JC PENNEY
A Company Valuation
Laura Chandler
Katrice Krumplys
Jackie Phan
J.C. Penney Company, Inc.
Description
The Firm
JCPennys was started in 1902 by James Cash Penney in Wyoming as a store for mining
and farming families to purchase work clothes (jeans, fabric, etc.). James Penney founded the
store with the Golden Rule in mind, treat others in the way that you want to be treated and up
until 1913, the stores were named as such. The company expanded from the West Coast out to
the East Coast and still focused on providing working class families clothing and accessories.
JCPennys specializes in affordable family clothing, in style inexpensive jewelry, and home
furnishings/goods. It is in the Department Store industry with over 1,000 stores nationwide.
The Industry and the Competitors
As the economy has been taking a recent downturn, families are forced to make more
frugal financial decisions when it comes to apparel and accessories. Therefore, it is of no
surprise that the competition among reasonably priced clothing and department stores is pretty
fierce. JCPenny’s top competitors include Kohl’s, Macys, and Sears and Roebuck and Co. (the
last two are privately traded) (http://finance.yahoo.com/q/co?s=JCP+Competitors). All of
JCPenny’s direct competition focuses on the apparel needs of women, men, children, and
teenagers. However, unlike most of their competition, JCPennys also offers services at a few
select stores as well including portraits, optical appointments, salon, and decorating
appointments.
(http://www.jcpenney.com/dotcom/jsp/customerservice/storeService.jsp?pageId=pg100071&nav
Action=jump&navCount=0&departmentLeftNav=false) .
In order to keep up with their competitors, JCPenny has recently started an aggressive
advertisement campaign that can be seen online as well as on TV channels. On their website,
JCPenny has a moving panel of pictures on their home page with the words “Dear__” insert
America, Trendsetters, Starry-Eyed, Sexy, etc. for the various different types of consumer
products, but tending to focus on women (http://www.jcpenney.com/dotcom/index.jsp). Because
of their frequent sales and lower prices, JCPennys does not immediately appeal to families of
upper income levels. Families with higher disposable incomes might prefer department stores
such as Nordstrom.
Key Firm Value Drivers
Social Responsibility:
JCPenny was founded with the principle of the Golden Rule. Therefore, it is of no
surprise that the store currently has programs related to corporate social responsibility.
Environmental Principles:
One aspect of corporate social responsibility that JCPennys focuses on is being
environmentally friendly. They have a lengthy proclamation of principles pertaining to being
greener as a corporation. They tend to focus on the production and operations aspects of being
greener (packaging, reducing paper consumption, improving waste facilities systems, reducing
their energy footprint, and more). They also are concerned with the health and safety of their
employees when it comes to having more safe workspaces, chemicals, machineries, etc.
JCPennys was vague when describing how they would conduct tests to see how environmentally
friendly former JCPenny sites are (http://www.jcpenney.net/-Our-Company-aspx/CorporateSocial-Responsibility/Matters_of_Principle0817-(1).aspx).
Work Principles:
JCPenny takes pride into making sure that their facilities and work environments are
friendly and safe for their employees. Note to self: research more how JCP is helping
promote the wellbeing of their employees beyond the mandatory laws and regulations.
JCPennys also has high expectations of their suppliers when it comes to deliverables as well as
values (http://www.jcpenney.net/-Our-Company-aspx/Corporate-SocialResponsibility/Supplier_Principles0829.aspx).
Financial Statement Analysis
Liquidity
Current
Quick
Debt
Management
Total Debt to Toal
Assets
Times Interest
Earned
Profitability
Operating Profit
Margin
Profit Margin
ROA
ROE
Company Values
2011
2010
Industry Values
2011
2010
2009
1.84
2.41
2.05
2.2
1.9
2.1
0.79
1.19
1.12
0.7
0.6
0.8
64.90%
58.22%
62.02%
14.50%
12.20%
12.50%
-0.01
3.60
2.55
5.70%
4.30%
5.30%
-0.0003
-0.88%
0.12
2.19%
0.10
1.43%
4.30%
4.60%
5.40%
5.30%
5.20%
2.70%
-1.33%
-3.79
2.98%
7.12%
2.00%
5.25%
6.60%
20.20%
4.70%
17.40%
8.00%
17.50%
2009
* Retail Industry NAICS Code: 452111
Trend/Historical Analysis
Liquidity – From 2009 to 2010 J.C. Penney’s current ratio increased by .36 (from 2.05 to
2.41) and from 2010 to 2011, the current ratio decreased by .57 (from 2.41 to 1.84). The same
pattern is shown through looking at their quick ratio. From 2009 to 2010, it increased by .70
(from 1.12 to 1.19), but decreased from 2010 to 2011 in the amount of .40 (from 1.19 to .79).
Since both the current and quick ratios are decreasing over time the conclusion is drawn that
liquidity is worsening over time. Therefore, J.C. Penney does not have as good ability to use
assets to cover the cost of liabilities as they come due.
Solvency – From 2009 to 2010, J.C. Penney’s debt-to-total assets ratio decreased by 3.8% (from
62.02% to 58.22%), but it increased by 6.68% (from 58.22 to 64.90%). This indicates that J.C.
Penney’s ability to finance liabilities is improving over time. Over the years, more of the
company’s assets are being financed by debt.
ROE & ROA – The return on shareholder’s equity increased by 1.87% from 2009 to 2010 (from
5.25% to 7.12%) but decreased by 10.91 from 2010 to 2011 (from 7.12% to -3.79%). A similar
story is told when looking at the return on assets ratio. From 2009 to 2010 the ROA increased by
.98% (from 2% to 2.98%) and from 2010 to 2011 it decreased by 4.31% (from 2.98% to 1.33%). Due to the ROE and ROA ratios declining throughout the years a conclusion can be
made that J.C. Penney is becoming less effective at generating profits from its shareholder equity
and assets.
Profitability – The gross profit margin increased by .76% in 2010 (from 1.43% in 2009 to 2.19%
in 2010) and decreased by 3.07% in 2011 (from 2.19% in 2010 to -.88% in 2011). Due to the
declining profit margin through the years a conclusion can be drawn that J.C. Penney’s ability to
produce profits from its revenue is steadily worsening.
Benchmark Analysis
Liquidity – In comparison to the retail industry, J.C. Penney’s lower ratio in 2011 indicates that
it has a slightly worse liquidity in the most recent year. In 2011, the current ratio for J.C. Penney
is 1.84 and the industry is a close 2.2. For quick ratios in 2011, J.C. Penney’s ratio is higher than
the industry at 0.79 compared to the industry at 0.70.
Solvency – The company on an individual level has an improving solvency, but in comparison
the industry their solvency is at a much higher rate. For 2011, J.C. Penney has a debt-to-assets
ratio of 64.90% in comparison to the industry ratio of 14.50%.
ROE & ROA – In terms of shareholder’s equity and return on assets, J.C. Penney is doing much
worse than the industry as a whole. In 2011, the ROE for J.C. Penney is -3.79% and the industry
value is a much better 20.20%. When looking at the ROA ratios for 2011, J.C. Penney has a ratio
of -1.33%, while the industry has an ROA of 6.60%.
Profitability – When comparing profitability ratios between the retail industry and J.C. Penney, it
is fair to see that J.C. Penney is less profitable. In 2011 the gross profit margin for J.C. Penney is
-0.88%, whereas the industry is at 4.60%.
Analysis of Riskiness
Firm Risk
According to J.C. Penney Company, Inc.’s Form 10-K, there are a number of environmental and
internal risk factors that may affect the firm’s profitability and or reputation. Within this
document one of the company’s high level risks stated is that “we face uncertainties in
connection with the implementation of our strategies to transform our business”.
