Sears Holdings Corp.'s (SHLD) bankruptcy filing Monday morning offers a grim outlook for J.C. Penney Co. (JCP) which already has seen its shares lose substantial ground this year.
Shares of J.C. Penney were down 2% in premarket trading Monday after a 2.8% decline on Friday that came amid reports of Sears' pending bankruptcy filing. J.C. Penney's stock price has plunged 48% year to date, according to FactSet data.
Unfortunately for JCP shareholders, the stock's slide, while not as bad as the nearly 89% drop in Sears shares this year, is not the only thing the two storied retailers have in common.
Borrowings Burden a Comeback
Despite a robust retail environment bolstered by a booming economy, J.C. Penney is struggling to keep its head above water.
As was also the case with Sears, a burgeoning debt burden amid its stock's slide has left J.C. Penney saddled with a level of debt significantly greater than the value of the company itself.
The company currently carries $4.2 billion in debt, with a total company valuation of only $554 million.
Jan Rogers Kniffen, president of retail consultancy J. Rogers Kniffen Worldwide Enterprises, told Real Money in a recent interview that J.C. Penney is the likeliest company to follow in Sears' path precisely because of this debt burden.
"The debt load is what kills these companies,"Kniffen said. "It keeps the company from reinvesting in the business when they really need to be."
J.C. Penney's debt burden thus might keep it from capitalizing on Sears' sudden donation of market share.
Short Interest
So, if the market is readying the funeral pyre for J.C. Penney, how might you be able to play this action? One answer is, of course, short-selling.
According to Short Squeeze, a data platform covering short interest movements, many already have taken this option, with 133.7 million J.C. Penney shares sold short in total. The interest represents 46.8% of the retailer's float.
Real Money's David Butler said shorts are likely to win the day at J.C. Penney in his column on Friday.
"With Sears basically circling the drain, I view J. C. Penney as the next bet for shorts," Butler wrote.
The company's flagging sales coupled with its debt burden make it an ideal target for investors awaiting an imminent downfall.
"Make no mistake, further financing and losses will lead to further pressure on the shares," Butler said. "That's where the shorts come in."
Can New CEO Stem the Tide?
Still, J.C. Penney does have some hope.
New CEO Jill Soltau takes the helm after the company maneuvered without a captain for five months, marking the most significant period of decline in the company's shares this year. Her accession to the lead role might help calm shareholders through the current storm.
In addition, Soltau comes into office with the ability to gobble up much-needed market share as Sears folds. Despite its decline Sears still recorded $3.2 billion in sales in its most recent quarter.
"J.C. Penney & Burlington (BURL) seem best positioned to gain share in 2019 due to close proximity to Sears stores," Credit Suisse analyst Michael Binetti said in a note explaining the impact of Sears' bankruptcy. "We estimate JCP could see as much as a 260 basis point lift to annualized same-store sales growth."
If Soltau can position her company correctly she could end up providing vital lifeblood to the ailing retailer, especially as the pivotal holiday season arrives.
Possibly Too Little, Too Late
As J.C. Penney comes toward the holidays and eyes the market share left in Sears' wake, company executives could become more confident in a comeback.
However, the company may be beyond salvageable for the newly crowned leader.
"We are maintaining our cautious rating on J.C. Penney, underperform [with a]$1.00 target price," UBS's Binetti said despite his positive forecast for share gains. "We see any Sears share gains likely to be eclipsed by an ongoing longer-term cycle of store closures, overhead reductions, scale benefit losses, and leverage constraints to growth investing."
His analysis adds to David Butler's take that the company's downfall has been years in the making and no one catalyst nor one person can turn it around.
"I question whether new CEO Jill Soltau really has the means to fix the situation," he said. "I think she's come into a scenario that's too far along to solve."
