JCP Case Study

Saving J.C. Penney Due Date: June 6th

On October 2018, J.C. Penney hired a new CEO, Jill Sotau, after Marvin Ellison resigned

five months earlier after three years of being CEO. Sotau asked the interim CFO to be brought up

to speed with the last three years. He delegated this job to Alicia Smith, a financial accountant

who recently received her MBA. She was asked to perform a detail financial analysis and

provide the results by the end of the week. Along with the analysis, he asked that she give

recommendations on how to address weaknesses and highlight strengths presented by the

financial statements. Knowing that this could boost her career, she decides to spend the week to

focus on J.C. Penney’s account and find a way to help save J.C. Penney.

Overview of Retail Industry

Overall, 2017 was a good year for retail. Sales were up from the previous year from

$1.85 trillion to $1.92 trillion1. Even the destruction from high-category hurricanes helped boost

sales for home improvement stores like Lowes. With the increase in technology, there has also

been a shift in consumer preference; this is no more evident than the increase in online sales

from $99.9 billion the previous year to $115.3 billion in 2017. Companies more and more are

dedicating resources to get their online presence seen and used. Another big winner in the retail

industry are “big-box” retailers including Wal-Mart and Target, who act as a one-stop destination

for consumers. Walmart, who a few years back was losing consumers to Amazon, had huge sales

growth in 2017 due to their e-commerce effort2.

However, it has not been a good year for everyone. The “retail apocalypse” also arrived

in 2017 and devastated many companies. Although there has been an economic boom with high

consumer confidence, and unemployment at an all-time low, there has been a number of retail

chains closing stores. According to Bloomberg, 6,752 retail store announce closing, 553 of these

are department stores3. The department store industry includes about 20 U.S. companies. In

2017, the annual sales for department sales was about $55 billion4. Department stores are faced

with competition from online vendors like Amazon as well as discount department stores such as

Ross, and large retailers such as Wal-Mart. Since 2000, sales in department stores has decreased,

which has caused many stores to close. While some of this decrease could be due to the financial

recession, part of it is due to their sluggish response to competition. Department sales are highly

cyclical and dependent on holiday shoppers. Some companies can make up to a third of their

sales just in the fourth quarter. About 55% of department sales come from apparel products, 11%

from cosmetics, 9% from footwear, 5% from appliance and the remaining 20% is others. J.C.

Penney allocation of sales can be found in Exhibit 1. It is forecasted that from 2018 to 2022,

sales will only continue to decrease for department stores.

Many chains are incumbered with debt and with sluggish sales growth; many retails are

having a harder time making payments. In 2017, a long list of retail stores filed for Chapter 11

bankruptcy5. This list includes stores such as RadioShack, Payless, Rue21, Aerosoles, and one of

the biggest bankruptcies to date “Toys “R” Us. Even historical stable department stores, like

Macy’s, are laden with billions of debt, and after the bankruptcy of Toys “R” Us, refinancing has

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become a lot harder. With refinancing becoming harder and competition stiffer, these companies

may not have any choice but to follow Toys “R” Us to bankruptcy. The retail apocalypse is not

finish collecting victims, as it seems to be encroaching at the doorstep of J.C. Penney.

JC Penney History

James Cash Penney founded J.C. Penney (JCP) in 1902 with the name “The Golden

Rule” with the mission to “treat others as they would like to be treated.6” Since then, it has

grown to over 870 stores nationwide, 11 supply chains, and over 97,000 associates worldwide.

Throughout the years, JCP was known for its catalogues and its sales, which would bring

shoppers to its door. JCP, like other retail stores would make most of their sales during the

holidays and discount promotions. In 1994, JCP introduced its website that allowed shoppers the

convenience to shop wherever they are. This opened access to new consumers.

