Pedestrians pass by a J.C. Penney sign in New York. Scott Mlyn | CNBC

America's department stores are on a sinking ship, racing for a lifeboat that might not be big enough for all of them. For J.C. Penney, the bankruptcy clock is ticking after it skipped a mid-April interest payment. Its turnaround plans have been sidelined by the coronavirus pandemic, which has forced the closure of all of its stores. Macy's, with liquidity drying up, has tapped advisors at investment bank Lazard and law firm Kirkland & Ellis to explore options that include new financing. Nordstrom in early April raised $600 million by placing a handful of its real estate assets into a separate company and borrowing against the new entity by issuing bonds. High-end department store chain Neiman Marcus also on April 15 missed a payment on some of its bonds, according to a letter sent to the retailer's board from Marble Ridge Capital, which owns a significant portion of the $137.7 million in bonds that mature in October 2021. Neiman Marcus now has until the middle of May to make the interest payment. After that, pending no payment, the company could be pushed into bankruptcy court by its bondholders. Neiman Marcus is currently preparing to seek bankruptcy protection as soon as this week, Reuters reported Sunday morning. A spokesperson for Neiman Marcus declined to comment. Prior to Covid-19 hitting the U.S., department stores were in trouble because they had failed to keep up with shoppers' changing tastes. These retailers had been investing in ways to win back customers. But now their stores are closed to halt the spread of the virus. And no one knows exactly how long this will be the case. The situation is dire. Department stores need funds — and fast — to make it through the closures. But once shops reopen, even more cash will be needed to invest back into their businesses and win sales. As each retailer works toward a solution, it is likely that not all of their plans are worth funding. Capital is flowing, but only into the businesses that banks view as worth saving. "Borrowers of all shapes and sizes are drawing their revolvers," Cathy Leonhardt, managing director and co-head of consumer retail at PJ Solomon, said. "Unlike 2008, there is less resistance from banks in meeting these requests and there is certainly no stigma associated with defensive draws." "The best and the brightest are going to survive, and even thrive thereafter," she added. "But if you are marginal, it will be more difficult to get the requisite capital to survive." Shoppers have been shifting away from the mall. This past holiday season, department store retailers saw sales decline 1.8% from Nov. 1 through Dec. 24, according to Mastercard Spending Pulse. The decline happened even as holiday retail sales overall grew 4.1%, the National Retail Federation said. The brands — like Nike, Coach and Levi's — that department stores have long relied on have taken note, opting to invest in their own stores and websites to sell directly to consumers, leaving the middlemen struggling.

'Different stages of distress'

Coming out of a dismal 2019 holiday season, each department store operator had laid out strategies to try to bounce back. These included shutting underperforming stores while opening smaller locations, launching new in-house apparel or home brands, improving merchandising and growing sales online by offering more convenient pick-up options. The pandemic, inevitably, threw a wrench in those plans. And now Penney, Macy's, Nordstrom and Kohl's are pulling financial levers solely to stay afloat, calling the situation entirely unprecedented. As this has unfolded, their stocks have taken a beating on Wall Street. Combined, a whopping $12.3 billion has been wiped from these four retailers' market caps since the start of 2020.

A "Temporarily Closed" sign hangs in the window of Nordstrom Inc. store in the Midtown neighborhood of New York, U.S., on Friday, March 20, 2020. Gabby Jones | Bloomberg | Getty Images

"The category has been on its way out for years. They are just in different stages of distress," Mark Cohen, former Sears Canada CEO and director of retail studies at Columbia University, said about department stores. "This crisis we are in is going to accelerate the decline of the genre," he added. Cowen & Co. estimates that these retailers can make it four to seven months with their stores shut, bringing in $0 in bricks-and-mortar sales. "There is no question that if this goes on for another month or two, it could seriously damage a lot of companies on the edge," said Tom Mullaney, head of restructuring services at commercial real estate services firm JLL. One way or another, the legacy of this pandemic will likely be fewer department stores in America. These companies are facing a test unlike anything they have ever been through before. Among the usual options for companies in distress are restructuring debt directly with creditors, restructuring with court assistance in bankruptcy or liquidating entirely. The last choice could be unsavory if stores remain closed, however. Creditors would recoup less money if shops cannot hold going-out-of-business sales. Sporting goods retailer Modell's, for example, was able to temporarily suspend its bankruptcy in March, stating the coronavirus outbreak had made its liquidation sales impossible to complete. "This is a liquidity crisis of enormous consequences," Cohen said. As these options are weighed, the story of Sears will serve as a cautionary tale. After more than a century in business, Sears filed for Chapter 11 bankruptcy protection on Oct. 15, 2018. Even though it continues to operate, Sears' store count keeps shrinking — a sign the department store chain's sales are still eroding.

