Last month, J.C. Penney (NYSE:JCP) said that it will close at least three stores this year -- and likely more -- based on an ongoing evaluation of its store fleet. But in addition to having too many locations, J.C. Penney's stores are also too big (on average), according to management.

There are good reasons for J.C. Penney to prefer smaller stores. Indeed, Kohl's (NYSE:KSS) -- one of its biggest rivals -- has been shrinking many of its stores, even though most Kohl's locations were already quite a bit smaller than a typical JCPenney. However, it may be much harder for J.C. Penney to shrink stores to its desired size in a productive way than it is for Kohl's.

J.C. Penney wants to be more like Kohl's

As of one year ago, J.C. Penney had 872 stores covering 95.6 million square feet, putting the average store size at a little less than 110,000 square feet. However, a recent story (subscription required) by The Wall Street Journal revealed that J.C. Penney's management "prefers stores between 70,000 and 90,000 square feet, a sweet spot that enables it to display all its merchandise without having excess space."

While J.C. Penney had never previously laid out a specific square footage target, it's no surprise that management would prefer smaller stores. First, the company opened a new concept store in Brooklyn in a 75,000-square-foot space last summer. Even with this smaller footprint, J.C. Penney was able to fit both a Sephora boutique and an appliance showroom in the store.

A rendering of the exterior of the JCPenney store at Kings Plaza in Brooklyn

J.C. Penney opened a 75,000-square-foot concept store in Brooklyn last year. Image source: J.C. Penney.

Second, new J.C. Penney CEO Jill Soltau commented on her first earnings call with the company that the stores "are over-assorted and heavy on inventory." Having smaller stores would enable J.C. Penney to radically reduce its inventory.

Indeed, this is the main logic behind Kohl's decision to shrink about 500 stores. Kohl's stores have an average of 88,000 square feet of space, but the company has found that it can reduce its square footage by 25,000 square feet or more in lower-volume stores without impacting sales. It is looking to lease or sell the excess space to high-traffic retailers like discount grocer Aldi.

It's a long way from here to there

Getting to its ideal store size won't be easy for J.C. Penney. While its average store size is around 110,000 square feet today, that total includes smaller-market locations that are less than half that size. Most of the company's mall-based stores are even larger.

For example, the 49 JCPenney stores in CBL & Associates' mall portfolio average 120,000 square feet in size. Its 37 stores in malls owned by Washington Prime Group average 128,000 square feet. The average JCPenney store in Simon Property Group's portfolio is even larger, at around 160,000 square feet. Finally, Pennsylvania REIT -- one of the few mall owners that lists the square footage of each anchor tenant in its malls -- has 15 JCPenney stores in its portfolio. Only one is within the 70,000- to 90,000-square-foot "sweet spot," while three have more than 200,000 square feet of space.

The exterior of a JCPenney store

Most JCPenney stores are much too large today. Image source: J.C. Penney.

Thus, many JCPenney stores have about 50,000 square feet of excess space -- and some have significantly more. While the company could potentially close off entire floors to radically shrink its largest stores, that would mean a lot of wasted real estate.

Unfortunately, subleasing excess space won't be easy. Most Kohl's stores are on one floor in strip malls or stand-alone locations, making it relatively simple to put up a wall and sublease the extra square footage. By contrast, JCPenney stores tend to be in older buildings attached to regional malls, creating a lot of complications for subdividing those spaces.

Will mall owners help?

J.C. Penney's financial position is fairly weak today. It can't afford to spend the amount it would take to reconfigure hundreds of stores to create room for other tenants.

Some mall owners (such as Simon Property Group) are better capitalized, and may be interested in recapturing some of J.C. Penney's space. That's especially true in high-performing malls where it would be relatively straightforward to find tenants willing to pay substantially higher rents than J.C. Penney.

However, other mall owners are already overwhelmed with vacant department store buildings and are struggling to fund the redevelopment of those spaces. These lower-tier mall operators probably have little or no interest in taking back space from J.C. Penney.

This could set the stage for some tough negotiations between J.C. Penney and many of its landlords. J.C. Penney may pair requests to shrink its square footage at certain malls with threats to close those stores if the landlords refuse (creating an even bigger redevelopment problem for them). It will be interesting to see how these negotiations play out over the next couple of years -- and whether J.C. Penney can make significant progress in shrinking the size of its stores.

Check out the latest J.C. Penney earnings call transcript.