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What’s Going on With Penney’s Bankruptcy?

J. C. Penney’s bankruptcy case seems to have hit a bump in the road.

The bankrupt retailer missed a promised filing deadline regarding the asset purchase agreement for its operating arm to its two largest landlords, Simon Property Group and Brookfield Property Partners.

On Sept. 9, Penney’s attorney Joshua Sussberg said the appropriate documents would be filed “within 10 days” of that court hearing. That filing, expected on Sept. 19, was also supposed to herald a subsequent filing for bidding procedures for a court auction of the mass merchandiser’s assets, with the bankruptcy judge’s approval and order filed by Sept. 21.

Instead, Penney’s filed for an extension of its right to file an exclusive plan of reorganization on Sept. 11. The initial period expired on Sept. 14, and gave the retailer until Nov. 13  the exclusive right to solicit votes in favor of a reorganization plan. The filing is seeking a 120-day extension of both periods. Noting that the company is “on the precipice of a going-concern transaction,” an extension would allow Penney’s to “diligently pursue an appropriate and value-maximizing resolution” of its Chapter 11 case, the court document said.

A non-binding letter of intent was filed on Sept. 10, indicating the landlords’ interest in acquiring the go-forward operations, excluding 161 stores and six distribution centers, which will be placed into two separate real estate investment trusts for the benefit of the bankrupt retailer’s first-lien lenders. The total transaction is valued at $1.75 billion.

But the filing on Sept. 11 said, “Over the coming weeks, the OpCo Stalking Horse Bidder, the debtors, and the First Lien Lender Group will work to finalize definitive documentation and effectuate the transaction.” That suggests that the requisite documentation possibly hit a snag in negotiations. The filing did note that Penney’s has already “negotiated lease amendments that, once finalized, will result in more than $25 million in annual rent relief.

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Bankruptcy Judge David Jones has been pushing the retailer to move the case along, hoping Penney’s will reemerge as a going-concern deal and save over 70,000 jobs. A 120-day extension mean Penney’s would exit bankruptcy in early December.

Penney’s posted its second-quarter earnings report on the same day it filed its extension request,, revealing a widening quarterly net loss to $398 million, or $1.25 a share, versus a net loss of $48 million, or 15 cents, a year ago. As talks continue, the delay in filing its asset purchase agreement in light of the net losses suggests there’s an outside chance that bidders are concerned about the company’s sales outlook.

More interestingly, the company said its category sales, as a percent of total sales, were consistent year-over-year, meaning that women’s apparel at 19 percent were somewhat lower than the 22 percent a year ago, as men’s apparel and accessories sales held steady at 21 percent. Other categories include women’s accessories, steady at 16 percent, and footwear and handbags at 11 percent. The only other categories that Penney’s sells is soft home goods, toys and jewelry. With the exception of home, 12 percent of total sales, the other two categories only represent total sales in the single digit percentages.

The problem is that the department store company has always been known as the place consumers go to for fashion. That’s fine when there’s a broader need for both weekend and career-ready apparel. But with many consumers now working from home, Penney’s will have to make sure it can jump onto the casual, cozy and comfort loungewear that consumers want now, presuming it has vendors who are willing to ship it goods. If losses continue to trend higher and there are additional bankruptcy exit delays, some wholesalers may elect not to ship for fear of not getting paid later on. But even if the retailer does gets those shipments in, how much it can actually sell to consumers remains to be seen.

The mass merchant has always targeted middle-class consumers, many of whom are now largely unemployed due to the coronavirus. And if the airline sector doesn’t get the industry bailout it wants, as many as 75,000 more could join the ranks of the unemployed. That leaves far less available for discretionary spending as consumers focus on immediate needs, like paying for housing expenses and putting food on the table.