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Shopko Is Liquidating: These 2 Department Stores Could Be the Winners

Adam Levine-Weinberg, The Motley Fool

Earlier this year, struggling retailer Shopko filed for bankruptcy and announced plans to close a huge proportion of its stores in the hope of finding a buyer that could help it reorganize.

Those efforts proved fruitless. Earlier this week, Shopko acknowledged that it wasn't able to find a buyer willing to keep the general merchandise chain going, even on a smaller scale. As a result, Shopko will liquidate all of its remaining stores over the next few months. This represents an important market share opportunity for several rivals -- most notably, Kohl's (NYSE: KSS) and J.C. Penney (NYSE: JCP).

The exterior of a Kohl's store.

Kohl's could get a nice sales lift from Shopko going out of business. Image source: Kohl's.

Goodbye, Shopko

When it filed for bankruptcy two months ago, Shopko said that it would shutter about 30% of its stores: 70 unprofitable stores and 40 that were only marginally profitable. A month later, the company more than doubled the list of stores to be closed, saying that talks with potential buyers indicated that Shopko had a better chance of survival with a smaller footprint.

However, the prospect of operating a successful general merchandise chain with barely more than 100 stores -- while competing against much bigger rivals -- seemed like a fantasy from day one. Thus, it wasn't surprising that Shopko failed to find a going-concern buyer.

On Monday, the company announced that it will liquidate the rest of its stores over the next 10 to 12 weeks. The first round of store closures related to the bankruptcy filing took place earlier this month, and Shopko stores will continue to close in several waves between now and mid-June.

While Shopko was smaller than most of its main rivals, it still generated about $2.7 billion of revenue in 2017 -- hardly an insignificant number. Its disappearance will leave a void in the U.S. retail landscape, particularly in the Midwest, where most of its stores are located.

Department stores could be the biggest winners

Shopko carries a wider range of merchandise than department stores. It sells food and general household goods, and many of its stores feature pharmacies and/or optical departments.

That said, Shopko also carries a wide range of brand-name and private-label apparel, footwear, and home goods. Department stores probably have the most to gain from Shopko going out of business, simply because sales growth has been so hard to come by. For big department store chains like Kohl's and J.C. Penney, picking up even $100 million in incremental sales from Shopko would be a huge win.

The exterior of a JCPenney store.

Image source: J.C. Penney.

Kohl's is positioned to win a sizable chunk of Shopko's sales, due to the heavy geographic overlap between the two chains, both of which are based in Wisconsin. Kohl's also has the broadest footprint of any department store chain, with more than 1,100 stores.

J.C. Penney could be another big beneficiary. While many investors have criticized it for having too many locations, J.C. Penney's 864 stores give it meaningful overlap with Shopko, even in some of the small towns where the latter operates.

A key avenue for sales growth

Last year, Kohl's posted a 1.7% comparable store sales increase, near the high end of its full-year guidance for 0% to 2% comp sales growth. Furthermore, management projected that comp sales will rise 0% to 2% again in fiscal 2019.

Kohl's is already poised to benefit from the mid-2018 liquidation of Bon-Ton Stores during the first half of fiscal 2019. The Shopko liquidation will add to its sales momentum beginning next quarter. That, along with Kohl's other sales growth initiatives, could help the company beat its sales and earnings guidance this year.

By contrast, J.C. Penney posted a 3.1% comp sales decline last year, and it hasn't provided sales guidance for 2019, as it is early in the process of turning itself around. Still, management recently noted strong results in stores that previously competed with Bon-Ton. J.C. Penney is likely to get a similar tailwind from Shopko going out of business.

For both Kohl's and J.C. Penney, success will depend primarily on internal initiatives to drive sales growth and margin expansion. But it will certainly help that they will face less competition going forward, as weaker competitors like Shopko finally disappear.

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