J. C. Penney Company Inc.

Group A+
Badr
Yun Zhou
Pei Zhang
1. Introduction
In 1902, JCPenney was first opened in Kemmerer,Wyoming by James Cash Penney. Ten
years later the company was launched to public and was the first to provide middle class
family needs in one place. The idea of Penney is to bring middle income families to one
place where they can find discounted clothing, electronics, footwear, furniture, and
housewares as the company continued acquiring other firms and providing new
merchandises along these years.

During the 1960s and 1970s Penney had faced a remarkable growth and success as it
operated more than 1600 stores in 50 states including Alaska and Hawaii. Moreover, the
company kept expanding and adding more merchandise such as auto centers, garden
merchandises and beauty salons. In 1971 James died at the age of 95 and in the same year
the company reaches its first 5 billion in revenue.

Since 1980 and for two decades the company has noticed that it was operating more that
it should which was reflected by its actions toward automotive and hardware department.
Penney sold its automotive repair shops to firestone. During the same era Penney has
started its online stores through Viewtron Vediotex Services. Furthermore, In 1984
JCPenney acquired the First National Bank and called it JCPenney National Bank, which
gave the company the advantage to issue its own VISA cards and MasterCard. Following
its unique strategy into being first mover toward decisions JCPenney has begun it TV
Shopping channel in 1989. By the year 1998 Penney has become biggest retailer in the
Catalog industry and expanded its drug stores after acquiring Fay’s Drug and Kerr Drug.
In addition, Penney started its Internet store, which has grown into the largest apparel and
furnishing retail site on the Internet. Through all these years Penney stores consisted of
three levels averaging 261,500 square feet.

By the year 1998 JCPenney closed 44 underperforming stores and started its one level
stores consisting of 94,000 Square Feet. This did not prevent the company from being
successful and continuing its growth in the industry. Recently after celebrating its 100
years as a retailer, the company has sold their direct marketing insurance unit to Dutch
insurer, which will allow them to focus on the retail business. During 2002 and 2009 the
company let go some of its businesses such as Eckerd, which was an acquired thrift Drug.
Moreover, the company lunched new public website in 2007 which covers the company’s
private and exclusive brands. The company also added some more sections and selection
brands for young adults, men’s apparel, and woman’s apparel.

Old Mission Statement By James Cash Penney when he opened his first store was "Do
unto others as you would have others do unto you". While, new Mission Statement is
"Work and win together to achieve superior performance”.
JCPenney Core Competence is to retail private and exclusive brands at daily discounts
affordable prices to satisfy consumers’ needs.

Explaining JCPenney’s Core Competence gives us an idea about some of the issues the
company is dealing with the past 3 years. Since the beginning of 2011 after the great
recession, the company has been recording a decline in sales and stock prices. A multi
billion company lost almost one billion in 3 years. Yet the retailing industry is at growth
and companies such as sears, Kohl’s, Wal-Mart are reporting an increase in their
revenues. JCPenney’s Board of directors decided to use Ron Johnson, a former Apple’s
retail chief who led retail’s efforts for almost a decade at Apple using innovation and
creativity. Mr. Johnson started with changing JCPenney’s core competence and mission
by cutting of daily discount coupons and starting stores within store strategy.

Furthermore, he wanted consumers to shop at their most comfortable zone inside

JCPenney where they can find hair salons, nail shops, and beauty salons as well. He was
targeting also a new demographic of upper middle class which will take years to establish
this base of customers. In addition, he changed the logo and advertised that JCPenney is
welcoming new customers. In order to steer J.C. Penney away from its image as a
discounter, believed that Johnson the department-store chain needed to offer consumers
more upscale products rather than the company’s traditional private labels.

