Risk Factors and Risk

JCP -- Kohl's Risk Factors JC Penney's business has a number of risk factors. On the surface, JC Penney should be in a stable, uninteresting industry, but there are a number of risk factors, and the company's recent difficulties have revealed some of these. The first major risk factor is that JCP is, ultimately, in the fashion business.

Any company that sells clothing faces the singular reality that clothing fashions change, and if at any point the clothes it sells are not in line with the latest fashions, it will be stuck with excess inventory that will have to be sold at a significant discount, in many cases at a loss. Purchasing is therefore a critical element of JCP's business. The company's purchasers must accurately gauge the coming trends for each season.

There is a long lead time with respect to fashion trends -- clothes go on sale at least one season ahead and buyers have to put in their orders two seasons ahead. This gap between purchase orders and the season creates risk for any company selling clothes, and a company that does the volumes Penney does is especially at risk.

If they have a year where their inventory turnover is lower than expected, and revenues are down, that probably relates back to the purchasing function and a misalignment between their purchasing priorities and the fashions for the year. Another significant risk for JC Penney is brand loyalty. Normally, a large department store has fairly stable brand loyalty, but JC Penney has learned the hard way in recent years that there is risk related to such loyalty.

When you rely on brand loyalty and repeat business, as any large company must, that can create a certain inertia in the business, where management is afraid to make changes. JCP faced this situation a few years ago, when it wanted to shake up the brand, and made a series of decisions that ultimately alienated its core audience. The company was put on the brink of disaster, and changes to its pricing policies in particular lost it many regular customers, without replacing them with new ones.

The company has undertaken substantial efforts in the past couple of years to restore brand loyalty (Halkias, 2015). It needs to -- its stores have a tremendous, expensive physical footprint and it needs a lot of traffic in order to pay for that. A third risk, faced by JCP today, is financial. The company has high fixed costs, and its efforts to transform its business have left its finances vulnerable as a result of declining revenues. In FY 2014, which ended in January 2014, the company had an operating loss of $1.242 billion.

Successive years of operating losses have impacted on the company financially, and even last year it faced an operating loss of $89 million. So despite efforts to restore the company's financials, JCP is still quite vulnerable, something reflected in its low stock price (below $7) and market cap (MSN Moneycentral, 2017). The value of the company's equity has been hammered in recent years, and its retained earnings now sit at negative $3 billion on the balance sheet (MSN Moneycentral, 2017).

It is about to finish its next fiscal year at the end of January so it will be interesting to see where it sits at that point. There are other risk factors that are identified in their Form 10-K, in which a company is obligated to outline its different risks. Some are fairly self-evident, like the risks posed by competition. JCP does operate in a highly-competitive industry. On one hand, it competes directly against Kohl's, Macy's, Nordstrom, Dillard's and other major department stores.

On the other hand, the entire department store category competes against smaller shops -- both chains and independent stores -- for the clothing category. JCP's direct competitors are typically large, well-run companies. But the entire department store category is struggling. Where Penney's management snafus a few years back occurred was in trying to branch out because the category is struggling and the audience was aging. JCP tried a lot of things to win younger customers, who prefer smaller stores more directly targeting their needs.

The company's efforts failed, and managed to alienate members of their core audience at the same time. So the nature of competition proved highly risky, to the point where any misstep can cause the company to struggle. The best way to overcome this, of course, is by making the right decisions, and that starts with management. The company is also vulnerable to recession. Mass market retailers are affected by broad economic conditions, so GDP growth and unemployment -- classic macroeconomic measures -- matter to the company.

The Great Recession caused all companies in the industry to struggle. The key for JC Penney is that now after its management issues in the past it is more financially vulnerable than usual. A recession now would hurt Penney more than most of its rivals. The company needs to bolster its financials, or at least have a game plan for how it would react quickly to a recession, in order to mitigate this risk. As with all company's Penney is also a target for cybercrime.

Cybercriminals can gain malicious code easily, and use that code to target companies. A large company is a great target, especially if it has not been investing in cybersecurity to the degree it wants. One with more of an old school culture is more vulnerable to phishing attacks, but ransomware or Trojans that target banking or customer information are also tactics that would be especially suitable for a company like JC Penney.

The company needs to ensure that, despite its financial condition, it invests enough money into cybersecurity, in order to mitigate this particular risk, because it could cost them millions, damage the brand, and have a lasting effect on consumer confidence right at the time when the company is trying to build that confidence back up. Management Process One of the biggest stories in retail was the management disaster at JC Penney. The company, faced with static sales and an aging customer base, sought to reshape its image.

The board brought in an Apple exec, Ron Johnson, who would theoretically bring fresh blood and an outsider's perspective to the company. The move was an utter failure, one from which the company is still recovering to this day (Tichy, 2014). Johnson did not understand the retail business, the department store business, and the JC Penney culture. To the company's credit, it was quick to move on from Johnson's disastrous tenure.

This wasn't a hard decision, of course, because the poor management was reflected in cratering sales, and it was possible to argue that some of his moves would have paid off given more time, but credit to the board for stabilizing the business at a level that would (almost) pay the rent. The current CEO as of mid-2015 is Marvin Ellison. Some of the company's ideas -- the ones Johnson didn't eviscerate -- were rooted in 1960s views of shopper behavior.

Ellison has sought to modernize the approach that the company takes to its merchandising decisions, such as recognizing that men are capable to doing their own shopping. The company, instead of taking no risks pre-Johnson or bold ones under his tenure, now takes calculated risks. They use a store near corporate headquarters to test out ideas, before rolling them out across the country, and they have a more proactive approach to merchandising and to fashion.

The company is in a state of financial recovery right now -- still risky, but doing better. This has to be credited to the current leadership (Wahba, 2016). The current approach is more data-driven than in the past. The company had relied a lot on inertia, doing things the way that they had always been done. This was built into the culture. Johnson basically rejected that, and made dramatic changes too quickly, in what ended up being a shock to the company. Ellison's approach has been calmer.

The company has started to adopt best practices in the area of data analysis, in order to make better decisions. It tests ideas and gathers information about whether they work or not, before rollouts. The.