J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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of J. C. Penney’s direct competitors. Year-over-year, J. C. Penney’s stock pricehas climbed 20.18 points or 32.65 percent. Over the past five years, J. C.Penney’s stock price has climbed 59.97 points or 272.34 percent.http://moneycentral.msn.comJ. C. Penney is also focused on continued growth within the departmentand discount segment of the retail industry. J. C. Penney recently announcedplans to open 250 new stores over the next five years and renovate about 300existing stores by 2011. The opening of new stores coupled with J. C. Penney’syear-over-year positive same store sales growth is indicative of the Company’scommitment to continued growth and expansion of its market share within theretail industry.Total Assets, Net Sales, and Comparable Sales Growth2002 2003 2004 2005 2006Total Assets* $17,787 $18,300 $14,127 $12,461 $12,673Net Sales* $17,384 $17,513 $18,096 $18,781 $19,903Sales Growth 2.80% 0.80% 4.90% 2.90% 3.70%*in millions9
Industry OverviewThe retail industry is broken into eight segments, which include apparel,catalog and mail order, department and discount, drugs, grocery, homeimprovement, specialty, and technology. Because of its wide array of retailmerchandise and services, J. C. Penney is placed in the department and discountsegment of the retail industry. The companies in the department and discountsegment had combined annual revenue of approximately $475 billion, in 2006(www.firstresearch.com). The major competitors of J. C. Penney within thissegment include Kohl’s, Dillard’s, Stage Stores, Inc. and Stein Mart.The department and discount segment of the retail industry “includes10,000 companies that operate 40,000 stores. The industry is highlyconcentrated: the 20 largest companies operate 26,000 stores and hold 95percent of the market” (www.firstresearch.com). However, since the companieswithin this segment provide similar products and services, they are forced tocompete primarily through merchandising and supply chain management. Theprofitability of individual companies within this segment relies greatly on correctmerchandising and efficient supply chain management. For instance, J. C.Penney has launched a new “Every Day Matters” advertising campaign and hasbegun offering a large selection of private and exclusive brands in addition to analready extensive line of national brands in an effort to separate itself from itscompetition. The Company’s goal is to attract middle-income consumers byproviding stylish, high quality merchandise at a reasonable price.The department and discount segment of the retail industry can be furtherdivided into three unique tiers. The first tier, luxury department store retailers,caters to wealthy, style conscious consumers who are more concerned withbrand name products and superior customer service. This tier includes retailerslike Neman Marcus, Nordstrom’s, and Saks 5 th Avenue. The second tier,department store retailers, targets middle-income families who are concernedwith style, quality, and affordability. This tier includes retailers like J. C. Penney,10
Page 1 and 2: J. C. Penney Company, Inc. Equity V
Page 5 and 6: Industry AnalysisIn 1902, James Cas
Page 7 and 8: Financial Analysis, Forecast Financ
Page 9: Business & Industry AnalysisCompany
Page 13 and 14: Five Forces ModelThe Five Forces Mo
Page 15 and 16: ConcentrationThe level of concentra
Page 17 and 18: capable of offering lower prices th
Page 19 and 20: If a firm wishes to shut down, it m
Page 21 and 22: Legal BarriersMany industries have
Page 24 and 25: These costs include issues such as
Page 26 and 27: Bargaining Power of SuppliersThe de
Page 28 and 29: The relative bargaining power of th
Page 30 and 31: Competitive StrategiesIn order to a
Page 32 and 33: Department stores have to focus on
Page 34 and 35: The Big PicturePlayers in this indu
Page 36 and 37: Lower Input CostsJ. C. Penney is at
Page 38 and 39: in the last five years. This trend
Page 40 and 41: convenient for different consumers
Page 42 and 43: transactions have been improperly s
Page 44 and 45: Penney does state in its annual rep
Page 46 and 47: Operating and Capital LeasesOperati
Page 48 and 49: Potential Accounting FlexibilityA f
Page 50 and 51: truly are. J. C. Penney, however, h
Page 52 and 53: Qualitative Analysis of DisclosureT
Page 54 and 55: we can see why targeting the strong
Page 56 and 57: manipulation diagnostics for J. C.
Page 58 and 59: Net Sales/Net Accounts ReceivableNe
Page 60 and 61:
Net Sales/Unearned Revenue1200Net S
Page 62 and 63:
Below is a chart of sales manipulat
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As for the industry, all the compan
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Pension Expense/SG&APension Expense
Page 68 and 69:
Below is a chart of all expense man
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discount rates in respect to pensio
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Financial Analysis, Forecast Financ
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paying off their short-term obligat
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ecause many firms in this segment o
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Penney’s inventory turnover is in
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ConclusionAnalysis through liquidit
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operating efficiency because the fi
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Return on AssetsReturn on Assets0.1
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Capital Structure AnalysisWhen look
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however, in 2006, J. C. Penney show
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Sustainable Growth RateSustainable
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average of only years 2005 and 2006
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(reported in millions)Annual Income
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We then began to look at the equity
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Common Size Balance Sheet 2002 2003
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(numbers in millions)Statement of C
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ConclusionOverall, it appears that
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Inc. We set these averages equal to
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Price to BookPPS BPS P/B IndustryAv
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Price Earnings GrowthPPS EPS PEG In
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y J. C. Penney’s EBITDA. Then we
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Regression Analysis3 Month Rate 72
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Intrinsic ValuationsIntrinsic valua
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amount in the eye’s of shareholde
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This particular stock price in our
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esidual income or converge. Future
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To find our long run return on equi
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Sensitivity AnalysisGrowth Rates0 -
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for this large difference between s
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Analyst RecommendationAfter careful
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AppendixLiquidity RatiosCurrent rat
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Capital Structure RatioDebt to equi
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SUMMARY OUTPUT3 Month Regression72
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SUMMARY OUTPUT6 Month Regression72
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SUMMARY OUTPUT2 Year Regression72 M
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SUMMARY OUTPUT5 Year Regression72 M
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SUMMARY OUTPUT10 Year Regression72
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Cost of Equity 0.1361Estimated Pric
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Discount Dividends Model0 1 2 3 4 5
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Residual Income Model WACC(AT) 0.07
Page 150 and 151:
Z-Score AnalysisZ-Score=1.21.43.320
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