- Even if Sears emerges from bankruptcy, it faces continued challenges, which could benefit Macy's, J.C. Penney and Dillard's, Moody's said.
- That potential benefit comes department stores have struggled to maintain their relevance.
- Still, further Sears store closures could hit REITs like CBL and Washington Prime particularly hard.
Even if Sears SHLDQ ' contested deal to save roughly 400 stores with ESL Investments secures approval from the bankruptcy judge, the owner of Kmart and Sears faces continued challenges that could reap benefits for Macy's M , J.C. Penney JCP and Dillard's DDS , said credit ratings agency Moody's Investors Service in a report published Thursday.
The deal, announced earlier this month between ESL — the hedge fund run by Sears' chairman Eddie Lampert — has the aim of shrinking the store back to profitability, after it filed for bankruptcy in October with roughly 700 stores. The company hasn't turned a profit since 2010. It is also facing robust competition from Walmart WMT , Target TGT and Amazon AMZN , making a successful emergence a challenging feat.
If Sears' challenges continue into its post-bankruptcy life, it could mean an eventual second bankruptcy or further store closures. Either of those options benefit Macy's, J.C. Penney and Dillard's, which have a "significant number of overlapping locations" with Sears and Bon-Ton, a Sears competitor that recently liquidated.
Bon-Ton announced the liquidation of its 260 stores last year, when it was generating roughly $2.5 billion in sales. The liquidation had a "material positive impact" on Kohls' and Macy's sales performance, Moody's said, citing company statements.
Sears, by contrast to Bon-Ton, has roughly $2 billion in apparel sales, Moody's estimates.
That potential boon comes at a needed time for the department store industry, which continues to face heightened challenges. Brands have undercut malls as they have built up their ability to send their products to directly to shoppers, rather than rely on a department store as an intermediary. Meantime, many department stores are located in malls, which have become less convenient as shoppers head online.
Even if Sears successfully emerges, the department store industry could contract by 3.5 percent in 2019, according to Moody's. That's on top of an estimated 13 percent contraction in 2018. From 2015 through 2017, the sector logged a compound annual decline of 3.6 percent.
The fall could be steeper if Sears' rival J.C. Penney is unable to turn around its business beyond any short-term bumps from Sears' travails. The retailer has struggled as it lost track of its core customers, zigzagging between millennials and an older shopping base, as well as its ability to stay relevant amid the rise of online shopping. It has been further challenged by a heavy debt-load, an over-extended store footprint and string of executive departures .
Amid those broader challenges, Sears' issues will not be a benefit for all. In particular, less affluent regional malls may suffer, Moody's wrote. Those malls are located in areas with fewer and less affluent shoppers than many of the higher-end malls owned by real estate investment trusts like Simon Property Group. SPG It is, therefore, harder to replace a tenant like Sears with one more popular with today's shoppers, like Warby Parker or upscale gyms likes Life Time Fitness.
"For a struggling mall, an additional anchor closure can often accelerate the decline," wrote Moody's.
As an example, it cited the Midland Mall in Midland, Michigan which lost a Sears, J.C. Penney and Bon-Ton owned Younkers in the span of two years, forcing it to liquidate in June.
Mall REITs CBL CBL and Washington Prime WPG have both less desirable real estate and exposure to both J.C. Penney and Sears, making them more vulnerable as we head into 2019, Moody's said.
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