic act might be. However, whatever tricks they might come up with, they might be advised to call Eddie Lampert for some ideas (the infamous CEO who led the dismantling of Sears). Sorry, I digress.

[callout]They will likely do some abracadabra financial engineering…life support stuff. I have no idea what that magic act might be. However, whatever tricks they might come up with, they might be advised to call Eddie Lampert for some ideas (the infamous CEO who led the dismantling of Sears).[/callout]

Simon and Brookfield want the retail operations, while another lien lending group is making a case for owning the property assets: the roughly 160 stores and however many distribution centers. These would likely be put into a REIT. Of note, REIT\’s can tend to bleed the operating unit to death with excessively high lease arrangements. One example was the acquisition of Mervyn\’s department store chain\’s real estate in 2004 by a private equity firm that raised the rent by 90 percent, which was a major reason for Mervyn\’s ultimate demise. Simon and Brookfield, being major players in the real estate business might be better equipped to deal with the likely new REIT owners.

These will all be short- to medium-term concepts just to keep Penney on life support long enough to figure out what to do with a brand that consumers are no longer interested in, particularly younger consumers, who, by the way, have absolutely equal distaste for mall shopping. It\’s a lose/lose guys.

An Anchor Is Drowning Malls

However, for the time being, Simon and Brookfield did realize that JCP was too big to fail, even if it was just for the short term. Simon has 63 JCP stores in its portfolio spread throughout its 200+ malls. And Brookfield has 73 JCP stores across their 170 retail properties. And as I mentioned in the aforementioned article, JCP as an \”anchor\” store with very favorable leases, was (but, now unlikely) a traffic magnet. This benefited the hundreds of smaller specialty retailers and other tenants, whose leases were much higher. However, their leases contained the ability for these stores to break or negotiate lower leases upon the departure of the anchor stores.

The pickle Simon and Brookfield now find themselves in is that while short term they can keep JCP as an anchor and may be able to save losses of millions of dollars in smaller tenant departures or severely down-scaled leases, the failing JCP prize they just won, is just that. They are failing. And ironically, the JCP stores are indeed an anchor around the malls\’ necks.

Reinventing the Mall

Even before the pandemic, experts were predicting the demise or at least the repurposing of roughly 900 of the country\’s 1200 major malls. The primary reasons were no brainers: a dramatic shift in consumer shopping behavior, particularly among the next-gen cohort, armed with technology and the ability to be the new POS, forcing retailers to respond to them wherever they might be, whenever they request it, 24/7.

Accelerants

Now, the pandemic, and as in millions of other cases, has simply accelerated the negative trajectories that businesses were already on.
So, anchor tenant JCP is too big to fail in the minds of Simon and Brookfield, with its demise threatening the loss of millions, if not billions of dollars for the two. But now what are they going to do? With the traditional mall model headed for the dust bin of history, now owning another dust bin candidate, do they just punt? Or do they have a Hail Mary Pass in their playbook?

At the end of the day, one must ask: Is this a sign of the future of retail? Real estate deals? Pure transactions, no more magic? Is retail only worth the real estate it sits on?

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