JC Penney Case

Group 2- Valerie Steppel, Mallory Krah, Shana Moore, Dean Bartins, Xavier Engle,
Brandon Naretto
Cases in Finance
J. C. Penney Company
Introduction
JC Penney is facing a serious liquidity issue. At the end of its 2012 4th quarter,
its capital structure showed to be in danger when compared to the structure of
relative competitors. The company’s cash balance finished at $930 million for the
2012 year end, significantly down from the previous two years. This is not enough
considering credible analysts had predicted the company would need no less than
$1 billion to operate efficiently. Fiscal year 2013 is expected to yield a net loss of
$1.5bil. This capital deficit leads management to decide whether they should issue
debt or equity to finance the additional funds needed to operate.
Analysis
JC Penney's current ratio is seemingly healthy at first glance. With 1 being the lowest
benchmark for a healthy company, JCP's lowest current ratio was 1.432, which is optimistic .
However, upon further investigation of the quick ratio, a measure of the short term liquidity of
a firm, JCP’s inability to carry cash is exposed. From Q1 2011 through Q4 2012, JCP had a mostly
downward trending quick ratio which already started at a poor .6818. See Exhibit 5 for charts to
detail this downward trend. This analysis shows that JCP is extremely inefficient in ridding of
their inventory and is facing liquidity issues deep below the surface level.
The leverage ratios reveal an increasingly weak financial position over the
last eight quarters. JCP began with a debt-to-capital ratio of 39.5% in Q1 2011 and
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Brandon Naretto
Cases in Finance
ended Q4 2012 with at 48.5%. The interest coverage ratios are also alarming for
JCP, as a healthy company should have a ratio at 1.5 or above. They began Q1
2011 with a ratio of 2.8 and ended Q4 2012 with a ratio of -13.1. Finally, the cash-
to-debt ratio decreased significantly over each quarter, starting at 5.2% in Q1 2011
and ending at -24.9% in Q4 2012. Based on these ratios, JCP’s financial position is
unfavorable and past the point of no return. Their debt is growing and capital
shrinking. Limited cash flows are forcing missed interest payments on debt and an
inability to pay down any debt balances significantly.
Over the past eight quarters the company has managed its working capital
accounts well. Supporting this statement is the fact that each quarter they have
positive Net Working Capital (NWC). This is, along with the change between
quarters can be found in Exhibit 5. While JCP has a positive NWC, they do show a
substantial decline from period to period. At this current pace, JCP will soon have
negative NWC, which leads to trouble maintaining cash flow and the ability to
satisfy debts. There are a few solutions that could help JCP generate the necessary
cash flow. One potential solution is to rely on JCP’s credit revolver, which has the full
$1.5bil available. Another solution could be accessing the debt market or the equity
market. This solution will probably not be all that successful because issuing the
kind of debt the company needs will carry a non-investment-grade credit rating and
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Cases in Finance
the company would need to issue more stock than they could have years prior
since share price has already dropped significantly. Lastly, the company could
tighten their cash flow by stretching payables and reducing inventories.
Exhibit 3 depicts the fund statement that estimates JCP will need external
funding of $1.117bil in additional capital by year-end 2013 to satisfy the $1bil cash
