J.C. Penney Advances as ISI Recommends REIT-Like Entity

J.C. Penney Co. jumped after an analyst at ISI Group said the retailer could turn its top 300 stores into a real estate investment trust-like entity that would sublet space to other brands.

J.C. Penney, based in Plano, Texas, rose 6.2 percent to $16.44 at the close in New York, for the largest increase since Feb. 21. The company was the biggest gainer in the Standard & Poor’s 500 Index.

A REIT operating under a separate name could be valued at about $40 a share, Omar Saad, an analyst at ISI Group in New York, wrote in a note today. The remaining J.C. Penney-branded business, with 800 stores, could be worth about $6 a share, he said.

“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,” Saad wrote.

Last month, J.C. Penney reported that annual sales plunged 25 percent to $13 billion, the lowest since at least 1987, during the first year of a transformation plan under Chief Executive Officer Ron Johnson. The department-store company, which plans to turn most of the chain’s stores into clusters of boutiques, has lost longtime J.C. Penney shoppers by experimenting with a shift to everyday low prices and replacing classic products with trendy new brands.

Saad listed Ugg, H&M and Calvin Klein among brands and merchants that could be willing to lease space in the REIT unit. ISI doesn’t have a rating or price target for J.C. Penney’s shares.


The remaining stores could continue under the J.C. Penney brand using a “traditional discount-driven department store model,” Saad wrote.

J.C. Penney has agreements with landlords that would largely prevent subleasing, Liz Dunn, an analyst at Macquarie Group Ltd. in New York, said today in a telephone interview. While landlords could agree to sublet, it’s unlikely, said Dunn, who has a neutral rating on the shares, the equivalent of a hold.

“The logistics of it make it really challenging to do unless there’s a more severe distressed scenario whereby Penney’s went bankrupt or something,” she said. “I don’t think that’s happening anytime soon.”

Asset ‘Benefit’

Spinning off some of the real estate could buy the company time as it pursues a turnaround strategy, William Frohnhoefer, an analyst in New York with BTIG LLC, said today.

Real estate is “an asset which we believe can be accessed to the benefit of equity investors,” Frohnhoefer, wrote in an investor note March 14, when he initiated coverage of the retailer with a buy rating.

However, the company would have to reach an agreement with a group of bondholders who claim the retailer defaulted on debt, he said today in a telephone interview.

Daphne Avila, a spokeswoman for J.C. Penney, declined to comment.

Chief Financial Officer Ken Hannah said last week that J.C. Penney aims to reverse its “huge miss” with core customers last year by expanding private-label lines such as St. John’s Bay.

Caribou Coffee Co. said last week it would no longer pursue plans to open shops in J.C. Penney’s stores, about six months after Johnson cited the company as a potential partner.

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