Sears vs. J.C. Penney: Which is worse?

Both of these storied retailers are on the skids. But if you want to bet on a turnaround, it's clear that one of them is trying harder.

By MSN Money Partner Jan 14, 2014 12:35PM

By Jeff Reeves for MarketWatchMarketWatch on MSN Money

 

Choosing between Sears or J.C. Penney right now is a bit like choosing between eating sawdust or getting a root canal.

 

Neither option is appealing.

 

The stocks of these storied retailers are both suffering -- losses, revenue declines, stock prices that have dropped precipitously since 2011 and brands tarnished in the eyes of consumers and investors alike.

 

But if you gave me $1,000 in free money with the express condition it be invested in either Sears (SHLD) or J.C. Penney (JCP) stock, my choice would be clear.

 

(Article continues after video.)

That’s for one simple reason: J.C. Penney is reducing costs and trying to reinvent itself out of necessity, while Sears started the process of bone-deep cuts long ago... with seemingly no intention of ever stopping.

 

Given the choice between a struggling company that is trying to improve and a company that doesn’t care about long-term strategy as long as it makes this quarter’s numbers, I’ll take the former.

 

Let me show you a deeper look at both Sears and J.C. Penney.

 

Sears is its own worst enemy

To be clear: I don’t mean to imply Sears management, led by hedge fund icon Eddie Lampert, doesn’t care about the company or its shareholders. Deep cost cutting has likely been to boost profits as much as possible -- or at least to juice the company’s stock price.

 

After all, Lampert’s ESL Investments has held a massive stake in the retailer since he orchestrated a merger between Sears and Kmart in 2005. And even after redemptions forced him to cut the stake recently, ESL still owns 48% of Sears at last tally. That’s a stake that Lampert would clearly rather see rise than fall, both for his personal fortune and for his reputation.

 

A Sears store in Illinois. © Daniel Acker/Bloomberg via Getty ImagesUnfortunately, the actions taken under Lampert’s leadership appear short-sighted and a serious impediment to any future success. Any efficiency has been had, and there’s little juice left for the squeezing at Sears.

 

Consider that, for several years, the company has internally functioned under a “decentralized system” of business divisions. It’s a system that, one former exec described as “warring tribes” and that author Mina Kimes likens to “The Hunger Games” in a cutting BloombergBusinessweek profile of Sears after Lampert formally took the reins as CEO of Sears in 2013.

 

To make matters worse, this constant war over resources has been increasingly fierce as revenue has steadily dried up. In 2006, Sears posted revenue of over $53.0 billion, and should finish its most recent fiscal year at $36.6 billion -- a decline of over 30%.

 

Look at the company’s declining capital expenditures and you’ll see just how little Sears is investing in its future. Across 2011, Sears spent $432 million on capital expenditures. Across 2012, it was $378 million. And by my math, Sears will easily finish under $300 million in capex with only $201 million spent over the first three quarters of the year.

 

Just do some quick math and you’ll see how paltry that is. Sears has about 2,500 full-line and specialty retail stores, equaling about $120,000 per location for the year.

 

By contrast, Target (TGT)   has about 1,800 locations and spent $3.2 billion last year -- more than 10 times what Sears dished out, equaling about $1.78 million per location. Oh, and Target has increased its capex roughly 50% from $2.1 billion in 2011, while Sears has been cutting back.

 

This is not a new trend, either. I expect total capex for Sears since the beginning of 2008 to come in well under $2.4 billion when fourth-quarter numbers are reported. That means despite having fewer total locations, Target spends more in one year than Sears has spent on improvements to its business since before the Great Recession.

 

When it comes to Sears, its recent capex numbers speak volumes on how the company is being run with a painfully short-term outlook.

 

J.C. Penney at least tried

Of course, it’s worth noting that sometimes miserly behavior like that at Sears is necessary to keep the lights on. After all, Sears simply has less potential than it did 20 years ago.

 

Case in point: Thanks in part to incredibly lean operations, Sears is in a better cash position than embattled rival J.C. Penney. By my tally, Sears carries $4.7 billion in total debt vs. a $4.5 billion capitalization -- an ugly number, sure, but much more comfortable than the $5.6 billion in total debt Penney carries on a market cap that’s just $2.4 billion.

 

All this debt doesn’t come cheap, either, considering both have CCC+ debt ratings from S&P that the agency reserves for companies that are “vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.”

 

Case in point: Penney has a batch of bonds due in 2015 that carry a whopping 6.875% interest rate, while some 2016 notes carry a 7.65% rate.

 

One could argue J.C. Penney should have been more aggressive with cuts and could take a page out of the Sears playbook — based on both the debt levels as well as stock performance; Sears stock is down only slightly in the last year while Penney shares have sold off a staggering 60%.

 

But here’s the thing: At least Penney tried. I would much rather invest in a company that attempted to grow and failed than a company that appears to have resigned itself to circling the drain.

 

J.C. Penney took a big shot in 2012 on an ambitious (and some might label naïve) “store within a store” strategy, a plan that hoped to evolve the business under the guidance of former Apple (AAPL) retail chief Ron Johnson. It failed miserably, as evidenced most painfully in a staggering $552 million loss in the fourth quarter of 2012.

 

So Penney fired Johnson and replaced him with Mike Ullman, the CEO who presided on roughly seven years of disappointing sales at the retailer before Johnson took over in 2011. The company has pretty much hit the “reset” button to stabilize things.

'

Bears have good reason to be skeptical with a debt load like that and a severe case of déjà vu in the C-Suite. And given the history of Penney’s stock, investors are clearly unwilling to go through this again.

 

But like I said... at least Penney and its board knew that something had to give.

 

Doing something beats doing nothing

Like I said, I have zero interest in buying either of these battered retail players right now. In fact, if you want trading advice regarding these stocks, my best idea is to buy calls to protect against a squeeze and then short them instead.

 

But while both stocks are in deep trouble, I have more faith in J.C. Penney than Sears.

Sears seems to be content on spinning off businesses where it can find value, like the planned Lands’ End spinoff and the Sears Hometown and Outlet (SHOS) spinoff from 2013 -- and simply bleeding the rest of the business dry.

 

Penney took a big gamble and failed, and is now regrouping. Whether it has enough time on the clock is anybody’s guess, but at least it has a plan.

 

The same can’t be said for Sears. Lampert is acting out Wall Street cliché, slashing and burning in the wake of the 2005 Sears-Kmart mash-up with no apparent long-term plan to speak of and no short-term plan beyond the idea of more profits at any cost.

 

I don’t know if either stock will end the year higher -- and people are speculating about whether either stock will even be publicly traded anymore in 12 months’ time.

 

But if I had to back one of these companies on turnaround hopes, my money is on J.C. Penney.

 

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VIDEO ON MSN MONEY

166Comments
Jan 14, 2014 3:15PM
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Recently, my parent's 5 year old Kenmore washer stopped working and they called a company (not Sears) to come out and service it. They told my parents it would be $400, plus it would take time to get the part. They then decided to just buy a new washer and went to a Sears store in Novi, Mich. The salesman, who was also the manager of the store, tried talking them into buying another Kenmore washer, but my mom told him she didn't want another Kenmore due to this one not working after only 5 years. The manager asked them if they purchased a warranty, which they did, but my parents told him they were sure that the warranty had probably ran out. The manager looked into it and found out that indeed, the warranty had just recently expired. He told them Sears WOULD still honor the warranty and sent a Service guy out to find out what the problem was. Not only did he repair the major problem that caused the washer to stop working completely, he also ordered a new lid to replace the old one that had started to rust. My mom and dad did not have to spend a penny to have it fixed and now have washer that is like new! This is the way Sears used to operate and take care of their customers by backing up their products. I believe if Sears consistently treated their customers like this, they would have more business than they could handle.
It's just a shame that it probably won't happen like that.

Jan 14, 2014 2:11PM
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The author is making a BIG assumption that Sears is trying to stay in business.  That does not appear to be true.  Eddie is selling off the pieces and will soon go for all the real estate holdings.  He will make out just fine while the rest of the employees are out on the street when everything is closed up.  I would bet Sears is closed up long before Pennys.  At least Pennys is trying to stay in business.
Jan 14, 2014 2:35PM
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Just returned a washer and dryer because Sears could not deliver as promised.  Gladly went to HomeDepot and paid more money to get what I wanted, when I wanted it.  By far the worst customer service I have ever had.  It is only a matter of time before Sears closes its doors not only for financial reasons but for their poor customer service.
Jan 14, 2014 2:38PM
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I hope neither goes under..... I don't want to see anyone lose there jobs even if management is phucked up.

Jan 14, 2014 2:40PM
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I have to say I was pessimistic about JCP and it still may be too late, however I recently went shopping for myself after Christmas on a weekday. Sales were over and people were back at work.  JCP was busy and people were buying. The clothes seemed better choices again and the shelves were stocked.  Sears had shuttered the bottom floor in the same mall and had only the smaller upper floor with tools, housewares and appliances. I think Sears has surrendered.
Jan 14, 2014 3:23PM
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We used to do alot of our shopping  at Sears in Tampa and you wouldn't even know you are in America, they just speak Spanish over the loud speaker! We could never understand what they were saying....So we stopped shopping.
Jan 14, 2014 2:39PM
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Having worked for Sears, part-time, for a few years, I can attest to how horribly short-sighted and poorly run their upper management is. This all filters down to your local Sears. The emphasis was always the bottom line and that came first. Screw customer service, get those credit apps! (for which they made money).  It was never about selling products. I hate to see Sears go; I used to always shop there, so did my mom but the way they run their business, treat their employees AND their customers as a result of poor management,  they need to either get new management with an eye to the future or go out of business.
Jan 14, 2014 2:10PM
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Sears should go under. They are terrible.
Jan 14, 2014 1:05PM
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Sears- by a long shot. When their credit division got caught bullying customers are charging nose bleed rates, it needed to go. It's iconic brands built for decades on quality, affordability and reliability were ABUSED by a joke of a management team.
JCP--- one of the first to buy a bank for it's credit services and kept it as a service aspect. Penney's failed with the influx of imported crap with iconic brand labels. It's own brands used to be made in the USA. Plain Pockets competed with Levi's. Arizona was made by the same Chinese factory that made all the other knock-off brands for every big box and every former iconic brand.

