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Sephora Breaks Up With J.C. Penney for Kohl's -- Good News for Investors?

Dec 02, 2020 by Maurie Backman
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Last month, Target (NYSE: TGT) announced a strategic partnership with Ulta Beauty (NASDAQ: ULTA) to open a series of makeup and skin care shops inside its stores. And now, Sephora and Kohl's (NYSE: KSS) are following in their footsteps.

Sephora, a competitor of Ulta and well-known cosmetic retailer, is making plans to open at least 850 shop-in-shop locations in Kohl's stores by 2023, 200 of which will be open by fall 2021. The new shop-in-shop setups will measure 2,500 square feet and will be located at the front of the store, making them easy to spot. Sephora plans to offer over 100 brands as part of its Kohl's partnership, which will replace the existing beauty product line Kohl's offers.

A strategic move for Sephora

Sephora is currently partnered with J.C. Penney (OTCMKTS: JCPNQ), a struggling department store with a highly uncertain outlook. In May, J.C. Penney filed for bankruptcy, citing the coronavirus crisis as a driver. But in reality, the long-established department store had been having trouble well before the pandemic began. J.C. Penney's most recent profitable year was as long ago as 2010, and its net losses since have reached about $5 billion.

Though J.C. Penney had its bankruptcy plan approved recently, it took a bailout by mall operators Simon Property Group (NYSE: SPG) and Brookfield Property Partners (NASDAQ: BPY) to come to its rescue. But J.C. Penney still faces a bleak outlook as it heads into what will likely be a sluggish holiday season.

Kohl's, on the other hand, has a much healthier outlook, so ditching J.C. Penney is a smart move for Sephora. And its new partnership is likely to be mutually beneficial: Sephora will get to grow its customer base substantially, while Kohl's can draw in new customers who will soon benefit from more of a one-stop shopping experience (something that's become increasingly important during the pandemic). Sephora also plans to open 60 to 70 stand-alone stores in the coming year -- but it will continue to assess its strategy as its partnership with Kohl's evolves.

Good news for real estate investors?

On the real estate investing end, Sephora's latest move is a mixed bag. While teaming up with Kohl's will help both retailers thrive, thereby ensuring their presence in malls and shopping centers, losing Sephora's line could be a blow to J.C. Penney at a time when the storied department store can't face another hit. If J.C. Penney folds, it will result in widespread mall vacancies, compromising mall REITs and leaving operators with a major struggle on their hands.

In fact, the primary reason Simon and Brookfield bought J.C. Penney was that they couldn't afford to lose it as an anchor tenant. As such, while Sephora's latest announcement is positive news on one hand, it's a blow on the other. Investors will need to hope that under Simon and Brookfield's ownership, J.C. Penney finds a way to reestablish itself as a valued consumer brand -- not a dying one that's barely hanging on.

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Maurie Backman owns shares of Kohl's. The Motley Fool owns shares of and recommends Ulta Beauty. The Motley Fool has a disclosure policy.