Though in-store sales have been sluggish for years given the boom of online shopping, 2020 has been particularly brutal for many retailers, and J.C. Penney (OTC: JCPN.Q) is no exception. The struggling department store filed for Chapter 11 bankruptcy in mid-May when pandemic-inducted store closures added to its financial woes. But now, the 118-year-old retailer is set to emerge from bankruptcy in a deal that could really work wonders for shopping malls.
A critical deal
J.C. Penney has not had a profitable year since 2010 and has been closing stores in an effort to conserve cash. While its Chapter 11 bankruptcy filing was hardly shocking in a year when numerous retailers were forced to seek out bankruptcy protection, the move was also a sign that malls and real estate investors may truly be in trouble.
J.C.Penney, which, at the time of its bankruptcy reorganization filing had a store count of over 800, has long been a mall mainstay, and the loss of its stores could be catastrophic for the many shopping centers that were already grappling with reduced foot traffic before the pandemic began.
But now, good news emerges: Mall owners Simon Property Group (NYSE: SPG) and Brookfield Property Partners (NASDAQ: BPY) have reached an agreement to buy J.C. Penney out of bankruptcy. The agreement values J.C.Penney at around $1.75 billion and means that more than 600 store closures may be prevented and that massive layoffs may be avoidable. J.C. Penney CEO Jill Soltau is confident that the sale is the best option for stakeholders, and once the deal is complete, the retailer will have about $1 billion in cash to continue its operations.
What's in it for Simon and Brookfield?
Shopping malls simply can't afford to lose more stores -- it's that simple. In 2019, a record 9,300 retailers shut their doors permanently, and there's the potential for up to 25,000 additional stores to close by the time 2020 comes to an end thanks to the COVID-19 outbreak. Losing department stores is especially detrimental to malls, which rely on them as anchors to draw in customers and pay for valuable space. And unfortunately, both Macy's (NYSE: M) and Lord & Taylor have announced store closures this year, with the latter shuttering all locations permanently.
By acquiring J.C.Penney, Simon and Brookfield just might manage to stop the bleeding at a time when malls can't afford another blow. And that could ultimately help keep malls in business and prevent mall REITs from losing value.
Of course, this isn't the first time Simon and Brookfield have snatched up a bankrupt retailer. Earlier in the year, they bought Forever 21, and just recently, Simon announced that it would be buying Brooks Brothers. By adding J.C.Penney to their list, Simon and Brookfield have the goal of keeping as many stores open as possible in the hopes of saving malls from an otherwise rapidly approaching demise.
Of course, J.C. Penney's survival is by no means guaranteed, and malls still face their share of challenges even in light of this news. Foot traffic, which was already waning before the COVID-19 pandemic, may be difficult to come by as stores are forced to limit capacity and general health concerns keep shoppers at home, where they can purchase goods and apparel from the safety of their laptops. But the hope is that by keeping J.C. Penney alive, malls, too, will ultimately manage to thrive despite the persistent threat of the retail apocalypse.