netrashetty
Netra Shetty
J. C. Penney Company, Inc. (NYSE: JCP) is a chain of American mid-range department stores based in Plano, Texas, a suburb north of Dallas. The company operates 1,107 department stores in all 50 U.S. states [2] and Puerto Rico.[3] JCPenney also operates catalog sales merchant offices nationwide in many small markets.
Most JCPenney stores are located in suburban shopping malls. Previously, most stores were located in downtown areas. As shopping malls became more popular in the latter half of the 20th century, JCPenney followed the trend by relocating its stores to anchor the malls. In more recent years, the chain has continued to follow consumer traffic, echoing the retailing trend of opening some standalone stores, including some next door to competitors. Certain stores are located in power centers and can be considered big-box stores. The company has been an Internet retailer since 1998. It has streamlined its catalog and distribution while undergoing renovation improvements at store level.
In addition to selling conventional merchandise, JCPenney stores often house several leased departments such as Sephora, Optical, Portrait Studios and Jewelry & Watch repair.
JCPenney also features discount outlet stores. Some of these were converted from regular JCPenney stores.
J.C. Penney (NYSE: JCP) is a leading department store retailer of apparel, accessories and home furnishings. They produce their own private brands in addition to selling products from other companies. Due in large part to the recession, the company's sales decreased by 6.9% during 2008 and another 5.0% in 2009. However, widespread discounts and strict inventory control were able to prevent the company's sales from decreasing even further.
In addition to the recession, which has hit retailers hard during 2008 and 2009, the company also faces changing consumer tastes--consumer traffic is being drawn to Wal-Mart (WMT) and Target (TGT) at the expense of department stores such as J.C. Penney and Macy's Inc. (M). The amount of money spent at department stores as a fraction of total consumer spending decreased from 11% in 2002 to 6% in 2008.[1] In addition, J.C. Penney relies heavily on private labels--54% of the company's 2009 revenue came from private brands.[2] Although private label products--in order to appeal to as many customers as possible--are not unique enough to compel fashion-conscious consumers to purchase them, they are still a viable option for customers who do not follow trends. In addition, their higher margins(3-5% higher than national brands), combined with the company's strict inventory control, has actually lead Morgan Stanley to increase their rating of the company on confidence they will exceed Wall Street earnings expectations.[3]
Business Overview
Contents
1 Business Overview
1.1 Business and Financials
1.1.1 FY 2009 Results
1.1.2 Q1 2010 Results (ended May 1st)
1.1.3 Q2 2010 Results (July 31, 2010)
1.1.4 Q3 Fiscal 2010 Results (ended October 30th, 2010)
2 Trends and Forces
2.1 Private Brands Not Unique Enough to Differentiate from Cheaper Alternatives
2.2 J.C. Penney Responds to Slowdown in Consumer Spending
2.3 Increases in Commodity Prices Will Raise Clothing Retailer Prices
3 Competition
4 References
J.C. Penney is a leading department store retailer with 1,108 stores in the United States and Puerto Rico as of 2010.[4] The company divides its merchandise into several categories which include: men's, women's and children's apparel, accessories and cosmetics; footwear; home furnishings; leisure and recreational equipment; jewelry and watches.[5]
Business and Financials
Sales by category for JCP FY 2009[6]
In June 2009, Morgan Stanley upgraded its rating of JCP from equal weight to overweight, due to confidence the company will exceed Wall Street earnings estimates. This new confidence is due to the company's high reliance on private-label goods. Private-label products are produced by J.C. Penney itself as opposed to national brands, which are produced by separate manufacturers. Private label products benefit the consumer and the company because they are usually priced lower than national brands and their profit margins are 3 to 5 percent higher than national brands as well. 54% of J.C. Penney's 2009 sales came from private labels[7], which means it benefits highly from their benefits. The upgrade caused J.C. Penney shares to increase by 1.7%.[3] Morgan Stanley's upgrade comes in the midst of a slump in the retail industry. The 2007 Credit Crunch as well as the recession in the American economy have led to decreasing sales in 2008 and 2009. Consumers who are unsure of their futures or their financial security have cut back on their spending, especially on nonessential items such as clothing and accessories. The holiday season, which is a time when many retailers make the majority of their sales, did not provide any relief from decreasing sales during the rest of the year.
FY 2009 Results
For FY 2009, JC Penny reported revenues of $17.55 billion, down 5.0% from 2008. Comparable stores sales decreased 6.3% as a result of low consumer spending and JCP's strategy of not offering clearance merchandise or drastic promotions. Sales also declined in catalog and outlet stores by $152 million (16% of the net sales decline in 2009) signaling a shift to online sales at jcp.com. Sales of non-comparable stores opened in 2009 and 2008, net closings, added $308 million to net sales (net store openings of 15 in 2009 and 28 in 2008). Mall sales were flat from 2008. Private label sales continued to grow representing 54% of total merchandise sales in 2009, up from 52% in 2008. Gross profit margin was slightly improved to 39.4% due to lower cost of goods sold. Operating margin declined to 3.8% from 6.1% in 2008. Net income declined 56% to $251 million. [8]
Year Operating Revenue (millions) Operating Profit (millions) Operating Margin Net Income (millions) Net Profit Margin Same Store Sales Change
2009 $17,556 $663 3.8% $251 1.4% (6.3%)
2008 $18,486 $1,135 6.1% $572 3.1% (8.5%)
2007 $19,860 $1,888 19.5% $1,111 5.6% 0.0% [9]
Q1 2010 Results (ended May 1st)
Total sales in the first quarter increased 1.2% compared to last year to $3.9 billion, while comparable store sales increased 1.3%. Six of the seven merchandise divisions had sales gains with the strongest merchandise results in men’s, shoes and handbags, and children’s. [10]
Earnings per share were $0.25 compared to $0.11 per share in last year’s first quarter. [11]
Gross margin increased 90 basis points to 41.4 percent of sales. Operating income for the first quarter improved 46.2 percent to $155 million or 3.9 percent of
sales. Net income increased 140% to $60 million versus $25 million last year. [12]
Q2 2010 Results (July 31, 2010)
JCP reported net sales of $3,938, flat year over year. Gross margin increased 90 basis points over last year to 39.4 percent of sales. SG&A expenses were tightly controlled, increasing $31 million or 2.5 percent when compared to last year's second quarter.
Operating income for the second quarter increased 41.8 percent to $95 million or 2.4 percent of sales. Net income was $14 million, up from a net loss of $1 million in the Q2 2009.
Comparable store sales were up 1% year over year. [13]
Q3 Fiscal 2010 Results (ended October 30th, 2010)
JCP reported net sales of $4.189 billion, an increase of $10 million from Q3 fiscal 2009.[14]
Comparable store sales increased 1.9% compared to Q3 fiscal 2009.[14] This is the third straight quarter that JCP comp. store sales increased.[14]
In addition, online sales increased 3% compared to Q3 fiscal 2009.[14]
JCP net income increased from $27 million to $44 million, a testament to the firm's immense cost-cutting measures.
Despite the discontinuation of its Big Book catalogs, JCP's sales have still rose with a 3.3% rise in internet sales via jcp.com.[15]
On October 8th, Pershing Square Capital Management, a large hedge fund, acquired more than 26% of JCP's shares, which makes the fund JCP's largest shareholder. Pershing Square's hedge fund manager, William Ackman, is expected to push for changes that he thinks will increase value in JCP, which will increase pressure on JCP's CEO.[16]
Trends and Forces
Private Brands Not Unique Enough to Differentiate from Cheaper Alternatives
Private label brands are produced exclusively for a particular store. For example, J.C. Penney has a number of private label brands including Arizona Jeans Co. and Stafford.[17] Retailers such as Macy's and J.C. Penney find private labels very attractive because the pieces often have higher margins than branded merchandise from other companies. However, the economic crisis of 2008-2009 has made people more reluctant to spend. When consumers have less money to spend, they will be more inclined to spend it on something that excites them. Private label brands, in an effort to appeal to as many consumers as possible, are less likely to spur a person to buy them when disposable income is already scarce.[18] Also, the proliferation of discount retailers such as Wal-Mart, Target and Kohl's (some with their own exclusive brands) means that consumers can trade down to another store if they can no longer afford prices at J.C. Penney. Private label merchandise, by its nature, is not differentiated enough to keep fashion-conscious consumers purchasing them in lieu of lower-priced alternatives. Since 54% of J.C. Penney's 2009 sales came from private labels[19] a decrease in sales of private brands will have a large adverse effect on its income.
