Sears & J.C. Penney: No Longer the Belles of the Ball

by Marc Bastow | May 18, 2012 11:30 am

Everyone knows why we still go to high school or college reunions: We want to see how everyone else is aging, who lost weight, who got plump and how we look compared to the ladykillers and man-magnets 20 years ago.

The same curiosity extends to investors looking at a reunion of sorts for two American retailing icons: J.C. Penney (NYSE:JCP[1]), and Sears Holdings (NASDAQ:SHLD[2]). We all remember what they looked like back in their heyday: solid earnings, scores of stores around the country, stable dividends, pleasant shopping environments and (perhaps most importantly) bright futures.

It’s sad to say that, at first glance, it appears neither of these two companies have aged well at all. They might not survive the century.

Heck, they might not survive the decade.

There’s so many reasons, but the wider picture is fairly evident: adapt or die. And until very recently, neither Sears nor Penney’s adapted.

Competition from all sides and angles in the past appeared on the landscape. Big-box retailers like Wal-Mart (NYSE:WMT[3]) and Costco (NASDAQ:COST[4]). Clothing retailers like Kohl’s (NYSE:KSS[5]) and TJX (NYSE:TJX[6]). Home-improvement warehouses like Home Depot (NYSE:HD[7]). Electronics and appliance sellers like Best Buy (NYSE:BBY[8]). All these companies (and more) devoured revenues and profits across every segment of Sears’ and Penney’s business models.

The future? Forget it: E-tailers like Amazon (NASDAQ:AMZN[9]) and eBay (NASDAQ:EBAY[10]) are having a field day on Sears’ and Penney’s dime, too.

So where does that leave these venerable names? Well, let’s take a look at where they stand, and come to some conclusion about where they’ll go:

New Management

In February 2011, Sears introduced Louis D’Ambrosio, an Avaya alumni, as CEO. I’m not sure what a telecom guy brings to the table for retail — even one who worked with the company for a long time as a consultant — but that’s just me. Oh, and D’Ambrosio led Avaya through the maze of taking a public company private. Just worth noting.

In November 2011, J.C. Penney brought on Ron Johnson[11], an Apple (NASDAQ:AAPL[12]) retailing guru, to change the company’s strategy (and hopefully its fortunes). Johnson’s first move was to empty the corner offices of any lingering JCP detritus, so he signed up four new executives — including two with high-level retail experience — with a tempting $26 million in total bonus money. Johnson’s personal retailing brilliance will cost JCP a mere $53 million in executive compensation alone.

New Strategy

Johnson and his board decided Penney needed to establish itself as the “Fair and Square” company, which means the discounting and sales events JCP made its bones on are gone. J.C. Penney now is focused on one “low” price all the time. The company is spending billions of dollars reformatting stores, right-sizing inventories and laying off people[13] to get the strategy right.

D’Ambrosio is overseeing what almost appears to be a “dismantle” strategy. Of course, he will abide by whatever Eddie Lampert — whose ESL Investments is the majority shareholder — determines. Perhaps Lampert, a real-estate guy by trade, sees the intrinsic value of the company assets as more important than retailing. The company has jettisoned the Outlet and Hometown stores, sold off Canadian leases, lowered its investment percentage in Sears Canada and closed down smaller stores throughout the U.S. Oh, and Sears’ Land’s End business is on the block, too.

“D’oh!” Moments

In a controversial move, JCP’s spring catalogue featured a real-life same-sex couple identified as Wendi and Maggie, holding their two daughters, and they appear to be wearing wedding bands. JCP immediately was targeted by the conservative group One Million Moms[14] for what the organization said was “taking sides” in the culture war. Whether the “D’oh” moment belongs to JCP for running the ad or One Million Moms for protesting is up in the air, but it was an ugly snafu in the midst of a broader company reinvention — and one JCP knew should have been coming, considering early outrage over Ellen DeGeneres’ role as a spokesperson. So if nothing else, the timing was poor.

Sears’ biggest “D’oh” moment probably came in 2005 when Lampert arranged to buy similarly struggling retailer K-Mart and its portfolio of lousy leases and bloated cost structure. Of course, “D’oh!” also would befit the slow decline allowed in both the quality of products and shopping experience.

Earnings

Penney’s announced earth-rattling earnings results[15] earlier in the week, posting losses well above even the most optimistic analyst’s projections. To make matters worse, Johnson suspended the company dividend in an effort to save money. The result? A 30% decline that cut JCP to its lowest price since last summer.

Sears announced better-than-expected earnings[16], but a great deal of the bump is based on sales of assets, not a vastly improved business. Sears managed to use the money wisely, paring down debt, so the stock was rewarded during the day. Asset sales as a long-term strategy? Only time will tell.

Outlook

Everyone might be looking away from these two at the alumni dinner, but eventually, someone will take them home.

The great fear with JCP is that it simply will bleed so much money that it can’t recover, ending up instead with prettier new stores with the same ol’ emptiness. Penney’s is trying to remake its entire branding in a world where every retailer seems to have a niche: so Penney had better find one[17], and quickly. The makeover is costing a ton of money, and customers so far aren’t adjusting well to life without craze-inducing sales. Johnson and his team have time, but JCP likely will never be a great retailer again.

Sears is on the way out, but with a different ending: smaller, leaner … and perhaps private. Lampert and D’Ambrosio know what it takes to make a well-oiled machine, and they are slowly doing the dance of the private equity funds: slash costs, sell off some profitable assets for cash, pay down debt, and find the exact number of businesses you want to involve for the long term.

As a pure retailer, Sears might not look anything like it did back in high school, but in the end I think we’ll see Sears looking just a little bit better at the next reunion.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AAPL.

Endnotes:

  1. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  2. SHLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHLD
  3. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  4. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  5. KSS: http://studio-5.financialcontent.com/investplace/quote?Symbol=KSS
  6. TJX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TJX
  7. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  8. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  9. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  10. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  11. brought on Ron Johnson: https://investorplace.com/2011/11/jc-penney-ceo-ronald-johnson-jcp-apple-aapl/
  12. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  13. laying off people: https://investorplace.com/2012/01/jcpenney-jcp-to-cut-thousands-of-jobs/
  14. targeted by the conservative group One Million Moms: https://investorplace.com/2012/05/second-lesbian-protest-for-j-c-penney/
  15. earth-rattling earnings results: https://investorplace.com/2012/05/jcpenney-turnaround-turns-ugly-jcp/
  16. Sears announced better-than-expected earnings: https://investorplace.com/2012/05/sears-turns-profit-shares-spike/
  17. Penney had better find one: https://investorplace.com/2012/05/jcpenney-turnaround-turns-ugly-jcp/

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