(http://media.corporateir.net/media_files/IROL/70/70528/reports/JCP__2011I10K/HTML2/jc_pe
nney-10k2011_0007.htm) Despite efforts on the part of J.C. Penney to offset hard economic
times and to draw customers in, there is never any guarantee that consumers are going to be
buying or feel comfortable spending their money. In order to try and maximize the company’s
potential and profit, J.C. Penney has recruited a new executive team and revamped their policies
in terms of “pricing strategy, marketing cadence, store layout and merchandise assortments”.
(http://media.corporateir.net/media_files/IROL/70/70528/reports/JCP__2011I10K/HTML2/jc_pe
nney-10k2011_0007.htm) The firm is largely dependent on the skills of the management and
associates on the ground level to implement their strategies effectively. Therefore, any losses of
personnel or management would have a very adverse effect on the ability of the company to
implement their new strategies and maintain their competitive edge in the market. There is also
going to be a decline in sales for a pro-longed period of time due to the changes, particularly in
pricing strategy. There will inevitably be great shake-ups to the organizations stability in a time
of such rapid and extreme changes across the board. The change in management, particularly in
terms of the CEO Ron Johnson, is creating internal tension as well as a lack of confidence in the
direction of the company (http://www.businessinsider.com/inside-jcpenney-2013-2). Lack of
employee confidence and motivation can create significant problems in the efficiency of the
company. If these changes are not implemented successfully the risk of the company over hall
will have failed and it will be extremely difficult for the company to rebound.
Industry Risk
In terms of the overall retail industry J.C. Penney Company, Inc. is subject to the same
threat of substitutes and low switching costs that all retailers face. Consumers are able to go to
whichever store they like and the industry can turn on a dime when it comes to fashion.
According to the company itself, “our sales and operating results depend on customer
preferences and fashion trends (Form 10-K). The sales industry is subject to the whims and
desires of the consumer who has plenty of other options. The individual firms are responsible for
building their brand in such a way as to offset this issue. The fact that there are so many retail
possibilities available to consumers leads to high risk to the individual companies as “The retail
industry is highly competitive, which could adversely impact our sales and profitability”. Some
of these other firms may have greater resources at their disposable. Economic factors and what is
going on within the government also have huge impacts on the way consumers choose to spend
their discretionary income.
Market Risk
In terms of market share J.C. Penney Company, Inc. is only at 3%. While this is not nearly as
promising as it could be, this is also the same amount that Apple had in comparison to target and
other tech retailers in the late 1990s (http://www.businessinsider.com/the-6-ways-ron-johnsonplans-to-transform-jc-penney-into-americas-favorite-store-2012-1). Department stores in general
have been decreasing their control of the market share and giving it up to specialty stores such as
J. Crew, Pottery Barn, and Banana Republic. In order to combat this, J.C. Penney plans to set up
their stores into a subsection of specialty stores and plan their layout to distinguish different
sections easily. The new strategies of tapping into celebrity endorsements and gaining new
corporate partners, such as Martha Stewart and Ellen DeGeneres, has helped to drum up the
company’s image in the current market (http://blog.blytheco.com/marketing/jcpenneymarketing-risk-or-award/)
Only time will tell if their marketing strategies work to rebrand the company, or if the layout
changes will help to distinguish the image form other decaying department stores.
Process of Beta Estimation
Prior to calculating our own beta For JCP, we found beta values online from three
different reputable finance sources. As of March 29, 2013, Yahoo finance’s stated beta value for
JCP was 1.98, Google Finance’s beta value for JCP was 1.86, and MSN Finance’s beta value for
JCP was 1.81. All three of these estimated beta values are very close in range of one another ,but
value slightly because each different online source using a slightly different method of
calculating beta. To make our own estimation of beta, we used Yahoo Finance’s historical data
regarding JCP’s prices for the past five years as well as using the S&P 500’s market data over
the past five years. After using a simple regression method through excel, we were able to
identify beta of 1.84922, or about 1.85. Our estimated beta value is within range of the other
financial institution’s estimation of beta. Since our beta estimation is 1.85, this indicates that JCP
is riskier than the average stock in the current market.
