J.C. Penney files for bankruptcy and its survival couldn't be more uncertain

Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss JC Penney’s filing for Chapter 11 bankruptcy and preview retail earnings with Stacey Widlitz of SW Retail Advisors.

Video Transcript

BRIAN SOZZI: Welcome back to "The First Trade." Fallen retail giant JCPenney filed for chapter 11 bankruptcy this weekend. It's unclear what its plans for the future exactly are.

Joining us to discuss is Stacey Widlitz of SW Retail Advisors. Stacey, always good to-- good to speak with you. I'm sure you saw that JCPenney news. It's a company you and I have talked a lot about in the past.

But do you think JCPenney will be akin to Lehman Brothers? And by that I mean JCPenney is forced to take one for the team or the sector at large and they go under and they do not emerge for bankruptcy because I would make the case there isn't a space out there or a place out there for a mid-tier department store like this.

STACEY WIDLITZ: Well, you know, I think obviously JCPenney, with over 800 stores, is going to look a lot different if they survive. Perhaps they could have 150 stores. It's going to look like a very different model, just like Sears-- what happened with Sears.

But I would also argue that it's not just JCPenney. There are-- you know, the department-store space in general is-- the only differentiation is really on price. So, you know, you don't-- you can't exist like that.

So I would also say that, you know, Macy's, obviously their 600 stores could look a lot smaller a year, two years from now. Nordstrom as well is shrinking stores, and they're one of the healthiest in the business. So I think, you know, there will definitely be some that go by the wayside, and others that are healthier may look significantly smaller a year or two from now.

ALEXIS CHRISTOFOROUS: Stacey, we know while JCPenney is in chapter 11-- we see it with J.Crew and Neiman Marcus. They're hoping to slim down and reemerge stronger, but what about the likelihood of another company coming in and buying up assets and the JCPenney as we know it today doesn't exist? How likely is that? And if so, who might the buyer be? because the whole retail sector in general is hurting right now with the exception of a few of the big names like Amazon and the big-box retailers.

STACEY WIDLITZ: So I think in order for a struggling retailer to catch a bid, you have to have really strong real estate. And, you know, with JCPenney, a majority of their real estate is not going to be in A-plus malls here. So I think that is a big hurdle for a rescuer to come in.

You know, another trend we've seen is some of the REITs coming in, buying some of the smaller format-- particularly in the specialty-apparel space, coming in and buying up the names so that they can kind of turn them around and keep them in the mall rather than having them go dark. I think this is a very different situation where it's JCPenney just has these huge square foot footprint stores that we just don't need anymore. So I don't know that a likely buyer is out there.

HEIDI CHUNG: Hi, Stacey. It's Heidi Chung here. So a big week, obviously, for retail. We have a lot of heavyweights reporting this week. I want to get your overall thoughts on what we can expect but also mostly on the home-improvement giants, so Home Depot and Lowe's. I think I made some six trips to Home Depot this past weekend, and I was not the only one focusing on some home-improvement projects there. So I want to get your thoughts on those giants as well.

STACEY WIDLITZ: Sure. I think, you know, you and everybody else was headed out looking for a project that you could do at home to keep your time going.

So, you know, I think Home Depot was one of these companies that was in one of the strongest positions to begin with, and this stay at home, hey, let's fix up our house because we don't have anything else to do just kind of propels their comp. But I think most important coming out the other side of this is that they still have that pro business, which is so much larger than it is for Lowe's business. And that's higher ticket, and that's going to bring them out the other side of this when the world reopens again.

Clearly we've got Walmart which is half food. So they're going to be a huge beneficiary on the comp side. They could put up a double-digit comp here. The question is as we fill our pantries and the stocking is over, what happens six months from now in that category?

BRIAN SOZZI: Stacey, I think we could agree that hundreds-- hundreds of JCPenney stores are about to close over the next few months. Do you think this is a situation-- there will be a lot of liquidation sales, products being given away, 60%, 70%, 80,% 90% off? Does this situation with JCPenney drag Macy's into a bankruptcy situation before the holiday season?

STACEY WIDLITZ: I think the liquidation that will go on in JCPenney is just one of the many liquidations we are going to see. So even for the healthy retailers, we know that all of this inventory from spring/summer has been stuck overseas in manufacturing facilities. We know it's been stuck on boats. We know it's been stuck in warehouses. So all that stuff has to be liquidated.

