J.C. Penney may be set to shutter more stores and the closures could put pressure on some mall operators.
The retailer in February said it would shutter 18 full-line stores and nine home and furniture stores. In a Moody’s Investors Service report released Monday on how “J.C. Penney’s Tough Road Leads Mall Owners and Operators to Mitigate the Risk,” senior credit officer Christina Boni said the retailer has “very good liquidity to pursue its turnaround in 2019, with a revolver availability and cash totaling about $2 billion.” She also noted that despite its underperformance, J.C. Penney remained free cash flow positive in fiscal 2018. However, with more than 840 stores, the credit analyst believes there still room to close some stores to support an evolving turnaround plan.
“J.C. Penney will likely target store closures in the 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. One of the retailer’s biggest challenges, and something chief executive officer Jill Soltau has had to face, has been how to maximize productivity in stores.
The retailer will have to consider its box size, and whether some stores might benefit from being partly walled off without inventory to make the store presentation more attractive to bolster profitability, Boni said. So far, J.C. Penney hasn’t been able to leverage its biggest asset, its store base, to maximize systemwide sales, and it lags its department store peers when it comes to a frictionless experience between the stores and online.
While many malls with exposure to the retailer are strong operators, struggling malls that are impacted by closures among multiple anchor tenants, could face difficulties. Some of these are properties encumbered by commercial mortgage loans, where the risks increase when another major anchor tenant vacates. The better real estate investment trusts (REITS) can weather the change, such as through the pursuit of nontraditional anchors such as off-price retailers, grocery stores, gyms and entertainment tenants.