Despite Turnaround, J.C. Penney Seen Closing More Stores

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JC Penney Opens New Store In Brooklyn
Spencer Platt/Getty Images

By Krystina Gustafson | @KrystinaGustafs

Things have certainly been looking up at J.C. Penney (JCP) over the past few months. After about two years of declining same-store sales, the department store finally gained traction in its turnaround by reversing this metric and posting positive comparable-store sales for three-straight quarters.

Still, questions remain regarding whether the company can continue its upward trend as comparisons get more difficult, and as it enters into what many experts are predicting will be an even more promotional holiday season than 2013.

Belus Capital Advisors analyst Brian Sozzi said investors are anticipating some sort of letdown from its upcoming analyst day Wednesday, as evidenced by a 15 percent drop in its share price over the past month.

Sozzi said he predicts Penney’s will use the event to announce “mass store closures,” which would ultimately bring its store count from 1,062 as of August, to under 1,000. But with sales and earnings moving in the right direction, he said, the closings won’t be seen as a sign of weakness.

“We think J.C. Penney’s five-year plan includes bringing the store count to below 1,000 in order to maximize efficiencies and position it properly in a world of online and same-day delivery consumption,” Sozzi said in a note to investors. “Store closures will likely be concentrated in not renewing leases and exiting those locations with low rent payments early.”

Sozzi has a hold rating and a $ 10 price target on Penney’s. Shares were trading more than 6 percent lower at $ 9.37 in Monday afternoon trading.

In a note issued to investors last week, Morgan Stanley (MS) analyst Kimberly Greenberger also said she expects Penney will trim its store base over the next few years. She anticipates the retailer will shutter about 10 to 20 stores annually, depending on opportunities to exit leases. It’s unlikely it will do so any faster after taking a $ 44 million charge for closing 33 underperforming stores this year, she said.

“We think massive store closures [200-plus] and immediate cost cuts are unlikely given the associated cost,” she wrote.

Once closed, the stores could generate about $ 3 million in savings per store, she said.

J.C. Penney declined to comment on whether it is planning to announce new store closures this week.

Penney’s wouldn’t be alone in rightsizing their store fleets in the era of online shopping. Companies from Staples (SPLS) to Aeropostale (ARO) have said they are also looking to trim their store counts to cut costs at a time when industrywide, online sales are growing exponentially faster than bricks-and-mortar sales.

Last month, Penney’s said it will hire 35,000 workers for the holiday season, in line with the number for 2013.


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