A lot of the brands are talking about carrying it over to this time next year. There's a very small percentage of the fashion brands that can keep stuff, you know, till next year. But I think we are going to see mass liquidation second half of this year. I don't know that that pushes Macy's in a different direction in the short term, but for sure in the short term we're going to see 60%, 70%, 80% off in the apparel space.

We're already seeing pretty nice across-the-board discounts, even in footwear. So for the consumer, if they have the money to get out there and shop, this is going to be a field day this second half of the year.

ALEXIS CHRISTOFOROUS: What do you think that means for the Christmas buying season? I mean, could it actually turn out to be a bright spot? Those people who can't afford to go out and shop-- I mean, everything's really going to be on sale. We're going to see some steep discounts, right?

STACEY WIDLITZ: So I think there's deep discounts, particularly online, but then also we have to talk about the psyche of the consumer and also what happens with this virus. Is there a second wave? You know, right now, the malls are starting to open. Stores are starting to open. Everybody's feeling a little bit optimistic. You know, I would caution that what does a mall look like?

When you have restrictions of, hey, you can only have 25% of the volume that you used to be able to pack into a store, especially a small store, you can't-- you can't run the volumes that you used to in order to pay your rent at the current levels. So I think that's a whole other part of the equation that's a big challenge to retail. And if the REITs and the malls and the landlords don't play ball with the tenants, you're going to see a lot more bankruptcies going on.

BRIAN SOZZI: And, Stacey, what specialty-apparel retailers are you most concerned about? A lot these malls are about to lose their anchor tenant and the liquidations. There's no reason necessarily to walk into a Gap, not that they've been doing good for any stretch of time. But why bother going in there at all?

STACEY WIDLITZ: Right. I think that there will be a lot of the undifferentiated names that, you know, maybe we don't see a huge chunk of their stores reopen again, or maybe they reopen and then, second half of the year, traffic is down 40%, and they just can't make a go of it and say, listen.

You know, luckily a lot of the leases in the past several years that have been signed are shorter-term leases. So you see a lot of leases start to just roll off here. And, you know, if it's not an emergency closing situation, it's a, hey, let's just shrink. You know, let's just shrink to oblivion here.

So I do think for, you know, the Gap and many other names, they've all kind of talked about this is an opportunity to really look at your store base and think about how big you actually can be versus how big they've been telling the Street. And that even is for Old Navy that was quite successful for so many years. I mean, they were going to double their store base. That's just not going to happen now.

ALEXIS CHRISTOFOROUS: Stacey, in the prior hour we spoke with the CEO of VF Corporation, you know, the company behind North Face, Timberland, JanSport, on and on. Do you think a company like that is better positioned than other apparel retailers simply because of the kinds of activities we're doing now? We're going more outdoors, and their brands tend to you know, lend themselves to that more than others.

STACEY WIDLITZ: So I think something that VF Corp pointed out, which is important, is their conversion rates kind of remain OK while traffic is clearly way down for everybody. So that's what you want to see. You're hearing such mixed stories out there from different retailers so far of, oh, you know, traffic's way down, but conversions are also concerning. So that tells you something about the brand. So that's the good news for VF.

And also, they've talked about, you know, they're keeping their powder dry for potentially another acquisition out there that, at this time, there will be great opportunities for brands out there that just can't make a go of it. So I think they are, you know, one of the stronger positioned out there, and also they have the Vans brand that was really kind of on its way up in terms of momentum.

ALEXIS CHRISTOFOROUS: Real quick before we let you go, I just-- because she just said something that sparked me there, Brian. Oh, if they were to go out and buy another company, VF Corporation, who might you see them buying up, Stacey?

STACEY WIDLITZ: I mean, that's-- you know, that's hard to say at this point. What I would say is that this is a company that's made strategic acquisitions over time, and they have the opportunity, if there's something out there, that looks interesting. But I'm not going to make any predictions on that one. Sorry, Alexis.

ALEXIS CHRISTOFOROUS: I tried. OK.

BRIAN SOZZI: All right, let's leave it there. Stacey Widlitz, SW Retail Advisors, go out there and shop. A lot of good deals to be had.

STACEY WIDLITZ: You too, Brian. Get out there.

BRIAN SOZZI: Oh, I'll be out there. You better believe it.