However, in the last few years JCP has faced many problems. Sales have decreased over

the last 3 years and in 2017 posted a loss. Unlike other retail stores who has recovered from the

great recession, JCP has struggled to stay relevant. JCP faces competition on many fronts, with

stores such as Target, Walmart, and Amazon stealing many of its custumers7. However,

competition is not its only problem. Many of its present misfortunes can be traced back to

mistakes made by Ron Johnson, the chief executive officer, in 2011, who promised to make JCP

“America’s favorite store.” “He did that by getting rid of its discounting culture and beginning to

refashion its stores as collections of boutiques for hip brand8.” While the idea may have been

good, the implementation was reckless. He did not take time to get to know how the company

work, or to speak to others for advice. Instead, transformation was automatic without any test

runs to determine how the market would react to change. His idea to transform JCP into Apple

was a complete fail. He alienated its customers with change in brands and eliminated discount,

and did not do a good job attracting new customers. In the 17-months that Johnson was there,

sales dropped by about $6 billion, 40,000 employees had to be let go, and share price fell

dramatically. Johnson failure to understand the market and how JCP worked was detrimental to

the store. In 2012, Johnson was let go.

After Johnson, the former CEO Myron Ullman return to fill in the vacated role. Ullman’s

first set of business was to stabilize JCP through reversing Johnson’s action9. He restored the

private labels and reintroduced discounts and promotions, along with releasing an apology.

However, his actions proved a little too late, with some customers finding alternative options.

In 2015, a new CEO was hired, Marvin Ellison, a former executive of Home Depot. Ellison

continued Ullmann’s strategy to stabilize JCP and to cut cost. Ullman and then Ellison retired

$1.4 billion in debt, successfully partnered with Sephora to create Salon by InStyle, as well

revamp the home and appliance department10. However, Ellison has failed to bring new ideas to

the table, rebrand JCP, and attract new consumers.

J.C. Penney Operating Strategy

One of the biggest problem that JCP faces is its debt. JCP has a total debt of $4.232

billion and has a $10.55 million of quarterly repayment due11. Exhibit 2 shows JCP’s long-term

debt. Additionally, the decrease in sales is worrisome for the investors, which is evident in the

spiraling decrease of stock price. Exhibit 3 compares the return of JCP over five years. The graph

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is provided by JCP and assumes that $100 was invested in JCP’s stock, as well as S&P 500 stock

index, as well as S&P Department stores which includes competitors: Macy’s, Kohl’s and

Nordstrom. This graph shows the returns on JCP is much lower than its competitors and the

market.

So what are they going to do about it? In their latest SEC report, JCP identified a three-

prong strategy, which include improving their private brand, omnichannel retailing, and revenue

per customer. The objective is to increase sales and profitability. Prioritizing their brand is a key

to increasing revenue with the help of their omnichannel strategy, which allows consumer to

shop online, as well as through their mobile device. Another important strategy is to cut down

cost. In 2017, JCP closed 138 stores, which decreased their SG&A cost for that year. In March

2018, J.C. Penney also fired 130 home office positions as well as 230 store positions, which is

estimated to save them approximately $20-25 million12. However, for the strategic plan to work

JCP Penney needs to overcome its challenges. The retail business is highly saturated with

competition and JCP needs to find a way to stand out. The ever-shifting preferences of consumer

and fashion trend is another challenge. They most work on improving the image of the brand if

they have any hopes of saving JCP.

Discussion Questions

Financial statement is provided in Exhibits 4 and 5 for the last 3 years. The industry averages can

be found in Exhibit 6.

Provide a summary of the issue that J.C. Penny face. Assume the role of Alicia Smith, prepare a

3-5-page memo that analyzes the financial condition of JCP. Included in the memo should be a

section describing the company’s liquidity, asset management, debt management, profitability,

market value and your recommendations to JCP. Make sure that you include the heading of each

section in your report. Also include the following financial exhibits in excel:

• A written summery of the company’s financial position and a decision of whether JCPenney should continue their current course of action or change direction.

o Vertical (common size) analysis of income statement and balance sheet o Horizontal (percent-change) analysis of income statement and balance sheet o Complete Ratio Analysis and Industry comparison. For each area, the students

need to determine if the strategic changes made have resulted in an improved and

worsening financial position for the company.

