J.C. Penney: Store Closures Are Likely To Be Prolonged

Summary

• J.C. Penney's stores are scheduled to reopen by April 2.
• There is likely to be still a significant growth in reported Coronavirus cases by then.
• Thus, J.C. Penney's store closures are likely to be extended.
• This puts it on track to generate -15% or worse comps in 2020 along with adjusted EBITDA under $300 million.
• It has a relatively small bond maturity in June 2020, but may decide to file for bankruptcy by then if its business does not recover well enough post store closures.
• Looking for more stock ideas like this one? Get them exclusively at Distressed Value Investing. Get started today »

The best-case scenarios for J.C. Penney (JCP) appear to be out of reach now with its store closures and the acceleration of testing revealing more of the extent of the Coronavirus issue in the United States. It will probably take at least a month for J.C. Penney's stores to re-open now, and there is a significant risk that it doesn't repay its relatively modest $105 million June 2020 debt maturity. Whether it files for bankruptcy by then or decides to try to continue on through the holiday season will likely depend on how foot traffic recovers post-store closures.

Store Closures

J.C. Penney announced that its stores and business offices were closing starting on the evening of March 18 and were scheduled to reopen April 2. That re-opening date appears to be quite optimistic now.

The reported number of Coronavirus cases is over 50,000 in the United States now, up from under 6,000 one week ago (March 17). Some of this growth in reported cases is due to the catch-up in testing as testing capacity has increased very substantially. However, based on the experiences in places like China, South Korea and Italy, the daily growth rates in the United States are still likely to remain +10% or more until at least the end of the month.

That suggests that by the time J.C. Penney plans to reopen its stores, there will likely be upwards of 150,000 confirmed cases, with the daily growth in reported cases still around 15,000 per day. Thus it seems unlikely that J.C. Penney will re-open its stores with those conditions.

Another couple weeks may reduce the growth rate to levels where store re-openings may be reconsidered, but I'd say that J.C. Penney is probably looking at four to six weeks of store closures now.

Significant Financial Implications

This significant period of store closures will probably drop J.C. Penney's full-year comps by around 7% by itself, even allowing for the continued online sales operations. As well, with many people out of work during this time, there may be a continued impact on J.C. Penney's results for a while. The scenario where J.C. Penney's comps are down -15% or worse for 2020 seems fairly likely now.

J.C. Penney will also have a large amount of inventory to clear out after the store closures, affecting its gross margins. With the store closures, most of J.C. Penney's employees are off work and unfortunately are not getting paid (other than by using PTO). This is not surprising given J.C. Penney's precarious financial situation though. The reduced wage expenditures will offset some of the effect from lost sales and inventory clearance, but its 2020 EBITDA is likely to fall over 50% short of its original targets now though.

Bond Maturities

J.C. Penney's June 2020 bond maturity is now trading at only 58 cents on the dollar, reflecting significant concern that J.C. Penney won't pay that maturity back. A month ago this $105 million maturity wasn't much of a concern (trading at 96 cents on the dollar then), but now J.C. Penney will probably take a hard look at not redeeming that maturity. It is now looking at significant cash burn in 2020 and the prospect of a weakened economy coming out of the crisis.

I'd assume that J.C. Penney will make its $24 million in unsecured interest payments due on April 1 and April 15. The June 1 bond maturity gives it a bit of time to assess how business looks post-store closures though, and if it is still down substantially by then, J.C. Penney seems likely to throw in the towel.

J.C. Penney also recently drew $1.25 billion on its revolver, which appears to be close to the maximum allowed (although availability changes depending on its receivables and inventory).

Conclusion

Bankruptcy is very likely for J.C. Penney with the hit to its business from the store closures and the damage to the economy from the virus. The data about the virus indicates that J.C. Penney's store closures are likely to be extended beyond its initial two week period. This puts the best-case scenarios for J.C. Penney out of reach, and it is probably looking at worse than -15% comps and under $300 million in adjusted EBITDA for the year now.

With J.C. Penney's already weak financial state, it can't handle this sort of damage. There is a significant risk that J.C. Penney files for bankruptcy by its June bond maturity, depending on how its business looks post-store closures.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in JCP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.