For 18 months the company has lost almost another 1 billion because of the new
spending strategy and Mr. Johnson’s vision, which is to imitate Apple’s innovation and
creativity. He also ended prices with (00) instead of (99) which psychologically have
been proven that consumers accept $9.99 more than $10.00. He came up with the idea of
unique boutiques within each J.C. Penney—the store-within-a-store concept. He focused
more on the more affluent. He also tried to play the game theory with customers where
new merchandises start with a certain price and drops down after 6 weeks, which is costly
for JCPenney. JCPenney is known of its fast floor merchandises change, which they
come already discounted and start selling until the entire floor change with the new
designs. This strategy was also be killed by Johnson. He tried to deal with department
stores’ biggest problem, promotional pricing, or what we often call high-low pricing. But
the depths of the recession made this everyday-low-prices strategy difficult to carry out.
The result of 2012 operations was a 25 percent plunge in revenues, a 50 percent decline
in stock price, and a 13 percent drop in customer traffic.

April, 8, 2013 JCPenney’s Boarder of Directors fired him and hired the former CEO Mr.
Myron Ullman and he said at his first interview “ the right direction may be… reverse”
and explained that time has changed but most of JCPenney’s values are providing the
best deals to consumers who are loyal and know what to expect from JCPenney.
Now, the in-house design team has grown from 50 specialists to a team of 200
sophisticated technical and talented designers. They are designing power brands that
include Arizona, Ambrielle, a.n.a., Worthington, St. John’s Bay, Stafford, Okay Dokey,
JCP Home, Royal Velvet, Studio and many more.
Rajiv Lal a marketing expert at Harvard Business school was interviewed to explain what
went wrong with JCPenney and he Said: “No matter what, someone has to articulate a
new and improved strategy, but right now, amid all the distractions, that isn't happening.
That is very bad news for a once significant retailer and the thousands of men and women
who work there.”

Mr. Lal has explained some of the factors that have happened during Johnson were trying
to make JCPenney the next Apple by making it different, innovative and creative.
Johnson has started store within store concept and started high-low pricing strategy.
High-low pricing strategy did JCPenney no good. In fact, Penney’s customers are looking
for discounted prices and coupon. When this game is played and for six weeks they may
not find a satisfying price, they will go to the other competitors such as Sears, Kohl’s...etc.
But actually the Board has made its mistake again. Bringing back the old CEO, Myron
Ullman, has deepened JP Penney’s lock-in to that old, traditional and uncompetitive
brick-and-mortar strategy. He intends to return to JCP’s legacy, buy more newspaper
coupons, and keep doing more of the same, while hoping for a better outcome.

J.C. Penney's gross margin began to fall even before Ron Johnson took over in November
of 2011, most of the way through fiscal 2012. Johnson brought in new brands and
switched to an "everyday value" strategy, alienating customers and sending sales
plummeting by nearly 25% during his first and only full year. Gross margin fell as well,
and even after Johnson was replaced, the unwanted merchandise continued to drive down
to this number.

In fiscal 2014, the gross margin fell below 30%, about ten percentage points below its
2011 peak. Macy's has surpassed 40% in each of the past five years, and the more
discount-orientated Kohl's has stayed above 35%. J.C.Penney guided for a significant
improvement in the gross margin for the current year, but the next chart shows why even
getting back to historical levels doesn't solve the problem.

As J.C. Penney's revenue has collapsed, the company has attempted to slash operating
costs in order to compensate. But without significant store closings, there is a limit to
how low costs can go before the customer experience begins to suffer. During the past
two years, J.C. Penney's operating expenses have reached an unsustainable level. Back in
2010, both J.C. Penney and Macy's spent about 35% of revenue on operating expenses.
The two companies began to diverge even before Ron Johnson took the helm, with
Macy's becoming more efficient each and every year. By fiscal 2014, Macy's had cut
operating expense to just 30.2% of revenue, down from 36% in fiscal 2010. Macy's has
even started to rival the efficiency of Kohl's, closing the gap significantly over the past
few years.