Default on the horizon at J.C. Penney

For the past two years, Penney has only reported a profit during its holiday quarter. Revenue has declined for eight straight quarters. Chief Executive Jill Soltau, who joined the company from fabric and crafts retailer Jo-Ann Stores in October 2018, was hoping to change that. Earlier this month, she had been scheduled to unveil more details of her turnaround plans. But Penney's meeting with analysts has been postponed indefinitely due to the pandemic. Penney drew down $1.25 billion from its revolving credit line in March. Beginning March 19, all 850 of its stores closed. The majority of its 85,000 employees have been furloughed. On April 15, the Plano, Texas-based department store chain skipped a $12 million interest payment, entering a 30-day grace period before a potential default is triggered. A skipped payment on a bond, to try to preserve liquidity, is typically a step that precedes a bankruptcy filing. In downgrading Penney's debt, S&P Global said it does not expect Penney to make the payment. Instead, the firm expects Penney will pursue restructuring either with or without court assistance. "J.C. Penney has been engaged in discussions with its lenders since mid-2019 to evaluate options to strengthen its balance sheet and maximize its financial flexibility, a process that has become even more important as our stores have also closed due to the pandemic," a spokeswoman said in an emailed statement.

Penney has roughly $4 billion of long-term debt. A $105 million bond repayment is due this June, according to Fitch Ratings, which is also forecasting Penney's sales to decline more than 25% in 2020. The retailer's market cap has fallen 75% to about $83.8 million this year, with its stock trading at around a quarter. "We expect a significant store footprint reconfiguration ... which may occur through a cleanse and rebirth through Chapter 11," Joseph Malfitano, founder of turnaround and restructuring firm Malfitano Partners, said about Penney.

Macy's looks to its real estate

Stresses are also mounting this month at Macy's. Three weeks before the Centers for Disease Control and Prevention announced cases of Covid-19 spreading within the U.S., Macy's said it planned to shut 125 stores in weaker shopping malls over the next three years. Although it has closed more than 100 stores since 2015, it still operates 551 of its namesake department stores, 34 Bloomingdale's shops and 19 Bloomingdale's outlet locations. Now, Macy's is looking to its real estate as a lifeline. It is considering issuing new bonds backed by some of its real estate to come up with extra cash, according to a Bloomberg report. Its revolving credit agreement allows the company to issue $500 million of additional debt backed by real estate or other non-inventory-related assets. Macy is at risk for breaching its contracts with lenders at some point during the current quarter, Cowen & Co. said in a research note to clients earlier this month. Cowen expects Macy's will be able to at least temporarily lift its covenants, preventing a bankruptcy filing. A Macy's spokeswoman said in an emailed statement: "The company is also exploring numerous options to strengthen our capital structure. We have relationships with a range of advisors." Macy's has been through bankruptcy court before, in the 1990s. It has been able to survive through the years, in large part, thanks to its massive portfolio of real estate, which Cowen has valued to be worth between $5 billion and $8 billion. But the longer Macy's stores sit shut without generating sales, the more that value dwindles. Meantime, Macy's has fully drawn its $1.5 billion revolving credit facility. It has furloughed the majority of its roughly 130,000 store workers and suspended its quarterly cash dividend, starting in the fiscal second quarter.

A view of a person wearing mask passing by a Macy's in Herald Square amid the coronavirus (COVID-19) outbreak on March 24, 2020 in New York City. John Nacion | NurPhoto | Getty Images

"The disruption and negative effect on consumer demand as a result of Covid-19 will require Macy's to refocus its efforts toward priortizing the preservation of liquidity and delaying its strategic plans to improve its operating performance," Moody's Vice President Christina Boni said. Moody's in late March downgraded Macy's debt to junk status. In the middle of February, the stock market valued Macy's at about $6 billion. But with shares down more than 65% year to date, its market cap now sits at $1.8 billion. With such steep declines, Macy's lost its spot on the S&P 500 Index at the end of March.

