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

average of only years 2005 and 2006 for J. C. Penney and started from there.This two-year average seemed like a very reasonable starting point, but becauseonly two years were used to average out future potential of the incomestatement, we did an industry average which included J. C. Penney as well asfour other competitors. This industry average, compared to J. C. Penney’srelevant two-year average, gave a jump-start to how we decided on whichvalues to use in forecasting the next 10 years.Going through the income statement, all line items that could beappropriately forecasted were considered. Because of the company turn-aroundafter 2004, as well as new brand launches, we went for a percentage that washigher than J. C. Penney historical two-year average of 3.96 percent. Afterbenchmarking this with industry average of 9.52 percent, we found that a 6.00percent growth rate was fair and very reasonable. From year 2006 to 2007,sales forecasted grew from a published $19,903 million to $21,097 million. This6 percent growth percentage is lower than the industry average; however, wefelt like this is an appropriate number considering Stage Stores had a higher thannormal growth rate, therefore raising the overall average. This high rate wasbecause Stage Stores opened more new stores over the last year than mostfirms in the industry.The cost of goods sold was determined to also be lower than not only theindustry average, 67.82 percent, but also the J. C. Penney five year averages,63.05 percent. This again is due to the fact of the company sold by J. C. Penneyin 2004. After this, sales and cost of sales went down for obvious reasons. Thetwo-year relevant average came to 60.71 percent. Looking at all of thesenumbers, we chose a number higher than our two-year average to match theincrease in sales of 61.00 percent. It is higher because as sales increase everyyear, the cost of sales will be a higher number in the long run.For the remainder of the forecasted line items, comparisons between theindustry, J. C. Penney five-year, and J. C. Penney two-year averages wereconsidered just as in sales and cost of sales for the values chosen. We felt that91