Financial Analysis

Suspension of promotional activities significantly dragged down JCPs revenue last year. Though
new CEO Myron Ullman suggested restarting the promotional strategy, JCP is still facing a
gloomy future in such a highly competitive industry. In this section, we would comprehensively
analyze JCPs sales and profitability, capital structure, solvency and liquidity, inventory, and
capital expenditure.

Sale and Profitability

For the past five years, JCPs net sales kept sliding down by $6,875 million (Table 1). From the
last six month and last three month data given from the latest 10Q report, we estimate that
JCPs revenue will most likely drop again in this year. Reviewing the J. Crew turnaround case in
2003, we anticipate that it might take one to two years for JCP to turn negative sales growth
rate back to positive.
Table 1: Sales and Margins - JCP 2007-2013
JCP
Net Sales
COGS
Gross Profit
Gross Margin
SG&A
SG&A Margin
Other Operating Expense*
Other Operating Expense Margin
EBITDA
EBITDA Margin
D&A
D&A Margin
EBIT
EBIT Margin

2007
19,860.00
12,189.00
7,671.00
38.63%
5,357.00
26.97%
9.00
0.05%
2,305.00
11.61%
426.00
2.15%
1,879.00
9.46%

2008
18,486.00
11,571.00
6,915.00
37.41%
5,395.00
29.18%
(115.00)
-0.62%
1,635.00
8.84%
469.00
2.54%
1,166.00
6.31%

2009
17,556.00
10,646.00
6,910.00
39.36%
5,382.00
30.66%
370.00
2.11%
1,158.00
6.60%
495.00
2.82%
663.00
3.78%

2010
17,759.00
10,799.00
6,960.00
39.19%
5,358.00
30.17%
259.00
1.46%
1,343.00
7.56%
511.00
2.88%
832.00
4.68%

2011
17,260.00
11,042.00
6,218.00
36.03%
5,109.00
29.60%
593.00
3.44%
516.00
2.99%
518.00
3.00%
(2.00)
-0.01%

2012
12,985.00
8,919.00
4,066.00
31.31%
4,506.00
34.70%
327.00
2.52%
(767.00)
-5.91%
543.00
4.18%
(1,310.00)
-10.09%

2013 LT6
5,298.00
3,699.00
1,599.00
30.18%
2,104.00
39.71%
97.00
1.83%
(602.00)
-11.36%
279.00
5.27%
(881.00)
-16.63%

2013 LT3
2,663.00
1,876.00
787.00
29.55%
1,026.00
38.53%
13.00
0.49%
(252.00)
-9.46%
143.00
5.37%
(395.00)
-14.83%

* Other Operating Expense includes pension, real estate, and restructuring and management transition.

About 5% decrease in the gross margin in 2012 largely came from inventory markdowns and
clearance sales. Though it seems to have descending trend, its declining rate became stable
probably because the newly introduced brands and merchandises start playing positive roles in
boosting sales. By taking multiple actions to reduce SG&A, for example reducing employee
payment and cutting marketing expenses, JCP saved $603 million in 2012 and is still shrinking it
in this year. However, poor sales performance keeps lifting the SG&A margin in this year.
Better-off EBITDA margin and EBIT margin in the last three month performance may indicate a
J.C.Penney Inc. 2013 10-K Annual Report, Pg. 23 & 26

positive effect of the renewed promotional strategy, but will likely stick in the negative position
for another couple of years. Recent hiking-up D&A margin suggests JCP is expanding its
investment in store fixtures, proved in MD&A in last 10K report.

Table 2: Sales and Margins - Comparison

08/2013 LTM12
Net sales
COGS
Gross Profit
Gross Margin
SG&A
SG&A Margin
Other Operating Expense*
Other Operating Expense Margin
EBITDA
EBITDA Margin
D&A
D&A Margin
EBIT
EBIT Margin
Total Employees
Net sales/Employee
Total Stores
Net sales/Store

JCP
12,109.00
8,634.00
3,475.00
28.70%
4,705.00
38.86%
(3.00)
-0.02%
(1,227.00)
-10.13%
569.00
4.70%
(1,796.00)
-14.83%
116,000
0.10
1,095
11.06

Macy's
Kohls
Nordstrom
27,878.00 19,320.00 12,462.00
16,670.00 12,292.00
7,817.00
11,208.00
7,028.00
4,645.00
40.20%
36.38%
37.27%
7,478.00
4,287.00
2,843.00
26.82%
22.19%
22.81%
0.00%
0.00%
0.00%
3,730.00
2,741.00
1,802.00
13.38%
14.19%
14.46%
1,040.00
861.00
442.00
3.73%
4.46%
3.55%
2,690.00
1,880.00
1,360.00
9.65%
9.73%
10.91%
175,700
82,500
61,000
0.16
0.23
0.20
840
1,158
257
33.19
16.68
48.49

Dillards
6,746.60
4,217.00
2,529.60
37.49%
1,696.90
25.15%
0.00%
832.70
12.34%
260.70
3.86%
572.00
8.48%
32,870
0.21
301
22.41

JCPs current gross margin is 7.68%-11.5% lower than its competitors. With greater percentage
of SG&A and D&A, its EBITDA margin and EBIT margin are further behind Macys, Kohls,
Nordstrom, and Dillards (Table 2).

