[PDF] [PDF] Competing for Survival: A Turnaround of Department Store JC Penney

[PDF] North Visitor Parking

Main Entrance Heritage Way Directions to the JCPenney Home Office, 6501 Legacy Drive, Plano, TX 75024 From Hwy 121 (driving east from DFW Airport):

[PDF] JC PENNEY COMPANY, INC - Retail Innovation

16 mar 2016 · 6501 Legacy Drive, Plano, Texas 75024-3698 (Address of principal executive offices) (Zip Code) (972) 431-1000 (Registrant's telephone 

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The Board of Directors has adopted these Corporate Governance Guidelines site (www jcp com) a telephone number, mailing address and email address for

[PDF] MATTERS OF PRINCIPLE - JCPenney

in which it does business, customers, associatess and shareholders The core principles were business, we invest considerable time and resources to understand and address environmental HOME OFFICE HEAdQUARTERS The core of 

[PDF] Can I ask another associate or job - JCPenney

of Business Ethics and ask our associates to renew their TAKING A CORPORATE OPPORTUNITY of our business, address changes in the law or for

[PDF] JC Penney Company, Inc l Annual Report 2006 - Annual Reports

roll out Sephora inside JCPenney stores in 2007 and beyond We also business, from our approach to merchandising, to our compelling marketing and east 5th Offering women versatile head-to-toe career wardrobe solutions with our unique ability to develop private brands that address the specific lifestyle needs of

[PDF] Main Street Empire: J C Penney in Nebraska - History Nebraska

Nebraska J C Penney store, 1941; J C Penney Scottsbluff store 1948 fire; Lincoln J C Penney new store 1950; interior of the company's first headquarters in Salt Lake City, Utah, but by the time office, he remained personally acquainted with his managers Company, explicitly address his belief in Jesus Christ Orlando

[PDF] CLG JC Penney - CLG Hedge Fund

56 7-acre J C Penney office campus in Plano, Texas, along with 45 2 acres of new Toyota North American headquarters, Liberty Mutual headquarters, and

[PDF] Competing for Survival: A Turnaround of Department Store JC Penney

marketing, the distribution revolution, and emerging retail business models ( MacKenzie, Currently, JCP's headquarters are located in Plano, Texas where the The turnaround strategy for JCP addresses the third element of a successful 

Caroline)BaierJensenEmma)Caroline)JakslandMadelon)K.)Grandjean)PoulsenMikkelHolst)SchouHansenMarc)FaarborgToftColumbia)Business)SchoolTurnaround)ManagementFinal)ProjectProfessor)Doug)SquasoniDecember)15,)2017Competing for Survival: A Turnaround of Department Store J.C. Penney

Key)industry)metric)EBITDA)ImprovementCostsCosts)related)to )physical)spaceInventory)managementRevenueDistributionServiceProductsTurnaround)strategyTurnaroundstrategyaimedatincreasingJ.C.Penney'sbottomQandtoplinegrowth121)224)198498)Sales)per)retail)sq.)feetJCPrankssignificantlybelowitspeersintermsofsalesperretailsquarefeetemphasizingtheneedforstoreclosurestoimprovethismetric050100150200250Stock)price)developmentCompeting for Survival: A Turnaround of Department Store J. C. PenneyThispaperiscenteredaroundJ.C.Penney,anAmericanretaileroperatingmorethan1,000departmentstoresacrossthecountry.Morespecifically,thefocusisonthefinancialandoperationalissuesfacingthecompanywhichhasledtodecliningrevenuesandtheincurrenceoflossesoverthepastfiveyears.Theanalysisbeginswithanoverviewofthecompanyandtheindustrywithinwhichitoperates.Itisevidentthattheentireindustryhasbeenunderpressureduetochangingdynamicssuchasthegrowingpopularityofonlineshoppingaswellasageneralincreaseincompetition,consequentlyerodingmarginsandprofitability.Toimprovethequalityofanysuggestedrecommendations,bothqualitativeandquantitativetoolsareusedinthepaper.Inthefinancialanalysisitisdiscoveredthatalthoughmostretailershavefeltagrowingpressureontheiroperations,J.C.Penneyseemstohavebeenaffectedthemost.Thecompanytherebyunderperformsinrelationtoitsmainpeersbothintermsofefficiencyandprofitability,whilesimultaneouslyfacingagrowingdebtburdenthatcannotbesustainedinthelongrun.Thecausesforthisdecliningperformancearesoughtthroughanexaminationofthecompany'soperationalandstrategicactivities,wheremanagementturbulenceandwrongfulstrategicinitiativesarehighlightedascontributingfactorstoJ.C.Penney'sdecliningperformance.AturnaroundstrategyisproposedwithhighlightsbeingstoreclosuresandagrowingonlinepresencetoensurebothbottomQandtoplinegrowthgoingforward.Finally,severalvaluationsareconductedtoexaminewhetherthecompanyshouldi)beliquidated,ii)besoldinanM&Aprocess,oriii)continueasagoingconcern.ThemostvalueQcreatingoptiontodebtandequityholdersistokeepthecompanyasagoingconcernwhileimplementingnecessaryturnaroundinitiativestoplaceJ.C.Penneyonatrajectoryofgrowthandprofitability.Executive)summary2007))))))))2009))))))))2011))))))))2013))))))))2015))))))2017Generalindustrydeclineevidentfromstockpriceperformanceoffourplayers.J.C.Penneyisclearlyperformingtheworst,approachingindex7inDecember2017Index)100)in)2007