balance requirement. In order to seek permanent financing, JCP should issue
equity. Issuing debt would be very unlikely due to their non investment grade credit
rating. Moody’s, one of the largest credit rating agencies, gave JCP’s a rating of Ba3,
which shows substantial credit risk. Also, with the 6% coupon rate the company
would have a difficult time making the coupon payments with limited cash inflow.
In order to receive $1.117 bil, 56 million additional shares will be issued at the
current market price $19.80. The par value of each share is 50 cents, so with the
additional 56 million shares, $28 mil will be added to the common stock and the
remaining to capital surplus in 2013.
Conclusion
Bill Ackman impacted both the stock price and the future of the company
from his active role as a shareholder. Bill’s decisions for the company changed the
stock price of JC Penny. When he managed to get Ron Johnson (from Apple) to be
the new CEO which rallied the stock price up around 17%. Although the stock price
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Cases in Finance
increased from Ackman’s optimism the same cannot be said for the company's
performance while Ron Johnson was CEO. Bill did however have the shareholders
interest in mind. He attempted to get someone in the CEO position to try and turn
the company around. He tried to the best of his ability to create change in a better
direction that would benefit him as well as all of the other shareholders. In the
end, Ron Johnson was not the right choice for JCPenney. He was not able to turn
around the company and create profit. His implementation of an expensive
management team seems like just a waste of money as there was no upside to the
management Ron brough on. In addition to the management team, he also had a
flopped business plan to get rid of promotions. Ron thought that getting rid of
promotions and having everyday regular prices would attract more customers. This
business plan failed considering that if a competitor would lower their prices JCP
would have no leverage on customers for special sales of their own resulting in a
loss of customers to competitors. In defense of Ron he was put in a tough situation
in a company that was on the decline and there may have been no good candidate
to truly turn around JCPenny, they may be too far gone to bring back their customer
base and profits no matter who the CEO is.
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Brandon Naretto
Cases in Finance
What do the liquidity ratios-current, quick, and cash-to-sales –reveal about JCP’s
financial position for the eight quarters spanning Q1 2011 to Q4 2012? (Sales has
shrunk from $32.3 billion to $12 billion in 2014.)
JC Penney's current ratio is seemingly healthy at first glance. The current ratio encompasses all
of the firm's current assets against their current liabilities and is a measure of how a firm can
pay off their short term liabilities. With 1 being the benchmark for a considerably healthy
company, JC Penney's lowest current ratio was 1.432, which is typically respectable. However,
upon further investigation with the quick ratio, a measure of the short term liquidity abilities of
a firm, the details here paint a different picture about the efficiency of JC Penney's ability to
have actual cash. This tells any observer how well the firm can pay off it's liabilities before
having to explore other financial avenues. From Q1 2011 through Q4 2012, JC Penney had a
mostly downward trending quick ratio which already started at a poor .6818. This ultimately
means that JC Penney is extremely inefficient in ridding of their inventory.
● What do the leverage ratios – debt-to-capital, interest coverage, and cash-

