Barnett and Company

How JCPenney lost its groove

In 1898, James C. Penney found work in a Colorado dry goods store called the “Golden Rule Mercantile Company”. He soon became a partner and in 1902 opened a 1,000 square foot Golden Rule store in Kemmerer, Wyoming. By 1914, the young man had bought out his partners, expanded to more than 30 stores, and moved his headquarters to New York City. 

The J.C. Penney Company was listed on the New York Stock Exchange in 1929, operated 773 locations, and refused to do business on credit. When he died in 1971 at age 95, James Penney presided over a behemoth with annual sales of $4 billion.

Rebranded as “JCPenney” in 1974, the retailer grew to over 1,000 stores and total sales of $20 billion at its peak in 2006, second only to Sears in the US, as the company’s stock price reached a high of $81.

Last Friday, the legendary retailer filed for chapter 11 bankruptcy. The stock closed at 25 cents per share. The temporary shutdown of most of the company’s stores due to the coronavirus proved to be the precipitating event, but the skids were greased long before the pandemic appeared.

Two nascent but monumental developments were brewing in the early 2000s that both Penney and Sears misdiagnosed. The rise of the “big box” super-retailers including Walmart, Costco and Target began to take market share from the traditional department stores in a generational shift that could not be effectively stemmed. But Penney’s management also missed the megatrend of online retailing, ironically deciding in 2009 to shut down its massive catalog division at just the time it could have been leveraging that infrastructure to enter the internet fray.

Nevertheless, the company still retained substantial brand equity among its loyal customers and might have found a way to evolve had it not been for an ill-fated incursion by a hedge fund manager with no retailing experience in 2012.

Pershing Square Capital acquired enough stock to elect the fund’s chairman Bill Ackman to the Penney’s board. Ackman was able to install a new CEO who was formerly the head of retailing for Apple and embarked upon a radical top-to-bottom disruption of the traditional retailer with a hipper, trendier vibe, even trading the familiar “JCPenney” for the amorphous “JCP”. But Penney was not Apple, and the result was a disaster. Sales plummeted by 25% as the radical and disorienting concept failed to attract new shoppers while simultaneously chasing away much of the traditional clientele. 

The experiment was dismantled in 2013, the JCPenney name restored, and the previous CEO was re-hired out of retirement to attempt a rescue. But the company had by then amassed nearly $5 billion in debt and although it made some progress in the intervening years, the former giant was a dead man walking, hanging on until it encountered the next economic shock. Enter the pandemic.

In a sign of the urgency facing the firm, it conducted its Chapter 11 bankruptcy hearing in US Bankruptcy court via videoconference on Saturday. It presented a plan to close about 30% of its stores and secure addition financing to continue operating through the restructuring. However, lawyers for the retailer noted that the funds are conditioned on approval of a business plan by July 15, or the company will immediately commence a sale of its assets, affectively ending its 118 history.

Neiman-Marcus, J. Crew and Stage Stores have also filed for bankruptcy, with more to come as excessive debt becomes impossible to service with sales in freefall. But for many of us who grew up in blue jeans and Scout uniforms from “Penneys”, it’s the end of an era.

Christopher A. Hopkins, CFA

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