Which Retailer Will Die First: Sears or J.C. Penney?

The clock is ticking on two retailing legends.

The market didn't have a very fashionable showing last week, but J.C. Penney (NYSE: JCP  ) and Sears Holdings (Nasdaq: SHLD  ) were near the bottom of the barrel.

Shares of J.C. Penney slipped 21%, while Sears -- the parent company of Kmart as well as its namesake department store chain -- plunged 24% on the week.

Sears punched out after another disappointing quarterly report. The iconic retailer posted another sharp adjusted loss. Revenue slipped 6% to $8.9 billion, as comps slipped 1.6% at domestic Sears stores and a brutal 4.8% at Kmart.

Analysts were ready for the red ink. They don't see Sears turning a profit on an annual basis for at least another two years. They just didn't expect same-store sales to be so weak. After all, shouldn't Sears be a major beneficiary of the disarray at J.C. Penney?

It certainly didn't seem that was the case earlier this year. Both stocks were big winners early on. Investors gravitated to Sears as an asset play. J.C. Penney -- under cheap chic and geek chic guru Ron Johnson -- was seen as a prime turnaround situation.

Well, both stocks have been hit hard in recent months.

A Penney for your thoughts
As bad as things are at Sears, J.C. Penney has it worse. Comps have fallen sharply in each of the chain's first three quarters under Johnson's new model. Its most recent quarter was a doozy, as same-store sales plunged 26%. The downgrades have come in droves after analysts had a little time to digest the Nov. 9 report. Several firms have been talking down J.C. Penney, and even Fitch stepped up last week to lower the retailer's credit rating.

Perhaps the biggest shock at J.C. Penney is that online sales plunged 37%. This is mind blowing. Even Sears managed to grow its Sears.com sales by 20% in its latest quarter.

Shouldn't J.C. Penney's everyday low price strategy worked out well for the chain. Isn't the new "JCP" logo a nudge for shoppers to check out jcp.com?

Last week's ad circular for J.C. Penney read "Welcome back" on the cover. It was a play on words. It's a Veterans Day nod, as a soldier on the cover returns home to his family. However, the copy also welcomed back shoppers that hadn't checked out its stores since its February makeover. Going by the company's comps over the past three quarters that's a pretty sizable audience.

JCP stands for "Johnson Can't Produce"
It's a pretty safe bet that last year's golden boy of retail won't have his halo for too much longer. He inherited a chain that was stagnant, but he has somehow shifted into reverse and pushed hard on the accelerator.

Sears and J.C. Penney have become the two sorriest chains in the land of lost retailers, but they got there in entirely different ways.

Eddie Lampert -- a value investor with Johnson-sized aura when he stepped in and combined Sears and Kmart -- has been cutting costs to preserve the company's capital. Many argue that his reluctance to spruce up Kmart stores have doomed the chain. Johnson, on the other hand, wasn't afraid to shake things up. He took the bold step of moving away from coupons and sales, investing in a new store layout where popular brands pop up for a "store within a store" town hall theme.

In other words, Lampert has crushed Sears through his inability to invest in the chains. Johnson is destroying J.C. Penney by investing in the makeover.

The philosophies aren't working, and one has to imagine that things would have played out better if Lampert had J.C. Penney and Johnson had Sears.

It may be too late to fix the problems
There aren't too many chains that get a second chance, but it's not as if J.C. Penney's everyday low pricing approach is a bad one.

Johnson cut his teeth at Target (NYSE: TGT  ) ; the discounter isn't the cheapest of the discount department stores, but it is the most stylish. Target uses exclusive product lines and its "cheap chic" aura to drive traffic. You can be hip even as you dive deeper into the closeout bin. The recently public Five Below (Nasdaq: FIVE  ) attracts young shoppers to its stores where everything is priced at $5 or less. Expansion is a major reason for net sales soaring 40% in its first quarter as a public company, but comparable-store sales also rose by an impressive 8.6%. On the higher end, a coupon-free existence can succeed if a sense of urgency is created. Francesca's Holdings (Nasdaq: FRAN  ) "deep but shallow" apparel-stocking philosophy means offering a limited amount of a lot of different items. Shoppers know that if they don't buy the outfit they like then that it may not be there when they come back.

