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Sears Holding’s potential bankruptcy creates opportunities for other retail players.

Where we were: Sears shares lost nearly 17% on Wednesday, and are falling again on Thursday ahead of what The Wall Street Journal reported could be a Friday bankruptcy filing ahead of debts coming due next week.

Where we’re headed: Some malls may welcome the change, while rival retailers will benefit from Sears’ demise, but it could be a tipping point for weaker malls.

Before the financial crisis, Sears stock (ticker: SHLD) traded at more than $90 a share. Three years ago, shares slipped to just over $20 a share, and Sears was clearly a troubled name. Investor skepticism continued to solidify, even as the stock crumbled, halving from nearly $7 at the start of 2017 to $3.58 by the end of last year, and tumbling from $2.99 six months ago to less than 50 cents on Wednesday.

A quick look at that chart shows why the department store’s potential bankruptcy filing isn’t a shock to the Street. That also means that there’s no shortage of retail peers that are prepared to move into its territory.

Cowen & Co.’s Oliver Chen looks at which companies might benefit from Sears’ fall today, writing that Walmart (WMT) and Target (TGT) are well positioned to gain from store closures, followed by J.C. Penney (JCP), Kohl’s (KSS) and Macy’s (M).

Some 92% of Sears shoppers also shop at Walmart, his research shows, 75% at Target, 56% at J.C. Penney, 55% at Kohl’s, and 54% at Macy’s. The total annual revenue up for grabs looks to be about $8.7 billion on a trailing 12-month basis, although he warns that the bankruptcy could be a headwind for peers if Sears uses substantial discounts to move merchandise in a liquidation.

Of course, Sears is hardly the only troubled chain. Chen’s colleague John Kernan writes that Sears, along with Stage Stores (SSI), Stein Mart (SMRT), and J.C. Penney, collectively carry $9 billion in debt with “little to no free cash flow.” He believes that off-price retailers would see the biggest boost if more of these beleaguered firms close stores, with some $3 billion to $6 billion of sales available for TJX (TJX), Ross Stores (ROST), and Burlington Stores (BURL) to capture.

Ultimately, Chen writes, market share gains from Sears’ demise will depend on a number of factors, including distance, shopper overlap, product and brand similarities, and promotions. Nor can retailers expect consumers to simply fall into their laps. “We believe the fight for share gains will be highly competitive, shares will be likely somewhat fragmented, and prior Sears shoppers could also just stay home and not shop for items that were more discretionary in nature.”

Credit Suisse’s Michael Binetti sees many of the same retailers benefitting, although he highlights J.C. Penney and Burlington as potentially the biggest beneficiaries in his coverage, due to their proximity to Sears locations.

Yet, looking past near-term sales gains, he warns that a potential liquidation of Sears would be a “very negative industry data point,” and one that could be a tipping point to accelerate the closure of C- and D-level malls, which are also struggling after the closures of Bon-Ton anchor stores. (The most financially stable malls are labeled A-level malls).

Some 59% of Sears banner stores share malls with a J.C. Penney, and 51% are in the same mall as a Macy’s. As noted above, J.C. Penney is also overleveraged and has lagging same-store sales, while Macy’s is shifting to focus on its strongest stores, i.e., not those in weaker mall locations. “We don’t see a reason another quality retailer would sign up to be a new stabilizing anchor in a large number of deteriorating malls,” he writes, and warns that while J.C. Penney could see a near-term bump, that doesn’t outweigh the company’s “longer-term cycle of store closures, overhead reductions, scale benefit losses, and leverage constraints to growth investing.”

So what should investors make of all this? Perhaps one of the most salient takeaways is the bifurcation of retail, and the fact that store closures aren’t finished. While many headlines this year have focused on the sector’s revival—consumer confidence is at an 18-year high, the SPDR S&P Retail exchange-traded fund (XRT) reached new all-time highs this summer, and, for a number of months, Macy’s year-to-date performance was better than Amazon.com’s (AMZN)—that’s not the whole story. There are still struggling retailers, such as Sears and Bed Bath and Beyond (BBBY), which recently crumbled after reporting earnings.

What’s worse is the timing: If retailers can’t demonstrate same-store-sales growth and other improving metrics now, when the macro backdrop is supportive, then when can they? As we approach the all-important holiday shopping season, comparisons are about to get tougher for retail, and those that couldn’t make the grade when the wind was at their backs may see their situation worsen further, and quickly.

Sears is down 5.5%, to 46 cents, in recent trading.

Make the Connection

Analysts are more optimistic about other areas of retail.

Among department stores, Cowen thinks Kohl’s has a brighter future.