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Why Sears bankruptcy will be bad for J.C. Penney

Struggling J.C. Penney (JCP) best brace for an avalanche that has been set in motion by the death of longtime foe Sears.

Sears, which filed for bankruptcy protection on Monday, will soon begin liquidation sales at 142 locations as a means to raise cash to pay back creditors. The liquidation sales – ranging from sweaters at Sears to toys at Kmart – will likely cause shoppers to check out the stores for hot deals. That traffic spike at Sears and Kmart could lead to fewer customers this holiday season wandering the aisles of J.C. Penney. To combat Sears’ rock-bottom liquidation prices, J.C. Penney could be forced to respond with its own cut-rate prices.

The vicious circle of deals will probably be most severe at malls that have both a Sears and J.C. Penney. Between two key mall operators in the U.S. alone – Simon Property and Macerich – there are 71 shopping malls that house both a Sears and J.C. Penney, according to Yahoo Finance calculations.

Going-out-of-business sales at Sears may come at a steep financial price to J.C. Penney this year, says retail analyst Rick Snyder of Clearview Trading Advisors. Snyder says a complete liquidation of Sears in the first quarter of 2019 would be a “significant headwind” for J.C. Penney, too.

“This won’t topple J.C. Penney, but it will almost certainly impact short-term results,” Snyder says.

New J.C. Penney CEO Jill Soltau will confront an early challenge in the form of the Sears bankruptcy.
New J.C. Penney CEO Jill Soltau will confront an early challenge in the form of the Sears bankruptcy.

J.C. Penney doesn’t need the Sears headache

The last thing J.C. Penney needs right now is a nationwide Sears liquidation. J.C. Penney shares have crashed 53% year-to-date amid a string of disappointing sales and profits. The stock has shed about 13% since Monday following the Sears bankruptcy news.

The weak financial results sent CEO Marvin Ellison packing to take the helm at Lowe’s in May.

J.C. Penney appointed retail veteran and former JoAnn Stores CEO Jill Soltau earlier this month as CEO. To snag her talents, J.C. Penney had to cough up a $6 million signing bonus. Soltau’s annual base salary is $1.4 million.

Soltau will be tasked with jump-starting J.C. Penney’s results just as a similar retail concept – Sears – is disappearing. Longer term, says Snyder, Soltau must find a place for J.C. Penney in the ever-changing world of retail.

But Snyder isn’t totally convinced J.C. Penney does have a place in the future of retail. After all, fellow mid-tier department store Sears has gone bust.

“I see 16 cents a share as intrinsic value for J.C. Penney shares.” J.C. Penney shares are currently trading at about $1.54.

A J.C. Penney spokesman did not immediately return Yahoo Finance’s email request for comment.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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