With J.C. Penney Closing Stores, Which Rising Stars Could Fill the Void?

Regional mall owner Pennsylvania REIT announced a repositioning strategy for its Exton Square Mall in mid-January after anchor tenant J.C. Penney (NYSE: JCP  ) disclosed its intention to close its store there. This is just one of a host of locations that the retailer plans to close.  The financial troubles of age-old big-box retailers like J.C. Penney and Sears Holdings have generally led to reduced operating footprints for these companies, which has left mall owners with unwelcome vacant space.  Fortunately, a new crop of retail juggernauts have risen up to take the place of the fading giants. So, what retail investment ideas can an investor glean from this particular redevelopment action?

Out with the old
J.C. Penney has certainly been wading in troubled waters recently, though that fact shouldn't be news to even a casual observer of newspaper headlines. The company's attempt to mimic retail kingpin Macy's through a more upscale product selection and an everyday low price strategy was poorly received by its value-conscious customers, which led to a sharp sales decline and a big operating loss in 2012.  Compounding its troubles, J.C. Penney tried to poach home fashion designer Martha Stewart from its larger competitor's clutches, a move that landed all parties involved in court and which will likely lead to a large financial cost for J.C. Penney despite its recent moves to unwind the relationship.

In 2013, J.C. Penney tried to move away from the precipice, largely through financing activities that included sizable issuances of debt and equity.  The company also reverted back to a focus on private-label brands and promotional marketing which seemed to staunch its customer losses, which was evidenced by a slight pickup in comparable-store sales in its latest fiscal quarter.  However, the cost of J.C. Penney's business "un-makeover" was prohibitively expensive, and as a result the company ended up in a weakened financial position that will likely mean further reductions of its presence in the nation's malls.

Starbucks.com




In with the new
Of course, J.C. Penney's exit from Exton Square stands in stark contrast to the store openings being engineered by financially strong and growing retail franchises like Starbucks (NASDAQ: SBUX  ) .  Despite a massive operating footprint of roughly 20,000 stores in 63 countries, Starbucks remains in expansion mode and this is especially true in the heavily populated Asia-Pacific region where it added nearly 600 stores in its latest fiscal year. The company also appears primed to gain additional traction from its 2011 acquisition of tea retailer Teavana as it continues to expand the unit's store network into new markets like Exton Square's Pennsylvania location.

In its latest fiscal year, Starbucks reported solid financial results which included a 12% top-line gain that was aided by the continuation of a favorable comparable-store sales performance. More importantly, the company took advantage of lower average coffee prices to generate higher operating profitability during the period, as it saw a 23.1% increase in its adjusted operating income. The net result for Starbucks was higher cash flow that will easily fund its growth initiatives, which include a larger mall-based presence for its Teavana unit.

Also entering the scene at Exton Square is Chico's FAS (NYSE: CHS  ) , a diversified women's retailer that has recently added both a Chico's and a White House/Black Market store to the mall's tenant portfolio. The White House/Black Market brand has been a growth engine for Chico's over the past few years which has helped the company expand its overall store base by roughly one-quarter and broadened its appeal to a younger, more affluent demographic.

chicos.com

To be sure, 2013 was not Chico's best year as it succumbed to weak industry fundamentals, which was evidenced by a 1.8% decline in its comparable-store sales that ended a four-year streak of comparable-store sales gains above 7%.  Nevertheless, the company's increasingly diverse brands across apparel categories and price points allowed it to remain profitable and debt-free during a challenging year and also provided the company with capital to continue growing its store base at a time when other retailers are retrenching.

The bottom line
Pennsylvania REIT's Exton Square mall repositioning is a pretty good snapshot of the changes in retail which have pitted shrinking old-time big-box retailers against growing specialty retailers which have strong brands. Since larger mall footprints for companies are usually precursors of higher sales and profits, Starbucks and Chico's FAS are definitely stocks that investors should watch.