J.C. Penney Responds to Slowdown in Consumer Spending
Retail sales in 2008 have decreased greatly from previous years due to the 2007 Credit Crunch. J.C. Penney's sales decreased by more than $1 billion from 2007 to 2008 and $930 million from 2008 to 2009. [20], and its operating income was cut in half. The company has responded to this decrease in consumer spending by cutting costs. It has kept its inventories lean in order to prevent further promotions that will only decrease its profit margin even more. In addition, the company's slight reliance on private labels over national brands will help its bottom line through the lower costs and higher profit margins associated with private label products. The company also has more control over production of private brands, meaning it is able to adjust sourcing and inventory to suit its specific needs. Although the company's private label brands are not differentiated enough for a fashion-conscious consumer, they still have a market in consumers who are not as heavily invested in trends.
J.C. Penney also chose to moderate its growth strategy as the 2007 Credit Crunch made it more difficult for third-party developers to obtain financing and projected economic conditions are not favorable towards more retail sales. As a result, JCP has cut down on its future anticipated store openings, which could negatively affect sales growth with less expansion.[21]
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[22] [23] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [24][25] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[22] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[22]
Competition
J.C. Penney's main competition is mid-tier department stores such as Macy's Inc. (M) and Kohl's (KSS).
Macy's Inc. (M) has 850 stores to J.C. Penney's 1,108. Also, its 2009 sales were $5,993 million higher than J.C. Penney's. Macy's has a higher price point than J.C. Penney and sells more exclusive brands. Although both companies produce private labels, they make less of a contribution to Macy's total sales than they do J.C. Penney. 19% of Macy's 2009 sales came from private brands whereas private brands constituted 54% of J.C. Penney's 2009 sales.[26] [27]
Kohl's (KSS) is slightly smaller than J.C. Penney, both in terms of sales and locations (Kohl's made $17,178 in revenue and has 1,067 stores as of 2010). Kohl's also operates at a slightly lower price point. The company has seen an increase in sales from 2008 to 2009--total sales for Kohl's increased by $789 million whereas J. C. Penney's total sales dropped by $930 million. Kohl's position as a discount retailer makes it more attractive for recession-stricken consumers who are looking to save money. Although it has fewer locations than J.C. Penney the fact the company sells its goods online means it is not at a large disadvantage to the larger retailer in terms of accessibility.[28]
Company 2009 Sales ($millions) Sales Change from 2008 Operating Margin Net Income($millions) Same Store Sales Change
J.C. Penney 17,556 (5.0%) 3.8% 251 (6.3%) [29]
Macy's 23,489 (5.6%) 4.5% 350 (5.3%) [30]
Kohl's 17,178 4.8% 10.0% 991 0.4% [31]
Most JCPenney stores are located in suburban shopping malls. Previously, most stores were located in downtown areas. As shopping malls became more popular in the latter half of the 20th century, JCPenney followed the trend by relocating its stores to anchor the malls. In more recent years, the chain has continued to follow consumer traffic, echoing the retailing trend of opening some standalone stores, including some next door to competitors. Certain stores are located in power centers and can be considered big-box stores. The company has been an Internet retailer since 1998. It has streamlined its catalog and distribution while undergoing renovation improvements at store level.
In addition to selling conventional merchandise, JCPenney stores often house several leased departments such as Sephora, Optical, Portrait Studios and Jewelry & Watch repair.
JCPenney also features discount outlet stores. Some of these were converted from regular JCPenney stores.
J.C. Penney (NYSE: JCP) is a leading department store retailer of apparel, accessories and home furnishings. They produce their own private brands in addition to selling products from other companies. Due in large part to the recession, the company's sales decreased by 6.9% during 2008 and another 5.0% in 2009. However, widespread discounts and strict inventory control were able to prevent the company's sales from decreasing even further.
In addition to the recession, which has hit retailers hard during 2008 and 2009, the company also faces changing consumer tastes--consumer traffic is being drawn to Wal-Mart (WMT) and Target (TGT) at the expense of department stores such as J.C. Penney and Macy's Inc. (M). The amount of money spent at department stores as a fraction of total consumer spending decreased from 11% in 2002 to 6% in 2008.[1] In addition, J.C. Penney relies heavily on private labels--54% of the company's 2009 revenue came from private brands.[2] Although private label products--in order to appeal to as many customers as possible--are not unique enough to compel fashion-conscious consumers to purchase them, they are still a viable option for customers who do not follow trends. In addition, their higher margins(3-5% higher than national brands), combined with the company's strict inventory control, has actually lead Morgan Stanley to increase their rating of the company on confidence they will exceed Wall Street earnings expectations.[3]
Business Overview
Contents
1 Business Overview
1.1 Business and Financials
1.1.1 FY 2009 Results
1.1.2 Q1 2010 Results (ended May 1st)
1.1.3 Q2 2010 Results (July 31, 2010)
1.1.4 Q3 Fiscal 2010 Results (ended October 30th, 2010)
2 Trends and Forces
2.1 Private Brands Not Unique Enough to Differentiate from Cheaper Alternatives
2.2 J.C. Penney Responds to Slowdown in Consumer Spending
2.3 Increases in Commodity Prices Will Raise Clothing Retailer Prices
3 Competition
4 References
J.C. Penney is a leading department store retailer with 1,108 stores in the United States and Puerto Rico as of 2010.[4] The company divides its merchandise into several categories which include: men's, women's and children's apparel, accessories and cosmetics; footwear; home furnishings; leisure and recreational equipment; jewelry and watches.[5]
Business and Financials
Sales by category for JCP FY 2009[6]
In June 2009, Morgan Stanley upgraded its rating of JCP from equal weight to overweight, due to confidence the company will exceed Wall Street earnings estimates. This new confidence is due to the company's high reliance on private-label goods. Private-label products are produced by J.C. Penney itself as opposed to national brands, which are produced by separate manufacturers. Private label products benefit the consumer and the company because they are usually priced lower than national brands and their profit margins are 3 to 5 percent higher than national brands as well. 54% of J.C. Penney's 2009 sales came from private labels[7], which means it benefits highly from their benefits. The upgrade caused J.C. Penney shares to increase by 1.7%.[3] Morgan Stanley's upgrade comes in the midst of a slump in the retail industry. The 2007 Credit Crunch as well as the recession in the American economy have led to decreasing sales in 2008 and 2009. Consumers who are unsure of their futures or their financial security have cut back on their spending, especially on nonessential items such as clothing and accessories. The holiday season, which is a time when many retailers make the majority of their sales, did not provide any relief from decreasing sales during the rest of the year.
FY 2009 Results
For FY 2009, JC Penny reported revenues of $17.55 billion, down 5.0% from 2008. Comparable stores sales decreased 6.3% as a result of low consumer spending and JCP's strategy of not offering clearance merchandise or drastic promotions. Sales also declined in catalog and outlet stores by $152 million (16% of the net sales decline in 2009) signaling a shift to online sales at jcp.com. Sales of non-comparable stores opened in 2009 and 2008, net closings, added $308 million to net sales (net store openings of 15 in 2009 and 28 in 2008). Mall sales were flat from 2008. Private label sales continued to grow representing 54% of total merchandise sales in 2009, up from 52% in 2008. Gross profit margin was slightly improved to 39.4% due to lower cost of goods sold. Operating margin declined to 3.8% from 6.1% in 2008. Net income declined 56% to $251 million. [8]
Year Operating Revenue (millions) Operating Profit (millions) Operating Margin Net Income (millions) Net Profit Margin Same Store Sales Change
2009 $17,556 $663 3.8% $251 1.4% (6.3%)
2008 $18,486 $1,135 6.1% $572 3.1% (8.5%)
2007 $19,860 $1,888 19.5% $1,111 5.6% 0.0% [9]
Q1 2010 Results (ended May 1st)
Total sales in the first quarter increased 1.2% compared to last year to $3.9 billion, while comparable store sales increased 1.3%. Six of the seven merchandise divisions had sales gains with the strongest merchandise results in men’s, shoes and handbags, and children’s. [10]
Earnings per share were $0.25 compared to $0.11 per share in last year’s first quarter. [11]
Gross margin increased 90 basis points to 41.4 percent of sales. Operating income for the first quarter improved 46.2 percent to $155 million or 3.9 percent of
sales. Net income increased 140% to $60 million versus $25 million last year. [12]
Q2 2010 Results (July 31, 2010)
JCP reported net sales of $3,938, flat year over year. Gross margin increased 90 basis points over last year to 39.4 percent of sales. SG&A expenses were tightly controlled, increasing $31 million or 2.5 percent when compared to last year's second quarter.
Operating income for the second quarter increased 41.8 percent to $95 million or 2.4 percent of sales. Net income was $14 million, up from a net loss of $1 million in the Q2 2009.
Comparable store sales were up 1% year over year. [13]
Q3 Fiscal 2010 Results (ended October 30th, 2010)
JCP reported net sales of $4.189 billion, an increase of $10 million from Q3 fiscal 2009.[14]
Comparable store sales increased 1.9% compared to Q3 fiscal 2009.[14] This is the third straight quarter that JCP comp. store sales increased.[14]
In addition, online sales increased 3% compared to Q3 fiscal 2009.[14]
JCP net income increased from $27 million to $44 million, a testament to the firm's immense cost-cutting measures.