Simply comparing sales from 2007 to 2012, we found that JCPs last five-year revenue
compound annual growth rate is -8.15%, 6.41% lower than Dilliards and 14.14% lower than
Nordstrom (Table 3). The biggest effect for this difference was JCPs failure in the specialty
strategy introduced by the previous CEO Ron Johnson who was replaced by Mr. Myron Ullman
in this April.

Table 3: Sales Growths - Comparison

Revenue
JCP
Sales Growth
Macy's
Sales Growth
Kohls
Sales Growth
Nordstrom
Sales Growth
Dillards
Sales Growth

2007
19,860.00
26,313.00
16,474.00
9,080.00
7,370.80

2008
2009
2010
18,486.00 17,556.00 17,759.00
-6.92%
-5.03%
1.16%
24,892.00 23,489.00 25,003.00
-5.40%
-5.64%
6.45%
16,389.00 17,178.00 18,391.00
-0.52%
4.81%
7.06%
8,573.00
8,627.00
9,700.00
-5.58%
0.63%
12.44%
6,988.40
6,226.60
6,258.30
-5.19%
-10.90%
0.51%

2011
17,260.00
-2.81%
26,405.00
5.61%
18,804.00
2.25%
10,877.00
12.13%
6,405.50
2.35%

2012
5 year CAGR*
12,985.00
-24.77%
-8.15%
27,686.00
4.85%
1.02%
19,279.00
2.53%
3.19%
12,148.00
11.69%
5.99%
6,751.60
5.40%
-1.74%

*CAGR refers to Compound Annual Growth Rate

Next, we would discuss JCPs profitability by comparing its return on assets, return on equity, and return
on invested capital to its direct competitors. Vertically, JCPs profitability is going worse from 2011 to
2013. In this year, 2%-3% further decline in ROA and ROIC with another 26.3% drop in ROE indirectly
reflects that JCPs capital structure moves more to debt. Horizontally, these three ratios are far lower
than competitors. In contrast, competitors ratios maintain at a stable level or have an inclining trend,
enlarging the differences (Table 4).

Table 4: Profitability - Comparison

JCP
Macy's
Kohls
Nordstrom
Dillards

Return on Assets
2011
2012 08/13 LTM12
2.40%
-7.90%
-10.00%
7.00%
7.70%
8.20%
9.30%
8.40%
8.40%
9.90%
9.90%
10.10%
6.10%
8.10%
8.50%

Return on Equity
2011
2012
08/13 LTM12
-3.20%
-27.40%
-53.70%
21.90%
22.30%
23.40%
16.30%
15.70%
15.80%
34.30%
38.00%
39.30%
22.40%
16.70%
18.00%

Return on Invested Capital

2011
2012 08/13 LTM12
3.80%
-12.60%
-15.00%
11.20%
12.50%
13.10%
11.90%
11.10%
11.20%
15.10%
15.50%
16.80%
8.80%
11.70%
12.40%

Capital Structure
Negative earnings and costly equity financing encouraged JCP to borrow money by debt. Strategy to
expand new brands and merchandises required a large amount of fund and almost doubled the total
debt. At the end of this third quarter, JCP had $5,834 million of debt. Of this amount, $850 million
represented revolving credit with a 5.25% interest rate due in April 2016, $111 million consisted of the
capital lease with a 8.3% interest rate, $2,250 million was senior secured term loan with an average 6%
interest rate, and $2.623 million included long term debt with about 7.5% interest rate (Table 5).

Table 5: Debt Structure - JCP

JCP
Revolving Credit (04/16 due, 5.25%)
Capital Lease (8.3%)
Senior Secured Term Loan (around 6%)
Long Term Debt (around 7.5%)
Total Debt

2011

2012

4.00

111.00

3,098.00
3,102.00

2,871.00
2,982.00

13-Aug % of Total Debt

850.00
14.60%
111.00
38.70%
2,250.00
45.10%
2,623.00
1.90%
5,834.00

Figure 1: Debt Structure - JCP

In this year, JCP added revolving credit facility and senior secured term loan into its debt structure
(Figure 1), which on the one way their lower required rate of return dragged down the weighted
average debt cost, on the other way the hiking amount in debt increased the companys leverage.
Furthermore, the revolving credit facility will expose JCP to high financial pressure when it approaches
to due in 2016. In addition, current turmoil debt market enlarges uncertainties in the future interest
rates and increases potential risks.