Regression Analysis: Firm versus Market
The Regression equation is
Firm = -0.0080+ 1.8420 Market
Coefficients
Standard Error t Stat
P-Value
Intercept
-0.00801286
Market Return 1.841984226
Multiple R
0.644730641
R Square
0.4156776
R Square (adj)
0.40542633
0.015758669 0.508473123
0.61308401
0.289265364 6.367800828 3.56866E-08
Firm Valuation and Recommendation
Capital Asset Pricing Model
In order to find the return on stock, commonly known as ri, we were able to input our known
values into the Capital Asset Pricing Model (CAPM). In the CAPM model we were able to solve
for ri through the following formula: ri=rf +(RPm)x Beta. In the formula, rf stands for the riskfree rate which is the 30 year U.S Treasury bond yield of 3.10 found on Bloomberg online. Our
RPm was given to us of 5% by Professor Zaiats and as mentioned previously, our estimated beta
of 1.85 was found by doing a regression model on excel. After plugging all of our values into the
CAPM equation, it looked as follows:
ri=.0310 +(.05) x 1.85
Through PEMDAs, we were able to solve for ri for a value of .1235. After converting this value
into a percent, we were able to note that the expected rate of return for JCP is 12.35%.
Discount Dividend Model Valuation
The next way we valued the stock of JCPenney Company, Inc. was to use the discount dividend
model (DDM). The equation that we used for this was Po = D1 / (R-G). This equation breaks
down into: Po = Do (1 + g) / (r-g). In this equation Do was used to represent the dividend of a
previous year, 2011, which was $0.80. In order to find the growth rate (g) for JCP we used the
equation below:
G= ROE x (1 – (dividend per share / EPS))
G = .0713 x (1 – (.8/1.82))
G = .0399
Through the use of this equation, we arrive at a growth rate of .0399. One other way of
computing the growth rate is to look at the historical dividends for 2009, 2010, and 2011 in order
to arrive at the retrospective annual growth rates for JCPenney Company, Inc. To do this method
we took the growth rate from 2009 to 2010, which was .092, and from 2010 to 2011, which was
.013 . This enabled us to find an average growth rate of .053.
We made the decision to use the growth rate of .053 due to what we believed was a higher
accuracy specific to JCPenney Company, Inc. as a whole rather than as a part of the retail
industry. The growth rate that we chose is the most firm specific because we calculated it with
numbers that specifically apply only to JCPenney as opposed to the first method which used
numbers relatable to the industry as a whole through the retention rate.
Having found all of this information and analyzed the best variable number for G we can now
find D1 in order to arrive at P0, as is seen in the first equation laid out at the top of this section.
Po = Do (1 + g) / (r-g)
Po = .80 (1 + .0399) / (.1235 - .0399)
Po = $19.52
The computed stock price for JCPenney Company, Inc. that we arrive at is $19.52. While this
may vary from the price arrived at through the next method of calculation, each method is valid
and should be taken into account when arriving at the valuation of any firm.
Valuations using Multiples.
Another way of finding the stock price for J.C. Penney was through valuations using
multiples. In order to find values of JC Penney using multiples, we multiplied JC Penney’s most
recent earnings per share (EPS), 1.82, by the industry P/E of 32.50 to get an answer of 59.15.
Our final estimate of the stock price comes to $39.34, from the computation found below, which
comes from the weighted average of the stock price from the DDM and the stock price we
obtained from valuations using multiples.
($19.52 + $59.15)
2
We chose to use the weighted average of the stock prices of the DDM and the stock prices of the
valuations using multiples because would give use a more accurate stock price. The weighted
average of these two values computed an as estimated stock price at a value of $24.54 higher
than J.C. Penney’s current traded stock price of $14.80