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Why J.C. Penney Will Succeed Where Sears Is Failing

By Daniel B. Kline - Updated May 22, 2018 at 10:51AM

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While one of these retailers has been focused on issues of finance, the other has pursued relevance.

Both J.C. Penney (JCPN.Q) and Sears (SHLDQ) have been hurt by the rise of digital retailers -- and most specifically, e-commerce giant Amazon. The difference between the two is how they have responded.

Under CEO Marvin Ellison (who announced today he was leaving the retailer to head up home-improvement giant Lowe's), J.C. Penney has learned from its mistakes and adjusted its strategy accordingly. That by no means guarantees its long-term survival, but it certainly gives the department store chain a better chance.

The exterior of a J.C. Penney store.

J.C. Penney has made major changes to its stores. Image source: J.C. Penney.

Here's what Sears has done

In contrast, there's the Sears turnaround plan being implemented by CEO Edward Lampert, which has largely consisted of closing locations and shedding assets to pay the chain's bills. That strategy would make sense if the retailer's biggest problem was that it had too many stores, and they were cannibalizing each other's sales.

In reality, Sears has struggled because it has lost relevance with consumers. That's a merchandise and branding issue, and not something that can be rectified by cutting expenses or reducing the company's footprint.

In the fourth quarter of 2017, Sears sales slid to $4.4 billion from $6.1 billion a year earlier. The company attributed half of that decline to the fact that is now has fewer locations, but the rest came from an 18.1% drop in same-store sales. That was in line with its full-year comp-sales decline of 15.2%.

Sears has responded to these further drops by closing still more stores, selling off real estate, and seeking buyers for those of its assets and brands that hold lingering popularity. That plan may forestall its death, but it's not one that can turn the company around.

Here's what J.C. Penney has done

Store closures have been part of J.C. Penney's plan too, but only a small part. Instead of trying to shrink its way to success, the company has tried to give consumers more reasons to visit its stores.

Among its efforts in that vein, it has revamped its salons, added Sephora store-within-a-store locations, brought toy departments to all of its stores, and added appliance department to more than half of them. The company has also added home services in markets Sears has abandoned. And, perhaps most importantly, it has took a hard look at its merchandise mix, and made major changes to its women's and girls' apparel offerings.

These changes have been mildly successful -- the company managed a  comparable-store sales gain of 0.2% in Q1. While total sales dropped by 4.3% in the quarter, the company noted in its earnings release that the decline was primarily due to it having shuttered 141 stores in the second and third quarters.

J.C. Penney's numbers aren't overwhelmingly strong, but they illustrate the stark differences between the two chains. Sears is in free fall, and engaging in non-constructive behaviors just to keep the lights on, while J.C. Penney has arrested its decline.

What happens next?

Sears will continue using financial maneuvers in order to pay its bills. But it's hard to see a path for the company that doesn't eventually end with it running out of assets, and having debts it cannot pay come due.

J.C. Penney's outlook, though brighter, is still uncertain. The chain has demonstrated that it can stem its declining sales, and that it can give consumers reason to visit its stores, even in the age of e-commerce. And the decline and eventual death of Sears will likely help J.C. Penney by removing a direct competitor, but that alone won't be enough to save it. To survive -- or even thrive -- amid this ongoing retail apocalypse, it will have to keep evolving its in-store experience, listening to its customers, and experimenting with new ways of luring them through its doors.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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J. C. Penney Company, Inc. Stock Quote
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