Financial Analysis of
Jc Penny
A brief overview of the rebrand
Financial Analysis of
Jc Penny
A brief overview of the rebrand

History
J.C. Penney Company, Inc has about 1,100 stores in all 50 states. J.C. Penney Company, Inc. (JCPenney) is the second largest department store in the United States behind Sears Roebuck. JCPenneys’ name came from James Cash Penney who started his first retail store in 1902 in Kemmerer, Wyoming, a small mining town when his was 26 years old called Golden Rule. Even though the local banker cautioned Penney against opening a "cash only" store, since three other previous investor attempts failed, Penney still proceeded. In Penney's 1st year, the store successfully made $28,898 in sales.
By 1913, Penney changed the company’s name to J.C. Penney Company, Inc. and moved the corporate headquarters to New York City to be closer to manufacturers and suppliers. Private label brands were a major reason for the success of the company; JC Penney could determine the price and used this to increase his profit margin. Some private label examples include Belle Isle, Ramona, and Honor Brand.
In 1929 the company was listed on the New York Stock Exchange. When the Great Depression hit, the company cut back its inventory and purchased goods at lower prices so it could pass the savings on to customers. The company's profits even increased during the Depression and the number of stores grew to 1,496. During World War II, Materials and merchandise were scarce, yet the company increased its sales to $500 million in 1945. A year before its 50th anniversary, the company reached its goal of $1 billion in sales.
An internal study in 1957 indicated that the company should adapt to changing consumer spending habits by beginning to sell on credit. The company issued its first JCPenney card and instituted the introduction of major appliances, home electronics, furniture, and sporting goods. Shortly thereafter in 1962, JCPenney got into the mail-order business after buying General Merchandise Company. Unlike most of its competitors, JCPenney was a late entry into the catalog mail-order business. Other major retailers began as mail-order companies and then launched into retail stores. The company discontinued their catalog sales in 2011.
In 1981, the company launched the first of what would be many massive reorganizations. This transformation focused on expanded the fashion lines and a new store design. In 1983 JCPenney announced a $1 billion program to rearrange merchandise emphasizing apparel, home furnishings, and leisure lines while discontinuing auto service, hard line appliances, paint, hardware, lawn and garden merchandise and fabrics. The company also introduced a communications system for broadcasting directly to its stores using satellite transmissions from headquarters allowing others to see what was available in their stores. This gave the company the cost-saving advantages of being centralized.
At the same time, the company began a more focused strategy surrounding four major merchandising groups: women's, men's, children's and home and leisure. In 1987 the company discontinued sales of home electronics, hard sporting goods, and photo equipment in its stores. The space that became available was then used for women's apparel. In 1988, the company reduced regional operations from five to four while launching a leveraged employee stock ownership plan.
In 1989 JCPenney was named the exclusive U.S. distributor for Olympic apparel. The same year the company broke ground for its new corporate headquarters in Plano, Texas which would be completed two years later. The company focused on another operations overhaul and reduced stores down to 1,328 by closing underperforming outlets and moved away from some of its private labels. JCPenney's concentration on woman accounted for 80 percent of apparel sales, the fact that each store now allocated up to 41 percent of its space and using a contemporary and fashion-forward environment caused sales to rise in 1992 and 1993. The company announced that its Gift Registry which was started in 1994 had already enrolled 100,000 brides and 25,000 newborns and planned to hit 250,000 by the end of 1996.
In 1996 the company allocated of $2.1 billion in capital expenditures to open 100 new domestic stores and refurbish 500 more over a three-year period and the expansion of its international presence through varied licensing agreements. JCPenney's department store operations continued to struggle in the late 1990s due to high operating costs with the clothing market segment being over populated with competition from discounters such as Wal-Mart and from high-end retailers such as Saks Fifth Avenue. A series of cost-cutting initiatives were launched, including the closure of 75 underperforming stores and the elimination of about 4,900 jobs in 1998. A new buying strategy was implemented early that year designed to get brand-name fashions into JCPenney stores on a much faster basis. JCPenney started online sales which totaled only $15 million that first year. By the end of the following fiscal year, sales had jumped to $102 million. The company also expanded overseas in January 1999 through the $139 million purchase of Renner, a 21-unit department store chain in Brazil.
Needing to reduce debt, JCPenney sold its credit card operations to GE Capital. "Stores-within-a-store" were set up to highlight eight of JCPenney's top private-label apparel lines, including Original Arizona Jean, St. John's Bay, and Worthington to hopefully help the store’s lagging performance. Sales increase was wholly attributed to Eckerd, which saw its sales increase 20 percent.
