J.C. Penney Wants to Keep Gaining From Sears' Losses

By Daniel B. Kline Markets Fool.com

With Sears Holdings' (NASDAQ: SHLD) Sears brand closing stores, abandoning markets, and generally getting smaller in an attempt to forestall bankruptcy, J.C. Penney (NYSE: JCP) has decided to aggressively go after itslongtime rival's customers.

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Roughly a year ago, the rebounding retailer, which delivered positive net income in 2016 for the first time since 2010, added appliances to about 500 J.C. Penney stores. The chain prioritized markets that Sears had left, or was likely to leave, and that experiment worked so well the company is expanding the offering to 100 more stores in 2017.

"We're exceptionally pleased with the performance of our over 500 new appliance showrooms, which continue to drive increased sales and gross margin dollar productivity," CEO Marvin Ellison said during his company's Q4 earnings call in late February, which was transcribed by Seeking Alpha (registration required). "Appliances reinforce the ongoing strength of our growth initiative as we pivot our retail strategy toward non-apparel and growing categories."

Now that J.C. Penney has successfully moved in on Sears' appliance market, the retailer has plans to go after another of its rival's traditional strongholds, home services. To do that, Ellison's company plans to launch J.C. Penney Home Services later this month.

J.C. Penney is moving into an area where Sears has traditionally done well. Image source: J.C. Penney.

What is J.C. Penney doing?

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J.C. Penney is going to partner with a number of companies including Samsung and Trane to test six home services programs in various markets to see which ones work. Through the various tests, the retailer will offer "turn-key services for heating and cooling systems, bathroom remodeling, quick ship and installed blinds, whole home water solutions and awnings, as well as easy-to-install smart home devices," the company said in a press release.

It's a move into an area that Sears has traditionally dominated. Ellison did not directly name his rival during the earnings call, but it was clear that this effort was an attempt to go after Sears' former and existing customers.

"Many years ago JCPenney was a strong player in the home install space. Now that we have a large mall competitor donating market share in this category, we feel the timing is right for us to test a series of home install initiatives," he said.

It's about more than Sears

While Sears' failures have created opportunity for J.C. Penney to step in, that's not the only reason the company is entering the home services market. Ellison explained in the press release that the opportunity in the space marries well with his company's customer base. He also noted that two-thirds of homes in the United States are over 30 years old, adding that consumers will spend more than $300 billion each year on home upgrades.

"There is a tremendous opportunity to capture additional revenue and minimize our dependence on apparel by catering our services to female homeowners who represent over 70% of our loyal customer base, and make the primary decisions regarding any home renovations," he said.

The various home services offers will be rolled out to about 100 J.C. Penney locations through a display in the home department. They will also be offered at jcpenneyhomeservices.com. Services will vary by market and the company also plans to offer a home services credit card to help customers finance these purchases.

It's just good business

J.C. Penney is smart in targeting Sears customers, but that's only a piece of why these moves make sense. Ellison has been smart in acknowledging that his company needs to move away from relying on apparel while also diversifying the offerings in its stores.

In a broad sense, for a retailer like J.C. Penney to survive, it needs to serve a much wider base than it has in recent years. Not all of these ideas will work, but the company is being smart in testing concepts, refining them, and recognizing that some will succeed in some markets, but not others.

Sears' struggles, and perhaps death, opens some doors for J.C. Penney. Ellison has correctly positioned his company to not only be ready to walk through those doors, but to kick them down when possible.

That's decidedly bad news for Sears, which could lose customers even in areas it intends to still serve simply because consumers will feel more confident buying home services or appliances from a retailer that looks more like it will be around for a while. Adding home services and increasing the stores selling appliances will make J.C. Penney stronger while dealing another blow to its rival, which may not be able to take too many more.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.