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J.C. Penney Faces a Tricky Rescue

(Bloomberg Opinion) — A familiar band of fixers may be coming to J.C. Penney Co.’s rescue. Can they do it again?

Major mall operators Simon Property Group Inc. and Brookfield Property Partners LP, along with Authentic Brands Group LLC, are in talks to buy the bankrupt department store chain, Bloomberg News reported Monday. This coalition has taken similar action before, rescuing teen clothing retailer Aeropostale several years ago and, more recently, buying fast-fashion mainstay Forever 21 out of bankruptcy. However, J.C. Penney should approach such an arrangement with caution, because it’s going to be uniquely difficult to make this one a win-win situation. 

Covid-19, of course, has turned the commercial real estate and retail worlds upside down. Thanks to an accelerated post-pandemic pace of e-commerce adoption, analysts at UBS now forecast that the U.S. will see about 100,000 store closures by 2025. Against that backdrop, Simon and Brookfield have even more incentive than usual to do whatever it takes to simply preserve occupancy of their shopping centers. J.C. Penney may not currently be paying its landlords huge sums since anchor tenants typically enjoy relatively low rents, but mall operators generally want to keep the lights on at as many stores as possible to keep their centers feeling vibrant and bustling.   

J.C. Penney has already pledged to shutter more than 150 of its 800-plus stores. The chain likely needs to close many more than that to become a healthy business. But doing so could be at odds with what’s good for Simon and Brookfield at this perilous moment.  

Plus, J.C. Penney isn’t just any mall retailer: it’s an anchor tenant, meaning it has huge footprints with their own entrances. Those boxes could be significantly harder to fill than, say, Aeropostale-sized stores, even in the best of economic times. But, as Bloomberg Intelligence analyst Lindsay Dutch points out, the kinds of tenants that might be good fits for one-time J.C. Penney stores —  hotels, gyms, or even offices — might be harder to line up now that we’re in a recession and the pandemic is making every one of those businesses rethink their formats. 

The result could be that Simon and Brookfield get control over what replaces empty J.C. Penney stores, which is helpful to protecting their overall mall profiles. But in the meantime, J.C. Penney may suffer brand damage if some of its locations are allowed to limp along with little investment for a long time while it undertakes that process. 

There would be some upsides to this potential buyout for J.C. Penney: The group’s rescue of Aeropostale is widely perceived as a success. And Brookfield had earlier pledged to put $5 billion toward helping retailers recover from the devastating effects of stay-at-home orders and a recession, a sign that J.C. Penney would be getting a partial owner that is deeply invested in saving not just the struggling retailer, but the entire mall ecosystem. 

Meanwhile, the CEO of Authentic Brands, Jamie Salter, told CNBC recently, “I think there is a play for J.C. Penney. I think J.C. Penney needs a purpose. And I have my ideas on what it should be.” It’s good that Salter understands returning J.C. Penney to health would have to be more than a cost-cutting exercise; it has to be a holistic reimagining of what a department store should be. 

Still, J.C. Penney would do well to consider the tricky dynamics of this moment for the retail and real estate industries. They might point to another suitor – Sycamore Partners is reportedly one – being its best shot at protecting its storied brand.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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