In 1969, JCPenney entered the drug store market with the purchase of Thirft Drug. In 1996, the organization expanded in the drug store business by acquiring Fay’s Drug and Kerr Drug. In November 1996, the company purchased the Eckerd chain and rebranded all stores in 1997 to Eckerd. Eckerd sales comprised nearly 40 percent of overall JCPenney sales and helped to keep the company profitable. In 2004, Eckerd was sold to Brooks Pharmacy and CVS.
In March 2000, JCPenney launched a $488 million restructuring program aimed at generating annual cost savings of $120 million. By January 2001, the company had closed 48 underperforming department stores and nearly 300 Eckerd outlets. In June 2001, in another debt-reduction initiative, JCPenney sold its direct marketing services unit, which included the company's insurance operations, to AEGON, N.V. for $1.3 billion.
The company began their most recent reorganization in 2011 by existing the catalog market and announcing a refresh of their stores and product lines. This analysis will determine if the rebrand was successful by looking at numerous ratios to ascertain the income, liquidity and profitability of the store. These ratios will also be compared to industry norms to determine if the JCP has been successful in their rebrand.
Income
The goal of any company is to make money. The gross margin indicates a company’s ability to turn current inventory into future cash. JCPenney notes in their annual report that the majority of their sales for the year come primarily from their 4Q earnings. A disappointing 4Q can mean a disastrous year. The gross margin for 2012 was 31.3% down from 36% for 2012 and 2011 respectively. The industry average was 36.6% in 2012, 39.4% in 2011. While JCPenney is underperforming by comparison, it is important to understand that one cause of the decrease in gross margin in 2012 was a discontinuation of merchandise most of which was sold on clearance. Much inventory was eliminated from the store as the company prepared to introduce new brands and products as a part of the refresh. Inventory management is essential to providing a strong gross margin. If demand is overestimated, inventory is marked down and sold at a discount, adversely affecting the gross margin and operating results. Gross income grew 1.9% between 2010 and 2011, but declined by 9.9% and is poised to decline by upwards of 40% for the current year with a gross profit margin dipping to just 24.4%. As the company already has declining assets, a strong sales year with strong results from operating activities will be essential. Profit margin was -8% and in 2012, JCP had a loss from operating activities. At the beginning of the 2012. In 2011, the profit margin was at -1% facing a small loss of $2M from operating activities. The majority of these declines in profit stem from merchandise sold off at a deep discount. The organization has posted net income losses in both 2012 and 2011 as a result of declining sales revenue and large expenses due to the rebrand. It should be noted that the organization was able to decrease operating expenses in 2012, but sales were not strong enough to provide operating income and the company lost $1.536B from operating activities. Large increases were seen in 2012 for pensions as a result of a buyout plan for employees. As the company continued to downsize and close underperforming stores, the company took a loss on real estate, contributing to the overall operational loss. In 2012, JC Penney reorganized and refreshed department stores in an effort to engage customers in a unique shopping experience. Restructuring costs have been a large expense in both 2011 and 2012. In 2011, the restructuring cost amounted to $451M which explains the small loss the company took on operating income. In 2012, the restructure/rebranding continued with a total cost of $298M, not enough to explain the $1.31B operating income loss. Declining sales once again become the focus. During 2012, JCP opened shops under Levi’s, Izod, Liz Claiborne, The Original Arizona Jean Co., and jcp brands. They also opened 78 Sephora stores inside JCPenney stores. One of the hidden costs of opening a new store is that it doesn’t immediately begin being profitable. It takes time to develop a following, for customers to be aware of its location and for repeat customers to return. With regard to opening Sephora inside of the stores, this may not be a wise choice. Many malls are already equipped with a Sephora store and the competition can cause the stores to cannibalize themselves.
