Morgan Stanley: A Sears Bankruptcy Could Benefit JCPenney

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