New York CNN Business  — 

The problems at JCPenney started long before the Covid-19 pandemic. A plan to get the company out of bankruptcy won’t end them.

The company has been struggling with severe problems for years.

JCPenney’s last profitable year was in 2010, and its net losses have totaled nearly $5 billion since then.

Since the summer of 2011, JCPenney has reported net profits in only five quarters, all of them in the holiday shopping season. Even before the current round of store closings, JCPenney had shuttered more than 20% of its stores while cutting more than 40% of its staff since 2011.

Losses in its most recent quarter soared to $398 million from $48 million a year ago, as revenue plunged by 45%. And that was with most of its stores open for at least two-thirds of the quarter, suggesting that it was lack of customer demand – not Covid-related store closings – that punished sales and drove up losses.

Still, the pandemic isn’t helping. JCPenney depends primarily on clothing and accessories for its sales. With millions of people out of work and millions more working at home, many for the foreseeable future, demand for those items has fallen sharply.

Big box competitors have captured more of that business during the current crisis. The fact that they sell groceries allowed Walmart and Target (TGT) stores to stay open as essential retailers during stay-at-home orders. Both have far more robust online sales than JCPenney.

“We’re certainly not going to see customers return in droves,” said Mark Cohen, director of retail studies at Columbia Business School. “They’re not shopping for clothing and accessories that JCPenney depends upon. And if they are, they’re not likely to be shopping at JCPenney or at the malls where they’re located. I know that Walmart and Target (TGT) have grabbed market share for apparel and accessories, and they’re not giving that back.”

A plan to save JCPenney

The 118-year old retailer, which filed for bankruptcy in May, announced an agreement last week to sell its retail operations to Brookfield Property Group and Simon Property Group (SPG), two major mall operators that were among its biggest creditors. The company’s real estate holdings will be folded into a separate real estate investment trust which is to be owned by its lenders.

The agreement gives the company a much needed lifeline to keep 690 stores open while it sets about closing another 149 stores ahead of the holiday shopping season. It also will protect 70,000 of the 85,000 jobs it had at the time of its May bankruptcy filing.

“The interest in our operations reflects our company’s strength and our loyal customer base,” said JCPenney CEO Jill Soltau. “As we continue to move through the sale process, our focus will remain on serving our customers and working seamlessly with our vendor partners. We have been a trusted partner to all of our stakeholders since 1902, and we expect to continue that track record for decades to come under the JCPenney banner.”

However, experts said the creditors’ willingness to keep the company alive – rather than pushing for liquidation – was less a vote of confidence in JCPenney and more of a sign of the historic weakness in the retail real estate market. A company closure would create huge vacancies in the malls where it is still a key anchor tenant. The vacancies could last for yeras. The mall operators were willing to step up to keep that from happening.

“At the moment this is the best outcome they could have hoped for,” said Cohen. “It enables them to be in business and they’re being propped up by a partner that is aligned with them and wants them to stay in business as well.”

What’s going right for the troubled retailer

JCPenney does have some modest advantages over the competition that give it some hope for survival.

About half of its sales are for private label brands, such as Liz Claiborne. JCPenney doesn’t own the brands, but it has exclusive right to sell them, giving it a certain level of customer loyalty. And unlike Sears, JCPenney has good relations with its vendors, said Reshmi Basu, an expert in retail bankruptcies at Debtwire, which tracks the finances of troubled companies.

It also has used the bankruptcy process to shed about half of the nearly $5 billion in debt it was carrying at the time of its filing, a level many believed to be unsustainable for a company of JCPenney’s size.

“Much of the debt overhang that would have killed them eventually has been set aside,” said Cohen.

Trouble in department store sector

But the entire department store segment has been losing customers and market share for years, not only to online retailers such as Amazon (AMZN) and the big box stores, but also to discount clothing chains such as TJ Maxx (TJX) and Burlington, which have been growing while others retailers closed stores.

Such shifts in the market and customer preference was already weighing on JCPenney’s long-term chances of survival. An uncertain holiday shopping season in the face of continued Covid-19 concerns won’t help its emergence from bankruptcy, said Basu.

“It’s not going to be an easy Christmas,” she said. “What I’m hearing from vendors, a lot of retailers don’t know what demand is going to be like. They don’t know what will be the impact of people working from home. They don’t know if there will be more stimulus money. And most of all they don’t know if there will be another uptick in Covid cases.”

That’s an especially serious problem for JCPenney, given its greater dependence than other retailers on strong holiday sales.

Many businesses are able to use the bankruptcy process to shed debt and return to profitability. But the retail graveyard is filled with store chains that emerged from bankruptcy, only to continue to struggle and file for bankruptcy once again in relatively short order. RadioShack, Payless Shoes, Gymboree and American Apparel all took that path to their decision to go out of business.

So Cohen is giving JCPenney only about a 20% to 25% chance of surviving for five years, even with the deal allows it to emerge from bankruptcy.

“They’ll be able to leave the intensive care unit, but they’ll still be in the hospital hooked up to an IV drip,” he said.