Liquidity
The primary focus of this analysis is centered around the year ending in January 2011 and forward as this is when the reorganization was announced and a dramatic change occurred in the company and on the financial statements. It will later be visited how this affected the organization’s stock price. It is particularly important in the department store industry as inventory turnover is generally a longer period and moves with the seasons. Cash flow is the most essential part of any business. JCPenney’s current ratio for the year ending February 2013 was 1.4. In 2013, the industry norm was 1.7 (Institute, 2014). JCPenney, although slightly less than the industry average, is able to cover their short-term debts. Over the last five years, JCP has trended above the industry average for the current ratio. JCP’s current ratio has significantly declined in the last three years. Liabilities have remained steady. Total assets have decreased and the company no longer has prepaid pensions on their balance sheet having offered an early retirement initiative in 2011. Overall, the company has less inventory on hand and as well as less cash on hand as a result of the heavy investment the company made in their stores. Debt-to-Equity poses a significant issue for JCPenney. For the year ending February 2, 2013, the company stood at 2.1. Using 1.0 as a benchmark, the company has nearly twice as much debt as it does equity. Not since 2009 has the company been below 1.0. Short-term liabilities have remained stable while long-term liabilities have actually decreased. In 2012, sales decreased by 25% year-over-year. This is as a result of selling many products on clearance in order to make way for new product lines and new suppliers. In 2011, the company experienced only a 3% drop in sales. In the same year, the company had $1.4B in reinvested earnings. In 2012, that number decreased dramatically to only $380M, impacting stockholders’ equity. If this trend continues, it will become a concern for the organization. However, in the midst of this rebranding those earnings are a primary source of financing in order to avoid increasing liabilities in the long-term. The organization has reorganized, rebranded and refreshed their stores many times over their long history and experience similar trends and losses, their stock price suffering. It is expected and preferred that the organization use equity to finance versus incurring debt. If the company can demonstrate progress, this number will rebound. Another important component of liquidity for any retail store is inventory turnover. During the year ending February 2013, JCP turned their inventory over 3.4 times. In the last three years, this number has remained steady. Their largest operations are in Texas with 94 stores with the second highest presence in Florida with 59 stores. In states with lesser temperature fluctuations, the need to turn inventory over by season would be less. In northern states, like Pennsylvania, exhibiting four distinct seasons, inventory turnover is most likely closer to 4. This number would be heavily influenced in a primarily retail apparel store by where the majority of operations take place. The average for the industry 2012 was 4.6, an all-time high over the last five years (Institute, 2014) and is trending downward at 4.1. It is important to note that compared to other department stores, JCP’s inventory turnover was at the 3.5 average in 2010 and slightly above the 3.4 average in 2011. Overall, until 2012, JCP was on par with the industry. JCP utilizes over 2500 foreign and domestic suppliers. These suppliers sell to JCP on open account purchase terms. If there is any concern regarding their financial position, suppliers may implement more restrictive payment terms, negatively impacting liquidity, inventory levels, sales and overall profitability. From a standpoint of dependence, they are differentiated enough that they are able to obtain merchandise quickly. From a cost standpoint, this may not be the most effective route. A better price may be obtainable if they limited their suppliers and increased their quantities. While this would limit merchandise, if successful, this could turn the company around. The risk they take is of course fashion trends shifting. In 2012, 23% of their sales came from women’s apparel, 56% from family apparel. While variety is the spice of life, streamlining their suppliers may help them increase sales. Inventory doesn’t need to turn over any more than four times each year. Fashion trends don’t change that quickly and there are only four seasons in a year in the north, fewer in the south. An issue that JCPenney faces is the ability to maintain inventory, specifically online. JCP held a President’s Day sale. However, by Saturday afternoon, the website was already out of many colors and styles of various items. This is an ongoing issue they face and could be a contributing factor of their declining sales. If a customer cannot purchase the item at JCP.com, it’s very easy to visit any other retailer website to make a similar purchase. In-store or online, these sales translate into cash. Since most transactions occur via debit card or credit card, there is a delay in collection. Understanding day’s uncollected sales allow a business to make financing arrangements to cover short-term liabilities. Days’ uncollected sales are up to 8.7 days from 2011’s 6.9 days. This longer wait period explains why assets are down overall and why the current ratio stands where it is. In May 2013, the first phase of a new processing system was implemented to replace legacy systems and enhance customer information security as well as speed up the sales process. This “speed-up” will help with payment collection as well as inventory management. If successful, days’ uncollected sales should decrease helping to improve overall liquidity. Profitability will be positively impacted as customer demands will be better monitored and satisfied, allowing the store to sell more merchandise at regular prices. In the annual report, JCP states that they may not have sufficient liquidity sources to meet their cash requirements. Operating losses based on assumptions and judgment calls in the first year of this reorganization/rebrand/refresh have significantly depleted their cash resources. The company has the ability to borrow from various credit facilities and will most likely see an increase in liabilities in 2013 as they rely on this source of funds for short-term working capital. The timeline for the refresh may need to be extended in order to improve their cash position in the coming months and years. They could, in turn, face stricter debt covenants which if not satisfied would result in a call on outstanding debts. If the company has limited resources, it may experience a downgrade of its credit rating by various agencies. This will further limit their ability to obtain short-term working capital and negatively impact liquidity and overall profitability as the company experiences delays between merchandise arrival and sales. According to their annual report, on February 8, 2013, JCP “entered into an amended and restated credit facility in an amount up to $1,850 million. We may request that the facility be increased by an additional amount up to $400 million.” (JCPenney, 2013)
Profitability
Ability to achieve profitable sales and make adjustment to respond to changing conditions.
