Management Analysis of JCPenney One of America's iconic department store fixtures is J.C. Penney which has provided American consumers with a wide range of family clothing and other merchandise for more than a century. In recent years, though, JCPenney has been experiencing some difficult times as its core market continues to be eroded by competitors and an aging business model. This paper provides a review of the relevant literature to develop a description and history of the company, its recent financial performance and to identify some of the managerial decisions that were made in response to changes in its market or competitive environment by JCPenney in recent years. A summary of the research and important findings concerning these issues are presented in the conclusion.

Description and History of the Company

According to JCPenney's promotional literature, "More than a century ago, James Cash Penney founded his company on the principle of the Golden Rule: treat others the way you'd like to be treated -- Fair and Square. His legacy continues to this day, as J.C. Penney Company, Inc. boldly transforms the retail experience across 1,100 stores and jcp.com to become America's favorite store" (About us, 2013, para. 1). In fact, JCPenney has been a long-time dedicated partner with American communities. In this regard, a former JCPenney Chairman, W.R. Howell (1999) emphasized that, "This philosophy was established with James Cash Penney's first store, aptly -- and purposely -- named The Golden Rule. The Penney Idea, established with the emporium named for its founder, was set in 1913" (p. 26). The "Golden Rule" historically followed by JCPenney is as follows:

To serve the public as nearly as we can to its complete satisfaction;

To expect for the services we render a fair remuneration, and not all the profit the traffic will bear;

To do all in our power to pack the customer's dollar full of value, quality and satisfaction;

To continue to train ourselves and our associates so that the service we give will be more and more intelligently performed;

To improve constantly the human factor in our business;

To reward men and women in our organization through participation in what the business produces; and,

To test our every policy method and act in this wise: 'Does it square with what is right and just?' (Howell, 1999, p. 26).

Today, through its subsidiary, J.C. Penney Corporation, Inc., J.C. Penney Company, Inc. (hereinafter alternatively "the company") sells a wide range of merchandise from a chain of department stores (Company profile, 2013). The company sells family apparel and footwear, accessories, beauty products, fine and fashion jewelry, and various home furnishings (Company profile, 2013). In addition, the company provides various services, such as styling salon, optical, portrait photography, and custom decorating (Company profile, 2013). As of February 2, 2013, it operated 1,104 department stores in 49 states and Puerto Rico employing about 116,000 full-time workers. The company also sells its products through its Internet Website, jcp.com. Founded in 1902, the company is headquartered in Plano, Texas (Company profile, 2013).

Financial Performance

The company has experienced some rocky periods in recent years, due in large part to its ongoing transformation to become "America's favorite store" by increasing its specialty store presence as well as other initiatives designed to overcome its sluggish financial performance. In fact, compared to the company's two major competitors, Kohl's and Macy's, JCPenney's financial performance is poor, and has even returned to its post-September 11, 2001 levels as shown in Figure 1 below.

Figure 1 J.C. Penney's historic stock performance vs. competitors: 1980 to date

Source: Yahoo! Finance (2013) at http://chart.finance.yahoo.com

Note:

M

Macy's

KSS

Kohl's

Sources of Risk or Uncertainty in JCPenney's Operations

The company's most recent annual report cautions that further losses may be experienced during the transformation initiative intended to propel JCPenney into the leading department store chain in the country. For instance, under "Total Net Sales," the company's annual report notes that, "In 2012, we completed the first year of our multi-year transformation strategy to become America's favorite store. We underwent tremendous change as we began shifting our business model from a promotional department store to a specialty department store" (Form 10-Q, 2012, p. 4). The first year of the company's transformation was described as "a difficult year" based on a decrease in comparable store sales of more than 25% in 2012; likewise, the company's online sales (which are included in the comparable store sales figures) also declined a staggering 33.0%, to $1,023 million (Form 10-Q, 2012). In addition, the company reports that, "Total net sales...