Compared with the four major competitors, JCP has the most diverse debt structure and is the only one
that is using revolving credit. Among these five companies, JCP and KSS are taking a large percentage of
capital lease in debt, while M, JWN, and DDS focus their debt financing in long term debt (Figure 2 and
Table 6).

Figure 2: Debt Structure Comparison

Table 6: Debt Structure - Comparison

08/13 LTM12 (% of Total Debt) JCP
Revolving Credit
14.60%
Capital Lease
38.70%
Senior Secured Term Loan
45.10%
Long Term Debt
1.90%
Total Debt/Equity
250.90%
Total Debt/Capital
71.50%

Macy's
96.80%
118.10%
54.10%

Kohls
Nordstrom
45.70%
54.50%
98.00%
75.80%
153.70%
43.10%
60.60%

Dillards
1.00%
99.00%
40.90%
29.00%

Looking into more details of leverage and risk, we compared the five companies of their last twelve
month debt to equity and debt to capital ratios. From table 6, JCP has the highest debt to equity ratio,
which is more than doubled that of Macys and even more than six times that of Dillards. Similarly, JCPs
debt to capital ratio is far greater than others. These two ratios indicate that JCP has a high debt level
and places itself in a very dangerous situation, especially when it is going through a distressed
operational period. In a word, JCP has a high solvency risk.

Liquidity
In this part, we picked two ratios, current ratio and quick ratio, to analyze JCPs liquidity. From 2010 to
2013, JCP has a declining trend in both current ratio and quick ratio (Table 7). Investigating JCPs annual
reports, we found that a great cut in cash and cash equivalents ($2,622 million in 2010, $1,507 million in
2011, and $930 million in 2012), as well inventory ($3,213 million in 2010, $2,916 million in 2011, $2,341
million in 2012), in the past three years was the primary reason for the reduced liquidity. In this year,
JCP more than doubled its debt to purchase more inventories of new merchandises, which may improve
its liquidity, but the upcoming growth in interest expense will further worsen the liquidity. However, if
the investment continues to consume cash, JCP will probably face more serious liquidity problems when
the debt comes to due.

Table 7: Current Ratio and Quick Ratio - JCP

JCP
Current Ratio
Quick Ratio

2007
2.0x
0.8x

2008
2.2x
0.9x

2009
2.0x
1.0x

2010
2.4x
1.1x

2011
1.8x
0.6x

2012
1.4x
0.4x

13-Aug
1.4x
0.4x

In addition, JCP has the lowest current ratio but the second highest quick ratio compared with other four
competitors (Table 8). This suggests that JCP has relatively low inventory storage or relatively high cash
reserve under a certain current debt level. Nevertheless, inventory in JCP already contributes 71.4%
(1.0/1.4) to total current assets, while its competitor Nordstrom only has 33.3% (0.6/1.8) and Dillards
has 90.5% (1.9/2.1) contribution.

Table 8: Current Ratio and Quick Ratio - Comparison

08/13 LTM12
Current Ratio
Quick Ratio

JCP

Macy's
1.5x
0.3x

Kohls
1.8x
0.2x

2008
2009
18,486.00 17,556.00
3,259.00 3,024.00
17.63%
17.22%
-10.49%
-7.21%

2010
17,759.00
3,213.00
18.09%
6.25%

1.4x
0.4x

Nordstrom
1.8x
1.2x

Dillards
2.1x
0.2x

Inventory
Table 9: Inventory - JCP
JCP
Net Sales
Inventory
Inventory Margin
Inventory Growth

2007
19,860.00
3,641.00
18.33%

J.C.Penney Inc. 2013 10-K Annual Report, Pg. 22

2011
17,260.00
2,916.00
16.89%
-9.24%

2012
12,985.00
2,341.00
18.03%
-19.72%

13-Aug
3,155.00
34.77%

Inventory is playing a crucial role in the retailing industry since it closely concerns with revenues,
warehouse costs, clearance risks, cash flows, and liquidity. Together with the dropping sales, inventory
was cut about 1/3 of the total amount in 2007 for the past five years. The average inventory margin (to
net sales) was 17.7% from 2007 to 2012 (Table 9). However, managements decision to develop new
brands and merchandises significantly increased inventory in 2013, and the inventory growth rate so far
in this year is 34.77%, compared to a -19.72% in last year. This growth in inventory will likely lift up
warehouse costs, consume more cash, and further increase liquidity risks. Differently, revenue in this
year changed in the opposite way to inventory, which led to a higher inventory margin (Table 10).
Highest inventory margin among all competitors represents that JCP has relatively high inventory. The
seemingly conflicting conclusions from the relatively high quick ratio and high inventory margin could be
explained by JCPs high debt and low revenue.