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Read/Post Comments (7) | Recommend This Article (6)

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  • Report this Comment On March 23, 2014, at 10:57 PM, TheWiseCurtis wrote:

    The bears are really running out of stories to spin. To write a big article about Penney's decision to close 33 marginal stores out of 1100 total as "the" big trend in retail real estates is just pathetic. this just shows you that the bears are down to their last grasp to hang on their losing short positions.

  • Report this Comment On March 23, 2014, at 11:22 PM, fresnosmokey wrote:

    I would put money on the Penney's here in Fresno, CA not going out of business any time soon. It is always neat, fully stocked, well maintained, and full of shoppers; and in fact, has the only Men's Big and Tall section of any department stores left and they sell at a reasonable prices and not at Big and Tall stores prices (which are usually at least double what Penney's prices are). If individual stores are having and not having problems, I would say that is a problem with local store management and not with Penney's as a whole. Corporate needs to find some cajones and start finding and hiring new store management teams. If a comparatively podunk town like Fresno can have a well run and successful JCPenney's, then any town can.

  • Report this Comment On March 24, 2014, at 4:29 AM, seaguy wrote:

    It seems that with online shopping your not going to see the anchor store locations at malls get another department store to fill the vacancy. In Bellingham, WA at the Bellis Fair mall Sears sold the store and vacated it at the mall. It was anchor location the store that replace it was The Sports Authority. Sears ended up opening a Sears Hometown store not far from the mall to keep a presence in the Bellingham Market which get's allot of Canadian shoppers.

  • Report this Comment On March 24, 2014, at 4:32 AM, seaguy wrote:

    Many Regional department store chains have gone out of business in the last decade which is to the benefit of Penney's and will aid it's survival. In WA we no longer have Lamonts, Mervyn's, Troutman's Emporium, and Gottschalks. All of those were competitors to JCP. But Kohl's has moved in to many of the shuttered Mervyn's locations and I imagine Kohl's putting the squeeze on Penney's/.

  • Report this Comment On March 24, 2014, at 9:43 AM, Paddlinpals wrote:

    The correct answer is NOBODY. True, Penney's has been loosing market share to Kohl's. In all honesty retail is way overbuilt in this country because populations have shifted and retalers have moved to keep up, but have not closed the older stores. Kohl's does not have that burden being a relative newcomer.

    You may also note that almost all Kohl's and all new Penney's are located in strip type centers and not Malls as that concept is also dying. The new strip centers are generaly less square footage and less costly to operate than malls. Sears, Penneys, Macy's and the regionals are stuck with with huge sometimes long term leases in old Malls with declining traffic. This is a profit killer. I guarantee you its eating Sears alive right now and if you look at Penney's store closings list its almost 100% mall based. when all of this washes out, I don't really think the mix changes much because I really doubt that anyone will miss the locations that end up closed anyway.

    Biggest looser, unless a miracle happens is Sears. They are loosing their business to everyone because they had such diverse product lines and doing nothing to try to get it back.

    Penney's and Macy's will "right size" shed some old real estate and be fine. Penney's probably will fare better as they are actually farther ahead with more suburban strip type (Kohl's type ) stores already open. Plus they are now on board with the no customer service, pile it out ala Kohls merchandising philosophy.

    The big proviso here is that neither panics and goes to a non retailer for their next CEO. Pretty sure Penney's has that out of their system though. How's about you Macy's?

  • Report this Comment On March 24, 2014, at 11:59 AM, Sockman wrote:

    Knowing the JCP stores that are closing in NJ and Hazleton Pa... They never performed to plan... indeed all four malls are sinking fast... The Article mentioned Exton Sq. Burlington had Macy's move out 2 years ago, now the plan is to tear down most of the mall. Phillipsburg is also in trouble, only has 66% occupancy, and most of the mall is filled with local low end shops. same for Burl and Hazle.

    The issue is more with the malls then JCP

  • Report this Comment On March 24, 2014, at 1:23 PM, fuskiegirl21 wrote:

    I shop at Marshall's, T.J. Maxx and Ross for Less so they may fill the void. Also Kohl's.

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