J.C. Penney went the other way, with lower revenue driving this number above 40%.
With the gross margin lower than 30%, and the best-case scenario being that the
company brings this number back up to around 40%, even if everything goes right for J.C.
Penney, a loss is still essentially inevitable. Add in the nearly $400 million in annual
interest payments, the result of ballooning debt, and it's clear that J.C. Penney will not be
profitable any time soon.

J.C. Penney's cost structure is not sustainable given its revenue, and the company is in a
race against time. It needs to grow revenue fast enough to bring its operating costs as a
percentage of revenue back to historical levels, while at the same time increasing its gross
margin by ten percentage points, all before the company's liquidity runs dry.
JCPenney operates in a highly competitive industry that includes significant promotional
activity, which could adversely impact its sales and profitability. Many factors enter into
the competition for the consumer’s patronage, including price, quality, style, service,
product mix, convenience and credit availability.

The retail industry is highly competitive, with few barriers to entry. JCPenney competes
with many other local, regional and national retailers (such as Macy’s, Kohl’s, Dillard’s
and Target) for customers, employees, locations, merchandise, services and other
important aspects of our business. Many factors enter into the competition for the
consumer’s patronage, including price, quality, style, service, product mix, convenience
and credit availability. Those competitors include other department stores, discounters,
home furnishing stores, specialty retailers, wholesale clubs, direct-to consumer
businesses, including the Internet, and other forms of retail commerce. Some competitors
are larger than jcpenney, and/or have greater financial resources available to them, and,
as a result, may be able to devote greater resources to sourcing, promoting and selling
their products. Competition is characterized by many factors, including merchandise
assortment, advertising, price, quality, service, location, reputation and credit availability.
The performance of competitors as well as changes in their pricing and promotional
policies, marketing activities, new store openings, launches of Internet websites, brand
launches and other merchandise and operational strategies could cause JCPenney to have
lower sales, lower gross margin and/or higher operating expenses such as marketing costs
and other selling, general and administrative expenses, which in turn could have an
adverse impact on our profitability.

The problem of changing the new CEO with the wrong strategy-- the old CEO, Myron
Ullman, has deepened JP Penney’s lock-in to that old, traditional and uncompetitive
brick-and-mortar strategy. He intends to return to JCP’s legacy, buy more newspaper
coupons, and keep doing more of the same.

That newspaper coupons, circulars and traditional advertising is not enough to compete
with on-line merchants, which have lower fixed costs, faster inventory turns and wider
product selection.

Close to three years ago, J.C. Penney changed strategy, and tried to move to the high-end
of the market. They refurbished stores, and did away with coupon discounts.

These are stressful times for JCPenney. Business right now is weaker than expected at the
beginning of the year. There are several reasons for the sluggishness. Although it feels
like a lame excuse to blame the weather, the fact is it was a very cold and icy winter. The
consumer just hunkered down at home and retailers felt the reduced demand as a result.
Of course Internet shopping can fill a void when consumers don’t want to leave their
homes, but the impulse purchases that happen when consumers visit stores are reduced.
Critical Facts
• J.C. Penney offices in Salt Lake City, Utah On January 24, 2011, JCPenney
announced it would exit the catalog business and close all 19 of its catalog outlet
stores. An additional seven stores, two call center facilities, and one customer
decorating facility would also be closed. One of the JCPenney Outlet Stores that
closed, at Franklin Mills Mall, in Philadelphia, PA, was replaced on March 2,
2012 by a regular JCPenney store.

• In June 2011, JCPenney announced that Ron Johnson would become the
company's new CEO.

• In October 2011, JCPenney sold the 15 remaining catalog outlet stores to SB

Capital Group. These stores will remain open then transition to JC's 5 Star Outlets.

• On December 7, 2011, JCPenney announced the acquisition of 16.6 percent of

Martha Stewart Living Omnimedia stock. JCPenney plans to put "mini-Martha
Stewart shops" in many of its stores in 2013, as well as starting a website together.

