Recent steps by J.C. Penney ( JCP) and Target ( TGT) to hive off noncore assets are the retail sector's latest symptoms of Wal-Mart ( WMT) disease. The operations being cut loose aren't alike. Penney's Eckerd unit is a chronically underperforming drugstore franchise whose margins were flattened by cutthroat competition, while Target's Mervyn's and Marshall Field's divisions have seen their high-end offerings fall out of favor with hurried bargain-hunters. But with each divestiture, the parents are leaving behind disadvantages that exist at least partially because of Wal-Mart, the country's biggest retailer. The moves were both motivated because "the consumer is more interested in getting the most bang for their buck," said Adrian Bachman, a portfolio manager at Rydex. At J.C. Penney, keeping a hand in the drugstore space made no sense, given larger competitors that could offer much more than just drugs and cosmetics at a single outlet. Meanwhile, Target has seen profit and sales stumble and growth disappear at its department store chains. Analysts generally expect both stand-alone J.C. Penney and Target stores to succeed as separate entities from the divisions that were holding them down. "Target is more in an offensive position, whereas J.C. Penney is in a defensive position," Bachman added.
Prudential analyst Wayne Hood sees the company buoyed by strengths in its improving catalog and Internet divisions, which account for 15% of the stand-alone company's sales. He expects double-digit sales and earnings-per-share gains over the next five years. In its latest fourth quarter, J.C. Penney said it lost $1.07 billion, or $3.42 a share, compared with earnings of $202 million, or 68 cents a share, in the prior-year period. The quarter included a charge of $450 million to write down Eckerd, and another $875 million charge from a deferred tax liability at the drugstore unit. Excluding Eckerd, however, earnings rose 43%, which beat analysts' estimates.