The decrease in total net sales includes the impact of our exit from our catalog outlet businesses in October 2011" (Form 10-Q, 2012, p. 4).
Effect of Government Regulations on JCPenney's Domestic and International Operations

The company's operations are currently limited to the United States and Puerto Rico; however, the company's online operations have a global scope. Therefore, the company's operations in 49 states and Puerto Rico are subject to U.S. government regulations while its international operations by virtue of its online sales are subject to controlling legislation in the jurisdictions involved (Fletcher 2003).

Description of the Inputs that are Used in JCPenney's Production Function

The company's sourcing for merchandise sold in its retail stores and online sales declined a full 4.7% in 2012 from 2011, down from 36.0% to just 31.3% in 2012 (Form 10-Q, 2013).

Introduction of New Products in Existing Markets or Creation of New Markets over Time

The dismal performance of the company has been offset, at least somewhat, by the introduction of marketing campaigns and new product brands (Loeb, 2013). The company's most recent annual report notes that, "Private brands, including exclusive brands found only at JCPenney, comprised approximately 53% of total merchandise sales for 2012, compared to 55% in 2011 (Form 10-Q, 2012, p. 4). In addition, Loeb cites some positive signs in new market creation: "There are a few initiatives that could help sales from being even worse in 2013. The J.C.Penney credit card is now also a loyalty card, and that may entice some customers to shop. Strong jewelry promotions at key times (Valentine's Day, Easter, Mother's Day, etc.) may bring some response given jewelry has always been a good business for J.C. Penney" (para. 3). Likewise, Loeb reports that the company's management has committed to opening a number of new specialty shops early in 2013 and still more stores later in the year. According to Loeb, "Among the brands opening shops [are] Pantone Universe, Martha Stewart, Michael Graves, Bodum and others" (para. 3).

Have the Prices of JCPenney's Products Increased or Declined Over Time?

A sampling of the company's mall and off-mall stores for 2012 shows a decrease in sales compared to 2011 (Form 10-Q, 2012). The company's most recent annual report points out that lower prices have not driven increased sales as much as expected. According to the company's Form 10-Q, "Although we sold more items at our everyday prices at a higher average unit retail during 2012, the increase in clearance merchandise sold at a lower average unit retail and the increase in clearance merchandise sold as a percentage of total sales more than offset that benefit" (2012, p. 4).

Effect of Demand Elasticity for JCPenney's Products and Pricing Decisions

Typically, basic necessities such as family clothing show relative inelasticity of demand and these products do not sell significantly more or less with corresponding changes in prices (Elasticity of demand, 2012).

Profitability Analysis

The company's most recent annual report (March 20, 2013) indicated that JCPenney's is experiencing a challenging period in its corporate history. According to the 2013 annual report, "We underwent tremendous change as we began shifting our business model from a promotional department store to a specialty department store. 2012 was a difficult year and our sales and operating performance declined significantly" (Form 10-Q, 2013, p. 3): Other salient highlights from the annual report concerning the company's recent profitability included the following:

1. For 2012, sales were $12,985 million, a decrease of 24.8% as compared to 2011.

2. Excluding sales of $163 million for the 53rd week in 2012, total net sales decreased 25.7%.

3. Comparable store sales decreased 25.2% for 2012.

4. Net loss from continuing operations for 2012 was $985 million (or $4.49 per share), compared to a net loss from continuing operations of $152 million (or $0.70 per share), for 2011 as well as net income from continuing operations of $378 million (or $1.59 per share) for 2010.

5. For 2012, gross margin as a percentage of sales was 31.3% compared to 36.0% in 2011 (Form 10-Q, 2013, p. 3).

The diminished gross margin as a percentage of sales was attributed by the company to elevated clearance merchandise sales levels and other markdowns that were taken during 2012, an initiative that was intended to clear discontinued inventory in preparation for new product and brands being introduced as part of the company's transformation to become "America's favorite store" (Form 10-Q, 2013, p. 3). Moreover, the company has reported a significant decrease in sales well into 2013, and many analysts expect things to get worse for the company before they get any better -- if they ever do (Loeb,…