▪ company’s liquidity, ▪ asset management, ▪ debt management, ▪ profitability ▪ market value

• Also give a summary update on how JC Penney performed in 2019? What is new for JCP? How did they react when other retailers went bankrupt? Are these changes reflected

in Sales and Profit? How was JC Penney impacted by Covid-19? In May 2020, JC

Penney filed for bankruptcy. What did this entail?

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Exhibit 1: Allocation of J.C. Penney’s sales

2017 2016 2015

Women’s apparel 22% 23% 25%

Men’s apparel and accessories 21% 22% 22%

Home 15% 13% 12%

Women’s accessories, including Sephora 13% 13% 12%

Children’s apparel 9% 10% 10%

Footwear and handbags 8% 8% 8%

Jewelry 6% 6% 6%

Services and other 6% 5% 5%

100% 100% 100%

Data: J.C. Penney 10-K SEC report

Exhibit 2: J.C. Penney’s Long-Term Debt

($ in millions) 2017 2016

Issue:

7.95% Debentures Due 2017 $

$ 220

5.75% Senior Notes Due 2018 (1) 190 265

8.125% Senior Notes Due 2019 175 400

5.65% Senior Notes Due 2020 (1) 360 400

2016 Term Loan Facility (Matures in 2023) 1,625 1,667

5.875% Senior Secured Notes Due 2023 (1) 500 500

7.125% Debentures Due 2023 10 10

6.9% Notes Due 2026 2 2

6.375% Senior Notes Due 2036 (1) 388 388

7.4% Debentures Due 2037 313 313

7.625% Notes Due 2097 500 500

Total debt 4,063 4,665

Unamortized debt issuance costs -51 -63

Less: current maturities -232 -263

Total long-term debt

$ 3,780

$ 4,339

Weighted-average interest rate at year end 6.1 6.3

Weighted-average maturity (in years) 16 years

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Exhibit 3: Stockholder’s Return

$0

$50

$100

$150

$200

$250

2012 2013 2014 2015 2016 2017

Stockholder's Return

JCPenney S&P 500 S&P Department Stores

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Exhibit 4: J.C. Penney’s Income Statement

(In millions, except per share data) 2017 2016 2015

Total net sales

$12,506

$12,547

$12,625

Costs and expenses/(income): Cost of goods sold (exclusive of depreciation and amortization shown separately below) 8,174 8,071 8,074 Selling, general and administrative (SG&A) 3,468 3,538 3,775 Pension 21 19 162 Depreciation and amortization 570 609 616 Real estate and other, net -146 -111 3 Restructuring and management transition 303 26 84

Total costs and expenses 12,390 12,152 12,714

Operating income/(loss) 116 395 -89 Loss on extinguishment of debt 33 30 10 Net interest expense 325 363 405

Income/(loss) before income taxes -242 2 -504 Income tax expense/(benefit) -126 1 9

Net income/(loss) -116 1 -513

Price $3.16 $8.31 $6.66 Earnings/(loss) per share: Basic -0.37 — -1.68 Diluted -0.37 — -1.68 Weighted average shares – basic 311.1 308.1 305.9 Weighted average shares – diluted 311.1 313 305.9

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Exhibit 5: J.C. Penney’s Balance Sheet

(In millions, except per share data) 2017 2016 2015

Assets Current assets: Cash in banks and in transit $116 $125 $119

Cash short-term investments 342 762 781

Cash and cash equivalents 458 887 900

Merchandise inventory 2,762 2,854 2,721

Prepaid expenses and other 190 160 397

Total current assets 3,410 3,901 4,018

Property and equipment 4,281 4,599 4,816

Prepaid pension 61 — —

Other assets 661 618 608

Total Assets

$8,413

$9,118

$9,442

Liabilities and Stockholders’ Equity Current liabilities:

