Dive Brief:

• J.C. Penney is in "advanced talks" with existing lenders for a loan to fund it through a potential bankruptcy, The Wall Street Journal reported citing anonymous sources.
• The retailer could file for bankruptcy "in the next few weeks," the Journal reported. Last week, Penney skipped a $12 million interest payment, putting it into a 30-day grace period. However, as the Journal noted, the company could enter a forbearance agreement with lenders.
• Penney's bankruptcy financing package could total $800 million to $1 billion, some of which could include existing debt, according to the Journal.

Dive Insight:

Penney's drift toward bankruptcy arguably started nearly a decade ago, when former Apple executive Ron Johnson joined the retailer. Under Johnson, Penney instituted a series of untested changes to its stores, merchandising and pricing. The transformation ultimately alienated customers and hammered its sales so badly that the company took on billions of dollars in new debt to fund losses.

One could also argue Penney's slide began even decades before that, as power strips, box stores and mass merchants began vacuuming up mall and department store sales. Penney was already in need of a serious turnaround push when Johnson came aboard. Hence the drastic changes he made at the department store, which some argue might have worked given more time, better messaging, and certainly more testing and refining.

In any case, the challenges facing Penney and current CEO Jill Soltau today are numerous and daunting and include debt, losses, sales declines, ailing malls, off-price and online competition, years of merchandise flubs, and pivots and inconsistency around audience.

Going into 2020, Penney had managed to at least reduce its inventory, an important first step to exiting the discounting trap and selling at higher margins. It had improved other metrics as well, in addition to launching new product lines, merchandising initiatives and a new concept store meant to test changes at the retailer. But losses and sales declines persisted through the fourth quarter. Finances are tight, though Penney has touted the liquidity available to it under its revolving credit line. 

Then came the COVID-19 pandemic. In response, Penney, like most major discretionary retailers, has closed its stores and made other painful business decisions. Now, instead of focusing on its turnaround, Penney is forced to use all its available resources merely to stay in business. 

J.P. Morgan analysts led by Matthew Boss describe a looming Penney bankruptcy as a "continuation" of 20 years of department store consolidation, building on 10 other bankruptcies in the sector since 2000, including those of Barneys New York, Sears, Bon-Ton, Montgomery Ward and other stalwarts.

Were Penney to liquidate, it could benefit off-price retailers like TJX Cos., Ross Stores and Burlington, as well as discounters and Amazon, the analysts said in an emailed client note. A Penney liquidation could also, the analysts note, create more disruption in the space, including at malls where its anchor stores go dark and for full-price sellers generally.