JC Penney Has the Bar Set High for the Holidays, Sears Expectations Low

While retail is struggling significantly overall, it is the weakest of retailers like J.C. Penney Co. Inc. (NYSE: JCP) and Sears Holdings Corp. (NASDAQ: SHLD) that are in a fight for their lives. Holiday season numbers will be crucial for these two, which means they both must exceed expectations by New Year’s. Initial anecdotal reports suggest that J.C. Penney, at least, had a good Black Friday.

While calling J.C. Penney’s uphill battle a full-blown turnaround may be a little premature, it is certainly outperforming Sears. Over the past year, J.C. Penney has been treading water while Sears is down 40%. J.C. Penney may have found its bottom already, while Sears is constantly setting new bottoms almost every year since 2008.

What may be working for J.C. Penney is its reintroduction of many of its own private brands over other external labels, which are harder to offer discounts on. The approach seems to be somewhat successful as J.C. Penney brands represent 51% of total sales as of the most recent quarter. J.C. Penney may have gotten a bit lucky on that score because a survey of its customers revealed that they mistakenly think that J.C. Penney’s private brands are national.

The good news is that J.C. Penney is hitting the holiday season ground running, with same-store sales up 6.4% last quarter. Expectations are high for the otherwise down-on-its-luck department store, for better or worse.

Sears on the other hand is still fumbling in the dark. Comparable store sales fell 10.8% last quarter and Kmart’s fell 7.1% while losing 600 stores year over year. Not exactly hitting the holidays in stride, this one. Sears also has a debt to equity ratio of 172%, even counting its cash buyout of $936 million of principle debt at the end of August. To be fair though, J.C. Penney is not doing any better on the debt front, with debt to equity even higher at 212%. Investors can ignore that so long as interest rates are near zero and the top line is recovering a bit.

ALSO READ: 10 Brands That Will Disappear in 2016

Given investor sentiment and the current perception of J.C. Penney as the recovery darling and Sears as the black sheep of all retail, the bar is now set quite high for J.C. Penney and it needs to follow through in order to validate perception and keep its nascent recovery going. For risk-takers though, Sears offers more leverage, as an outperformance by Sears by next earnings, estimated between December 2 and 7, could cause shares to rocket considerably higher given the sizable pessimism racked up to date. A miss, on the other hand, while bad for both, will be much more devastating for Sears than for J.C. Penney.

By Matt Winkler