2020 has been a brutal year for department stores, with many well-known names filing for bankruptcy. And not shockingly, J.C. Penney (OTC: JCPN.Q) wasn't spared. The long-standing department store chain filed for bankruptcy in May as the coronavirus pandemic killed its profits, as it did for so many retailers.
With waning sales and unhealthy levels of debt, J.C. Penney was actually in big trouble well before the pandemic began. Its most recent profitable year was 2010, and since then, net operating losses have reached about $5 billion.
J.C. Penney's bankruptcy filing wasn't particularly surprising, but what turned heads is that two well-known mall operators -- Simon Property Group (NYSE: SPG) and Brookfield Property Partners (NASDAQ: BPY) -- decided to come to its rescue by buying it out. Simon and Brookfield will own and operate the company going forward, albeit with a lot less debt thanks to that bankruptcy filing and fewer locations.
Some analysts say buying J.C. Penney was a strategic move for Simon and Brookfield, which rely on it as an anchor tenant in many of their malls. But despite a bailout, J.C. Penney's future looks pretty bleak in an age when digital sales are already rendering so many physical retailers obsolete.
Can J.C. Penney survive in the long run?
Near term, J.C. Penney faces some challenges -- namely, that we're not nearly out of the woods with regard to the coronavirus pandemic. While vaccines are on the way, it could be months until they're made available on a widespread level. That could, in turn, result in additional restrictions and closures during the winter months -- a blow J.C. Penney can't afford.
As a nonessential retailer, J.C. Penney can't operate if local lawmakers say otherwise. And given that millions of Americans remain unemployed, discretionary spending is on the downswing, which means that even if stores aren't forced to temporarily shutter, J.C. Penney could still see a decline in traffic and revenue.
But even if J.C. Penney manages to survive what's apt to be a sluggish winter for many retailers across the board, it has greater long-term problems. For one thing, its internet presence doesn't rival that of competing department stores like Macy's (NYSE: M) and Nordstrom (NYSE: JWN). While many apparel retailers have seen digital sales pick up since the pandemic began, in 2020, J.C. Penney's online market share declined compared to 2019.
But J.C. Penney also has many hurdles to overcome in an effort to make itself a more relevant brand and worthwhile stop on the average consumer's mall trip. And right now, it's unclear as to how it can do that. Just recently, Sephora announced it will be abandoning J.C. Penney and teaming up with Kohl's (NYSE: KSS) -- a major J.C. Penney competitor -- instead.
Closing its most notably underperforming stores will help J.C. Penney conserve cash, but the reality is that it needs a rebrand and stronger online presence to thrive in a post-pandemic world. Under Simon and Brookfield's ownership, J.C. Penney may manage to shift in the right direction, but if it doesn't, it could spell disaster -- not just for the department store itself, but the countless malls (and their investors) that rely on it as a viable tenant.