I Don't Buy The Bull Case For J.C. Penney
By Timothy Green | May 24, 2018 |

It's been a rough few days for struggling department store chain J.C. Penney (NYSE:JCP). The retailer's first-quarter report on May 17 was a disappointment, featuring almost non-existent comparable sales growth, a tumbling gross margin, and a big loss. Given that this came a day after Macy's put up some solid numbers, it's clear that J.C. Penney isn't benefiting from the strong consumer spending that its rival is seeing.

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On May 22, J.C. Penney CEO Marvin Ellison abruptly resigned to take the CEO job at Lowe's. In his time leading J.C. Penney, Ellison pushed the company into the appliance business, added toys to the stores, and expanded the number of Sephora shops. Unfortunately, none of these steps have had any real impact on the company's performance.

So far, J.C. Penney appears to be gaining momentum. Appliance sales boosted the company's comp sales by nearly 3 percentage points in the second quarter, according to management. While that increase came off of a low base in the prior-year period, it still implies that J.C. Penney sold about $100 million worth of appliances during the quarter.

J.C. Penney isn't resting on its laurels, either. Just last month, it added Frigidaire-brand kitchen appliances to its assortment. By offering its customers more options, J.C. Penney should be able to continue gaining market share in the appliance business.

The overlap between Sears and J.C. Penney is huge
It has become quite clear that J.C. Penney hopes to gain market share in major appliances at Sears' expense. This is a promising strategy: Sears still has a sizable share of the appliance market, and J.C. Penney has stores in many of the same malls as Sears.

In fact, of the 96 stores that Sears has closed or will close during fiscal 2017, 55 have a J.C. Penney in the same mall. Five more have a J.C. Penney store within two miles or less. This puts J.C. Penney in position to capture a disproportionate share of the appliance revenue that would have gone to the Sears store otherwise.

Most of the opportunity lies ahead
Some readers might wonder whether J.C. Penney has already exhausted most of its opportunity to gain market share from Sears in the appliance business. After all, J.C. Penney now has appliance sections in more than two-thirds of its stores, and Sears has already been shrinking for many years.

Yet despite all of its recent struggles, Sears did about $4 billion of appliance sales during 2016. If J.C. Penney could capture even a quarter of that revenue over time, it would have a major impact on the company's trajectory. (Analysts expect J.C. Penney's total revenue to reach $12.4 billion this year.)

It's also noteworthy that of the 60 J.C. Penney stores that are near a Sears store that closed this year -- or will do so in January -- only about half have appliance sections today. It's possible that some of these stores are too small to fit an appliance section. However, to the extent that it can add appliance showrooms to many of those stores, J.C. Penney has a clear opportunity ahead to continue gaining market share in appliances at Sears' expense.

J.C. Penney has been struggling in 2017, but its poor performance can largely be traced to its women's apparel business, which accounted for 24% of sales last year. By contrast, the home department (which includes appliances) only contributed 13% of J.C. Penney's sales in 2016. Management hopes that recent strategic changes will help right the ship in women's apparel. But even if that doesn't happen, the growth in J.C. Penney's appliance business over the next few years could be enough to make up for continued weakness in the women's apparel business.

This article originally appeared on The Motley Fool.