Table 10: Inventory - Comparison

08/13 LTM12
Net Sales
Inventory
Inventory Margin

JCP
Macy's
Kohls
Nordstrom
12,109.00 27,878.00 19,320.00 12,462.00
3,155.00
5,357.00
3,856.00
1,464.00
26.06%
19.22%
19.96%
11.75%

Dillards
6,746.60
1,459.30
21.63%

To well understand JCPs effectiveness in operation, we compared inventory turnover and total asset
turnover from both vertical and horizontal perspectives. Vertically, JCPs turnover multiples are going
down, which largely came from the sharply decreased revenue. Recent increase in inventory also
exacerbated the inventory turnover. Horizontally, JCPs turnovers were generally ranked in the middle
but ranked the lowest in the last twelve month, which confirmed the poor operation and inefficient
management (Table 11).

Table 11: Turnover

JCP
Macy's
Kohls
Nordstrom
Dillards

2011
3.6x
3.2x
3.7x
6.2x
3.1x

Inventory Turnover
2012
08/13 LTM12
3.4x
2.8x
3.2x
3.2x
3.5x
3.3x
5.9x
5.3x
3.3x
3.0x

Total Asset Turnover

2011
2012
08/13 LTM12
1.4x
1.2x
1.1x
1.2x
1.3x
1.4x
1.3x
1.4x
1.4x
1.4x
1.5x
1.5x
1.5x
1.6x
1.6x

Capital Expenditure
In general, the property, plant, and equipment (PP&E) margin went up from 2007 to 2012 and soared to
63.4% last year. The big jump was from two reasons: a) the net sales heavily plunged, and b) the
company is expanding investment on store fixtures. According to the PP&E growth, JCP slowed down its
investment in fixed assets from 2008 to 2011 but re-accelerated since last year. 7.94% PP&E growth in
this year so far reflected a large expansion in stores and merchandises. Tough PP&E increased in the
past five years, CAPEX had negative growth rates from 2008 to 2010, and 2012. This indicated that JCP
sold out a significant amount of discontinued operating assets and equipment in that period. However, a
206.34% growth in CAPEX this year suggests that JCP moderated its asset disposition. The growth of
accumulated depreciation and amortization (D&A) grew faster than that of PP&E from 2008 to 2011 but
slower from 2012 to 2013. This manifests that those disposed assets for the past five years may have
greater depreciation rates that contributed to more D&A in the first couple of years (Table 12).

Table 12: Fixed Assets, Depreciation and Amortization - JCP

JCP
Net Sales
PP&E
PP&E Margin
PP&E Growth
CAPEX
CAPEX Growth
Accum. D&A
Accum. D&A Growth

2007
19,860.00
7,178.00
36.14%
1,217.00
2,219.00

2008
2009
18,486.00 17,556.00
7,806.00 8,058.00
42.23%
45.90%
8.75%
3.23%
956.00
587.00
-21.45% -38.60%
2,439.00 2,701.00
9.91%
10.74%

2010
17,759.00
8,085.00
45.53%
0.34%
485.00
-17.38%
2,854.00
5.66%

2011
17,260.00
8,141.00
47.17%
0.69%
619.00
27.63%
2,965.00
3.89%

2012
12,985.00
8,233.00
63.40%
1.13%
284.00
-54.12%
2,880.00
-2.87%

13-Aug
8,887.00
7.94%
870.00
206.34%
3,067.00
6.49%

Comparing PP&E margin, CAPEX margin, and D&A margin to net sales, we found these three margins in
the last twelve months for JCP are all higher than those of other four competitors. Thus, we believe JCP
has heavily invested in its store expansion and shop fixture and this trend will continue for the next
couple of years.

Table 13: Fixed Assets, Depreciation and Amortization - Comparison

08/13 LTM12
Net Sales
PP&E
PP&E Margin
CAPEX
CAPEX Margin
D&A
D&A Margin

JCP
Macy's
Kohls
Nordstrom
12,109.00 27,878.00 19,320.00 12,462.00
8,887.00 14,346.00 13,980.00
7,080.00
73.39%
51.46%
72.36%
56.81%
870.00
546.00
861.00
721.00
7.18%
1.96%
4.46%
5.79%
569.00
1,040.00
640.00
442.00
4.70%
3.73%
3.31%
3.55%

J.C.Penney Inc. 2013 10-K Annual Report, Pg. 26

Dillards
6,746.60
4,487.30
66.51%
49.50
0.73%
260.90
3.87%

DCF Valuation Model

The DCF Model is based on three-year historical financial data (from 2010 to 2012) and a few
assumptions as following:

We assume 10/31/2013 as the valuation date and project free cash flows (FCFs) on a fiveyear time horizon (from 2013 to 2017).

