Two of America’s biggest middle-income department stores are struggling. Sears Holdings Corp (NASDAQ:SHLD) is slowly bleeding cash, while J.C. Penney Company, Inc. (NYSE:JCP)‘s future remains highly uncertain.
If there’s one company that stands to benefit, it appears to be Macy’s, Inc. (NYSE:M). Although Macy’s, Inc. (NYSE:M) has vastly outperformed both Sears and J.C. Penney over the last year, further upside may lay ahead.
J.C. Penney’s failed turnaround plan
J.C. Penney Company, Inc. (NYSE:JCP)’s current predicament can mostly be traced back to its (now former) CEO Ron Johnson. Although J.C. Penney’s business was — at the time Johnson arrived — slowly fading into irrelevancy, the company was still profitable.
But Johnson changed all that. He drove away the store’s key customers by eliminating coupons and axing many popular brands. At the same time, he spent roughly $1 billion in a single year, mostly through store renovations.
Johnson stepped down in April, and the store’s old CEO, Mike Ullman, has returned. Discounts are back, and J.C. Penney Company, Inc. (NYSE:JCP) just unveiled its newly renovated home goods department.
So there’s reason to be hopeful. I myself own shares, along with legendary fund manager George Soros. But that isn’t to say that the investment isn’t without its risks.
The damage done over the last year might have been too much. At the same time, J.C. Penney Company, Inc. (NYSE:JCP)’s new home goods are more expensive than its traditional customers are used to, and a judge could still force the store to stop selling its Martha Stewart-designed products.
Sears might be worse off than J.C. Penney
Not even Sears Holdings Corp (NASDAQ:SHLD)’ bulls see much hope for the company’s actual business operations, instead focusing on the value of the company’s assets — in particular, its real estate.
Bruce Berkowitz’s Fairholme Capital is a major Sears Holdings Corp (NASDAQ:SHLD) shareholder. Specifically, as of the end of March, it represented more than 12% of his fund — about $1 billion of stock. In a presentation he gave last year, Berkowitz argued for Sears Holdings Corp (NASDAQ:SHLD)’ stock mostly on the value of its real estate holdings.
But not everyone agrees with Berkowitz. Analysts at Credit Suisse reiterated their Underperform rating last month after Sears Holdings Corp (NASDAQ:SHLD) reported a disastrous quarter. In their note, Credit Suisse raised the obvious question — if Sears’ business is losing money, but its assets are so valuable, then why does the company continue to operate?
Macy’s could benefit the most
Assuming the worst-case scenario for both J.C. Penney Company, Inc. (NYSE:JCP)’s and Sears, Macy’s seems like the one store that could be poised to benefit.
Sears, Macy’s, Inc. (NYSE:M), and J.C. Penney frequently anchor the same middle-income shopping malls. In my area, the two closest shopping malls both have Macy’s, J.C. Penney and Sears stores.
Over the last year, shares of J.C. Penney have tumbled nearly 30%. Sears shares are down about 12%. Macy’s, Inc. (NYSE:M) shares? Up over 30%. Much of that performance may have been due to Macy’s own execution, but the decline of two of its major rivals certainly can’t hurt.
I asked Brian Sozzi, a retail analyst and CEO at Belus Capital, for his take on J.C. Penney and Sears. If you had to pick one I asked? Macy’s he responded — they’ll benefit from the eventual liquidations.
Even if that doesn’t happen, Macy’s might be worthy based on its own merits. Analysts at Sterne Agee recently initiated Macy’s, Inc. (NYSE:M) with a Buy rating and $60 price target — but at the same time, Sterne Agee sees upside for J.C. Penney.
Investing in department stores
Both J.C. Penney Company, Inc. (NYSE:JCP) and Sears Holdings Corp (NASDAQ:SHLD) have been poor performers in recent months. Both stocks remain hated — both are fairly heavily shorted. As of the last report, about 19% of J.C. Penney shares had been sold short, while 10% of Sears’ shares have been bet against.
But as those stores struggle, Macy’s seems poised to benefit. Many Macy’s, Inc. (NYSE:M) stores are located in close proximity to Sears and J.C. Penney stores, and of the three, it’s the one company whose management seems to be capable of executing.
The article This Stock Could Benefit From J.C. Penney, Sears’ Decline originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz owns shares of J.C. Penney Company. The Motley Fool has no position in any of the stocks mentioned. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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