Morgan Stanley: A Sears Bankruptcy Could Benefit JCPenney

As retailer Sears Holding Corp. (NASDAQ:SHLD) approaches bankruptcy, Morgan Stanley is considering the ramifications on competitors like J.C. Penney Co. Inc. (NYSE:JCP).

The Analyst

Morgan Stanley analyst Kimberly Greenberger maintained an Equal-weight rating on J.C. Penney with a $1.50 price target. 

The Thesis

Sears’ announcements regarding the addition of a restructuring expert, a boutique advisory board and a roughly 80-percent probability of default, interest in J.C. Penney stock has increased, Greenberger said in a Thursday note. (See her track record here.) 

J.C. Penney has the highest store overlap with Sears, based on radius research, the analyst said. The department store has manageable near-term debt, as it finished the second quarter with $182 million in cash. This funding appears sufficient for 2019 and 2020, she said. 

“Near term, if SHLD decides to close additional stores and/or engage in liquidation sales, retailers operating in the corresponding trade areas could experience some short-term pressure. We note, however, that SHLD has been closing stores for years," Greenberger said.

Sears has shuttered 835 K-Mart locations and 335 Sears stores in the last five years, the analyst said. 

Greenberger expects a potential benefit from further closures for retailers like J.C. Penney, as they could service the transitional shoppers.

Yet Sears may remain open through the holidays. The retailer is working out a deal with lenders to keep it afloat until at least Christmas, but the company must close some stores immediately in return, according to a CNBC report. 

The retailer's fate appears inevitable, despite the upcoming holiday season, as the company lost $508 million in Q2. Sears is also responsible for a $134-million debt payment due next week that may not be covered, CNBC said. 

Price Action

J.C. Penney shares were trading down 4.7 percent at $1.72 at the time of publication Friday. 

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