Morningstar: JC Penney store closings could hurt $ 30 billion in commercial mortgage-backed loans

Dive brief:

• The 140 or so store closures JC Penney announced last month could hurt some $ 30 billion in commercial mortgage-backed securities, with 39 closings in particular – in shopping centers already suffering from below-average tenant sales. average – on the verge of undermining some $ 7.29 billion in commercial mortgages. secured loans, according to a report by rating firm Morningstar emailed to Retail Dive.

• The 39 JC Penney store closures identified by Morningstar include one location each in Arizona, Arkansas, Connecticut, Florida, Georgia, Kansas, Maine, Mississippi, New Hampshire, New Jersey, Oklahoma, South Carolina, Tennessee, Texas, Virginia and Washington ; two each in Illinois, Indiana, Maryland, Minnesota, New York, North Carolina and Ohio; three in California; and six in Pennsylvania.

• Meanwhile, JC Penney is expanding bathroom remodeling services to 100 of its remaining locations, touting home HVAC systems, shades, whole-home water solutions, awnings and smart home technology. , according to a CNBC report. Bathrooms represent “a $ 300 billion market in which we believe we have the opportunity to capture significant market share,” Marvin, CEO of the discount department store. Ellison told CNBC’s “Power Lunch”.

Dive overview:

JC Penney said his massive store shutdown plan would generate annual savings of around $ 200 million, primarily through savings on occupancy, payroll, home office support, business administration and other store-related expenses. To mitigate the impact of the closures on its store employees, Penney is implementing a voluntary early retirement program for some 6,000 eligible employees.

It’s a bold step, but a necessary one, according to GlobalData Retail CEO Neil Saunders. “The brutal truth is that from a financial standpoint some of these stores just aren’t functioning and future investment in them cannot be justified,” Saunders said in an emailed note to Retail Dive. . “In our opinion, this rather aggressive action makes sense. Suddenly, this will improve JCP’s same store sales figures, as it is these outlets that are slowing the performance of the business. It will also allow the group to direct its capital and resources towards stores which have the best prospects for profitable growth. Certainly, there will be a short-term impact on the net result of lease termination and staff departure costs, which we expect to achieve in the first half of the coming fiscal year. “

But Penney’s exit from so many troubled malls nationwide will serve to exacerbate an already precarious position for those properties, Morningstar analysts said in their report.

“We continue to see a bifurcation in the market where lower quality Category B assets, particularly those in the secondary and tertiary markets, continue to lose tenants and cash flow, while Category A shopping centers of better quality receive continued investments from their owners in an effort to broaden their appeal to consumers, ”according to the report. “Class B properties may not be able to produce a sufficient return on capital to justify continued investment on the part of their owners. These properties may have more difficulty filling anchor spaces, which may remain vacant for an extended period. This can cause further deterioration in sales performance and an increase in the vacancy rate. “

JC Penney announced last month that in addition to closing between 130 and 140 underperforming stores, it will close two distribution facilities and offer buyouts to 6,000 workers over the next few months, even after posting a net profit for the first time since 2010. Closures represent an effort to reduce costs, leverage the lucrative real estate value of a supply chain facility in Buena Park, Calif., and better position the discount department store “to effectively compete with the growing threat of online retailers.” Ellison said in a statement.

JC Penney will release a list of stores slated to close in mid-March, once affected employees are notified, with most stores slated to close in Q2 2017. The stores in the line of sight represent approximately 13% to 14% of the company’s 1,014 store portfolio, less than 5% of total annual sales, less than 2% of earnings before interest, taxes, depreciation and amortization and 0% of net profit.