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How J.C. Penney Plans to Bypass Bankruptcy

While struggling J.C. Penney has enough liquidity to get through this year and most of next, the retailer is also taking proactive steps to buy itself some breathing room so it can effect a turnaround plan.

One of those steps is connected to debt restructuring options, such as an extension of maturities, perhaps, or bringing in new investors. The 117-year-old mass merchant was subject to reports and rumors that it had hired advisors to help it explore those options.

On Friday, the retailer said, “As a public company, we routinely hire external advisors to evaluate opportunities for the company. By working with some of the best firms in the industry, we are taking positive and proactive measures, as we have done in the past, to improve our capital structure and the long-term health of our balance sheet.”

Penney’s emphasized, “We have no significant debt maturities coming due in the near term, and we continue to maintain a strong liquidity position. Also, given our strong liquidity position we can confirm that we have not hired any advisors to prepare for an in-court restructuring or bankruptcy.”

Financially, first-quarter results for the period ended May 4 indicated the pressures the retailer is facing.

The report showed a drop in retail comparable store sales and an overall decline in sales, not to mention an 8-cent miss on adjusted earnings per share. That widened the quarterly loss from a year ago. The company said it still expected free cash flow to be positive for fiscal year 2019. Liquidity at the end of the quarter was $1.75 billion, down from the $1.9 billion it noted at the end of 2018. Penney’s follows the retail calendar and its year-end was Feb. 2.

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Jill Soltau, chief executive officer of Penney’s, said in May when the retailer posted its quarterly results that the company is continuing to map out a comprehensive long-term strategy.

Soltau is a retail veteran who was president and CEO of craft chain Joann Stores when she was named chief executive of Penney’s last October. She spent her early days walking the stores and learning about the mass merchant’s operations. One of Soltau’s key decisions early in her tenure was to cut back on major appliances. She also shifted gears and emphasized more softlines, such as apparel and home furnishings–both of which also have higher margins.

To that end, Soltau in February made a key hire when she re-established the chief merchant position–it had been vacant since the departure of John Tighe in November 2017–by naming Michelle Wlazlo to that position. Since Soltau joined the company, she has added to her management team in other roles, such as John Welling, senior vice president for planning and allocation.

And last month saw the appointment of Victor Ejarque Lopez as senior vice president, general merchandise manager for women’s apparel.

However, there’s criticism that perhaps Soltau hadn’t been moving fast enough to put together a turnaround plan, or let vendors and lenders know what exactly is her vision for the 117-year-old retailer.

And there’s concern that if additional tariffs–currently on hold–are imposed on Chinese imports of apparel and soft textiles, Penney’s could feel the sting if those levies result in a slowdown in consumer spending or an overall economic recession. The U.S. economy is still relatively strong and a recession doesn’t appear to be imminent for this year, but it could happen at some point next year or thereafter.

A focus on debt restructuring–first reported by Reuters on Thursday–would seem to be a wise move now, while there’s ample time to hold those talks and work out the nitty-gritty details.

For now, Penney’s still has the support of its lenders, as well as its vendors. Neither has sought tighter payment terms, and they seem willing to give Penney’s management team time to figure out the best strategy going forward.

What’s helping is Penney’s free cash flow position for 2019. That at least means that a bankruptcy filing is not in the cards for this year, and probably not even in 2020. But the risk climbs higher as the years progress further out, such as in 2021 and beyond.

Another area Soltau will probably need to take another look at is the retailer’s store count, as rents for unprofitable locations always hurt an operation’s overhead.

Under Soltau’s leadership, the company in February said it would shutter 18 full-line stores and nine home and furniture stores. And with an overall footprint of over 840 doors, there’s still room for more store closures.

Christina Boni, senior credit officer at credit ratings firm Moody’s Investors Service, in April said that one of Penney’s biggest challenges has been how to maximize productivity in its stores. She believes that Penney’s will likely “target store closures in approximately 100 malls that already have multiple vacancies.

If it chooses to close all these stores, it would reduce its store base [by] another 11 percent,” Boni noted.