Nordstrom leans on loyalty

Nordstrom appears in better shape than its peers, despite the retailer on April 8 issuing a warning that its financial situation could become distressed if its stores stayed dark for much longer because of Covid-19. "The longer our stores remain closed to the public, the greater impact it will have on our results of operations and financial condition, and if our physical locations remain closed to customers for an extended period of time our financial situation could become distressed," the company said in a securities filing earlier this month.

Nordstrom said the pandemic, so far, has had a "substantial impact" on its business. It said it expects its results for the quarter ended May 2, and beyond, to be "adversely impacted in a significant manner." Nordstrom has, however, already taken a number of measures to cut costs and raise additional liquidity, including furloughing the majority of its workforce, suspending its quarterly dividend payment effective in its fiscal second quarter, drawing down $800 million on its revolving credit facility and halting share repurchases. Analysts have applauded this. "We believe Nordstrom is taking necessary actions to survive the crisis," Baird analyst Mark Altschwager said in a research note earlier this month. Nordstrom last week priced a $600 million offering of senior secured notes, using its real estate, to add to its pot of cash. Nordstrom CFO Anne Bramman said in a statement about the retailer's recent debt offering: "These measures will provide Nordstrom with additional liquidity and flexibility not just for the short-term but over the longer term as we emerge from this unprecedented time." Unlike its peers, Nordstrom tends to close only a handful of stores, if any, each year. It has a smaller portfolio of locations: 380, including its off-price Nordstrom Rack business, that tend to be in higher-performing, so-called A malls.

A woman sits outside the barricaded and closed entrance to the Westfield Annapolis Mall in Annapolis, Maryland, on March 19, 2020. Jim Watson | AFP | Getty Images

According to an analysis by Fitch — which expects Nordstrom to see sales decline as much as 20% in 2020 — Nordstrom offers "differentiated merchandise and [a] high level of customer service enabling the company to enjoy strong customer loyalty." Fitch cited far fewer concerns around Nordstrom, compared with Penney and Macy's. Nordstrom shares have tumbled nearly 55% year to date, bringing its market cap to $2.9 billion.

Kohl's turns to curbside pickup

Since its stores are typically situated along open-air strip centers, not enclosed in shopping malls, Kohl's is better positioned to ride out the coronavirus pandemic than other department stores, analysts have said. Some have cited the retailer's limited-contact, curbside pickup offering in its parking lots during this pandemic as a strength. Kohl's "should be able to able to accelerate market share gains post the discretionary downturn," according to Fitch. The ratings agency expects Kohl's sales to fall about 20% in 2020, similar to Nordstrom. "Kohl's off-mall real estate footprint provides some insulation from mall traffic challenges," the ratings agency added. Gordon Haskett analyst Chuck Grom echoed this sentiment, saying he expects that consumers, coming out of the pandemic, are going to prefer shopping at places outside of malls more than ever. The ongoing shift away from the mall will accelerate, he said. Kohl's has more than 1,100 stores. Under Chief Executive Michelle Gass, it has focused on opening smaller locations. It has also divided some of its existing and bigger stores, to be able to lease out the extra space to gym and grocery operators. And it has been betting on its tie-up with Amazon — where it accepts Amazon returns at all of its locations — to drive traffic, and ultimately sales. On March 19, Kohl's announced that it had fully drawn its $1 billion unsecured credit facility to increase its cash position and "preserve its financial flexibility," in the midst of so much uncertainty. It also has temporarily suspended share buybacks. "As a company, we operate with great discipline to maintain a strong balance sheet and financial flexibility," Gass said at the time. On Friday, Kohl's entered into a fresh $1.5 billion senior secured, asset-based revolving credit facility, increasing its liquidity by roughly $500 million. The company said in a securities filing that it has borrowed the full $1.5 billion and used part of those proceeds to repay the $1 billion outstanding under its previous credit agreement. Kohl's shares are down about 63% in 2020. It has a market cap of roughly $2.9 billion.

'We don't sell things people need'