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

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We then began to look at the equity portion of the balance sheet. We began by looking atreturn on equity. We used an average of the last two years because, compared to the industry,there seems to be a convergence. We determined that J. C. Penney would remain constant atthe level of 28.77 because of this industry convergence. Retained earnings were determined bytaking the forecasted net income from the income statement and subtracting out the forecasteddividends. Since we cannot forecast the number of share we will have in the future, we used the226 million outstanding shares we already have.We then backed into total liabilities because of how liabilities plus equity equals assets. Wedecided that these numbers should balance out. We used the current ratio to determine what ourcurrent liabilities should be. We determined that trade payables should be a little higher than thatof the average found on our common-sized balance sheet. This is because we are increasing atan incremental level to meet industry average. We decided that the same process and reasoningshould be applied to our gift cards. Once the current liabilities were determined, we began toanalyze our total non-current liabilities. Total accrued expenses have had consistent ratios overthe past five years so we slightly increased it to meet the industry average. Notes payable havehad a consistent percentage of 20 for the past five years. We determined that this percentageshould be kept because once amounts get paid off we will have more notes payable due to ouraccelerated growth plan.95
(reported in millions)Balance Sheet 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Cash & short-term investments $2,474 $2,994 $4,687 $3,016 $2,747 $3,056 $3,239 $3,433 $3,639 $3,858 $4,089 $4,335 $4,595 $4,870 $5,163Receivables, net $705 $233 $404 $270 $263 $279 $296 $313 $332 $352 $373 $395 $419 $444 $471Merchandise inventories $4,945 $3,156 $3,169 $3,210 $3,400 $3,623 $3,840 $4,071 $4,315 $4,574 $4,848 $5,139 $5,447 $5,774 $6,121Prepaid expenses $229 $130 $167 $206 $238Total current assets $8,353 $6,513 $8,427 $6,702 $6,648 $7,076 $7,501 $7,951 $8,428 $8,933 $9,469 $10,037 $10,640 $11,278 $11,955Land & buildings $2,940 $2,760 $2,896 $3,045 $3,378Furniture & fixtures $3,946 $2,203 $2,145 $2,078 $2,104Leasehold improvements $1,268 $674 $674 $722 $795Accumulated depreciation $3,253 $2,122 $2,077 $2,097 $2,115Property & equipment, net $4,901 $3,515 $3,638 $3,748 $4,162 $4,422 $4,695 $4,984 $5,291 $5,617 $5,963 $6,330 $6,720 $7,134 $7,573Prepaid pension - $1,320 $1,538 $1,469 $1,235Goodwill & other intangible assets, net $2,798 $42 - - -Real estate investments $106 $169 $192 $270 $350Leveraged lease investments $131 $134 $139 $135 $140Capitalized software, net $228 $97 $99 $89 $95Goodwill - Renner - - $43 - -Deferred catalog book costs $73 $77 - - -Debt issuance costs, net $46 $52 $31 $24 $21Prepaid pension $1,172 - - - -Other assets $59 $27 $20 $24 $22Total other assets $1,815 $556 $524 $542 $628Assets of discontinued operations - $6,354 - - -Total noncurrent assets $9,514 $11,787 $5,700 $5,759 $6,025 $6,245 $6,619 $7,016 $7,437 $7,884 $8,357 $8,858 $9,390 $9,953 $10,550Total assets $17,867 $18,300 $14,127 $12,461 $12,673 $13,321 $14,120 $14,967 $15,865 $16,817 $17,826 $18,896 $20,029 $21,231 $22,505Trade payables $1,792 $1,167 $1,200 $1,171 $1,366 $1,440 $1,531 $1,628 $1,730 $1,840 $1,956 $2,079 $2,210 $2,349 $2,497Accrued salaries, vacation & bonus $570 $409 $443 $453 $455Customer gift cards/certificates $173 $179 $207 $219 $231 $243 $255 $268 $282 $296 $312 $328 $346 $365 $384Taxes other than income taxes - - $125 $74 $116Capital expenditures payable - - - $47 $88Interest payable $122 $132 $107 $95 $84Current portion of retirement plan liabilitie - - - - $74Advertising payables $187 $79 $78 $99 $93Current portion of workers' compensation & ge $99 $63 $68 $72 $67Occupancy & rent-related payables $91 - - $51 $46Common dividends payable $34 $35 $35 $29 $41Reserves for discontinued operations - - $221 $79 $34Taxes payable $123 $119 $79 - -Other accrued expenses & other curr liabils $432 $368 $352 $344 $363Total accrued expenses & oth current liabils - - $1,766 $1,562 $1,692 $1,633 $1,731 $1,835 $1,945 $2,062 $2,185 $2,316 $2,455 $2,603 $2,759Accounts payable & accrued expenses $3,791 $2,551 - - -Current maturities of long term debt $275 $242 $459 $21 $434Income taxes payable - - - $8 -Short-term debt $13 $18 $22 - -Deferred taxes $80 $943 - - -Total current liabilities $4,159 $3,754 $3,447 $2,762 $3,492 $3,717 $3,940 $4,176 $4,427 $4,692 $4,974 $5,272 $5,589 $5,924 $6,280Notes $1,928 $2,165 $1,857 $1,763 $1,763 $1,633 $1,731 $1,835 $1,945 $2,062 $2,185 $2,316 $2,455 $2,603 $2,759Debentures $1,525 $1,525 $1,525 $1,369 $1,369Notes & debentures $3,453 $3,690 $3,382 $3,132 $3,132Medium-term notes $493 $493 $493 $300 $300Convertible subordinated notes $650 $650 - - -Sunking fund debentures $392 $313 - - -Original issue discount debentures $156 $167 - - -Equipment financing notes $25 $21 $15 $10 $4Total notes & debentures - - $3,890 $3,442 $3,436Capital lease obligs & other long-term debt $46 $22 $33 $23 $8Total long-term debt, including current matur - - $3,923 $3,465 $3,444Less: current maturities $275 $242 $459 $21 $434Long-term debt $4,940 $5,114 $3,464 $3,444 $3,010Deferred taxes $1,391 $1,217 $1,318 $1,287 $1,206Retirement benefit plan liabilities - - $634 $590 $324Reserves for discontinued operations - - $114 $54 $51Other liabilities $1,007 $804 $26 $31 $30Total other liabilities - - $1,042 $961 $677Liabilities of discontinued operations - $1,986 - - -Total NonCurrent Liabilities $7,338 $9,121 $5,824 $5,692 $4,893 $4,657 $4,937 $5,233 $5,547 $5,880 $6,232 $6,606 $7,003 $7,423 $7,868Total liabilities $11,497 $12,875 $9,271 $8,454 $8,385 $8,374 $8,876 $9,409 $9,974 $10,572 $11,206 $11,879 $12,591 $13,347 $14,148Preferred stock $333 $304 - - -Common stock & additional paid-in capital $3,423 $3,531 $4,176 $3,479 $3,542Deferred stock compensation - - - - -Reinvested earnings $2,817 $1,728 $812 $512 $922 $1,085 $1,161 $1,241 $1,306 $1,396 $1,492 $1,572 $1,679 $1,794 $1,915Foreign currency translation ($164) ($115) ($104) - -Non-qualified plan minimum liability adjustme ($58) ($82) ($102) ($102) -Net unrealized gains on investments $19 $60 $74 $118 $166Net actuarial gain/(loss) & prior service (co - - - - ($342)Other comprehensive (loss) from discont opers - ($1) - - -Accumulated other comprehensive income (loss) ($203) ($138) ($132) $16 ($176)Total stockholders' equity $6,370 $5,425 $4,856 $4,007 $4,288 $4,947 $5,243 $5,558 $5,891 $6,245 $6,620 $7,017 $7,438 $7,884 $8,35796
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J. C. Penney Company, Inc. Equity V
Page 5 and 6:
Industry AnalysisIn 1902, James Cas
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Financial Analysis, Forecast Financ
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Business & Industry AnalysisCompany
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Industry OverviewThe retail industr
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Five Forces ModelThe Five Forces Mo
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ConcentrationThe level of concentra
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capable of offering lower prices th
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If a firm wishes to shut down, it m
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Legal BarriersMany industries have
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These costs include issues such as
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Bargaining Power of SuppliersThe de
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The relative bargaining power of th
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Competitive StrategiesIn order to a
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Department stores have to focus on
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The Big PicturePlayers in this indu
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Lower Input CostsJ. C. Penney is at
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in the last five years. This trend
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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 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
Page 128 and 129: 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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J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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