S&P Says JCPenney (JCP), Sears (SHLD) Paths to Recovery are Diverging

In a report published today, Standard & Poor's Ratings Services said J.C. Penney Co. Inc. (NYSE: JCP) and Sears Holdings Corp. (Nasdaq: SHLD) are experiencing contrasting roads to recovery.

"The ultimate outcome of these companies' plans may depend on relevant factors that are outside their control," said credit analyst Tobias Crabtree. "The financial health of the U.S. consumer, the extent and pace of the economic recovery, and the receptivity of the capital markets will all continue to play a part."

JCP's strategy under its prior CEO involved eliminating coupons and promotions and segmenting brands into a store-within-a-store format, but this did not appeal to the company's target customers and simultaneously alienated its core customers. JCP is now shifting its business back to a promotional model to halt the bleeding and regain lost customers.

In contrast to JCP, Sears' plan to improve performance and reinvent its business has demonstrated less success. Sears has been trying to transform itself into a member-based integrated retailer and to build a customer-loyalty program. It has invested significantly in technology to support this strategy. Despite the investments, however, overall revenues continue to decline. Additionally, the costs of Shop Your Way points compounded with traditional promotional discounts, giving rise to double promotional costs, have led to compressed gross margins.

Although the economy continues to strengthen, retail consumers are still reluctant to spend, especially on small ticket purchases. We do not see consumer demand in the space improving much and, in addition, the retail landscape continues to shift. Still, capital markets have been accommodating--allowing JCP and Sears to bolster their liquidity or extend maturities.

For the full report, see "J.C. Penney And Sears' Turnaround Paths Are Diverging," published Oct. 5, 2014.

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