It remains to be seen what Johnson will do with J.C. Penney. It's too late to make it "cheap chic" judging by the crowds that it will attract by offering free holiday family portraits this season to go along with its free children haircuts on Sundays. Sears will continue to meander, and eventually it will have to shutter Kmart stores and focus on a revival at its namesake franchise.

Investors should be smart enough to avoid either chain as investor, though waiting as a shopper for the going out of business sales makes sense.

More square than fair
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the "3 Companies Ready to Rule Retail" in our special report. Uncovering these top picks is free today; just click here to read more.


Read/Post Comments (29) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2012, at 6:23 PM, leaderoftheback wrote:

    I'm a lousy shopper. I want to get in, find something that fits and get the heck out (which never happens) and not feel like I've had my pocket picked. I visited Penney's for the first time in an eon and a half, as no other store was doing it for me (and on-line doesn't work for finding clothes that fit). I was first struck by how little there was in the store . I couldn't find ANYTHING. Then I did. Four pair of pants from 3 different racks; find the fitting room, throw 'em on; fine; grab a package of undies; $86 and I was out the door in 15 minutes. Next time I need clothes (enough that I'm willing to set foot in a store), I'm going straight to Penney's. I hope they are still in business, selling the same stuff for the same price. It definitely worked for me.

    (-and a note to the Penney's people: I would have bought a couple of dress shirts, but those were not so good).

  • Report this Comment On November 19, 2012, at 6:51 PM, Toast82 wrote:

    I read the title and thought the same thing years ago. Sears has a strong hardware and appliance dept. J.C. Penney's has continuously mismanaged how they approach shopping to increase the bottom line short term. That's now catching up to them. I'm betting J.C. Penney's will be the first to go.

  • Report this Comment On November 19, 2012, at 7:06 PM, Scoot411 wrote:

    I think Penny's will be the first to go as well. In my neck the of the woods Kohl's is just eating Penny's up. In fact, I shop there and the sales that Kohl's has is outstanding. At least, Sears has a hardware side and lawn & Garden section as well as clothing and electronics section. As far as K-Mart goes, it's getting its rear handed to it by Wal-Mart! However, I think Obamacare wipes out both next year!

  • Report this Comment On November 19, 2012, at 7:59 PM, jalistair wrote:

    Another factor to weigh in against JC Penney's is that they are under a boycott from AFA due to supporting homosexuality. Regardless of ones feelings on this issue it still must be taken into account since Penney's markets to families for their sales and AFA also markets to families for boycotts. As long as the Christian block continues to boycott Penney's it is not likely the company's bottom line will improve.

  • Report this Comment On November 19, 2012, at 10:51 PM, mbmcf wrote:

    As a long time JCP value shopper (wait till season change, then get what you wanted that they still have, at 75% off), I've been back to the local store at Christiana Mall a few times while they were doing their 'upgrade'.

    Very little traffic, store now looks empty. Their 'Square Deal' pricing is still 10-20% higher than it needs to be to get my purchases. The spiffy new mini stores within the store have lots of flash and glitter, but the mdse is of the 'so what' variety for me. Bad mdse mix, too pricey, too stylish.

    Oh, and they no longer seem to have a tall shop, and there are no shirts for tall people like me.

    Time to cut up the JCP credit card...

  • Report this Comment On November 20, 2012, at 12:09 AM, filegumbo wrote:

    Wow, after reading these posts I realize I am not alone. I ordered two Stafford dress shirts for pickup at the local JC Penney store. It took the better part of a month before I finally got notified that my merchandise was on hand. This was my first foray into this store since the "makeover" took place. First thing I encountered was that the "Will Call" department was no more, and was told I could pick up my order at any cash register. The cashier stations are adjacent to the store exit, like Target and Wal-Mart, far from where the pickup merchandise is stored. When my turn came up the cashier had to close the register and walk some considerable distance to fetch my order, all the while with a line growing ever longer at the cash register. This became stressful as I felt like I was holding up the line. Finally when the cashier returned and charged my card for the two shirts I ordered, I decided to open the box and check the goods. The invoice showed both shirts yet only one was in the box, and the pick ticket attached to the box only referenced one shirt, the cheaper of the two. I had just paid for both. The cashier and a supervisor searched the store's operations manual for phone numbers to call "headquarters" to trace the missing portion of my order, only to end up with the sound of a fax machine at the other end. They finally gave up. Meanwhile my cashier went back to the warehouse to search for a second package. He came back empty handed. The paperwork was confusing to the store personnel, who finally overrode the system and marked the missing shirt as "returned" --refunding me the difference in cash, since they apparently could not credit my Penny's card, which will now have carrying charges for a shirt I will never see. This whole process took almost an hour. Later I called the "Customer Service" 800 number only to be told the missing shirt was discontinued, yet they insisted that both my shirts had been checked in at the store. Will I be subjecting myself to any more of this frustration? I think JCP has lost a customer. Kohl's now has a store within a mile of Penney's and I will definitely check them out. A postscript--I was astounded when I placed the online order for my shirts--almost everything in my neck size (I require an 18 collar) was out of stock--I mean nearly every color and style of Stafford shirt--Penney's house brand that has been my mainstay. How can you be out of everything a month before Christmas? And yeah, to echo another commenter, the local store has no selection in the big and tall sizes--and what I ordered online was my fourth or fifth preference after seeing nothing but "out of stock" on the website. Sad to see after shopping at Penney's for over 50 years, but I don't think they are long for this world.

  • Report this Comment On November 20, 2012, at 2:50 AM, kukama wrote:

    No doubt about it...JCP will go first. First they dumped their TBA dept, and then totally abandoned their stores here in Hawaii. No self-respecting teenager would show up wearing stuff from JCP (isn't Pencrest already gone?)

    At least Sears still has a viable appliance and tools dept, but with their business being so shakey, their warrentee service could be a crap shoot and the discount (Ross's) and boutique shops are taking over the clothing business.

  • Report this Comment On November 20, 2012, at 8:34 AM, Truth2Power wrote:

    @mbmcf: Christiana Mall? Are you a fellow Delawarean, perhaps?

    --T2P

  • Report this Comment On November 20, 2012, at 8:36 AM, Truth2Power wrote:

    @Scoot411: Kohl's is sort of the anti-Penney's. Penney's has no sales and "everything discounted." With Kohl's, the "regular" prices are pretty steep, but EVERYTHING is ALWAYS discounted! I went in once and was hard-pressed to find something that wasn't marked at least "20% off." Guess we're seeing which model works best.

  • Report this Comment On November 20, 2012, at 10:12 AM, Scoot411 wrote:

    @Truth2Power, it's been a couple of months since I've shopped there, but the last time I was there I got 3 Haggar Henley LS shirts $30 each, 2 pairs of of Lee Dungaree carpenter pants at $30/pair, a Levi leather belt for like $25, and something else, but can't remember and my total was $190. I hit a special Friends and Family discount at 20% off and another special discount of 20% off for using my Kohls charge, which I NEVER let the interest take over on. Total Bill with tax, $120! I think that's a the key, is to hit their discounts and have a Kohl's charge for a little extra off. The store carries name brand stuff. Their professional sports apparel is 25% cheaper than what you'd find at the sports shopping website, like NFL.com and MLB.com. Not a big fan of their house brand because I swear that stuff shrinks in my washing machine.

  • Report this Comment On November 20, 2012, at 10:21 AM, wordjunkie wrote:

    "Everyday low pricing" rarely works as a marketing strategy. That's been proven many times. People are simply too addicted to the "Big Sale!".

  • Report this Comment On November 20, 2012, at 12:29 PM, topbeancounter wrote:

    Sear's has more property in prime locations. They will outlast JCP, although neither manager appears to know what the hell they are doing....

  • Report this Comment On November 21, 2012, at 3:39 PM, AMcGillacuddy wrote:

    Sears must be revived, Craftsman alone is worth their existence. I do agree with finally burying K-Mart, that chain has been on life support for ages.

  • Report this Comment On November 21, 2012, at 5:12 PM, Risky88 wrote:

    I have been sayin jcp will go under for 3-4 years

  • Report this Comment On November 21, 2012, at 5:46 PM, AnsgarJohn wrote:

    Kmart and Sears both suffer from trying to increase gross margin % (which are not the same in retail as manufacturing) instead of gross margin $ per sq. foot. Kmart: http://www.dbusiness.com/DBusiness/July-August-2010/Polyeste...

    IKEA's founder describes his fight against GM% thinking: http://www.good2work.com/article/8353

  • Report this Comment On November 22, 2012, at 1:10 AM, TMFVelvetHammer wrote:

    Rick, I've got to start reading you more closely. I just posted this to my Fool blog this afternoon:

    http://beta.fool.com/elihpaudio/2012/11/20/i-love-what-youre...

    Great minds, something something...

    -jh

  • Report this Comment On November 23, 2012, at 11:57 AM, gene132 wrote:

    Has anybody considered that we are entering the 6th year of a major depression? And that there are simply TOO MANY retailers for the size of the shrunken market? 2013 is going to bring a lot of bad news, as the depression takes hold. In the words of the POTUS "the best is yet to come".

  • Report this Comment On November 23, 2012, at 1:37 PM, CEDUP wrote:

    Sears/K-Mart are first. I buy lots from Penny's Online. Sears has nothing, KMart actually used to have things for less, now they have no selection of stuff. It's just more over paid management fleecing the companys, doing nothing but getting un earned large pay checks. Just like Sony, Sharp,Panasonic,Sanyo, soon Apple all gone. HP all gone. Pennys was a pioneer in retailing, how do they loose their way? I never go to Wal-Mart they are extremely depressing, last time was years ago, scared me. Ugly and that's the people walking around, with the horrible bleak looking spaces. Selling Chinese garbage,remember, the high cost of low prices! Montgomery Wards? E.J Korvettes, Korvettes used to have a great music dept, every LP, for less. . We will not survive if it continues to be a Wal-Mart planet. It's all devolving, CHEAP crap, not quality, or workers getting living wages.

  • Report this Comment On November 23, 2012, at 2:10 PM, AnXHoosier wrote:

    I sincerely hope it's Sears. Their pattern is to annoy you to buy the appliance service contracts, then not show up for service when you call. One time they told me I gave them an invalid phone number (yeah right), then when service finally did arrive (days late) the tech told me they don't have nearly enough techs to cover the service workload. Complaints to management? I got passed from one phone number to another to another. No one wanted to hear it, no one cared. I had been a very good customer over the years (tools, yard maintenance equipment, major appliances) but now I will no longer set foot in a Sears.

  • Report this Comment On November 24, 2012, at 9:33 AM, leaderoftheback wrote:

    Just want to reply to two things:

    re: Kohl's- I'd always had decent luck at Kohl's, but there isn't one close by so I am essentially betting that I'll find something. Sometimes I do, sometimes I don't, but it always takes hours either way. I drives me nuts; and not for nothing but the (previous) last time I went to Penney's, they had the same Haggar pants for something like $40 that I bought for twenty-something (on sale) at Kohl's. Those are the very same that I just bought at Penney's for $30. I'll pay $2 to not waste an hour shopping.

    re: Every Day Low Price Model- There are successful companies using EDLP. One that I am most familiar with is Hannaford food stores. They are an exceedingly well run company, so I think that is the difference with JCP (which may well improve it's management).

  • Report this Comment On November 24, 2012, at 11:36 AM, HRTKD wrote:

    All my dress shirts used to come from JCP. But within the last couple of years the selection was horrible, even on-line wasn't that great. Then came their in-your-face advertising using homosexual models. I'm part of the AFA boycott. I doubt that it is possible to quantify the effect of the boycott but my $250 in biannual shirt purchases went elsewhere.

    Most of my hand tools come from Sears. I prefer to buy the Craftsman brand for the warranty but their prices are starting to make me look at some of the premium brands. My local Ace Hardware sells Craftsman tools now so there is no reason for me to travel to the more distance Sears store. If Sears dies I hope that Craftsman lives on.

  • Report this Comment On November 26, 2012, at 8:54 PM, Mpolomarco wrote:

    gene132 - '6th year of a major depression'? I don't think you understand the concept.

  • Report this Comment On November 27, 2012, at 8:19 AM, mikecart1 wrote:

    They can both go at the same time if you ask me. Haven't been to either in years and have no need to. Kohl's, Target, Home Depot, and Amazon sell everything both stores do for much cheaper and I don't even need to leave my house. Going to JCP or Sears only causes anger because it is like a maze in the store and don't get me started on finding where to pay for the stuff. I remember back in the day that would be the hard part. Every payment counter was empty. Maybe the workers are out shopping at a competitor store when they should be manning the register???

  • Report this Comment On November 28, 2012, at 10:27 AM, nancydog wrote:

    My wife, an avid comparison shopper says that K-Mart will be the first to go--shoddy goods, advertising goods not in inventory, and indifference to consumers.

    I miss the Woolworth 5&10 of years ago.

  • Report this Comment On November 28, 2012, at 7:55 PM, Patt47 wrote:

    I'm going to go against a trend... I think JCP will make it. My 26 year old stylish daughter commented on the good values she can now get at JCP for her career wardrobe... This is an Express women shopping at JCP. They are abuzz about the deals on fb.

  • Report this Comment On November 30, 2012, at 12:46 AM, AquaVita wrote:

    Ron Johnson wants to eliminate cash registers. How does he imagine to cash people out? I think he still doesn't get how retail store, that sales clothes works. When a customer wants to buy a big purchase, how can I cash him out "on the floor" without any counter? It's not "Apple", when a customer buys 1-3 boxes. It' s clothes!!!! I have to fold it, and put it in the bags. Where bags are going to be, when there is no register and counter?

    Every time, when I think Ron Johnson can't get any dumber, he proves he can.

  • Report this Comment On January 05, 2013, at 1:28 AM, Rowants wrote:

    I used to buy all my tools at Sears, but the store keeps refusing to honor the warranties. And God help you if you need to warranty a tool that is sold 'online only', and that is getting to be alot of their tools. If I had the money to do so, I would sue Sears for failing to honor the warranty. I work in a diesel repair shop. 13 years ago when I started almost everyone had Craftsman tools, other than a couple guys who spent the big $$ on Snap On. Now, almost no one buys anything from Sears due to warranty issues. Most everyone buys either Snap On or Harbor Freight (yeah, they are extreme opposites, but the HF crap actually holds up pretty well, and they usually honor the warranty, better than Sears and less expensive), with a few goofballs buying Matco or Cornwell.

  • Report this Comment On March 20, 2013, at 12:57 PM, ginny789 wrote:

    Hmmm, very interesting post. I personally was just shopping for some golf bags (here http://aplussportsandmore.com/Golf-Cart-Bags-professional-Lo... ), and I was realizing how much I liked going to real stores like Sears more than online shopping. It's just interesting.

  • Report this Comment On January 14, 2014, at 4:54 PM, hatfieldd13 wrote:

    Before JC Penney started that stupid one price shopping--they were in trouble, but still had a chance to make it. When they changed I knew then they would not make it. As I told my husband, I am the shopper. I have predicted every business that would fold for the past 10 years. Kohls has them beat. Sears and K Mart are a done deal--no hope for them. Macy's is in trouble. Craftsman can make it as a stand alone.

    How these CEO's make the money and have no regard for the shopper--they get what they deserve. North Carolina Shopper

Add your comment.

DocumentId: 2119354, ~/Articles/ArticleHandler.aspx, 4/17/2014 11:22:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement