Which will go bankrupt first: J.C. Penney or Sears?

Both are expected to bleed serious red ink all of this fiscal year and even across the next 2 fiscal years.

By InvestorPlace Sep 19, 2013 12:53PM
Sears store on in Milford, Connecticut Spencer Platt/Getty ImagesBy Jeff Reeves

iplogoJ.C. Penney (JCP) and Sears Holdings (SHLD) are both doomed retail stocks. To some, the only question is which will go bankrupt and wipe out investors first.


Sears is losing hundreds of millions of dollars each quarter, with SHLD down about 50% from 2010 highs even after the recent short squeeze that sent the stock soaring from $40 to $60 on the continued hopes of "unlocking value" in its real estate holdings.


As for JCPenney, the stock is down 70% from its 2012 high built on Ron Johnson optimism. The former Apple (AAPL) retail exec failed and has now become the former JCPenney exec, and shares continue to slump with his predecessor Mike Ullman back in the saddle despite his previous stint, when he basically ran JCP into the ground.


Which one is worse? Well, it's hard to say.


Both JCPenney and Sears are expected to bleed serious red ink all of this fiscal year and even across the next two fiscal years. Both have an abysmal CCC+ rating from S&P, deep in junk territory and described as "currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments." Not pleasant.


So how likely is bankruptcy? Well, let's look at each pick separately.


First, JCPenney. The retailer has $5.8 billion in total debt and total liabilities of $9.3 billion vs. a market cap just under $3 billion. Fortunately, however, total assets are $11.6 billion (presuming they were valued correctly at the end of last quarter) so the math shows that selling the company for parts tomorrow could pay all the outstanding bills. With almost 25% more in assets than obligations, there's plenty of wiggle room, too.


But talk of credit drying up (investorplace.com) for JCPenney in August is a real threat. Obviously, the financing games to keep the lights on and restructure the business only work so long as the banks are willing to play ball. JCPenney could be one bad headline away from a credit freeze and a bunch of bounced checks.


Sears is in a similar but slightly better position. Total debts are $3.7 billion and liabilities are $16.9 billion. With a market capitalization of about $6.3 billion, the retailer has less debt than its market value -- something JCPenney can't claim -- and liabilities that are less than 3x market cap vs. more than 3x for Penney.


The real difference, however, is in total assets that top $19.3 billion -- almost 14% above its outstanding obligations. That's a slimmer margin than JCP but still a favorable one.


So when it comes to the question of bankruptcy for Sears or JCPenney, which is driven almost wholly by lenders who think it's the only way to get paid, there is clearly no imminent threat. As long as JCP and SHLD are worth more than their obligations, they will continue to operate as usual.


But the important thing for investors to note is that with continued cash bleed at both companies, the weight of debt service thanks to a poor credit rating and the overall consumer trend that has resulted in slumping sales for these department stores ... well, the losses will keep mounting and we might not be far removed from liabilities overwhelming assets at SHLD or JCP.


Neither will be going bankrupt anytime soon, barring a turn of very bad luck in the short-term, but given the trend, it's likely that either or both could face serious solvency questions as early as next year.


Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP


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151Comments
Sep 19, 2013 2:52PM
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I don't know which company will go bankrupt first but I do know my old lady worked at JCP for 13 plus years and was at almost 13.00 an hour. She led the region in credit card apps and loved her job and for a simple non management position of a retail clerk, she did pretty well.

Then one fall day the headhunter came in and took over the store. Inside of a week a lady that was never late, came in to work with a phone calls notice on her day offs when someone banged out (we lived under a mile away) and would go in at 2:00 am on Black Friday was thrown out the door for following the protocol of a 35 year employee who was the former store manager.

Over a dozen long term employees (some over 20 years at same store) were axed that week over assorted reasons and the younger, minimum wage employees who bang out sick, don't show up on time and hate their job, benefited. If JCP treats their employees like that then my guess is they are going to beat Sears to the grave. Not saying this out of bitterness, just my thought.

Sep 19, 2013 1:20PM
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As long as both companies continue to fail on their main focus, taking care of the employees and customers; they'll both be gone soon. The problem is, all of these slick forecasters will say or do anything to build up their stock so they're stock prices will go up and for what??? To keep the CEOs making their money. It's amazing, I spent 19 years at Sears and I knew more than any of the CEOs who get overpaid millions of dollars in stocks, plus their bonuses that I never got. Greed for the better part of the word: NOT GOOD. Shame on the stockholders shame on those who work close to those CEOs who are just yes men/women to them.

Sep 19, 2013 2:14PM
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Soon all we will have is WalMart, or should I just call it ChinaMart.

Sep 19, 2013 2:11PM
Sep 19, 2013 1:08PM
Sep 19, 2013 2:39PM
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Sears should go bankrupt.  I tried to exchange some broken "Craftsman" tools this past January only to be told that I would be put on a list as Sears did not have the items in stock because whatever factory they contracted with hadn't produced any.  It is now late September, I still don't have my replacement "lifetime warranty" tools, so, as far as I'm concerned, Sears can go right down the crapper where they belong.  Most of their current inventory can be bought cheaper elsewhere anyway, and a lot of their current garbage is made in China.
Sep 19, 2013 2:02PM
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how much sh.. do people need? all these companies are competing for less and less consumer dollars. an economy that relies so heavily on consumerism is a house of cards. maybe not this year or next, but the writing is on the wall.
Sep 19, 2013 2:08PM
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Does it really matter who goes broke first.  The country already is broke.  Surviving on it's last leg selling medicare supplements, "ask your doctor" pills and scamming old people out of their homes with reverse mortgage schemes.  I hope I would never puke an "ask your doctor" ad, try to scam people with medicare supplements or try to steal the homes they have worked so hard for.  God, please don't ever let me do either of those things!!!  I see the nation as the last glimpse of the brown thing swirling down the toilet after a flush. I was told years ago if something has to be advertised a lot, it isn't worth much.  And, if something is good, it doesn't have to be advertised.  I am sick of "ask your doctor!!!' ads!!
Sep 19, 2013 2:44PM
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JCP  was given the idea to become "America's store"  throw out ALL the foreign make junk and stock U
S made products.....JCP   did not listen....telling the customers JCP knows what you want to buy!!!!  CHEAP JUNK.

 

Sears and Pennys carry "Martha Stewart" products which absolutely are nothing but junk. I do not buy her products.

 

I do not go to either store to purchase anything!!!!!  Prices toooooo high, junk on the shelves.  Credit card interest rate toooooo high.

 

I now will look for local stores and Mom & Pop stores to spend my money, but still buy US made products.

 

GOOD BYE   SEARS AND JCP. you will not be missed!!!!

Sep 19, 2013 7:04PM
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Sears used to have good tools !!   They need to stop having them made in China junk  !! Go back to US made
Sep 19, 2013 3:48PM
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The last time I was in Sears it was a ghost town, Penney's pretty much the same. If I was younger looking for a retail job, I'd look elsewhere.
Sep 19, 2013 1:51PM
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The treat of JCP Credit freezing up in August is a serious threat but neither company will be going bankrupt soon?

 

Seems to me if the credit freezes up for JCP they will be in Chapter 11 protection the very next day seeing how they dont have cash to operate the business for even 1 week. 

Sep 19, 2013 2:22PM
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There has been so much negative publicity about Sears & JCPenneys  that I think many people have given up on them & gone to other retailers.  Sears has to sink some money into store renovations as most in my area look like the 1970's & JC Penney needs to go back to their original formula with coupons.  I know Penney's has started that again but their selection is so limited as they have kept the "boutique shops" the last CEO created and there is so much space in the stores you can drive a truck thru them.  Get more stock & more coupon blitzes should improve their sales.
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I dont know how either has stayed in business as long as they have.

 

Look at the volume of people going in/out of the stores versus a Walmart.

 

Then factor in the high real estate they have in malls. [ever see a Walmart in a mall?}

 

Their business model has not adapted to the market changes and their position now is proof positive of this.

Sep 19, 2013 3:07PM
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It would  seem more justifiable for Sears to head out the door, they have sub-contracted so much of what used to be fairly good quality goods and services, I.e. the Optical Shop, no connection to Sears except to appear as though they are by locating in the stores and having poor quality products and warranty coverage.  I used to like Sears for decades, but not in the last one, they have changed for the worse.   JCP just needs a new captain at the helm with conviction and clear direction, even if in the wrong direction temporarily.
Sep 19, 2013 3:57PM
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I hope MSN beats all of them to Bankruptcy!!!!!!!!!!!!!!!!!!!!!!

I seem to recall just reading an article about J C Penny having a tremendous increase in revenue? That doesn't seem to go along with MSN's wishes for all American companies to fail!

Sep 19, 2013 4:20PM
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Neither Sears or JCP are now worthy of the support they enjoyed for so many years . Customer service quality , that was worth paying a little higher for ,  is now almost non-existant , although there are exceptions . You now can usually pay much less , for virtually the same item , at numerous discount stores . How else do you explain seeing few customers in either store ? And with the economy the way it is , every dollar saved matters for most families . I don't know which one will fall first , but unless they decide to be discount stores , they WILL fall . Sad for both .

  

Sep 19, 2013 1:15PM
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jc penney they cannot compete with amazon that pays  no sales tax in more than 50% of states
Sep 19, 2013 3:56PM
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They were both at one time fantastic stores, but now with liberal management have gone to pot.  May they hold hands and walk  the plank together.
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