• In January 2012, the company's chief operating office at the time, Michael
Kramer, revealed to the Wall Street Journal that more than 30 percent of the
bandwidth of JCPenney's headquarters was used for the viewing of YouTube
videos during that month alone. Kramer consequently terminated the tenures of
1600 employees to change the company's workplace culture.

• On February 1, 2012, JCPenney began a new pricing method, with "Every Day"
prices on most days reflecting what used to be sale prices, "Monthly Value" for
certain items every month in place of sales, and "Best Price" the first and third
Fridays of each month, tied to paydays. Prices would also not end in 9 or 7,
instead using whole figures when pricing items. The changes in the stores include
a focus on the mini-stores such as those for Martha Stewart products.

• In April 2012, the company announced plans to trim its workforce, laying off
nearly 13% of its home office staff in Dallas, and closing a call center in
Pittsburgh. Many managers, supervisors and long-time employees were let go on
April 30, 2012, due to "simplified practices" that no longer needed as much
oversight.

• In June 2012, the company announced that Michael Francis, the company's
president, was leaving the company, after only eight months on the job, effective
immediately. In July 2012, the company announced that it was laying off 350
more workers at its headquarters.

• In August 2012, JCPenney began rolling out a Shops strategy in stores. The shops
are described as stores-within-a-store, planning to eventually roll out 100 shops in
 683 stores. That month, the company posted a second quarter comparable-store
loss of 22%, with Internet sales dropping 33%. At an analyst meeting in New
York the same day, Johnson said, "I’m completely convinced that our
transformation is on track." JCPenney's stock rose 5.9% on Johnson's comments
at the analyst meeting, the largest single-day stock increase since late January
2012. The "secret" prototype store is located on the 3rd floor of the store at Valley
View Center in Dallas, which has been closed to the public.

• Fourth quarter sales for JCPenney, in 2012, were poor. Sales were off 28.4% from
a year earlier, same store sales were down 32%. Strategic choices made by
Johnson a year earlier, including the change in pricing strategy, were being called
into question.

• It was announced in April 2012 that Nickelson Wooster would become the
creative director for JCPenney menswear. Wooster stated in an interview with
Esquire magazine that his influence on the brand would begin with spring
menswear available as of February 2013.

• On April 8, 2013, Johnson was fired from JCPenney after 17 months with the
company. Mike Ullman, the retailer's former CEO, was announced as his
replacement shortly afterwards—the official statement claimed that Ullman was
“well-positioned to quickly analyze the situation JCPenney faces and take steps to
improve the company’s performance.”

• In August 2013, William A. Ackman, of Pershing Square Capital Management,

continued his efforts to remove Thomas Engibous, the company's Chairman of the
Board of Directors. However, Ackman resigned from the board on August 12,
2013 and two new directors were subsequently appointed to the board, one of who
is former Macy's vice chairman Ronald Tysoe.

• On September 26, 2013, JCPenney, with Goldman Sachs as the sole underwriter,
announced plans to issue 84 million shares of its stock. The move stood in
contrast with CEO Myron Ullman's remarks from earlier that day, whereby he did
not foresee "conditions for the rest of the year that would warrant raising
liquidity."

• During a November 2013 conference call to Wall Street analysts, Ullman

announced that JCP is "restoring initial markups necessary to support the return to
a promotional department store strategy" with "gross margins, currently 29.5
percent of sales versus 32.5 percent a year ago, were lower due to the impact of
clearance sales to eliminate inventory overhang and to transition back to the
promotional pricing strategy the company is known for”. Ullman is removing the
radio frequency identification technology and returning to security tags because
shrinkage has "added 100 basis points on margins in the third quarter”. Various
analysts have mixed reviews of JCP's future.
• On December 1, 2013, J.C. Penney was replaced by Allegion in the S&P 500
Index. S&P cited J.C Penney's 37% fall in market value to $2.7 billion was "more
representative of the mid-cap market." J.C. Penney replaced Aéropostale from the
S&P MidCap 400 Index.

• In the later parts of 2013, Soros Fund Management sold away over 19 million
shares… after only owning them for a few months, originally purchasing them in
April 2013.

