Sephora Fires Back at J.C. Penney in Bid to End Partnership

(Bloomberg) -- Sephora USA Inc. escalated its legal fight with partner J.C. Penney Co., saying the department-store chain's response to the pandemic violates an agreement allowing it to operate about 650 in-house beauty boutiques.

J.C. Penney, which closed all its stores in March as the virus spread, persuaded a Texas state court judge last week to temporarily bar Sephora from exiting their 16-year arrangement. Sephora, concerned it would be locked into the contract if the struggling retailer files for bankruptcy, shifted the case to a federal court, where J.C. Penney's request for a more lasting order is in play.

“No part of JCP's fanciful, one-sided narrative was or is true,” Sephora said in federal court filings late Monday.

Many retailers are struggling to refinance debt as revenue plunges during the pandemic, hoping to buy time until they can attract shoppers once the restrictions begin to ease. J.C. Penney said it sued to prevent being harmed by Sephora's threat to end their contract at least two years early. The department-store chain is relying on the boutiques, which are staffed by J.C. Penney workers who sell Sephora products.

Sephora said J.C. Penney breached its contract by furloughing boutique workers during the shutdowns prompted by Covid-19. It also claims no harm would come from ending the arrangement early because the in-store boutiques have hundreds of millions of dollars of cosmetics and skin-care products in stock that can be sold over the next three or four months as J.C. Penney seeks a new partner.

On Friday, a federal judge in Sherman, Texas, is scheduled to hear arguments on Sephora's request to overturn the state-court order that expires May 14.

In a statement Monday, the department-store chain said it sought the temporary restraining order “so Sephora could not prevent JCPenney from reopening” the boutiques in its stores. “We remain committed to working together to drive sustainable, profitable growth,” the company said.

J.C. Penney's moves in state court “seek to unfairly and unreasonably bind Sephora's hands” and rob it of negotiating leverage if the department-store chain seeks creditor protection, Sephora said in court filings.

“In fact, it is JCP that seeks -- and has obtained through its wayward temporary restraining order -- ‘negotiating leverage' and to delay and change the basis for good faith wind-down discussions that have been underway between the parties for weeks, so that JCP can take advantage of an impending bankruptcy,” Sephora said.

J.C. Penney made rent payments last month but said it was skipping an interest payment on its outstanding debt, raising the prospect of a default. The company plans to reopen about nine stores this week, as stay-home orders begin to lift. It has been offering curbside service at 30 of its 850 stores in the U.S. since last month.

The case is J.C. Penney vs. Sephora USA, 4:20-364, U.S. District Court, Eastern District of Texas (Sherman).

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