The issue isn't the stores, it's the management and turning America into a forced-to-accept-crap spewed by business platforms. We need to go after degrees who brought America to it's knees. Instead, we gave them Golden Parachutes. Kill the inheritors, they knew EXACTLY what they were doing.   
Jan 14, 2014 2:27PM
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I would agree with you pretty much Mr. Reeves, except for ONE thing. The current CEO and the previous CEO at least TRIED to boot JC Penny. Like you say, at LEAST give them credit for that. They may have made dumb decisions, but they did at least try.


Now, at Sears, you have Lampert pretty much doing nothing but playing people off against each other. He is NOT trying to save the company, he is trying to LIQUIDATE it. I AM NOT a CEO, but even I can see what he's doing. And what he's doing, is trying to make Sears as CRAPPY as possible, and he's doing it on purpose!!! If he REALLY wanted to save Sears, he would be doing EXACTLY the opposite of what he's been doing. If I can see it, then HE should definitely see it. Since we can assume he does see it, and is doing this to Sears on purpose, you just KNOW he's got some short-sighted monetary gain in mind. GREED. GREED GREED.

Jan 14, 2014 2:15PM
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Sears at least has it's tools and lawnmowers etc to hold it over but the store is crap. I haven't been there in like 5yrs and I walked in and only one person was working to check people out in a huge mall based store. (They must be hurting). It smelled like my grandmothers basement (like mildew). I will never go there again. At least JCP is clean, organized and has some really great NY based high end brands and Sephora that's a huge plus.
Jan 14, 2014 1:55PM
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I am still wearing my JC Penney classic long skirts and blazers. which never seen to go out of style.
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JC Penny is going out of business in 2014,but Sears keep floating.we shall see more businesses closing down as the U.S.economy gradually keeps declining over the next few decades as well as the middle class disappears and only two social classes will be left; the rich and the poor,period 
Jan 14, 2014 5:17PM
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At the local K Mart, you could usually fire a cannon down the aisles and never hit a customer.
Jan 14, 2014 3:34PM
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.....Sears is in a financial death spiral.....................

 

Their balace sheet is unsound and the market cap is skewed higher due to Lampert propping up the share price since he owns 48% of the shares which minimizes the fluctuations. Additionally, the Sears name and reputation is permanently tarnished as can be attested by all the negative comments on this forum. Lampert is clearly selling off assets which will expedite the bankuptcy of Sears Holdings. My guess is 2-5 years at the most. Sears, Roebuck and Co. will end their 100+ year run. I have many fond memories of Sears - but their no longer competitive in today's retail enviironment.

 

JCP meanwhile has a good, sound reputation, public image and perception. The bankruptcy of Sears will further boost JCP. America needs a good mid-level retailer.

 

GO JCP!!

Jan 14, 2014 3:23PM
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Sears like most these days is only motivated by maximizing profit.  To be successful you have to think about giving the customer a good deal and a good reason to want to shop at your store. I used to love sears, I bought everything there, I never go in there anymore and it has nothing to do with the prices. The hardest thing to find at sears is a clerk. Accountants are ruining businesses, if you do a good job at retailing, the profits just roll in.
Jan 14, 2014 1:29PM
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Please don't take away my Craftsman or kenmore!
Jan 14, 2014 3:42PM
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Choosing between sears & jc penny...that's like choosing between a kick in the nuts & a poke in the eye with a sharp stick. I don't know about jc penny, but sears let me walk out of their Auburn, Mass. store when they wouldn't honor their own on-line price for a set of Michelin tires. Almost  $900 sale allowed to walk! To a local competitor who was more than happy to honor the sears price. I wonder if jc penny would be that stupid??  Sears was, & I think still is !!
Jan 14, 2014 5:17PM
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neither!!!!!!!!!!!! Never had a sears charge card, still getting letters from collection co. saying sears will settle $2700.00 for only $500.00. whats that all about. No wonder sears is so bad off.
Jan 14, 2014 1:22PM
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Regardless of who they are, they will all topple over one by one.
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