• On January 15, 2014, J.C. Penney announced it is closing 33 underperforming

stores and laying off 2,000 employees. CEO Myron Ullman explained in a news
release, “As we continue to progress toward long-term profitable growth, it is
necessary to reexamine the financial performance of our store portfolio and adjust
our national footprint accordingly.”

• Meanwhile, J.C. Penney's stock has plummeted throughout 2014.

2. Problem Statement
The new CEO (Johnson) ’s strategy to redesign the company cost JCPenney a lot.
Meanwhile, the improper strategy lead JCPenney to lose its core competence (low price)
and make the sales even worse.

3. Alternatives
1) Accelerate online sales such as one month ten-dollar-sale to increase the page
view thus increase the daily sales.
We should target to grow JCPenney’s online sales, stealing revenues from other
traditional retailers, while making the company more of a hybrid retailer that
profitably meet customers’ needs in stores, or online.

2) Increase coupons and broadening the discount.

This method may attract more customers, but is very costly to the company. If the
increase in sales fails to match the cost, it will be in vain.

3) Use social media to advertise coupons such as twitter, Facebook to get to

customer faster and cheaper.
It can have a great number of potential customers be involved. Also, proper
advertising can largely increase the market awareness. But if target customers are
not so interest in these social media, we may pay the high advertising fee for
nothing.

4) Keep the penetration strategy as well as the core customers base.

Carry out low price strategy again to penetrate into the middle-class market. By
doing so, the original customer will come back. Also, this method will attract new
customers to cultivate their loyalty to JCPenney.
Change the pricing strategy may make customer confused, or even make them
loose trust on the company.

5) Close some underperforming stores and jobs to cut down the costs.
J.C. Penney owns more than 400 of its 1,100 stores. About 550 of the 1,100 stores
are in shopping malls. In the malls, J.C. Penney generates something like $150 a
square foot in sales. Off malls, in its newer stores, the company has generated as
much as $250 per square foot, Ullman says. That’s why many analysts have
 suggested that the company should shed more stores, possibly selling the real
estate and pocketing the cash to fund new-store growth.
But it is costly to start the new-store and there is no guarantee for the dramatically
increase in the sales on new stores.

6) Adjust the sales according to Sears performance and try to steal the Sears
customers
The best strategy that J.C. Penney could pursue was to go after the Sears customer,
who is on the whole dissatisfied. The two chains have the same demographics and
similar merchandise. If Penney can steal the Sears customer, then at least in the
short run that might be a way to grow the business.
It is hard to predict the Sears action and the adjustments may not so effective to
attract their customers. Also, it may involve business secrets and illegal issues.

7) Cut the operating cost

Because the CEO—Johnson spent a large amount of money on advertising,
decorating exquisite shops and so on. By decreasing these fees, JCPenney can
earn more net income.
However, it is a tough task. Experts need to control the cost seriously.

8) Strengthen its private brands.

The in-house design team has grown from 50 specialists to a team of 200
sophisticated technical and talented designers. They are designing powerful
brands that include Arizona, Ambrielle, a.n.a., Worthington, St. John’s Bay,
Stafford, Okay Dokey, JCP Home, Royal Velvet, Studio and etc.
The private brands need a lot of money in new designing and it is time-consuming
to change the style in the stores.

4. Recommendation
• Keep the penetration strategy----low price
• Accelerate online sales.
• Use social media to get to customer.
• Cutthe operating cost
Keeping the penetration strategy is to regain the original customers base .Besides, by
accelerating online sales and using social media to get to customer, JCPenney’s net
 sales will boost. Also, if the cost can be controlled well, the net income will become
better.

