Will Best Buy Really Be the Biggest Winner From Sears Holdings' Demise?

Sears Holdings (NASDAQ: SHLD) started off 2018 by reporting dreadful sales results for the holiday season. The company remains in a tailspin, and management is resorting to desperate measures to keep the iconic retailer solvent. Nevertheless, most objective analysts agree that the writing is on the wall for Sears Holdings.

In this context, analysts are starting to turn their attention to the consequences of Sears Holdings' potential demise. A recent report from UBS projected that Best Buy (NYSE: BBY) would see the biggest sales and profit lift if Sears Holdings were to close all of its stores.

Surprisingly, the UBS report doesn't even mention J.C. Penney (NYSE: JCP) among the top 10 potential beneficiaries of Sears' collapse. However, J.C. Penney seems likely to see substantial sales gains if Sears disappears, at least in the short run.

Why Best Buy is poised to eat Sears' lunch

Despite its long string of sales declines, Sears Holdings is still a very large retailer. Merchandise sales likely reached about $14 billion in fiscal 2017, with apparel, "soft home" items, and major appliances together accounting for more than half of that total.

Best Buy has two big opportunities to profit from Sears' woes. First, it is likely to capture a big piece of Sears' already-dwindling consumer electronics business, which generated approximately $850 million of revenue last year, according to UBS estimates.

Second, Best Buy should be able to win a substantial chunk of Sears' multibillion-dollar appliance business. Indeed, Best Buy has already gained a lot of market share in appliances and may have overtaken Sears in 2017. Appliance sales now account for a high single-digit percentage of its $37 billion in annual domestic revenue.

J.C. Penney is even better positioned

While Best Buy is definitely on track to profit from Sears' woes, so is J.C. Penney. As Sears' main competitor at the affordable end of the mall-based department store spectrum, J.C. Penney is ideally positioned to gain sales in the apparel and soft home categories.

Furthermore, J.C. Penney is broadening its horizons to capitalize on Sears' plunging sales. Most notably, it has added appliance showrooms to roughly 600 of its stores since 2016.

In the third quarter of 2017, comparable sales in appliance sections that had been open for more than a year surged 30% at J.C. Penney. That was more than double Best Buy's appliance comp sales growth during the same period. Including appliance showrooms that had opened more recently, J.C. Penney's total appliance sales more than doubled during the third quarter.

In other words, J.C. Penney is already gaining market share because of the store closures and comp sales declines at Sears. It stands to reason that it would get an even bigger sales lift if Sears were to disappear entirely. In addition, J.C. Penney added another key brand, Frigidaire, to its appliance lineup as of Oct. 1, which should bolster its sales momentum.

J.C. Penney could get a big sales bump -- but would it last?

UBS estimates that if Sears Holdings were to close all of its stores, it might boost Best Buy's comp sales by about 2.5 percentage points. That translates to a roughly $1 billion sales gain.

In absolute numbers, J.C. Penney might not see quite as big a sales lift. Its appliance showrooms are fairly small, and it's still missing some major brands. On the other hand, J.C. Penney is about a third of Best Buy's size in the U.S., as measured by revenue. As a result, $500 million of incremental revenue -- which seems like an achievable target if Sears were to close -- would boost its comp sales by more than 4 percentage points.

The real question for investors is whether that sales gain would be sustainable. After all, U.S. mall traffic has been declining for years. I am cautiously optimistic on this front, particularly because J.C. Penney has posted the best comp sales results among mall-based department stores for the past few years.

In fact, Sears' demise could pave the way for a stabilization in traffic trends at some malls. One reason fewer Americans have been going to the mall lately is that most malls have too many ailing department stores and not enough restaurants and entertainment options. Store closures by Sears (and other department stores) will enable mall owners to redevelop those spaces to bring in more exciting tenants, potentially revitalizing customer traffic. This could have spillover benefits for the remaining mall-based department stores -- including J.C. Penney.

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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.