Sears Holdings Corp. and J.C. Penney Co. Inc. each saw a stock sell-off in Wednesday’s trading session for different reasons, and their futures right now couldn’t be more divergent.

This story first appeared in the October 9, 2014 issue of WWD. Subscribe Today.

At the end of last year, both retailers faced the same dilemma: operations reshaped by activist investors, slumping sales and not enough cash flow to meet their needs. Ten months later, it’s a different picture.

The backdrop at Sears has been shaped by its financially dextrous chief executive officer Edward S. Lampert, who is also the chairman and ceo of hedge fund ESL Investments, which together hold a 48 percent stake in the retailer. On Wednesday, the creeping fear factor moved further against Lampert’s Sears as investors sent shares down 4.8 percent to close at $28.85. The stock price dropped as low as $25.05 earlier in the day as investors were spooked about the chain’s future and concerns over its ability to pay vendors for orders six months out. And while Sears peddled hard to calm investor sentiment about its ability to pay vendors, there is still much doubt in the markets about its future. The overall sentiment is not whether Sears will kick the bucket, but when.

Shares of Penney’s fell 10.9 percent after the company revised its third-quarter guidance downward, due in part to a lackluster back-to-school sales in September, but overall the retailer is in a better position than it was a year ago when its current ceo, Myron “Mike” Ullman 3rd, was trying to right the wrongs from the Ron Johnson period, when billions in lost revenues were logged. Johnson was brought in as ceo by activist investor William Ackman of Pershing Square Capital to replace Ullman to shake things up. The good news at Penney’s is that company operations and losses racked up during the Ackman-Johnson era seem to have stabilized.


Sears observers and investors were unsettled Wednesday following reports that insurers were curtailing their exposure to the troubled retailer by pulling back on future orders by vendors to the mass chain. That also caused a concern that vendors might elect to stop shipment of orders for January.

Credit analysts weren’t as concerned as investors. Sources said insurers — they provide credit insurance to vendors so they get paid in case the retailer can’t make payment — such as Coface SA and Euler Hermes Group have been “reducing exposure for almost a year and haven’t written new coverage” for a time period longer than that. Vendors, either to WWD or to credit analysts, said their November and December shipments are being made. Many who are shipping are doing so as a “business” decision to support the retailer, not as a “credit decision.” Given the consolidation at retail the last few years, vendors might not have much choice if they want to stay in business. For many, there’s not many options left on where to sell, if not Sears.

Factors are inconsequential, one credit source said. That’s because of all the vendors who sell to Sears, “less than 3 percent of the company’s gross inventory is factored,” said one industry source familiar with Sears’ operations. One factor reached Wednesday said he’s still supporting his “existing clients.” This source said there’s been some debate among the factoring community over whether new business should be undertaken.

That’s because the real indicator of whether to approve January shipments can’t be made until early November, when Sears is expected to complete its rights offering, a move that should raise $380 million for its coffers.

One credit analyst said, “If the rights offering is successful, they buy themselves another quarter or two of liquidity.”

Another credit analyst added: “The $400 million loan to Sears from ESL created more concern, not less. It needs to be paid back in November, so it’s just a short-term fix. Sears needs to get its recapitalization done, and I think it needs to get that done sooner than later.”

And while credit executives were asked whether the latest rumble that spooked investors could push Sears to a bankruptcy filing, most said they didn’t think that would happen.

“Sophisticated credit executives won’t be [alarmed], unless the rights offering fails,” one individual said.

A Sears spokesman attempted to negate investor concerns, noting that Sears will have generated up to $1.45 billion in liquidity in fiscal 2014 with its many financial moves this year, including the $500 million dividend Sears received from its spin-off of Lands’ End, proceeds of $165 million from the sale of real estate assets and the fact that it has “no significant term debt maturities until late in 2018.”

The spokesman added that its book value for its “substantially unencumbered” real estate on its financial statements is about $5 billion, and that $6.5 billion in inventory is largely “already paid for.” He added that Sears continues to meet its obligations, and has the financial resources to deal directory with its vendors. He also noted that insurers have “never had to pay a claim to a vendor” tied to Sears’ business.

But the caveat is still Sears’ chief financial officer Rob Schriesheim’s reaffirmation at the beginning of this month of an earlier statement, that “over the next six to 12 months, it intends to evaluate its capital structure” and could take further actions as needed. That suggests that all the shifting of assets to build up to $1.45 billion in liquidity may not be enough for the ailing retailer.


