J.C. Penney Co.'s shares rallied Monday, after an ISI retail analyst suggested the struggling retailer that entails could put 300 of its top stores into an entity similar to a real estate investment trust. The new entity would have a new nameplate that would sublet to other brands.
In a report published Monday, Omar Saad, a retail analyst at ISI Group, noted that by converting Penney's top 300 locations into a highly profitable REIT-like entity, that strategy could conservatively generate $1.2 billion of sublet rental income.
That would result in a $10.8 billion enterprise valuation, or $40 per share. That could happen as the company continues to operate the remaining 800 locations under Penney's traditional discount-driven department store model that's being updated. That remaining business could be valued at $6 per share, Saad says.
"We think JCP's most valuable asset is its low-cost real estate, and we believe there are many premium brands that would potentially be interested in subleasing space within the best locations at $40 per square foot," Saad wrote in the note. That would be a discount to the $70 to $80 per square foot they would normally pay for a stand-alone store. He mentioned a variety of brands such as Ugg, Zara, DKNY and Clinique.
Saad said the brands could control the inventory, personnel, merchandising, shopping experience and fixtures.
The stock rally also seemed to also be fueled by Penney's rolling out Canadian brand Joe Fresh to nearly 700 of its 1,100 stores on Friday. The brand, known for its trendy, brightly colored casual clothes like pink jeans, appeared to resonate with shoppers over the weekend, says Brian Sozzi, a retail industry analyst with NBG Productions
The alternative plan from ISI comes as investors are becoming increasingly worried about Penney's ability to reverse mounting losses and sales drops that have snowballed under the first year of its transformation plan being spearheaded by CEO Ron Johnson, who came on board November 2011.
Penney reported dismal fourth-quarter results late last month that capped a year where Penney amassed nearly a billion dollars in losses and saw its revenue plunge nearly 25 percent to $12.98 billion.
Under Johnson, Penney began a turnaround strategy that included ditching coupons and most of its sales events in favor of everyday low prices, bringing in hipper designer brands such as Betsy Johnson and remaking outdated stores by installing shops to replace racks of clothing. Johnson's goal was to reinvent Penney's business into a hip place to shop in a bid to attract younger, wealthier shoppers. But in the past year since Johnson, the mastermind behind Apple's stores, rolled out his plan, though, once loyal customers have strayed away from the chain and it hasn't been able to get enough new shoppers to replace them
To turn around the business, Penney started to add back sales and bring back coupons last month. Penney, which began installing shops late last year, is counting on brands like Joe Fresh and a newly revamped home area, to be launched early April, to help attract shoppers. But investors fear Johnson won't be able to stem the bleeding of sales in time to finish transforming the stores.
Daphne Avila, a spokeswoman at J.C. Penney declined to comment on the report.
Shares rose nearly 9 percent, or $1.36 to $16.84 in early afternoon trading. Investors have sent shares down 60 percent from a peak of $43 in the days after the pricing plan was rolled out in February 2012.
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