A Schedule 13D filed by Sears (SHLD) Monday showed that CEO Eddie Lampert had cut his equity stake in the beleaguered retailer to 48.5% from a prior 55.4%. Certainly this is not reassuring the markets as recent channel checks showed further deterioration in the company’s comparable store sales trends during November. Sears is struggling to remain relevant in today’s retail environment, and Lampert’s recent selling isn’t sitting well with us about the retailer’s sustainability as an entity. The firm’s third-quarter results were atrocious, and the holiday shopping season appears to be shaping up as equally poor for Sears.
J.C. Penney (JCP) made headlines Tuesday on what initially seemed to be positive news: the company’s comparable store sales grew more than 10% in November. Though we note that it is certainly an improvement from double-digit declines, the measure anniversaries (laps) a very easy ~30% decline in November of last year. Importantly, the same-store sales stabilization tells us nothing about margins, profitability, and most importantly, cash flow. In this holiday season’s increasingly promotional environment, gross profit dollars will be much more important than top-line sales. The key question for J.C. Penney investors is not whether sales will stabilize, but whether cash burn will stop such that bankruptcy is no longer in the cards.
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Valuentum’s Take
Sears and J.C. Penney appear to be in a race to the bottom. Eddie Lampert may finally be seeing the writing on the wall at Sears, especially as “the real estate thesis” becomes stale and overused (1). J.C. Penney’s same-store sales growth in November was good, but the mark does lap a very easy number last year, suggesting performance wasn’t all that impressive. In an abbreviated holiday shopping season where there are six fewer days between Thanksgiving and Christmas this year, gross profit dollars will be much more informative of performance than top-line numbers. We continue to monitor Sears and J.C. Penney closely.
(1) At the end of their last fiscal years, respectively, Sears Holdings operated a national network of stores with 2,019 full-line and 54 specialty retail stores in the US (through Kmart and Sears) and 475 full-line and specialty retail stores in Canada (through Sears Canada, a 51%-owned subsidiary), J.C. Penney operated 1,104 department stores throughout the continental US, Alaska and Puerto Rico, of which 429 were owned, including 123 stores located on ground leases, and Radio Shack operated 4,395 U.S. company-operated stores throughout the US, as well as in Puerto Rico and the U.S. Virgin Islands.
There are a lot of stores that could eventually be on the auction block!
Needless to say, any entity seeking brick-and-mortar exposure has significant bargaining power over these three implicit “real estate plays.” Sears, J.C. Penney and Radio Shack each have their own unique challenges that will only be exacerbated by an increasingly more competitive retail environment this holiday season and beyond.