Sears and J.C. Penney: Which Will Disappear First?

Two of the oldest brands in U.S. retailing are engaged in a struggle for survival. And if either is to defy a Darwinian end, some evolution will have to take place.

Sears Holdings Corp. (NASDAQ: SHLD) reported second-quarter 2013 results before markets opened on Thursday. The company posted an adjusted earnings per share (EPS) loss of $1.46 on revenues of $8.9 billion. In the same quarter a year ago, Sears posted an EPS loss of $1.06 on revenues of $9.5 billion. The consensus estimates from Thomson Reuters called for an EPS loss of $1.10 on revenues of $9.01 billion.

J.C. Penney Co. Inc. (NYSE: JCP) generated revenues in its second quarter of $2.66 billion and posted an EPS loss of $2.66. The company's share price actually opened 7% higher on Tuesday morning after reporting results that were far worse than expected.

Today's results from Sears will not get the same reception. It is not that the store's results are that much worse. The problem is Sears has nothing left to sell off. Sales at its Kmart stores are dropping faster than sales at its Sears stores, and the company already has spun off its Hometown and outlet stores and half its Canadian stores.

Sears plans to cut its inventories by $500 million to around $8.1 billion by closing stores and reducing prices. Sears gained $290 million in cash during the second quarter from the sale of real estate. The company's goal is essentially to raise cash. And why do that? To make itself attractive to a potential acquirer perhaps? Isn’t that putting lipstick on a pig?

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J.C. Penney's strategy is different but no less anemic. The company could not afford to wait to see if former CEO Ron Johnson's strategy would turn the company around, so it returned to its former-former CEO's strategy, which is the one the company has used for decades and which essentially was undermined by the big-box discounters 30 or 40 years ago.

At the current pace of destruction, Sears looks like it will be the first to go. But it will be a close race.

Shares of Sears are down about 5.2% in premarket trading, at $41.00 in a 52-week range of $38.40 to $68.77.