Valuation Strategy
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PATRICK FRANK
JC PENNY VALUATION REPORT
Advanced Corporate Finance
3/25/2014
The Big Picture:
J.C. Penney is one of the oldest department stores in the world with 1,100 locations and 150,000 employees within the United States. The company was founded in 1902 by James Cash Penney in Kemmerer, Wyoming. The expansion of JC Pennys came about through a belief in the golden rule, this applying to his employees, community, business structure, and financial management. Their core beliefs stemmed from offering good value at a fair price to customers and ensuring that they received the best service possible from their employees. The J.C. Penney Company became public in 1927, and its continued growth was through managements ability to grow the company by offering stock incentives to managers and employees, continuing to meet the needs of the middle-income family, and capitalizing on the origination of the idea of the shopping mall. By the late 90s J.C.P had become the top catalog retailer in the United States, while maintaining consistent growth within its actual in store locations. In 2004, Mike Ullman was elected as CEO of J.C.P Initially Ullman was entering into a company that was just recently saved from the brinks of bankruptcy. Ullman leveraged the centralized company structure to control costs and inventory, restructured the companys debt, and sold off some of their acquisition holdings totaling 4.5 billion dollars. Not only did Ullman increase their financial standing by capital restructuring, but used his extensive experience as serving as CMO of Macys and Luis Vuitton to revive the failing JCP brand name. He approached the situation by installing partnerships with well known brands such as Sephora, Mango, and Liz Claiborne into the stores, and brought on teams on brand managers to improve the marketing and sales of JCPs private brands such as Arizona, Washington, and St. Johns Bay. Ullman kept close to the ideas and main drivers of the companys first CEO by having great concern not only with his customers needs by his employees. He led initiatives to invest in technology for the store to improve the in-store shopping experience and helped JCP to become the first major retailer to provide online services and sales. As followed by this Ullman increased spending on advertising dramatically to promote the new store and brand image. JCP used a broad market differentiation strategy by offering major discounts and special offerings to its customers. These techniques led JCP out of bankruptcy and delivered higher revenues and profits for the company. This success lasted until the recession in early 2007. Due to a decrease in consumer spending and the effects of the dwindling economy JCP lost market share and a majority of its customer base to its retail competitors such as Kohls, and Macys. JCP was saved from a pair of activist investors who purchased a majority stake in the company. These investors; Bill Ackman, and Stephen Roth, replaced Ullman with now former CEO Ron Johnson who was the former CMO at APPLE. The announcement was taken with a positive outlook form the market driving JCPs stock price up with hope for improvement with the companys once again failing business practices. This belief stemmed from hopes that Johnson would continue his ability to show market innovation such as he did with APPLEs major turnaround, what is mostly overlooked is that he was as well Targets CMO and achieved great success partnering with exclusive brands to increase to stores relevancy to the market.
In Q1 of 2012, Johnson presented his transformation plan for J.C. Penney, which included the fair and square pricing model. This new pricing model established a store-within-a-store design, which would focus on major designers offering low cost alternatives. Johnsons main focus was to attract the younger demographic and replenish JCPs appeal with the younger and aging market as well. In addition he also re-branded the store as JCP developing a new logo and store look. The main idea and drives of the fair and square pricing model was to eliminate all discounts that the store offered and maintain low prices throughout the whole year. This entered JCP into the competing markets of Wal-Mart and Target without even intentionally doing so. This strategy was the exact opposite of the companys initial strategy of inflated prices and heavy discounts and specials at peak points of the year, a similar model to most major mall retailers.
The result of Johnsons turnaround strategy was met with harsh criticism by the market, and by major confusion and un-appeal by the consumer base. This forced JCPs stock price to drop to an all time low in Q3 of 2012. Even though there was still some optimism about Johnsons ability to return JCP to profitability, the ultimate outcome was that the strategy led to a rapid decrease in revenues and profits year over year. After the clear failure of this new pricing model the company slowly drifted away from the strategy by offering “gifts” by mail or online to reach out to consumers. Many reports and surveys during this time were generated showing that JCPs largest customers (mid-income women) were not spending at the store because there were no sales or discounts offered. In Q4 of 2012 the company experienced the worst holiday shopping season of all time offering abstract gimmicks such as “free hair cuts” or “free photo booths” and other poor efforts to attract customers. This view from the market was taken as an extremely disorganized management team with a mixed and unclear company strategy. This outcome after the holiday season led to decreased revenues of over 35% from the stores peak a few years prior. In Q2 2013 JCP announced that Johnson would be stepping down and in turn Ullman would again become CEO. During Johnsons management period, JCP stock had lost over 50% of its value retreating to single digit numbers. Ullmans first act as CEO was to initiate a major issuance of debt (over half of their available line of credit) to help re-structure the company and complete the remodeling of several of the companies major stores. Currently over half of JCPs locations are still in the process of remodeling and their recent brand transformation program is far from complete. These issues along with the continually changing and inefficient management teams have position JCP in a incredibly dangerous place in a overly competitive market. .
JCPs main basis for its