Real Estate Could Save J.C.Penney

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Faced with dwindling sales and slumping share price, J.C. Penney may turn to its prime real estate to stay afloat. 

Annual sales dropped 25 percent to $13 billion, the lowest level in decades, during the first year of a transformation plan implemented by chief executive Ron Johnson, who was fired this week. Some analysts have speculated the chain may be sold in the wake of the disastrous run.

However, the retailer could turn its top 300 locations into a real estate investment trust to sublease space to other brands, Bloomberg reports.   

A REIT consisting of 300 stores, operating under a different name, could have a value around $40 a share, compared to the remaining J.C. Penney-branded business, which is valued at $6 a share, International Strategy & Investment Group analyst Omar Saad wrote in a note. 

"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," Mr. Saad wrote, listing Ugg, H&M and Calvin Klein as examples of brands that could be interested. 

The average cost of ownership for most of J.C. Penney's real estate is less than $5 a square foot, compared to $70 a square foot for most retail space around J.C. Penney stores, according to ISI Group analysis.  

The department-store company has lost longtime customers during its boutique-style transformation as it focuses on trendy new brands. As the company looks for a turn around, subleasing real estate could buy it time. However, some say it's not that easy. 

"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," Macquaire Group analyst Liz Dunn told Bloomberg. "I don't think that's happening anytime soon," she said, noting J.C. Penney has agreements with landlords preventing subleasing.  

Caribou Coffee recently announced they are backing out of plans to open shops in J.C. Penney stores, according to Bloomberg. No matter what course the retailer chooses, it's clear J.C. Penney is in repair mode. Last week chief financial officer Ken Hannah said the company aims to reverse its "huge miss."