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

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in the last five years. This trend will more than likely be reduced even more nowthat the implementation of the POS systems has been established in all locationsthis past year.Gross Profit Margin2002 2003 2004 2005 2006JCP 0.3076 0.3722 0.3875 0.3927 0.3932KSS 0.3442 0.3302 0.3516 0.3554 0.3637DDS 0.3805 0.4583 0.5007 0.5305 0.5188SSI 0.3029 0.2876 0.2891 0.2912 0.2925SMRT 0.2474 0.2514 0.2664 0.2809 0.2773Product Quality and VarietyJ. C. Penney offers a wide variety of brands and product in its stores andonline. Many of these brands have been created as private brands through J. C.Penney “as response to feedback from customers and research of directcompetitors” (J. C. Penney 2006 10-K). A recent example, according to the J. C.Penney 2006 10-K, is the new private label lingerie brand, Ambrielle. “Ambriellewas created to fill a void in the marketplace for a sensual lingerie brand targetedto the modern customer at a smart price” (J.C. Penney 2006 10-K). This is justone of the many examples of brand creation by the company to bring in a widerrange of customers that enjoy style at the right price. At J.C. Penney, theconsumer has the choice between varieties of quality goods.Investment in Brand ImageNot only do private brands bring in loyal customers, contracts withpopular brand names also attract other consumers to places they may notusually go. Fans of the popular cosmetic brand, Sephora, will visit J. C. Penneyjust to purchase these products then “shop around” the store, creating morerevenues for the company. J. C. Penney is not only selling Sephora products butis also talking with Polo Ralph Lauren’s Global Brand Concepts. This talk “hasrecently launched a new lifestyle brand, American Living, created exclusively for37
the J. C. Penney customer” (J. C. Penney 2006 10-K). Examples such as theseshow how J. C. Penney strives to differentiate the merchandise in its stores,creating a mix of product that ultimately stands out to the consumer as superiorthan the rest. This seems to have ultimately paid off because as J. C. Penney“continues to expand its stable of private brands; (they) now account for about45 percent of sales” (Covert, Wall Street Journal).Investment in Research and DevelopmentAccording the 2006 10-K report, J. C. Penney “has taken several actions toimprove the customer shopping experience across all channels, including moreclosely aligning stores and Direct promotions.” An example of how the companyhas implemented its findings is seen by looking at the a.n.a. brand, which targetsworking women. This clothing line implements a style that is classy enough towear during the week but not too formal for the weekend. The flexibility of thisline of clothing is what was demanded by the working women of today. J. C.Penney has also responded to the recent demands of the retail industry focusingon expansion within non-mall locations. J. C. Penney’s “250 stores it plans toopen in the next five years will be stand-alone entities, not connected toshopping malls” ( O’Connell, Wall Street Journal).Looking AheadJ. C. Penney has repositioned itself within the department store industryto identify with its target consumer, the middle-income family that would like toaffordable quality products. To reach this target consumer in more areas as wellas maintain a healthy growth rate, J. C. Penney is growing the number of storesin operation. The current agenda for the company is to open 50 new stores peryear from 2007 to 2009. This will help the company continue to capitalize on thepresent advantage of being one of the largest department retailers in the UnitedStates with 1,033 departments across 49 states. J. C. Penney is also focusing onthe latest idea of opening more locations in places that are freestanding and38
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 and 10: Business & Industry AnalysisCompany
Page 11 and 12: Industry OverviewThe retail industr
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 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
Page 64 and 65: As for the industry, all the compan
Page 66 and 67: Pension Expense/SG&APension Expense
Page 68 and 69: Below is a chart of all expense man
Page 70 and 71: discount rates in respect to pensio
Page 72 and 73: Financial Analysis, Forecast Financ
Page 74 and 75: paying off their short-term obligat
Page 76 and 77: ecause many firms in this segment o
Page 78 and 79: Penney’s inventory turnover is in
Page 80 and 81: ConclusionAnalysis through liquidit
Page 82 and 83: operating efficiency because the fi
Page 84 and 85: Return on AssetsReturn on Assets0.1
Page 86 and 87: Capital Structure AnalysisWhen look
Page 88 and 89:
however, in 2006, J. C. Penney show
Page 90 and 91:
Sustainable Growth RateSustainable
Page 92 and 93:
average of only years 2005 and 2006
Page 94 and 95:
(reported in millions)Annual Income
Page 96 and 97:
We then began to look at the equity
Page 98 and 99:
Common Size Balance Sheet 2002 2003
Page 100 and 101:
(numbers in millions)Statement of C
Page 102 and 103:
ConclusionOverall, it appears that
Page 104 and 105:
Inc. We set these averages equal to
Page 106 and 107:
Price to BookPPS BPS P/B IndustryAv
Page 108 and 109:
Price Earnings GrowthPPS EPS PEG In
Page 110 and 111:
y J. C. Penney’s EBITDA. Then we
Page 112 and 113:
Regression Analysis3 Month Rate 72
Page 114 and 115:
Intrinsic ValuationsIntrinsic valua
Page 116 and 117:
amount in the eye’s of shareholde
Page 118 and 119:
This particular stock price in our
Page 120 and 121:
esidual income or converge. Future
Page 122 and 123:
To find our long run return on equi
Page 124 and 125:
Sensitivity AnalysisGrowth Rates0 -
Page 126 and 127:
for this large difference between s
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Analyst RecommendationAfter careful
Page 130 and 131:
AppendixLiquidity RatiosCurrent rat
Page 132 and 133:
Capital Structure RatioDebt to equi
Page 134 and 135:
SUMMARY OUTPUT3 Month Regression72
Page 136 and 137:
SUMMARY OUTPUT6 Month Regression72
Page 138 and 139:
SUMMARY OUTPUT2 Year Regression72 M
Page 140 and 141:
SUMMARY OUTPUT5 Year Regression72 M
Page 142 and 143:
SUMMARY OUTPUT10 Year Regression72
Page 144 and 145:
Cost of Equity 0.1361Estimated Pric
Page 146 and 147:
Discount Dividends Model0 1 2 3 4 5
Page 148 and 149:
Residual Income Model WACC(AT) 0.07
Page 150 and 151:
Z-Score AnalysisZ-Score=1.21.43.320
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