Sears Holdings' Store Closing Spree Continues: J.C. Penney Is Set to Benefit

Downsizing has been a dominant theme at Sears Holdings (NASDAQ: SHLD) for the last few years. During that time, the company has closed hundreds of stores annually as it has tried (unsuccessfully) to return to profitability.

Last week, Sears Holdings announced its latest round of store closures. Another 64 Kmart stores and 39 Sears stores will close for good by early April. The latest step in Sears' ongoing retreat could help struggling rival J.C. Penney (NYSE: JCP) as it tries to stabilize its business and get sales growing again.

The pace of store closures accelerates

Just five years ago, Sears Holdings operated more than 2,000 full-size stores in the U.S. under the Kmart and Sears nameplates. By the end of fiscal 2016, that total had fallen by more than 30%, leaving the company with 735 Kmarts and 670 full-line Sears stores.

Sears Holdings has taken its downsizing initiative to a whole new level in the past year. In the first three quarters of fiscal 2017, the company closed about 300 stores. Another 45 Kmarts and 18 Sears stores are set to close this month. In total, Sears Holdings will have reduced its store count by more than 25% in fiscal 2017, including a more than 35% decrease for the Kmart chain.

This fast-paced effort to close money-losing stores has only modestly reduced Sears Holdings' losses. As a result, the company will continue shrinking in fiscal 2018.

On Jan. 4, management announced plans to shutter another 64 Kmart stores and 39 Sears stores between March and early April, with liquidation sales beginning this month. This will shrink the Kmart chain to around 400 locations and the Sears chain to around 500 full-line stores.

More good news for J.C. Penney

In the past two years, J.C. Penney has started to act more deliberately to gain market share from Sears. Most notably, in 2016, it installed appliance showrooms in 500 locations, roughly half of its store fleet. In 2017, it added appliances to approximately 100 additional locations. (Meanwhile, the company closed nearly 140 stores in 2017, so it now has appliance departments across more than two-thirds of its store base.)

This strategy is already paying off. In the third quarter, J.C. Penney's appliance sales doubled, including a 30% comp increase for the showrooms that had opened in the first half of 2016.

The company's momentum continued into the holiday season, as appliance comp sales increased by 30% again in the November-December period. J.C. Penney CEO Marvin Ellison attributed this strong performance to market share gains at Sears' expense.

Lots more opportunity ahead

The recent wave of Sears store closures has given J.C. Penney a big opening to continue growing its appliance business. Of the 18 Sears locations closing this month, 12 are located in the same mall as a J.C. Penney; among those 12 J.C. Penney stores, half have appliance showrooms today.

Similarly, of the 39 Sears stores that will close in the spring, 16 are located in a mall that also has a J.C. Penney. Five others are within three miles of a J.C. Penney store. Eleven of these J.C. Penney locations have appliance showrooms, while the other 10 do not.

J.C. Penney thus has two major paths toward further sales gains in the stores that overlap with Sears locations that are closing. First, J.C. Penney stores that already sell appliances should see a substantial sales lift from the demise of their biggest competitor. Second, J.C. Penney has a golden opportunity to add new appliance showrooms in 2018, with a focus on malls where Sears is closing its store.

J.C. Penney is just scratching the surface in terms of profiting from Sears' demise. Last year, it also expanded its mattress selection in many stores and began piloting various home remodeling services, aiming to chip away in two more categories where Sears is relatively strong. With Sears likely to continue closing stores at a rapid pace going forward, there will be plenty of growth opportunities for J.C Penney in the next few years.

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Adam Levine-Weinberg owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.