When J.C. Penney filed for bankruptcy on May 15, 2020, did it put another nail in Washington Square’s coffin or signal a major transformation of the mall?

‘The Washington Square mall was a wondrous thing when it opened. The enclosed site, designed to entice shoppers with large anchors supplemented by smaller scale stores, attracted customers from as far away as Seattle.

The original mall encompassed 1,093,500 leasable square feet and was the largest enclosed shopping center in Oregon. It has a long history of change and renewal.

A 160,000 sq. ft. Meier & Frank store was the first to open for business on August 16, 1973. A 211,900 sq. ft. Sears store came next in October of that year, followed by a 120,000 sq. ft. Lipman’s in November. In May 1974, Nordstrom made its debut with a 108,000 sq. ft. store, followed by an 89,300 sq. ft. Liberty House store in August 1974 and a 210,000 sq. ft. J.C. Penney store in August 1975.

Turnover among the larger stores began within a few years.

• In 1978, Frederick & Nelson took over the Liberty House store.
• In 1979, Frederick & Nelson acquired the Lipman’s chain and moved the former Lipman’s space; Mervyn’s then took over the former F&N space.
• In 2008, Mervyn’s declared bankruptcy and closed all its stores, including the one at Washington Square.
• In 1991, Frederick & Nelson declared bankruptcy and closed its Washington Square store.
• In 2005, Mervyn’s closed.
• In 2008, Dick’s Sporting Goods took over the former Mervyn’s space.

The mall weathered all of these changes and its current owner, Macerich, a real estate investment trust, has been rewarded with average sales per square foot of $1261. But much greater challenges have now emerged, particularly with the mall’s anchor stores, but with some smaller retailers as well.

The Wall Street Journal predicted last week that about 100,000 stores are expected to close over the next five years—more than triple the number that shut during the previous recession. Partly to blame is the jump in e-commerce to 25% of U.S. retail sales from 15% last year, UBS estimates.

“The turbocharged shift to e-commerce is expected to further depress profit margins and accelerate a shakeout in a country that already had too much bricks-and-mortar space for an increasingly digital world,” The Journal said.

It is also looking increasingly less likely that the economic recovery from COVID-19. In a May 17 interview on the CBS show 60 Minutes Federal Reserve Chairman Jerome Powell warned that the economic recovery could take over a year . “We’ll get through this. It may take a while,” Powell said. ” It may take a period of time. It could stretch through the end of next year.”

In the Portland Metro Area, no anchor stores at malls are really safe. On May 6, Nordstrom said it planned to permanently shut 16 of its 116 full-line stores as part of its adjustment to the retail environment during the coronavirus outbreak. The following day, it said it would not reopen its Clackamas Town Center location in Happy Valley, OR after the COVID-19 shutdown ends and that the store will be permanently closed by August, 2020. Nordstrom closed two other Oregon-area stores in 2015 and one in 2018.   Nordstrom stock over the past 12 months is down from $37.46 to $16.41, a 66% decline.

Against this backdrop, consider the situation with many of Washington Square’s stores as the mall remains closed during the COVID-19 turmoil:

 The mall’s current troubles began with the bankruptcy of Sears in 2018 and the closure of its 211,900 sq. ft. Washington Square anchor store in 2019.

 

On May 18, 2020, Pier 1 Imports, which was founded in 1962, said it is permanently closing all its 540 retail stores, including one at Washington Square. The stores will reopen after the COVID-19 shutdowns and then proceed to liquidate their merchandise.

The company filed for chapter 11 protection earlier this year on Feb. 17 in the U.S. Bankruptcy Court in Richmond, Va. and had hopes of a sale to an interested buyer, but none emerged. “It is now clear that Pier 1’s future does not involve any brick-and-mortar retail locations,” the company said.

Chinos Holdings, J. Crew’s parent company, which also owns Madewell, filed for Chapter 11 bankruptcy protection  in federal bankruptcy court for the Eastern District of Virginia on May 3, 2020.  J. Crew has lost money for six straight years. Like many of its peers, it took it on the chin with the increase in e-commerce. But J. Crew also struggled to deal with $1.7 billion in debt resulting from a leveraged buyout by two private equity firms ( TPG Capital and Leonard Green & Partners) in 2011.

“Like many other retailers, J. Crew and Neiman (Marcus) over the past decade paid hundreds of millions of dollars in interest and fees to their new owners, when they needed to spend money to adapt to a shifting retail environment,” the New York Times reported on May 14, 2020. “And when the pandemic wiped out much of their sales, neither had anywhere to go for relief except court.”