At an investors’ meeting Wednesday, much of the conversation on Penney’s centered on the stabilization of the business and market-share opportunities, as outlined by Ullman and his top lieutenants. Executives have set a goal of $1.2 billion in earnings before interest, taxes, depreciation and amortization in 2017, and see over the next three years a $1 billion growth opportunity in center core, a $750 million opportunity in home and an $800 million opportunity in omnichannel growth. Penney’s now sees comp-store sales this quarter in the low-single-digit range, versus earlier midsingle-digit guidance. For fiscal 2014, Penney’s guidance stays unchanged at midsingle-digit comparable-store sales growth and positive free cash flow, suggesting a fourth quarter that should be better than the third quarter.

Ullman’s challenges are to generate enough sales growth to get back in the black, capture market share in categories where it lagged the competition and sustain prevailing perceptions that it’s climbing back and getting relevant again to middle America.

“When they announced the fact that the third quarter was going to be lousy, the whole thing fell apart and the stock tanked,” said analyst and consultant Walter Loeb. “But the fourth quarter is going to be very strong. Lower gas prices will make the typical J.C. Penney customer feel pretty good about his income.” Loeb also said he felt Penney’s execs were conservative in their estimates on sales growth that they can achieve in center core, home and omnichannel. “I see a strong future for J.C. Penney as a middle-priced retailer. I don’t see them going away and there is no massive store closing coming.”

Though center core generates higher productivity, margin and operating profit than women’s apparel, “We have seen deeper declines in center core than apparel. That’s very counterintuitive,” said Liz Sweney, chief merchant and executive vice president. “We lag in share against all our moderate competitors.”

However, Sephora is generating double-digit comp-store increases, and will expand to additional Penney’s locations in smaller markets. At a typical Penney’s store, Sephora represents a “high-single-digit” percent of the total store volume, and at smaller stores, the penetration is higher on average. Sweney said footwear is “a major, major growth category,” but noted that it has a “very low share compared to competitors.” Women’s shoes have been vastly underspaced, and a new format, seen in the recently opened Brooklyn store, gives 30 percent more space to women’s, men’s shoes in their own area, a women’s footwear clearance area and an expanded athletic and junior business.

Siri Dougherty, general merchandise manager of women’s wear, said women’s apparel represents more than 25 percent of overall company sales, and two-thirds of that business comes from private brands, which afford the retailer 300 to 400 higher gross margin than national brands. Among the most popular are Worthington for career apparel, A.N.A. for the modern customer and Xersion for activewear.

Ullman also hinted at Penney’s getting deeper into fast fashion, stating “fast fashion is here to stay. The speed is accelerating.” Penney’s sells MNG by Mango in almost 600 locations, which Ullman characterized as “fast fashion at a price.”

John Tighe, gmm of men’s, said private brands are important to the retailer’s male customers as well, and represent 50 percent of the overall men’s business. Offering a variety of private brands for every category of business allows men — whom he characterized as “hunters, not gatherers” — to fulfill their shopping needs quickly. He singled out the Foundry Big & Tall business as a particular strength, saying Penney’s has the number-two market share in that business.

Mike Rodgers, chief customer officer, said the omnichannel business is expected to represent an additional $800 million in sales with a 15 percent compounded annual growth rate over the next three years. For the first half of this year, he said, sales were up 21 percent and traffic was up 10 percent. This is in sharp contrast to the $500 million in sales that evaporated when former management separated the Internet and store businesses.

Looking ahead, Rodgers said Penney’s will work to expand its buy-online-ship-to-store-or-home option and work on same-day pickup and delivery. Enhancing the mobile app is also a priority for the future, as 50 percent of all retail transactions by 2015 are expected to have a “digital component,” he said.

Ed Record, chief financial officer, said Penney’s comparable-store sales through the spring are running 6.6 percent ahead of last year and the company has posted three consecutive quarters of positive sales growth, which will allow it to “invest in growth initiatives.” Long-term, the cfo projected that by 2017, sales will be $14.5 billion, gross margin will be $5.3 billion and EBITDA will be $1.2 billion.

“We’ve stabilized the financial position. We are back in key items, and definitely back in the consumer mind-set,” Ullman told the analysts. He also said private brands have been restored and enhanced, a number of brands and merchandise that “clearly didn’t resonate” were dropped, and that 505 home departments have been remerchandised. “However, there are still enormous challenges, not the least of which is getting consumers to spend more. “Despite the fact consumer confidence is increasing, spending is still flat. It’s not clear when it will change,” Ullman said. “We count half of America’s families as our customers. We need to increase the share of wallet they spend with us.”

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