Annual Report Analysis of J.C. Penney Company, Incorporated
Sarah Gray & Jade Vinson
Hampton University

Abstract
This paper is going to provide an analysis of the J.C. Penny Company, Incorporated (JCP) and its financial statements. We begin by giving a background of the company and an overview of the company’s commodities for brief understanding; and then proceed to discuss the financial state of JCP. We review and analyze the company by calculating ratios necessary to conclude JCP’s current financial health. We then provide a section showing the company’s current pro forma financial statements. Next, there is a pro forma projection for the year 2020. Lastly, there will be a regression analysis comparing the stock prices of JCP to the S&P 500 Index. Keywords: ratio, projection

Annual Report Analysis of J.C. Penney Company, Incorporated In 1898, James Cash Penney entered into business with Guy Johnson and Thomas Callahan for their dry goods stores called Golden Rule located in Wyoming and Colorado. The following year, Penney was sent to Wyoming to open a new store with the owners using his savings and the help of a small business loan. After the opening of the first store on April 14, 1902 he opened two more. In 1907, Johnson and Callahan ended their partnership and Penney bought full interest at all three locations. By 1912, there were 34 stores open and in the following year the company became incorporated under J.C. Penny Company and William Henry McManus became its cofounder. By 1941, there were 1,600 stores in operation. After years of continued growth and relative successes, the company is now entering what can be a very steep, and irreversible decline. In 2011, J.C. Penney exited the catalogue industry by closing 19 catalogue stores (the rest later being sold off to SB Capital Group). In the same year, the company was also accused of spamdexing—the manipulation of key phrases to drastically increase rankings in search results—by the New York Times. The company denied any part in the scheme, however, Google significantly reduced their search result visibility.
By 2012, the company had announced that it would be significantly reducing its workforce because new practices no longer required as heavy of a staff. 13% of Dallas employees were laid off, a Pittsburgh call center was closed, a company president was let go after only eight months in his position and 350 workers in the headquarters office were laid off. By the year 2013, the company’s market value had decreased by 37% and in the following year 33 stores were closed leaving 2,000 people unemployed. In 2013, Chief Financial Officer, Ken Hannah, was excused of having an extra-marital affair. Soon after, Soros Fund Management sold its 19 million shares, bought just months prior. In the current year, J.C. Penney’s stock continues to fall.
It is clear through the events that have transpired that J.C. Penney is facing significant financial difficulty relative to their particular industry and business size. In this annual report analysis, we will analyze J.C. Penney’s pro forma statements using financial ratios to evaluate the efficiency and likelihood of continued growth. We will be using liquidity ratios to measure J.C. Penney’s ability to eliminate short-term debt and meet unforeseen cash requirements. We will also be using profitability ratios that will measure the company’s efficiency in operations through its cash flow. This will determine its capabilities in obtaining debt and equity financing. We will be using solvency ratios to measure the company’s ability to pay off its long-term debts.
After these ratios are calculated, we will calculate the Altman Z-Score to evaluate the company’s likelihood of bankruptcy. We will then conduct an analysis of the pro forma statements (income statement, balance sheet, statement of cash flows and statement of stockholder’s equity)
Ratio Analysis Profitability ratios allow a user to see how well a company is generating profits. For most ratios in this category are ideally very high because it shows that the company is successful in gaining profit. One ratio used for determining profitability is the profit margin ratio. To begin, the profit margin is the percentage of sales or revenue that can be counted as profit. It is often considered the sole measure of determine the financial health of a company or organization. In plain terms, it is a ratio of profit to total sales. In order for a company to operate successfully, the company must attain enough profit to cover operating expenses, cost of the product, debt expenses and wages for employees. JCP has a profit margin ratio of -11.7%. This means that the degree of their losses is -11.7% relative to sales meaning that the company is essentially losing a significant amount of money during operations. The gross profit margin ratio is another way to measure a company’s financial health. However, this ratio measures how well the company utilizes its labor and materials in the operations of the company. It is ideal to have a high gross profit margin ratio because that indicates that the company is retaining more profit to cover operating expenses and other expenses. JCP has a gross profit margin of 29.4% indicating that it is retaining 29.4% of its profit to pay for its operations. While this is not drastically low, it is not at all high and indicates financial health issues. Debt ratios are an excellent indicator of how worth of a credit a company is. It also gives insight into its’ borrowing habits and how well it uses the money to finance itself. Leverage is a necessary measurement in the financial health of a company because it indicates how well a company is using debt to increase its available capital. While debt is a powerful tool to increase the efficiency of a company, it also adds significant risk. The degree of operating leverage ratio shows what effect operating leverage has on a firm’s EBIT. The higher the degree, the more EBIT will be effected by changes in the sales value. JCP has a DOL of 2.42.
Turnover ratios are also known as efficiency ratios. These ratios show the relationship between different asset forms and sales. One type of turnover ratio is the asset turnover ratio.
The asset turnover ratio shows how well a company is using its assets to acquire revenue. This ratio uses all assets (current and noncurrent). JCP has an asset turnover of .982. While a high asset turnover ratio indicates a company is using its assets well, a low one indicates the opposite. JCP asset turnover ratio indicates that sales have slowed tremendously and that there may be a problem with inventory or some particular equipment. JCP’s liquidity ratios are calculated to understand the company’s financial ability to pay for its accumulated short-term debts. If the numerical value of the total ratio is a high number, then the company is within good standing to pay for their short-term debts. JCP is at a moderate standing when viewing their liquidity ratios. This puts JCP at an advantage due to the fat that some investors search for companies with high current ratios and other shareholders seek out companies with lower current ratios.
By calculating JCP’s Altman Z-Score, it is easier to determine the likelihood of the company going into bankruptcy. By calculating JCP’s Z-score in both years of 2012 and 2013, we were able to determine that JCP, as a company, isn’t likely to fail. Their Z-Scores aren’t completely high enough for the company to feel completely comfortable, but as stated before, JCP is in moderate standing.