Could J.C. Penney Follow Sears Down the REIT Road?

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Friday’s announcement from Sears Holdings Corp. (NASDAQ: SHLD) that it was exploring the creation of a real-estate investment trust (REIT) for 200 to 300 of its owned stores sent the company’s shares soaring. The stock closed up 31% on the day and reached a peak of nearly 48% above Thursday’s closing price.

Could J.C. Penney Co. Inc. (NYSE: JCP) be thinking about doing something similar? Should it be?

In its Form 10-K filing for 2013, Sears reported that it owned 728 of its 2,429 (about 30%) store locations in the United States and Canada. The percentage is probably slightly different now because Sears has been closing (mostly leased) stores and reports store counts only once a year.

According to a retail industry note from Charles Grom at Sterne Agee, J.C. Penney’s owns about 39% (428) of its 1,094 stores, putting the company roughly into the same ballpark as Sears. Other department stores with similar ownership ratios are Kohl’s Corp. (NYSE: KSS) and Nordstrom Inc. (NYSE: JWN) with 35% and 37% ownership, respectively.

Sears wants to transform itself into what Grom calls “an asset-light, integrated retail member-focused company,” which is not something that J.C. Penney appears to be contemplating. J.C. Penney has chosen instead to return to its former model of promotional pricing and has shown little interest (so far) in the kind of financial engineering that Sears is considering.

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Sears could solve its liquidity problem by forming a REIT. While J.C. Penney didn’t exactly solve its liquidity problem, it was able to borrow enough cash late last year to give it some breathing space.

And remember, the cash J.C. Penney borrowed last year was collateralized by the company’s real estate. Setting up a REIT may be tricky, if not impossible.

J.C. Penney’s current problem is that its turnaround is stalled. The company’s plan to raise sales by more than 5%, lower spending and improve margins by 2017 has the ring of wishful thinking. Same-store sales for the third quarter are expected to rise by the low single digits, compared with a decrease in same-store sales of nearly 5% in the third quarter a year ago and a drop of about 26% two years ago. The bar is so low that it is practically lying on the ground.

J.C. Penney reports third-quarter results next Wednesday. The current consensus estimate for loss per share is $0.79 and the revenue estimate is $2.81 billion. The per-share loss is a major improvement over last year’s $1.85 loss, but the revenue estimate is up a mere 1%.

On Friday, J.C. Penney’s shares closed up about 4.6%, at $7.82 in a 52-week range of $4.90 to $11.30. Investors were probably thinking that if a REIT will work for Sears, it will also work for J.C. Penney. Not this week.

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