Retailers: J C Penney Company Inc (JCP) vs. Sears Holdings Corp (SHLD)

With both companies facing possible extinction this is not a question for average investors

Asking investors to choose between J C Penney Company Inc (NYSE:JCP) or Sears Holdings Corp (NASDAQ:SHLD) is like asking vacation travelers which cruise ship they’d prefer to take — the Titanic or the Lusitania?

Retailers: J C Penney Company Inc (JCP) vs. Sears Holdings Corp (SHLD)
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No rational investor would say yes to buying JCP stock or SHLD stock. However, I’m not talking about your average 401(k) investor. I’m thinking about speculative investors, those willing to risk and lose capital on two department stores struggling to survive.

JCPenney or Sears: Which Should You Pick?

JCP stock is down 33.6% year-to-date, while SHLD is treading water so far in 2017, down 7.7%. Neither of these stocks would qualify as momentum plays; they do, however, represent stocks that are in the middle of possible dead-cat bounces with Sears still down 7.4% and JCPenney up 16% in the past month, well ahead of the S&P 500’s rather modest 2% return.

With both stock prices in single digits, my question to the gamblers out there is a simple one. If you had to buy one of these stocks to save your life, which would it be?

I believe the choice is an easy one. For me, it has to be JCPenney. Here’s why.

We’re Talking Equity, Not Debt

For both stocks to be worth something in five or ten years, each company has to be in business in 2022 and beyond.

Both face potential bankruptcy.

In the event either were to file for Chapter 11, it’s conceivable that a restructuring plan could keep the business operating, but the likelihood of the equity surviving bankruptcy is remote.

“Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares,” states the SEC’s investor publication about bankruptcy. “In most instances, the company’s plan of reorganization will cancel the existing equity shares.”

I know family friends who inherited Eastman Kodak stock before it entered Chapter 11 in January 2012. When it emerged from bankruptcy in September 2013, those shares were worthless.

So, it’s possible once a reorganization plan is approved by the bankruptcy court, that the original common shares have some actual value, but unlikely. In a Chapter 7 liquidation, there is even less chance once the court-appointed trustee liquidates all the assets.

It’s a big reason why Eddie Lampert and Bruce Berkowitz hold approximately $2 billion of Sears’ debt. In the event of a Chapter 11 filing, they have greater control over what happens to the company once it emerges from bankruptcy.

If Lampert and Berkowitz only held equity — they own 85% of Sears — they’d be on the outside looking in although Lampert, as CEO, would continue to run the business.

But, if it files Chapter 7, everything is liquidated, creditors made whole including Lampert and Berkowitz, and if there’s anything left over, shareholders can claim those funds.

Is Bankruptcy a Possibility for JCP?

Well, you can never say never, but despite terrible same-store sales — its first-quarter earnings saw same-store sales decline 3.5%, considerably worse than the Street’s estimate of 0.7% — it’s expected to make money in both 2017 (49 cents per share) and 2018 (44 cents per share).

Where Sears has negative cash flow, JCPenney is generating positive cash flow. More importantly, CEO Marvin Ellison continues to do whatever it takes to deliver profitable growth for the business.

On July 13, it announced that it was putting toy shops in all of its stores and continues to add new categories to compete with, Inc. (NASDAQ:AMZN) and the rest of the e-commerce world.

In a move that should provide confidence for investors, JCP announced July 24 that Jeffrey Davis was the new CFO at the company replacing Edward Record who resigned in early July.

Why would a man who’s been CFO at both Darden Restaurants, Inc. (NYSE:DRI) and Wal-Mart Stores Inc (NYSE:WMT) take this job if he didn’t think the future was reasonably decent.

Bottom Line on JCP and SHLD Stock

In the short time Ellison has been at JCPenney, he has made a lot of decisions and changes to its business to survive in this retail environment.

Eddie Lampert has had over a decade to rework Sears, but he has done little to show he understands or cares about retail.

Sears stock might have jumped on the news Kenmore products will be sold on Amazon, but that’s merely a temporary bounce.

When, not if Sears goes bankrupt, a Chapter 11 filing could give it another life. If it’s Chapter 7, JCPenney gains in a big way from its demise.

Average investors shouldn’t own either stock, but if you’re a betting man or woman and can afford to lose the capital, JCP stock is the one you buy.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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