Embattled retailer J.C. Penney is often in the news now that Sears has left the building. A new CEO with a well regarded strategy for rejuvenating the company has given hope to some that “Penney’s” will survive where so many others have failed. We’ve written about the company multiple times in recent months, starting in July 2019. The company, though, has been on our Under Performers list since IVQ 2018 and is currently rated CCR 4 on our 5 point scale, just above non-performing.
Hopes were high that the holiday shopping season might prove a turning point for the company. However, as an article in Motley Fool suggests, that’s not been the case. Same store sales have been disappointing: “The company saw comparable-store sales drop by 7.5% for the nine-week period ending Jan. 4. If you exclude the fact that the retailer exited the appliance and furniture categories, comp sales dropped by “only” 5.3%. For the full year, the company expects same-store sales to drop by 7%-8%. That number improves compared to a loss of 5%-6% if you exclude the company dropping appliances and furniture”.
Once again the company’s survival is in question as there is no reason to believe the downward trend is reversible. We’ve added J.C. Penney to the list of companies that we expect to drastically restructure or file for some sort of bankruptcy protection in 2020.
As we noted in our most recent post, BDC exposure has actually grown in the IIIQ 2019 (to $18mn at cost) as TPG Specialty (TSLX) joined FS Investment II, III and IV as lenders, but in an asset-based facility. How any of these blenders will fare in a potential bankruptcy is impossible to suss out at this point. In late September all but one of the positions held were marked at par or better. As we’ve seen with other borrowers on a long downward slide those valuations can change, though, when an actual bankruptcy happens. Even TSLX – which has magisterially navigated multiple troubled companies that eventually went into bankruptcy – will have to keep their wits about them. At some point in 2020 we expect to join Warren Buffet to find out who’s been swimming naked.