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J.C. Penney Is Quietly Closing a Few More Stores

Adam Levine-Weinberg, The Motley Fool

Last year, struggling department store operator J.C. Penney (NYSE: JCP) was one of several major retailers to close stores en masse in response to weak sales trends. J.C. Penney ultimately closed nearly 140 stores last summer: primarily smaller, rural locations.

J.C. Penney isn't likely to implement a similar round of store closures in 2018. That said, during the past two months, it has quietly announced plans to close a handful of stores.

The exterior of a J.C. Penney store

J.C. Penney is closing just a few stores this year. Image source: J.C. Penney.

The great debate over store closures

Since taking the helm of J.C. Penney a few years ago, CEO Marvin Ellison has made it clear that he doesn't think downsizing is the solution to the company's problems. Like many other retail CEOs, Ellison has concluded that having a broad store network is critical for brand engagement and for supporting a vibrant e-commerce business. (For example, J.C. Penney ships some online orders from its stores and offers in-store pickup as a cheaper alternative to home delivery.)

Skeptics counter that J.C. Penney's revenue has plunged by nearly 40% over the past decade. As a result, they argue that the company needs to close more locations to improve sales productivity across its store fleet.

However, retailers tend to retain only a small proportion of the sales from stores they close. J.C. Penney wouldn't return to its pre-recession level of sales productivity if it closed 40% of its stores -- it would just give up even more market share. Additionally, J.C. Penney has a unique opportunity to boost sales by capitalizing on Sears Holdings' (NASDAQ: SHLD) apparent death spiral.

Nevertheless, J.C. Penney closed 139 stores last year, largely because many of those locations were too small to support the company's sales growth initiatives. The two most important of these are Sephora boutiques (designed to attract younger and more fashion-conscious customers) and appliance showrooms (designed to capture sales from Sears).

A Sephora boutique inside a J.C. Penney store

J.C. Penney's Sephora boutiques have helped attract new customers. Image source: J.C. Penney.

The pace of store closures slows

J.C. Penney will close at least a few more stores in 2018, but it won't be anything like last year's massive downsizing. Thus far, there are specific reasons for each of the 2018 store closures that have come to light.

Just this week, J.C. Penney closed a store in St. Louis. At 50,000 square feet -- less than half the size of a typical J.C. Penney -- this store was too small to install a Sephora boutique or an appliance section. The company has half a dozen other stores in the metro area. Meanwhile, a store of similar size in Humacao, Puerto Rico was destroyed by Hurricane Maria, and J.C. Penney has decided not to rebuild. It has a store 25 minutes away that is nearly twice as large.

An even smaller location in Mount Vernon, Ohio (22,542 square feet, according to the landlord) will close in May. The fourth store that will close is in a dead mall in Galesburg, Illinois. Understandably, J.C. Penney doesn't want to stick around through a lengthy and uncertain redevelopment process there.

Stable sales trends pave the way for a stable store base

While J.C. Penney performed poorly for much of 2017, it rebounded nicely during the holiday season. Earlier this month, it reported that comp sales rose 3.4% in the November-December period. The company highlighted home and beauty as two areas of strength, suggesting that its appliance showrooms and Sephora boutiques remain key growth drivers.

With sales trends stabilizing -- and Sears retreating faster than ever -- there's no reason for J.C. Penney to close lots of stores this year. While it will shutter at least four locations, it is doing so with a minimum of publicity. In previous years, J.C. Penney has put out a press release stating how many stores will close and when, but it has not done so in 2018.

Of course, if sales trends take a turn for the worse, J.C. Penney could change course again and close additional stores. Furthermore, the company is likely to continue culling its fleet of smaller stores. However, J.C. Penney hopes to keep most of its store fleet operating to bolster its cash flow and support its omnichannel strategy -- and to put the company in position to pounce if Sears Holdings collapses.

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Adam Levine-Weinberg owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.