 

 

After a long decline,  J.C. Penney filed for bankruptcy on May 15, 2020. The company, which hasn’t booked an annual profit in nine years. said it plans to close an undisclosed number of its roughly 850 department stores and put itself up for sale. The company’s annual net sales contracted 8.1% to $10.7 billion in 2019, following a 7.1% decline in 2018, 0.1% in 2017 and 0.4% in 2016. J.C. Penney’s stock hit a high off $82.23 on March 29, 2007. It started 2020 at $1.12 a share and has been trading below $1 per share for most of this year. It closed on May 15, 2020 at 24 cents a share.

“I don’t think there is a place for J.C. Penney anymore,” Robin Lewis, founder and CEO of The Robin Report, which reports on the retail industries. said to CNBC on May 16, 2020. “Even if we didn’t have this virus … we have been over-stored for half a century in this country.”

In the same vein, an April 2020 report from Green Street Advisors, a real estate research firm, said more than 50% of the department stores anchoring America’s malls are going to close permanently by the end of 2021. “Many malls will now be faced with multiple anchor vacancies, a tough place to come back from, especially in an environment where demand for space is virtually non-existent,” said said Vince Tibone, a Green Street analyst.

The April report was prescient when it said JCPenney in particular was on the edge of a bankruptcy that would probably result in its liquidation.

On May 18, the company said it expects to close about 242 stores — 30 percent of its locations — as part of a restructuring plan.

 

“With little or no revenues coming in for these non-essential retailers – traditional department stores, fashion, and luxury retailers being the most profoundly affected – many of the most prominent mall-based retailers, which have been struggling for years from falling sales and weighted down by too much debt, are teetering on the brink,” the Robin Report said in April 2020. Macy’s Inc. lost its investment-grade rating from Standard & Poor’s and saw its debt rated junk in February 2020.

The company is now seeking loans to bolster its cash flow, which has significantly decreased as a result of the shutdown, according to a May 7, 2020 regulatory filing. It is also looking to sublease almost half of its Long Island City headquarters in order to retain more of its cash.

Over the past 52 weeks, Macy’s stock has dropped from a high of $23.40 to $5.31 on Friday, May 15, 2020.

 

 

Gap Inc. is the parent company of Gap, Athleta, Banana Republic, Old Navy, Janie and Jack, and Intermix.

Sonia Syngal, CEO of Gap Inc. said in mid-March that the company would likely reopen fewer stores for the flagship Gap brand after the COVID-19 closures are lifted. “We’ll be using this as an opportunity to refashion the company for what we want it to look like over the next 50 years,” Ms. Syngal told the Wall Street Journal in early May 2020.

Market watchers are more cautious, having watched Gap’s stock decline from $17.28 at the beginning of the year to $7.60 on Friday, May 15, 2020, a 56% drop.

“The apparel industry is rattled, and Gap is no exception,” Forbes reported on May 7, 2020. ” A COVID recession will impact the company’s revenues, cash flows, and ability to pay dividends. We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 40% from $16.4 billion in 2019 to $10 billion in 2020.”

On April 23, 2020, Gap Inc. warned in a filing with the U.S. Securities and Exchange Commission it may not survive the next 12 months intact. The company said it had suspended rent payments for shuttered stores, which approximated $115 million per month in North America, and was in talks with landlords to defer payments, change lease agreements, or in some cases, terminate the leases and permanently close some stores.

“We will need to take additional actions to both preserve existing liquidity and seek additional sources of liquidity, beyond our currently available cash and credit facilities within the next 12 months as existing cash and cash expected to be generated from operations may not be sufficient to fund our operations,” the SEC filing said.

 

Abercrombie & Fitch derives the bulk of its revenues from the US, which has been hit hard by COVID-19. The outbreak of the virus has led to a steep fall in demand, which the company’s Q1 2020 results on June 4, 2020 will likely confirm with major drops in revenues across all segments.

“Already struggling with sluggish sales and low gross margin, the company will face significant challenges from store closures,” The Motley Fool, a financial and investing advice company, said in mid-March.

Abercrombie & Fitch, showing it is not immune to the impacts COVID-19 is having on other retailers, has said it’s open to leaving any shopping center while it reassesses its store base. “We’re willing to walk away from any mall at this point. It’s about getting the right store in the right location at the right size,” CFO Scott Lipesky said in March.

Its stock is down from $17.48 at the start of the year to $11.14 at the close on Friday, May 15, 2020.

L Brands, parent of  Victoria’s Secret, Pink and Bath & Body Works, might not survive the pandemic after Sycamore Partners, which agreed to buy a 55% stake in Victoria’s Secret in February, tried to cancel the $525 million deal and agreed earlier this month to scrap it. Shares of L Brands have fallen 53% in the past 12 months.

On May 14, 2020, Leslie Wexner, a retailing legend, officially retired after 56 years as head of the company. The New York Post reported that his departure came at a time when his reputation “…has been tainted by sagging sales at Victoria’s Secret; complaints of a culture of misogyny, bullying and sexual harassment at the lingerie peddler; and new revelations about Wexner’s business dealings with convicted pedophile Jeffrey Epstein.”

On May 20, L Brands,, posted a first-quarter net loss of nearly $300 million and reported that net sales fell 37 percent in the quarter to $1.65 billion. Sales at Victoria’s Secret fell by almost 50% half and Bath & Body Works declined 18%.

Victoria’s Secret, which has long positioned itself as a purveyor of elegant and sexy lingerie styles,  has been struggling with changing tastes, declining revenues and a stale image.

 

Lolli & Pops candy company filed for bankruptcy in August 2019.  Online sales ceased in February 2019 and the company ceased paying rent to some landlords in April 2019. The company blamed vanishing visitors at shopping malls for its financial troubles. In March 2020, the company was purchased for $2.4 million by an affiliate of TerraMar Capital LLC, which said it planned to diversify the company into e-commerce and wholesale. It is unclear whether TerraMar is succeeding in reviving the company.

1-800-flowers.com, the parent company of Harry & David, which has operated seasonal stores at Washington Square, said in April 2020 it would permanently close most of the brand’s bricks-and-mortar locations in the U.S. and focus on an e-commerce future.

Harry & David filed for bankruptcy protection in 2011, crippled by debt piled upon it by private equity owners. The company emerged from six months in Chapter 11 bankruptcy protection in September 2011 after the court approved its reorganization plan. 1-800-flowers.com acquired Harry & David Holdings for $142.5 million in cash. The sale closed in September 2014.

 

Standard & Poor’s ratings say Ascena Retail Group (ASNA), the parent of Ann Taylor, could default in coming months or years. It is expected to face significant challenges as remote work becomes more prevalent in the coronavirus era and the way women dress, particularly professionals, is changing dramatically.

Ascena operates stores under the Premium Fashion segment (Ann Taylor, LOFT, and Lou & Grey), Plus Fashion segment (Lane Bryant, Catherines and Cacique) and for tween girls under the Kids Fashion segment (Justice).

“Ascena…has had five consecutive years of losses as it has struggled to offer the right clothing selection, relied heavily on discounting and maintained stores in less-than-ideal locations,” Bloomberg reported in Oct. 2019.

Ascena recently repurchased some of its debt at below-par prices, which S&P Ratings deemed a “selective default.” Even after the company relieved some of its debt burden with that step, S&P assigned Ascena a credit rating of CCC-, the lowest before default. That was based on the analysts’ expectation of “conventional default or a broad-based restructuring of Ascena’s capital structure in the next six months.” Ascena’s stock is down 83% year to date. 

Houston-based Tailored Brands Inc., the parent company of Jos. A. Bank (and Men’s Wearhouse), has been showing sales decreases and rapidly shrinking profits. In Its fourth quarter earnings, Tailored Brands saw net sales drop 3% to $691 million while Jos. A. Bank sales dropped 5% to $204.7 million.

For the full fiscal year 2019, on a GAAP basis Tailored Brands reported a loss of $35.0 million compared to operating income of $13.3 million in Fiscal Year 2018.  Mary Beth Blake also resigned as president of Jos. A. Bank in December as part of a reorganization.

Men’s Wearhouse’s acquired  JoS. A. Bank in March 2014 for $1.8 billion. With both retailers now suffering sales declines, Tailored Brands would probably prefer to have that $1.8 billion now.

“(Tailored Brands)…is trying to change course a bit by offering things like jeans and more business-casual attire,” The Motley Fool wrote in Dec. 2019. “But this segment is pretty well saturated by a plethora of brands, so it’ll be tough. Tailored Brands is far from a top stock and faces multiple challenges that all need to be addressed now. Based on its balance sheet, the time to fix those problems is getting shorter and shorter.”

The company’s stock is down more than 70% so far this year.

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Washington Square closed on March 18, 2020 because of the Covid-19 crisis. A reopening date is still not settled. When it does reopen, with so many of its retail tenants at risk, the continuation of the mall as we know it is doubtful. Will Washington Square be able to evolve to suit changing economics and tastes?

Will it be more like this:

Or this: