Sears' Slow Death Is a Cautionary Tale for J.C. Penney

 | Sep 14, 2018 | 1:18 PM EDT
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J.C. Penney Company Inc.'s   (JCP)   investors should watch Sears Holding Company's  (SHLD)  decline closely, as it offers a bleak future scenario for the company.

Sears and J.C. Penney are two of America's oldest retailers, both charting a history of over 100 years. Yet, their next chapters are under threat as Sears shares have fallen 63.8% and J.C. Penney stock has dropped 42.1% year to date. Both stocks are now valued under $2 per share.

Even with Sears' stock pop this morning, most investors are avoiding the stock and all but one analyst has abandoned coverage of the stock.

As Jim Cramer pointed out this morning, Sears is on the brink of disappearing even from its share donor status to competitors, which is more bad news for J.C. Penney. It has sustained itself with gains picked from the bones of Sears in recent years.

The Street reported that cash problems could create a difficulty for the company to run even to the end of 2019 and the tailwinds could disappear as soon as next year.

Jan Rogers Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises LLC, a retail investment consultancy, added that the two companies' similarities offers more negatives for J.C. Penney management, beyond the loss of the consumer tailwind.

Debt Drowns Retailers

One of the main problems that Kniffen highlighted in his interview with Real Money today is the debt problem that both retailers contend with.

At Sears, a seriously underfunded pension plan and numerous loan agreements to help shore up the lagging defined benefit plan has put the company under stress.

Last year, the company's continued maneuvering to refinance its debt and work around its mounting liquidity problem caused Fitch ratings to  downgrade the company's credit rating to default.

"We're looking at a gradually melting ice cube," Kniffen said of the company. "I don't think many people think Sears will ever be a relevant player in retail again."

For J.C. Penney he identified debt as a major problem for the company as well, and one that the company will need to contend with to avoid Sears' fate.

"Its debt that kills these retailers," he said. "And JCP is heavily levered."

He compared the company's position to that of Toys R' Us, which went bankrupt under the stress of a levered buyout arrangement that it could no longer sustain.

J.C. Penney currently holds $4.2 billion in debt, which accounts for 133% of the company's revenue in the last quarter.

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