Terminal Values (TVs) are estimated by multiple EV/EBITDA (Averaged four major
competitors 2012, Bloomberg) (Appendix A).

The discounted rate is anticipated by WACC, which combines cost of debt and cost of
equity, and they are weighed by their total book value and market value, respectively
(Appendix B, C, D).

$298 million valuation allowance in deferred assets that came from restructuring hugely
dragged down the effective tax rate to about 3% in this second quarter . We picked 10%
in 2013 as averaged from the last six month and last three month. Supposing revenue will
trend up in the following five years, we estimated the tax over EBIT ratio as 20% in 2014
and 30% for 2015-2017.

Referring to the historical performance of J.Crew that went through restructuring since
2003 (Table 14), combined with Bloomberg analyst opinions, we approximated the net
sales growth rates to -5%, 10%, 12%, 14%, and 15% from 2013 to 2017, separately
(Appendix E).

Table 14: J.Crew Historical Reference

J.Crew
Sales Growth
Gross Margin
SG&A Margin

2001
43.80%
36.50%

2002
-5.80%
41.60%
39.00%

2003
-1.20%
38.50%
39.30%

2004
-0.12%
36.20%
40.00%

2005
16.60%
40.50%
35.80%

2006
18.50%
41.80%
33.40%

2007
20.90%
43.40%
32.50%

According to the recent 10-Q quarterly report, we estimated gross margin as 30% in 2013.
Reviewing the change in J.Crews gross margin since 2003, we anticipated that JCPs would
gradually grow back to approximate 38% in 2017 (Table 15).

The company cut about $600 million SG&A last year to $4,506 million at the end of last
fiscal year. Considering the amount of SG&A hovered around $5,000 million from 2007 to
2011 (Table 1), we slightly increased SG&A to $5,000 from 2013 to 2017 and divide them
with the estimated net sales to obtain the future SG&A margins (Table 15).

J.C.Penney. Inc. 2013 10-Q quarterly report, Pg.16

Table 15: EBIT Estimation - JCP

EBIT Estimation
Gross Margin
SG&A Margin
Pension Margin
Other Margins
EBIT Margin

2013E
30.00%
38.00%
1.30%
5.00%
-14.30%

2014E
34.00%
33.00%
1.00%
5.00%
-5.00%

2015E
36.00%
33.00%
1.00%
5.00%
-3.00%

2016E
37.00%
29.00%
1.00%
5.00%
2.00%

2017E
38.00%
27.50%
1.00%
5.00%
4.50%

In the 2013 10-K annual report, management estimated $100 million drop in pension
expenses. In terms of the income statement in 10-Q second quarter 2013, we calculated
the pension margin as 1.3%. Assuming no big change in the pension plan, we put 1% as
pension margin for the rest of forecasting years (Table 15).

Other margins include D&A margin, real estate margin, and restructuring and management
margin. Measuring it with data in the recent 10-Q report, we simply assumed 5% for the
next five years (Table 15).

Plan to bring in more selling spaces will result in greater CAPEX expenditure and D&A
expenses. By recent 10-Q report, we approximated CAPEX as $1,000 in 2013. Considering
the doubled debt burden will require amounts of cash in three years, we inferred the asset
investment would slide down from 2014 (Appendix E).

According to 10-Q, we estimated the change in inventory as $900 million in 2013. It is

reasonable that JCP increased its inventory in such a shifting period, but it should not last
long. From Table 10, the extremely high inventory margin may represent an inefficient
inventory management. Thus, we anticipate that JCP will later reduce its inventory
(Appendix F).

According to Table 13, we forecasted the D&A growth rate as 6% in 2013 and 2014 and
stayed at $600 million from 2015 to 2017 (Appendix E).

FCF=EBIT-Tax-Capex-Increase in WC+D&A.

We selected the midpoint of each year as the discount period to equally allocate FCF to a
whole year, based on which we calculated discount factors.

Equity Value=EV-Debt-Preferred equity-Minority interest +Cash and cash equivalent.