to- debt reveal about JCP’s financial position for the eight quarters spanning
Q1 2011 to Q4 2012?
The leverage ratios reveal an increasingly weak financial position over the
eight quarters from Q1 2011 to Q4 2012. They began with a debt-to-capital
ratio of 39.5% in Q1 2011 and ended Q4 2012 with at 48.5%. The interest
coverage ratios were also not looking good for JC Penney, as a healthy
company should have a ratio at 1.5 or above. They began Q1 2011 with a
ratio of 2.8 and ended Q4 2012 with a ratio of -13.1. Finally, the cash-to-debt
ratio decreased significantly over each quarter, starting at 5.2% in Q1 2011
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Brandon Naretto
Cases in Finance
and ending at -24.9% in Q4 2012. Based on these ratios, JC Penney’s financial
position was unfavorable and past the point of no return. Their debt is
growing and capital shrinking, they are showing that they aren’t able to make
interest payments on debt, and their cash flows have significantly decreased
which has lead to them to not being able to pay back their increasing debts.
● Shana- How has JCP managed its working capital accounts over the past
eight quarters?(Exhibit 5) Is there an opportunity to squeeze more cash from
any of these accounts? (Solution 1: Tighten cash flow by stretching payables
and reducing inventories)
Over the past eight quarters the company has managed its working capital
accounts well. Supporting this statement is the fact that each quarter they
have positive NWC. A positive NWC indicates a company has sufficient
funds to meet its current financial obligations and invest in other activities.
The higher a company’s NWC is the better. This can be seen as a sign of a
well- managed company with the potential for growth. While JC Penney has a
positive NWC, they do show substantial decline from year to year. This
indicates that soon JC Penney will have negative NWC and this will mean the
company is in trouble maintaining cash flow and being able to satisfy debts.
Solution 1: Tighten cash flow by stretching payables and reducing inventories
Solution 2: Rely on JC Penney’s credit facility which has $1.5 billion of
available credit
Solution 3: Access the debt market or the equity market
● Assume that JCP experience a $1.5 billion net income loss for 2013 and a
cash balance of $1.0 billion is required for JCP to operate efficiently.
Create pro forma sources and uses of fund statement to estimate JCP’s
external funding required by year-end 2013. Be prepared to recommend
whether the debt or equity issuance is a better choice as the source of
external funding. How will the stock price react to the announcement of a
debt offering or an equity issuance? (JCP has a $1.5 billion revolver, which is
only good as a short term credit source of funds. So, for a longer
term/permanent financing, they could access either the debt or the equity
market.)
What effect did Bill Ackman have on the company? Were his interests
●
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Cases in Finance
appropriately aligned with those of the shareholders? How do you assess the
board’s decisions regarding CEO appointments? Was Ron Johnson the right
choice as the CEO?
Bill Ackman impacted both the stock price and the future of the
company from his active role as a shareholder. Bill’s decisions for the
company changed the stock price of JC Penny. When he managed to
get Ron to be the new CEO which rallied the stock price up around
17%. Although the stock price increased from Ackman’s optimism the
same cannot be said for the company's performance while Ron
Johnson was CEO.
Bill Ackman did have the shareholders interest in mind (which includes
himself) when exercising his controlling interest on JC Penny. He attempted
to get someone in the CEO position to try and turn the company around. His
investment style is an active investor who tries to pressure management into
making decisions he believes will benefit shareholders. His past active
investments included Wendy’s, Target, and Barnes and Noble. He saw JC
Penny as having the most potential out of his whole portfolio. With that
being said he tried to the best of his ability to create change in a better
direction that would benefit him as well as all of the other shareholders.
· Asses Board’ decisions regarding CEO appointments
i. High CEO turnover
ii. CEO appointments had a negative affect on the company
as none of the CEOs could really turn around the company
iii. Quickly cycling through CEOs did not allow any continuity
of business decisions
iv. High CEO turnover is unsettling for investors
v. Not good for shareholders
vi. The board of JC Penny seemed desperate as they cycled through
CEOs in a short time frame. They tried to rush from CEO to CEO
to try and find one that fits. All of this change created a lot of
uncertainty for the fate of JC Penny and worried shareholders.
· In the end, Ron Johnson was not the right choice for JCPenney. He was
not able to turn around the company and create profit. His
implementation of
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Brandon Naretto
Cases in Finance
an expensive management team seems like just a waste of money as there
was no upside to the management Ron brough on. In addition to the
management team, he also had a flopped business plan to get rid of
promotions. Ron thought that getting rid of promotions and having everyday
regular prices would attract more customers. This business plan failed
considering that if a competitor would lower their prices JCP would have no
leverage on customers for special sales of their own resulting in a loss of
customers to competitors. In defense of Ron he was put in a tough situation
in a company that was on the decline and there may have been no good
candidate to truly turn around JCPenny, they may be too far gone to bring
back their customer base and profits no matter who the CEO is.
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Group 2- Valerie Steppel, Mallory Krah, Shana Moore, Dean Bartins, Xavier Engle,

its capital structure showed to be in danger when compared to the structure of

debt or equity to finance the additional funds needed to operate.

inability to pay down any debt balances significantly.

tighten their cash flow by stretching payables and reducing inventories.

balance requirement. In order to seek permanent financing, JCP should issue

remaining to capital surplus in 2013.

around the company and create profit. His implementation of an expensive

loss of customers to competitors. In defense of Ron he was put in a tough situation

base and profits no matter who the CEO is.

● What do the leverage ratios – debt-to-capital, interest coverage, and cash-

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