Penney Shares Rally; Could Store Sublets Save The Day?

Shares of beleaguered retailer J.C. Penney were rallying on signs that new strategies are attracting customers as the company boosts rent income.

J.C. Penney(JCP) is among the market’s big morning movers, �with shares up $1.01, or 6.5%, to $16.50.

“Oppenheimer said its store tours over the weekend suggested customers look to be reacting positively to the Joe Fresh launch on Friday. Separately, ISI Group said the company’s top 300 stores, with substantially below-market rents, could generate about $1.2 billion of sublet rental income …” �Marketwatch reports.

The fear is that Penney could default on its debt covenants if its business continues to flounder and it burns through its cash. Hedge fund York Capital Management is shorting J.C. Penney debt, pitting York’s James Dinan against Penney investor-fan William Ackman. Ackman, at Pershing Square Capital Management, started buying Penney stock in 2010, Reuters notes.

Earlier this month, Penney denied rumors that CEO Ron Johnson was leaving the company. The makeover under Johnson, including a store-within-a-store strategy that includes�Martha Stewart Living Omnimedia (MSO), hasn’t exactly shored up the company’s market value, which has dropped from nearly $8 billion last year to a recent $3.6 billion.

Shares of Martha Stewart Living were off 3% Monday.�Martha Stewart defended Johnson on CNBC last week, saying his vision is strategic but it “takes awhile” �for transformations to reap meaningful benefits.

Barron’s magazine was dubious about Penney’s ability to boost profits last year (“Penney Wise? Not Exactly,” Jan. 23, 2012- subscription required). The shares, then at $35, have fallen by roughly 53% since.