Despite the discontinuation of its Big Book catalogs, JCP's sales have still rose with a 3.3% rise in internet sales via jcp.com.[15]
On October 8th, Pershing Square Capital Management, a large hedge fund, acquired more than 26% of JCP's shares, which makes the fund JCP's largest shareholder. Pershing Square's hedge fund manager, William Ackman, is expected to push for changes that he thinks will increase value in JCP, which will increase pressure on JCP's CEO.[16]
Trends and Forces
Private Brands Not Unique Enough to Differentiate from Cheaper Alternatives
Private label brands are produced exclusively for a particular store. For example, J.C. Penney has a number of private label brands including Arizona Jeans Co. and Stafford.[17] Retailers such as Macy's and J.C. Penney find private labels very attractive because the pieces often have higher margins than branded merchandise from other companies. However, the economic crisis of 2008-2009 has made people more reluctant to spend. When consumers have less money to spend, they will be more inclined to spend it on something that excites them. Private label brands, in an effort to appeal to as many consumers as possible, are less likely to spur a person to buy them when disposable income is already scarce.[18] Also, the proliferation of discount retailers such as Wal-Mart, Target and Kohl's (some with their own exclusive brands) means that consumers can trade down to another store if they can no longer afford prices at J.C. Penney. Private label merchandise, by its nature, is not differentiated enough to keep fashion-conscious consumers purchasing them in lieu of lower-priced alternatives. Since 54% of J.C. Penney's 2009 sales came from private labels[19] a decrease in sales of private brands will have a large adverse effect on its income.
J.C. Penney Responds to Slowdown in Consumer Spending
Retail sales in 2008 have decreased greatly from previous years due to the 2007 Credit Crunch. J.C. Penney's sales decreased by more than $1 billion from 2007 to 2008 and $930 million from 2008 to 2009. [20], and its operating income was cut in half. The company has responded to this decrease in consumer spending by cutting costs. It has kept its inventories lean in order to prevent further promotions that will only decrease its profit margin even more. In addition, the company's slight reliance on private labels over national brands will help its bottom line through the lower costs and higher profit margins associated with private label products. The company also has more control over production of private brands, meaning it is able to adjust sourcing and inventory to suit its specific needs. Although the company's private label brands are not differentiated enough for a fashion-conscious consumer, they still have a market in consumers who are not as heavily invested in trends.
J.C. Penney also chose to moderate its growth strategy as the 2007 Credit Crunch made it more difficult for third-party developers to obtain financing and projected economic conditions are not favorable towards more retail sales. As a result, JCP has cut down on its future anticipated store openings, which could negatively affect sales growth with less expansion.[21]
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[22] [23] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [24][25] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[22] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[22]
Competition
J.C. Penney's main competition is mid-tier department stores such as Macy's Inc. (M) and Kohl's (KSS).
Macy's Inc. (M) has 850 stores to J.C. Penney's 1,108. Also, its 2009 sales were $5,993 million higher than J.C. Penney's. Macy's has a higher price point than J.C. Penney and sells more exclusive brands. Although both companies produce private labels, they make less of a contribution to Macy's total sales than they do J.C. Penney. 19% of Macy's 2009 sales came from private brands whereas private brands constituted 54% of J.C. Penney's 2009 sales.[26] [27]
Kohl's (KSS) is slightly smaller than J.C. Penney, both in terms of sales and locations (Kohl's made $17,178 in revenue and has 1,067 stores as of 2010). Kohl's also operates at a slightly lower price point. The company has seen an increase in sales from 2008 to 2009--total sales for Kohl's increased by $789 million whereas J. C. Penney's total sales dropped by $930 million. Kohl's position as a discount retailer makes it more attractive for recession-stricken consumers who are looking to save money. Although it has fewer locations than J.C. Penney the fact the company sells its goods online means it is not at a large disadvantage to the larger retailer in terms of accessibility.[28]
Company 2009 Sales ($millions) Sales Change from 2008 Operating Margin Net Income($millions) Same Store Sales Change
J.C. Penney 17,556 (5.0%) 3.8% 251 (6.3%) [29]
Macy's 23,489 (5.6%) 4.5% 350 (5.3%) [30]
Kohl's 17,178 4.8% 10.0% 991 0.4% [31]
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