J.C. Penney Company, Inc. – Court Authorizes the Debtors to Begin Phase 1 Store Closings (154 Stores) from June 12th; Consultants Anticipate $20mn of Supervisory and Advertising Expenses Through September 27th

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June 11, 2020 – The Court hearing the J.C. Penney Company cases issued a final order allowing the Debtors to (i) “immediately” (from June 12th) conduct their store closing process and (ii) assume a prepetition Consulting Agreement with Hilco Merchant Resources, LLC, and Gordon Brothers Retail Partners, LLC (and, together with Great American Group, LLC and Tiger Capital Group, LLC, collectively, the “Consultant”) to manage the Debtors' store closing process [Docket No. 727]. The Debtors are now in the “Phase 1” of store closings, which includes the liquidation of 154 stores. The order attaches several addendums to the 2017 Consulting Agreement, the most recent noting that the sales process is expected to last through September 27th. The Consultant also notes that "supervisory" and "advertising" expenses for the period are expected to be $11.7mn and $8.2mn, respectively (this in respect of an anticipated 192 leased locations).

Initially the Consultant Agreement was amongst the Debtors, Hilco and Gordon Brothers with Great American and Tiger capital brought into the mix just after the Debtors' Chapter 11 filings. The Debtors' requesting motion notes in a footnote: "Pursuant to section 11(B) of the Eleventh Addendum, on June 1, 2020, Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC exercised their right to form a contractual joint venture with Great American Group, LLC and Tiger Capital Group, LLC for such parties to act as additional 'Suppliers' as that term is defined in the Eleventh Addendum….Great American Group, LLC is an affiliate of B.Riley Real Estate, LLC, one of the Debtors’ proposed real estate advisors in these chapter11 cases."

The Debtors' motion [Docket No. 542] continues: “The Debtors operate approximately 846 brick-and-mortar retail locations throughout the United States and Puerto Rico. Recognizing the need to right-size their store footprint to align with industry conditions, the Debtors’ management team and advisors undertook an extensive analysis of the Debtors’ existing store footprint, evaluating, among other factors: store profitability, sales trends, occupancy costs, mall risk, customer and competitive factors, and the geographic market conditions in which each store is located. The Debtors and their advisors also evaluated the potential to negotiate lease modifications with applicable landlords and specific operational circumstances related to each store’s performance. Based on this review, and depending on the outcome of the Debtors’ restructuring efforts and success in ongoing negotiations with landlords for certain rent concessions and cure costs reductions, the Debtors anticipate rationalizing their store portfolio to approximately 600 stores. Each store identified for closing has significantly underperformed, has seen downward sales and margin trends, is located in high-risk properties, or no longer fits the Debtors’ market strategy… The Debtors project that each Store Closing Sale will take approximately 10–16 weeks to complete. The Debtors will reject the leases associated with the Closing Stores as and when appropriate.

The Debtors and their advisors continue to review their store portfolio and anticipate they will identify additional stores to be closed in subsequent phases (the 'Additional Closing Stores' and, together with the Phase 1 Closing Stores, the 'Closing Stores'). Following the Petition Date, the Debtors, with the assistance of B. Riley Real Estate, LLC, began lease modification negotiations with all the Debtors’ landlords for rent concessions, cure costs waivers, and certain contractual modifications, with the goal of improving the financial performance of the Debtors’ go-forward store base and rationalizing costs as the Debtors implement their COVID-19 recovery plan. These lease negotiations are ongoing and the Debtors’ ability to obtain more favorable lease terms and rent reductions may affect the identification of Additional Closing Stores. Where the Debtors are unable to obtain sufficient relief in the lease negotiations concerning stores that are on the cusp of failing to meet certain performance standards, such stores will close as part of a second or third phase of Store Closing Sales. The Debtors expect to complete all lease negotiations by mid-July 2020.”

In a June 4th press release detailing their "store optimization strategy", the Debtors announced that they had “taken the first step in implementing its store optimization strategy. Following a comprehensive evaluation of its retail footprint and a careful analysis of store performance and future strategic fit for the Company, JCPenney identified the first phase of 154 store closures. Following entry of an order at the June 11, 2020, hearing with the U.S. Bankruptcy Court for the Southern District of Texas, in Corpus Christi, Texas, store closing sales will begin at 154 locations.

The Company expects additional phases of store closing sales will begin in the coming weeks. As the Company remains focused on its Plan for Renewal and driving sustainable, profitable growth, it intends to reduce its store footprint and focus resources on its strongest stores and powerful eCommerce flagship store, jcp.com. Store closing sales for the first round of store closures are expected to take 10-16 weeks to complete.

‘While closing stores is always an extremely difficult decision, our store optimization strategy is vital to ensuring we emerge from both Chapter 11 and the COVID-19 pandemic as a stronger retailer with greater financial flexibility to allow us to continue serving our loyal customers for decades to come,’ said Jill Soltau, chief executive officer of JCPenney. ‘I am incredibly grateful to our talented associates for their ongoing dedication and their passion for meeting and exceeding our customers’ expectations during this difficult and uncertain time. All impacted associates will be treated with the utmost consideration and respect.’

Ms. Soltau continued, ‘We will remain one of the nation’s largest apparel and home retailers as we continue to operate a majority of our stores and our flagship store, jcp.com, to ensure our valued customers continue to have access to the products and brands they need and want. As of June 4, 2020, we have reopened nearly 500 stores since government officials have eased COVID-19 restrictions and we look forward to opening more. We are excited to welcome back our customers and associates at these locations, and we will continue to take actions to be best positioned to build on our over 100-year history’.”

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