Merchandise accounts payable

$973

$977

$925

Other accounts payable and accrued expenses 1,119 1,164 1,360 Current portion of capital leases, financing obligation and note payable 8 15 26

Current maturities of long-term debt 232 263 101

Total current liabilities 2,332 2,419 2,412

Long-term capital leases, financing obligation and note payable 212 219 10

Long-term debt 3,780 4,339 4,668

Deferred taxes 143 204 425

Other liabilities 567 583 618

Total Liabilities 7,034 7,764 8,133

Stockholders' Equity Common stock (1) 156 154 153

Additional paid-in capital 4,705 4,679 4,654

Reinvested earnings/(accumulated deficit) -3,122 -3,006 -3,007

Accumulated other comprehensive income/(loss) -360 -473 -491

Total Stockholders’ Equity 1,379 1,354 1,309

Total Liabilities and Stockholders’ Equity 8,413 9,118 $

9,442

Shares Outstanding (in million) 312 308.3 306.1

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Exhibit 6: Industry Average

Liquidity Averages Ratios

2017

Current Ratio 1.55

Quick Ratio 0.35

Asset Management Ratios

2017

Total Asset TO 1.5

FA TO 3.996742

INV TO 3.883333

Debt Management Ratios

2017

Liabilities to asset 0.706009

TIE 4.549735

Profitability Ratio

2017

Operating Profit Margin 6.36%

Profit Margin 4.21%

ROA 8.46%

BEP 11.67%

ROE 29.28%

Market Value Ratios

2017

P/E Ratio 14.02

M/B ratio 4.57

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Resources:

1. North America Retailing Sector. (2018, January). Retrieved from

https://www.mergentindustryreports.com/about-the-industry-reports.html.

2. Green, T. (2018, January 03). Wal-Mart Had an Incredible 2017. Retrieved from

https://www.fool.com/investing/2018/01/03/wal-mart-had-an-incredible-2017.aspx

3. Townsend, M., Surane, J., Orr, E., & Cannon, C. (2017, November 8). America's 'Retail

Apocalypse' Is really Just Beginning. Retrieved from https://www.bloomberg.com/graphics/2017

-retail-debt/

4. Department Stores Industry Profile. (2018, September 3). Retrieved from

http://www.firstresearch.com/Industry-Research/Department-Stores.html

5. Ruff, C., & Unglesbee, B. (2017, December 13). The running list of 2017 retail apocalypse

victims. Retrieved from https://www.retaildive.com/news/retail-bankruptcies-2017/446086/

6. JCPenney Newsroom. (n.d.). About JCPenney. Retrieved from

https://www.jcpnewsroom.com/about-company-info.html

7. Meyersohn, N. (2018, September 27). How it all went wrong at JCPenney. Retrieved from

https://www.cnn.com/2018/09/27/business/jcpenney-history/index.html

8. Wahba, P. (2016, May 16). Ex-Penney CEO: "I was told people wanted change, but the truth

is nobody wanted change." Retrieved from http://fortune.com/2016/05/16/ron-johnson-penney/

9. Ladd, B. (2018, July 15). Killing JC Penney: Can The Iconic Retailer Be Saved? Retrieved

from https://www.forbes.com/sites/brittainladd/2018/07/15/killing-jc-penney-can-the-iconic-

retailer-be-saved/#635b356761bf

10. Duprey, R. (2018, May 30). After CEO Jumps Ship, Can J.C. Penney Stay Afloat? Retrieved

from https://www.fool.com/investing/2018/05/30/after-ceo-jumps-ship-can-jc-penney-stay-

afloat.aspx

11. JCPenney Corp. (2018). Form 10-K/A 2018. Retrieved from SEC EDGAR website

http://www.sec.gov/edgar.shtml

12. JC Penney. (2018, March 2). JCPenney Announces Strategic Realignment of its Senior

Leadership Team. Retrieved from https://ir.jcpenney.com/news-events/press-

releases/detail/316/jcpenney-announces-strategic-realignment-of-its-senior