J. C. Penney’s financial picture is growing even more dire after the ailing retail chain opted not to make a $17 million interest payment due Thursday, adding to concerns it could follow in the unfortunate footsteps of Neiman Marcus, John Varvatos, J.Crew and J.Hilburn with a bankruptcy filing of its own.
The department store company elected not to make Thursday’s $17 million interest payment, which comes with five-day grace period, Penney’s said in a regulatory filing Thursday with the Securities and Exchange Commission.
“J.C. Penney made the strategic decision to not make an interest payment due on May 7 and take advantage of the grace period to continue ongoing constructive discussions with lenders and maximize financial flexibility,” Brooke F. Buchanan, Penney’s senior vice president, communications, said in an email on Thursday.
Thursday’s missed payment follows another $12 million interest payment that Penney’s also elected to skip last month in favor of its attendant 30-day grace period. Both windows expire just days apart next week.
It’s not uncommon for companies staring down a possible Chapter 11 filing to hang onto their cash, which greases their operational wheels through the twists and turns of bankruptcy. The process is an expensive one, both in terms of operating the company and because of the myriad advisors hired to help reorganize the business and its capital structure.
Over the past few weeks, talks with lenders aired the issue of debtor-in-possession financing, meaning the retailer isn’t ruling out bankruptcy as a strategic option under consideration, sources said.
Buchanan declined to comment on the possibility of a filing. “The coronavirus pandemic has created unprecedented challenges for department store retailers across the industry,” she said, “and has resulted in extensive store closings.”
Penney’s has “successfully met or exceeded guidance on all five financial objectives for 2019 and saw comparable store sales improvement in six of eight merchandise divisions in the second half of 2019 over the first half,” she added. “We remain focused on our Plan for Renewal, as we begin to reopen stores and offices in markets when it is safe to do so and in a phased approach.”
However, not everyone is as confident in Penney’s ability to survive in an environment where non-essential retailers are just now slowly coming back to life weeks after the government ordered them closed. As sales slowed to a crawl in the wake of store shutdowns, Penney’s pushed out the timeframe to pay invoices owed to vendors, another move to keep cash in the coffers.
Last month, factors decided to stop approving orders for vendor clients that wanted to know if it was okay to fill Penney’s orders, or at least the orders it didn’t cancel. One factor said the decision was made because the retailer pushed payment terms too far out, from a standard 30 days to 90 days to 120 days and beyond. That kind of payment time frame doesn’t hold water when the pandemic has created inscrutable uncertainty about retail’s future and the consumer’s appetite to spend in a few months’ time. Plus, there was little reassurance that Penney’s could avoid a tour of bankruptcy court, one finance executive said.
A one source familiar with Penney’s lender discussions told Sourcing Journal that no decision has been made regarding “lending” arrangements, but acknowledged that a decision will need to be made over the next few days before the payment grace periods come and go next week. Once those expire, Penney’s will be considered in “default” on both debts, making a bankruptcy filing all but inevitable.
Penney’s is expected to provide a financial update next week.