NEW YORK (AP) -- J.C. Penney Co.'s shares rallied Monday, after an ISI retail analyst suggested the struggling retailer that 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.
THE SPARK: In a report published Monday, Omar Saad, a retail analyst at ISI Group, said that by converting Penney's top 300 locations into a highly profitable REIT-like entity, the company could conservatively generate $1.2 billion of sublet rental income.
That would result in a $10.8 billion enterprise valuation, or $40 per share. He said that could happen even as the company continues to operate the remaining 800 locations under Penney's traditional discount-driven department store model that's being updated. That 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's price rally also seemed to be fueled by what appears to be a favorable response among shoppers to Penney's launch of Canadian brand Joe Fresh at nearly 700 of its 1,100 stores on Friday. Daphne Avila, a Penney spokeswoman, said the first weekend launch of the collection, known for its brightly colored casual designs, "exceeded" expectations around the country. The line includes $8 T-shirts, $19 pink jeans and $39 black and white striped dresses.
THE BIG PICTURE: The alternative plan described by ISI comes as investors are becoming increasingly worried about Penney's ability to reverse mounting losses and sales declines 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 $1 billion 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 year since Johnson, the mastermind behind Apple's stores, rolled out his plan, 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 last month to resume sales and bring back coupons. 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 sales decline in time to finish transforming the stores.
Penney spokeswoman Avila declined to comment on the ISI report.
SHARE ACTION: Shares rose 7 percent, or $1.10, to $16.58 in 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.