5. Pro-forma statements
1. The first table is the financial statement from 2011 to 2013. If JCPenney can do as our
recommendations, we can immagine that the situation will be changed. we keep other
factors the same as the year 2013, but to increase total net sales by 3% in year 2014, and
decline the selling, general and administrative (SG&A) by 4%. Also, increase the net
sales by 9% and decrease the SG&A by 2% in the next two years. The second table
indicates our pro-forma. (In million)

2011 2012 2013

Total net sales $ 17,260 $ 12,985 $ 11,857
Cost of goods sold 11,042 8,919 8,367
Gross margin 6,218 4,066 3,492
Operating expense/(income):
SG & A 5,109 4,506 4,114
Other operating expense 1,111 870 798
Operating expense/(income) 6,220 5,376 4,912
Other income/(loss) 150 (325) (32)
Net income/(loss) $ (152) $ (985) $ (1,388)
(Table 1)

2014 2015 2016

Total net sales $ 12,213 $ 13,312 $ 14,510
Cost of goods sold 8,367 8,367 8,367
Gross margin 3,846 4,945 6,143
Operating expense/(income):
SG & A 3949 3,870 3,792
Other operating expense 798 798 798
Operating expense/(income) 4,747 4,668 4,590
Other income/(loss) (32) (32) (32)
Net income/(loss) $ (869) $ 309 $ 1,585

All in all, the total net sales increases from $ 11,857 million to $ 14,510 million, about 25%
percent increase in three years. Also, the net income enjoys 11.4 times increase from -152
million to $ 1,585 million.
2. The third table is the balance sheet from 2011 to 2013, by increasing sales and
decreasing expense, the balance sheet will also changed (as table 4).

2011 2012 2013

Assets 11,424 9,781 11,801
Liability 7,414 6,610 8,714
Equity 4,010 3,171 3,087
(Table 3)

2014 2015 2016

Assets 12,161 14,994 17,393
Liability 7,124 8,865 9,600
Equity 5,037 6,129 7,793
(Table 4)
In conclusion, the total assets rises from $11,801 million to $ 17,393 million in three
years, about 47.4% increase.
6. Conclusion
JCPenney is in the retail industry, which is highly competitive, with few barriers to entry.
We compete with many other local, regional and national retailers for customers,
employees, locations, merchandise, services and other important aspects of our business.
Those competitors include other department stores, discounters, home furnishing stores,
specialty retailers, wholesale clubs, direct-to-consumer businesses, including those on the
Internet, and other forms of retail commerce. The annual earnings and cash flows depend
to a great extent on the results of operations for the last quarter of our fiscal year, which
includes the holiday season. Our fiscal fourth-quarter results may fluctuate significantly,
based on many factors, including holiday spending patterns and weather conditions. This
seasonality causes our operating results to vary considerably from quarter to quarter.
According to these features, it is normal the sales are not so good. Before 2011, the sales
decreases a little bit mainly because the total economic recession.

But the board changed the CEO In June 2011. The new CEO Ron Johnson used a wrong
strategy that try to change its core competence—low price and want to build a new image
of JCPenney, which made it more focus on middle class. Actually, due to the economic
recession, the middle class people diminished. Therefore, even though Mr. Johnson cost a
huge number of money in changing the logo and in advertising, JCPenney continued to
lose more money than before. In order to steer J.C. Penney away from its image as a
discounter, believed that Johnson the department-store chain needed to offer consumers
more upscale products rather than the company’s traditional private labels, which made
the situation worse.

The board of director finally found the serious situation last year and hired Mike Ullman,
the retailer's former CEO back to company. However, the nearly two years mistakes
made JCPenney left behind to its competitors. Therefore, some former strategies may not
so effectively to attract customers from traditional retailers and especially hard to
compete with online retailer because of their low cost and lower price products.

Fortunately, there are still some ways to help the company out. Our recommendations are
try to follow the market trend by accelerate its online sales and use some fashionable
social media to enlarge our customers and give them a better environment for shopping
and communicating. Another important part is stick to our private brands to differentiate
our products with others. We need to take good advantage of this. Our loyal customers
are willing to pay for those low price and good quality products under our private brand.

All in all, we still have a promising future.