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Why Sears Is the Wrong Role Model for J.C. Penney

By Dan Caplinger - Apr 16, 2013 at 2:45PM

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Real-estate plays on retailers haven't gone anywhere.

Long-struggling retailer J.C. Penney (JCPN.Q) saw its stock soar today as reports surfaced that the company may be looking to use its real-estate assets to raise capital. As of 1:50 p.m. EDT, the stock is up 6%. J.C. Penney's move would be part of a broader strategy to maximize its available cash. The retailer borrowed $850 million from its credit line yesterday and is working with advisors to raise at least $1 billion to put toward completing its reorganization efforts.

What's troubling, though, is how familiar this storyline sounds. In particular, it seems eerily reminiscent of the assurances Sears Holdings (SHLDQ) gave investors that its real-estate assets would bail out the former retail giant.

Is J.C. Penney following Sears down the wrong path?
J.C. Penney could tap its real-estate assets in many different ways. One proposal involves dropping its real estate into a real-estate holding-company subsidiary. The holding company could then issue notes that would be guaranteed by the J.C. Penney parent company. Another possibility involves selling J.C. Penney's properties outright and then leasing them back. That's a strategy Advanced Micro Devices used to raise $164 million in cash with its Austin business campus.

But thus far, when investors have looked to real-estate plays as a way to justify investing in beleaguered retail operations, they've been disappointed. Sears Holdings (SHLDQ) is the obvious example, with many analysts saying the company has undervalued assets in its mall property leases scattered across the nation. Yet by itself, real estate hasn't saved Sears from the uninspired management of its core retail business, which has continued to founder as customers have seen little in the way of innovation or exciting new products.

Admittedly, Sears has had some success raising cash with outright sales of its assets. Last year, for instance, Sears sold nearly a dozen lucrative properties, including its crown-jewel Ala Moana location in Hawaii, to General Growth Properties (GGP) for $270 million. As Fool contributor Adam Levine-Weinberg noted earlier today, the fact that major J.C. Penney investor Bill Ackman also has a big position in General Growth Properties boosts the odds that a potential deal will go through.

Be careful
It's clear that J.C. Penney needs to raise cash to move forward, and a real-estate strategy may help it solve its short-term needs. But the experience of Sears shows that relying on real estate to provide a long-term solution to retail troubles is far from a surefire strategy.

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Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ
Brookfield Property REIT Inc. Stock Quote
Brookfield Property REIT Inc.
GGP

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