JCP is not a profitable company. Sales are rapidly declining. Operating losses continue to climb as assets are depleted. In 2010 and 2011, the company has a zero return on assets, a veritable break-even point where they were still able to function. In 2012, the company posted a -.1 return, demonstrating what the rest of the rations have alluded to: JCP is in trouble. The net loss from operations for the year ending 2012 amounted to $985 million. This translated to a loss of $4.49 per share. In 2011, the loss from operations was $152 million in 2011, just $0.70 per share. In 2010, operations produced a positive net income of $378 million. The resulting losses in 2012 stemmed from a $298 million restructuring charge as well as a loss of approximately $155 million in sales as a result of aforementioned markdowns related to inventory realignment. On a positive note, SG&A was reduced by $603 million. JCPenney is traded on NASDAQ. Comparable stocks include Sears, Target and Macy’s. As of the week of February 17, 2014, all four of these companies are down from their 52-week highs. Sears is down 39%, Target 23%, Macy’s just 6% and JCP 76%. With the exception of JCP, all of these stocks are currently trading over $40. The stock price has been in a rapid decline for the last two years. It reached a five-year high the week of February 13, 2012 peaking at $42.68/share. It has since declined by nearly 86% and bottomed out just under $5. It is currently trading around $6 per share. This decrease is fueled by subpar returns and significant declines in net revenue. Analysts are overwhelmingly declaring it a hold as the results from the most recent fiscal year will be released in March. If the company is able to demonstrate some improvement, the market will react accordingly. The organization is currently exploring several initiatives surrounding branding, pricing, marketing, store layout and merchandise realignment. As a result of these changes, the company has experienced a prolonged period of sales decline. These results fell well below the expectation of the company and they were forced to revisit old strategies. The company has also opted to focus on its largest stores for the refresh first and to leave smaller stores in their current state.
Analysis
The year 2012 marked the beginning of a transformation for the JCPenney Corporation. Initial results have been disappointing for the organization however, they’ve successfully reorganized, refreshed and rebranded a number of times throughout their 112-year history. As long as they can remain liquid and immediate and sustained improvement in sales is realized, it could be very successful. The new store layouts will present choice merchandise. There will be decreased square footage so inventory will need to be replenished more often and managed very efficiently. Sales may be reduced as a result and overall profitability would suffer. If it is successful and customers embrace these changes, the company will find success and a foothold for the company in the future. The most difficult sell will be to the customers. Many loyal shoppers were dismayed with the changes and stopped shopping at JCPenney. In an attempt to rectify this situation, JCP came forward, admitted they were wrong and brought back some of their classic brands. The reintroduction of St. John’s Bay in the fiscal year ending February 2013 was welcomed by many of these lost customers. The company launced several social media and traditional media campaigns to express their apologies. The advertisements ended with “Come back to JC Penney. We heard you, now we’d love to see you.” The company returned back to the JC Penney name from the abbreviated JCP. Another strategy JCP has employed is to bring back their coupons in lieu of their “Best Price Friday” sales which were held on the first and third Friday of the month. This had alienated many of their long-time customers. JCPenney is in the midst of finding the right mix between new brands and old favorites. In March of 2013, the Joe Fresh brand was introduced widespread amongst nearly 700 of their stores. This is a new brand that has attracted new and youthful customers. The company is also in the process of partnering with Michael Graves (also with Target) and many others. The company is replacing Martha Stewart’s line with a Liz Claiborne line as a result of pending litigation with Macy’s. Even though JC Penney’s has changed their business models over the years, the jury is still out on whether this most recent attempt will ultimately succeed. A lot of emphasis will be placed on the upcoming operating results of the fiscal year ending February 1, 2014. The company will have to increase net revenue to show that they have won back the business of their customers while welcoming new shoppers into the fold. Results from the third quarter revealed that sales were down 11%. The company’s most profitable quarter is the fourth quarter. If they are able to post a strong fourth quarter and recoup from the year, they’ll be in a strong position to turn their current financial distress into a profitable business endeavor.

References
Institute, T. R. (2014). RetailOwner.com. Retrieved from Benchmarks: https://www.retailowner.com/Benchmarks/GeneralMerchandiseStores/DepartmentStores.aspx#2883257-current-ratio
JCPenney. (2013, February 2). JCPenney Annual Report.