Table 16: DCF Sensitivity Analysis - JCP

Terminal Multiple

Discount Rate

6,262.34
5.09%
6.09%
7.09%
8.09%
9.09%

5.0x

5.5x

6.0x

6.5x

7.0x

5,747.6
5,434.6
5,136.4
4,852.1
4,581.1

6,356.0

6,964.5
6,604.4
6,261.4
5,934.4
5,622.6

7,573.0
7,189.4
6,823.9

8,181.4
7,774.3
7,386.4
7,016.6
6,664.1

6,019.5

5,698.9
5,393.3
5,101.8

6,475.5

6,143.3

Table 17: Intrinsic Value - JCP

Present value of enterprise

Less: Debt
Less: Preferred stock
Less: Minority interest
Plus: Cash and cash equivalents
Equity vlaue
Basic shares outstanding
Implied share price
Current price

Most Likely
6,262.34
(5,821.00)
1,535.00
1,976.34
304.60
6.49
6.75

Best
8,181.42
(5,821.00)
1,535.00
3,895.42
304.60
12.79

Worst
4,581.06
(5,821.00)
1,535.00
295.06
304.60
0.97

According to the above assumptions, we discounted projected FCFs in 2013 - 2017 by WACC to
obtain the present enterprise value as $6,262.34 million. Subtracting out the net debt, we
calculated the implied share price by the acquired total equity value divided by the total
number of basic shares outstanding. Finally, we estimated the intrinsic value on 10/31/2013 as
$6.49/share, lower than the market price on that day. Thus, we concluded that JCP stock is
currently slightly overvalued in term of our DCF model.

Relative Valuation Model

In this section of the paper, we estimate JCPs equity value by the relative valuation model. As
negative LTM earning, EBITDA, and free cash flow made invalid P/E, TEV/EBITDA, or P/FCF
ratios, we are only looking at the enterprise-based TEV/Sales ratio here.

Selection of Comparable Firms

We selected four comparable firms: Macys Inc. (M), Kohls Corp. (KSS), Nordstrom Inc. (JWN),
and Dillards Inc. (DDS), based on the following criteria (Table 18):

They provide similar products and services: apparels and accessories, beauty products, and
home furnishings.
Their latest total enterprise value is greater than $4,000 million, and their latest market
capitalization is greater than $2,000 million.
They are all NYSE listed and set their primary business in the United States.

Table 18: Competitor Selection

10/9/2013
JCP
Macy's
Kohls
Nordstrom
Dillards

Industry Exchange Location TEV Market Cap.

Retailing NYSE
U.S.
6689.3
2403.3
Retailing NYSE
U.S.
21427.5
15937.5
Retailing NYSE
U.S.
15138.8
11143.8
Retailing NYSE
U.S.
12862.8
10868.8
Retailing NYSE
U.S.
4213.7
3504.6

Table 19: Multiple Selection - TEV/Sales

FY 2012
S&P 500
JCP
Macy's
Kohls
Nordstrom
Dillards
Average
Median

TEV/Sales
1.68
0.5
0.74
0.74
1.05
0.71
0.81
0.74

Table 20: Estimated Price by TEV/Sales Multiple

Market Enterprise Value
Less: Debt
Less: Preferred stock
Less: Minority interest
Plus: Cash and cash equivalents
Equity vlaue
Basic shares outstanding
Implied share price
Current price

6,054.50
(5,821.00)
1,535.00
1,768.50
304.60
5.81
6.75

Since JCPs TEV/Sales ratio is quite smaller than its competitors, we decided to employ 0.5 to
measure the price (Table 19). With known $12,109 million LTM sales, we estimated TEV as
$6054.5 million. Similar with DCF model, we subtracted net debt from the estimated TEV and
divided it by total outstanding shares to obtain the implied share price as $5.81 (Table 20).

Combining the two valuation results, we conclude that JCPs stock is slightly overvalued on the
valuation date.

Appendix A: EV/EBITDA Estimation

FY 2012
TEV/EBITDA
S&P 500
8.95
JCP
NA
Macy's
5.49
Kohls
5.23
Nordstrom
7.16
Dillards
5.97
Average
5.96
Median
5.73
Approximate 6x

Appendix B: WACC Estimation

JCP
Equity
Debt
WACC

Weight
28.74%
71.26%
100%

Cost
13.55%
4.48%

(current weight by 13-Aug)

Debt
5,821.00
Equity
2,348.19
Total capital
8,169.19
Beta (equity)
Risk free rate (30 Govt. Bond)
Market risk premium
Cost of equity
Unsystematic risk (midsize $1.1B~$4.7B)
Total cost of equity
Credit rating of debt
Cost of debt (FINRA)
Tax rate
After-tax cost of debt

1.79
3.70%
5.00%
12.65%
0.90%
13.55%
CCC7.00%
36%
4.48%

W*C
3.89%
3.19%
7.09%

Appendix C: Beta Estimation - Regression

JCP
Date Adj Close*

SPY
Monthly
Adj Close*
Return%

JCP-Rf
Monthly
Deviation

Monthly
Deviation

-0.88%
-29.80%
-14.83%
-14.83%
-3.15%
6.76%
8.36%
-14.31%
-13.88%
2.84%
9.56%
-25.59%
-1.46%
-7.17%
15.55%
-3.74%
-11.44%
-27.57%
2.05%
-10.85%
-5.00%
18.60%
9.42%
-0.43%
20.35%
0.23%
-13.72%
-10.72%
-2.82%
-8.17%
7.35%
2.40%
8.72%
-0.44%
-3.21%
6.41%
15.17%
35.74%
-19.17%
15.44%
-22.16%
-6.05%
-9.11%
16.34%
10.80%
-6.33%
-7.71%
-13.56%
-1.58%
12.03%
-0.66%
5.50%
9.73%
-15.30%
54.02%
30.63%
-8.79%
-14.52%
3.41%
-20.91%

0.48%
2.85%
-3.30%
4.86%
-1.64%
2.05%
1.61%
3.49%
0.97%
4.81%
0.58%
0.26%
-2.13%
2.23%
2.19%
0.88%
3.75%
-6.32%
-0.98%
2.91%
4.04%
4.33%
0.74%
-0.72%
10.60%
-7.24%
-5.81%
-2.31%
-1.99%
-1.44%
2.59%
-0.30%
3.16%
2.02%
6.38%
-0.31%
3.52%
8.64%
-4.81%
6.52%
-5.48%
-8.25%
1.24%
5.79%
2.81%
-3.94%
1.60%
5.86%
-2.23%
3.24%
3.39%
7.15%
-0.38%
5.54%
9.62%
8.03%
-11.06%
-8.52%
0.68%
-7.27%

1-Oct-13

8.75

-0.57%

169.34

0.79%

3-Sep-13

8.8

-29.49%

168.01

3.16%

1-Aug-13

12.48

-14.52%

162.86

-3.00%

1-Jul-13

14.6

-14.52%

167.89

5.17%

3-Jun-13

17.08

-2.84%

159.64

-1.33%

1-May-13

17.58

7.06%

161.8

2.36%

1-Apr-13

16.42

8.67%

158.07

1.92%

1-Mar-13

15.11

-14.00%

155.09

3.79%

1-Feb-13

17.57

-13.58%

149.42

1.28%

2-Jan-13

20.33

3.15%

147.53

5.12%

3-Dec-12

19.71

9.87%

140.35

0.89%

1-Nov-12

17.94

-25.28%

139.11

0.57%

1-Oct-12

24.01

-1.15%

138.32

-1.82%

4-Sep-12

24.29

-6.86%

140.89

2.54%

1-Aug-12

26.08

15.86%

137.4

2.50%

2-Jul-12

22.51

-3.43%

134.05

1.19%

1-Jun-12

23.31

-11.13%

132.48

4.06%

1-May-12

26.23

-27.26%

127.31

-6.01%

2-Apr-12

36.06

2.36%

135.45

-0.67%

1-Mar-12

35.23

-10.54%

136.36

3.22%

1-Feb-12

39.38

-4.70%

132.11

4.34%

3-Jan-12

41.32

18.91%

126.61

4.64%

1-Dec-11

34.75

9.73%

121

1.04%

1-Nov-11

31.67

-0.13%

119.75

-0.41%

3-Oct-11

31.71

20.66%

120.24

10.91%

1-Sep-11

26.28

0.54%

108.41

-6.94%

1-Aug-11

26.14

-13.42%

116.49

-5.50%

1-Jul-11

30.19

-10.42%

123.27

-2.00%

1-Jun-11

33.7

-2.52%

125.79

-1.68%

2-May-11

34.57

-7.86%

127.94

-1.13%

1-Apr-11

37.52

7.66%

129.4

2.90%

1-Mar-11

34.85

2.71%

125.75

0.01%

1-Feb-11

33.93

9.03%

125.74

3.47%

3-Jan-11

31.12

-0.13%

121.52

2.33%

1-Dec-10

31.16

-2.90%

118.75

6.68%

1-Nov-10

32.09

6.72%

111.31

0.00%

1-Oct-10

30.07

15.48%

111.31

3.82%

1-Sep-10

26.04

36.05%

107.21

8.95%

2-Aug-10

19.14

-18.86%

98.4

-4.50%

1-Jul-10

23.59

15.75%

103.04

6.83%

1-Jun-10

20.38

-21.86%

96.45

-5.17%

3-May-10

26.08

-5.75%

101.71

-7.95%

1-Apr-10

27.67

-8.80%

110.49

1.54%

1-Mar-10

30.34

16.65%

108.81

6.09%

1-Feb-10

26.01

11.11%

102.56

3.12%

4-Jan-10

23.41

-6.02%

99.46

-3.63%

1-Dec-09

24.91

-7.40%

103.21

1.91%

2-Nov-09

26.9

-13.25%

101.28

6.16%

1-Oct-09

31.01

-1.27%

95.4

-1.92%

1-Sep-09

31.41

12.34%

97.27

3.54%

3-Aug-09

27.96

-0.36%

93.94

3.70%

1-Jul-09

28.06

5.81%

90.59

7.46%

1-Jun-09

26.52

10.04%

84.3

-0.07%

1-May-09

24.1

-14.99%

84.36

5.85%

1-Apr-09

28.35

54.33%

79.7

9.93%

2-Mar-09

18.37

30.93%

72.5

8.34%

2-Feb-09

14.03

-8.48%

66.92

-10.75%
-8.21%

2-Jan-09

15.33

-14.21%

74.98

1-Dec-08

17.87

3.71%

81.69

0.99%

3-Nov-08

17.23

-20.60%

80.89

-6.96%

1-Oct-08

21.7

86.94

SPY-Rf

Monthly
Return%

Monthly Rf

0.31%

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.55965325
R Square
0.31321176
Adjusted R Square 0.30137058
Standard Error
0.12796216
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

Beta
Adjusted Beta

1
58
59

SS
MS
F
Significance F
0.433118078 0.433118 26.45107
3.3391E-06
0.949710198 0.016374
1.382828276

Coefficients Standard Error t Stat

P-value
-0.0239012
0.016840485 -1.41927 0.161172
1.83564343
0.356916579 5.14306 3.34E-06

1.84
1.56

Appendix D: Cost of Debt - FINRA

Present value fo debt-free cash flow

Discount period
Discount factor

EBIT
EBIT margin
Less: Taxes
Debt-free earnings
Less: capital expenditures
Less: increase in NWC
Plus: depreciation and amortization
FCF

Net sales
Net sales growth
EBITDA

DCF Model: JCP

($ in million)

832.00
4.68%
203.00
629.00
(485.00)
(316.00)
511.00
339.00

(2.00)
-0.01%
(77.00)
75.00
(619.00)
141.00
518.00
115.00

6,262.34

(1,310.00)
-10.09%
(551.00)
(759.00)
(284.00)
748.00
543.00
248.00

Historical (FY Ending)

2010A
2011A
2012A
17,759.00 17,260.00 12,985.00
-2.81% -24.77%
1,343.00
516.00
(767.00)

(2,547.79)

0.17
0.99

(1,764.01)
-14.30%
(176.40)
(1,587.61)
(1,000.00)
(565.00)
575.58
(2,577.03)

2013E
12,335.75
-5.00%
(1,188.43)

(348.66)

1.17
0.92

(678.47)
-5.00%
(135.69)
(542.77)
(300.00)
(145.00)
610.11
(377.66)

2014E
13,569.33
10.00%
(68.35)

306.79

2.17
0.86

(455.93)
-3.00%
(136.78)
(319.15)
(200.00)
275.00
600.00
355.85

2015E
15,197.64
12.00%
144.07

851.40

3.17
0.81

346.51
2.00%
103.95
242.55
(100.00)
315.00
600.00
1,057.55

2016E
17,325.31
14.00%
946.51

1,249.93

4.17
0.75

896.59
4.50%
268.98
627.61
(100.00)
535.00
600.00
1,662.61

2017E
19,924.11
15.00%
1,496.59

PV of terminal value

Discount period
Discount factor

Terminal Value
2017 EBITDA
Terminal multiple
Terminal value

DCF Assumptions
Discount rate
Terminal multiple
Valuation Date
Tax rate

6,750.68

4.17
0.75

1,496.59
6.0x
8,979.51

7.09%
6.0x
10/31/2013
36%

Appendix E: DCF Model

-382
-25
278
36
13
-80

900
-5
-200
50
-180
565

2008

2013E

JCP
Inventory
Prepaid Expenses and Other
- Account Payable
- Current Income Tax
- Accrued Expenses and Other
Increase in NWC

JCP
Inventory
Prepaid Expenses and Other
- Account Payable
- Current Income Tax
- Accrued Expenses and Other
Increase in NWC

2014E

2009

300
-5
-100
0
-50
145

-235
-36
-32
57
-142
-388
2015E

2010

-200
-5
0
-50
-20
-275

189
-27
93
-33
81
303
2016E

2011

-300
-5
50
-100
40
-315

-297
67
111
15
-37
-141
2017E

2012

-500
-5
100
-150
20
-535

-575
5
-140
-117
79
-748

Appendix F: NWC Historical Data and Estimation

Appendix G: Historical Income Statement 2007-2013

S&P Capital IQ

Appendix H: Historical Balance Sheet 2007-2013

S&P Capital IQ

Appendix I: Historical Statement of Cash Flow 2007-2013

S&P Capital IQ