11.IntroductionTheretaillandscapeisprojectedtochangemorewithinthenextfiveyearsthanithasdoneoverthepastcentury(MacKenzie,etal.,2013).Lookingnotonlyatdepartmentstores,butattheretailspaceingeneral,thefirstsevenmonthsof2017saw19bankruptcies,surpassingtherecordof18filingsduring2009(Thomas,2017).Someattributethedecliningperformanceofretailerstothegrowingimportanceofonlineshoppingwhileothersviewitasamarketcorrectionforthosechainsthatwerenotproperlyequippedtocompeteintheindustryintoday'scompetitiveenvironment.All,however,agreethattheconceptofadepartmentstoreasweknowit,isabouttochange(Cohen,2017).Thedepartmentstoreindustryhasbeenindeclineforthepastfiveyears,andthistrendisexpectedtocontinuewithrevenueprojectedtofallatarateof4%annuallyto$156.4billionin2017(Cohen,2017).Annualgrowthbetween2017and2020isfurthermoreexpectedtofall-2.6%(Statista,2017a).Cohen(2017)projectsthattheaverageindustryprofitmarginwillbe2.6%in2017,adeclineof1.4percentagepointsfrom2012.Inadditiontodecliningsales,brick-and-mortarstoresincurhighoperationalcost,relativetoonlinecompetitors,primarilyduetosalariesandretailspace.Trendsamongphysicaldepartmentstoresarelowerprices,higherfrequencyofpromotionsandmorefundsallocatedtomarketingandadvertising.Inthepastdecade,brick-and-mortarstoreshavefollowedthegrowthformulaofopeningstorestoacquireandservicemorecustomers(MacKenzie,etal.,2013).Thisgrowthstrategy,however,isnolongervalidasconsumerpurchasingdecisionshavechangeddramatically.Previously,acustomer'spurchasedecisionprocessstartedwithchoosingastoreandthenselectingaproductinthatstore.Thisisinlinewiththedesignofdepartmentstores,whochoosebrandsrelevanttotheirtargetcustomergroup.However,consumersnowresearchonlinebeforegoingtothestoresreducingtheneedforassistanceintheshoppingprocess.Customersaretherebytakingchargeoftheinitialscreeningofbrands,makingthevaluepropositionofdepartmentstoresobsoletetoacertainextent.Departmentstoresalsofacethechallengeofshiftingconsumerpreferences,asshoppersde-selecttraditionalbrandsinfavorofnon-traditional,startupbrands,whicharerarelypresentinlargedepartmentstores(Roeder&Rupp,2017).Inaddition,customersareusingtheirsmartphonestobenchmarkprices,getinputfromsocialmediaandfriendsandfamily-andwhentheyarereadytobuy;numerousonlineretailerscreateandincreasepricetransparencyinthemarket,tothedetrimentofphysicalstores(Baird,2017).Inaddition,onlineretailersdeliverproductsdirectlytotheendconsumer,oftenwithinthesameday.Goingforward,fivetrendsareconsideredsignificantinwinningadominantpositionintheretailmarket,in cludingdemographicchanges,multichanneland mobilecommerce,perso nalized

2marketing,thedistributionrevolution,andemergingretailbusinessmodels(MacKenzie,etal.,2013).Alloftheabo veeleme ntspresen ttraditionaldepartm entstoreretailerssuchas J.C.Penney(hereinafter,JCP)withasignificantchallenge.MajorplayersintheindustryareKroger,Macy´s,Nordstrom,Kohl's,andJCP,thelatterbeingthesubjectofanalysisinthispaper.ThefollowingsectionwillgiveanintroductiontoJCPandthechallengesitisfacingintheseturbulenttimesinachallengingindustry.2.CompanyOverview2.1KeyCompanyFactsJamesCashPenneyandWilliamHenryMcManusfoundedJCPin1902,andithassincethenbecomeoneofthelargestdepartmentstorechainsintheUS,operating1,013locationsacrossthecountryandemploying106,000people.Currently,JCP'sheadquartersarelocatedinPlano,TexaswherethecompanyisledbyCEO MarvinEll ison.JCPtargetslow-andmid-incomehouseholdssellingmerchandisewithinthefollowingsegments:clothing,cosmetics,electronics,footwear,furniture,housewares,jewelryandappliances.Asapartofarecentgrowthstrategy,thecompanyhasdividedkeyoperationsintothreepillarsi)beauty,ii)homerefresh,andiii)specialsizes.Thecompanyholdsbothnational-andprivate-labelbrands.Asof2016,private-labelbrandsaccountedfor44%ofsales(J.C.Penney10K,2016).Overthepastcoupleofyears,JCPhasexperiencedfinancialproblems.Priorto2011,thegrowthofJCPwasstagnatingfortwodecades,whichmadetheboardhireRonJohnsonfromAppleasthecompany'snewCEO.RonJohnsontriedtoimplementradicalchangesbygoingawayfromcoupons,salesanddiscounts,andmoretowardseveryday"fairandsquare"lowprices.However,thiswasnotreceivedwellbycustomers.After16months,withRonJohnsonasCEO,saleshaddeclinedmorethan25%,andthestockpricehaddecreasedbyalmost50%.Thisfurtherresultedinaroundoflayoffs,with19,000peoplelosingtheirjobs.From2011to2015JCPexperiencedfivestraightlosingyears,whichamountedtoa$3.5bnlossintheperiod(Isidore,2017).Thecompanystillfacesseveralchallenges;revenueisdeclining,debtobligationsamounttonearly$3,6billion,andthecompanyhashighoperationalcostrelativetoe-commercecompetitorswhocontinuetowinmarketshare.Becauseofaliquidationofpoorlysellinginventory,especiallyintheappareldivision,andtheclosingof127oftheleastprofitablestores,JCPmanagedtogeneratea$1millionadjustedEBITDAin2016,whichisthefirstshadowofprofitabilityinsixyears.Thiswas,amongotherelements,aresultofthegrowingfocusonprivatelabels,allwithahighergrossmarginthanbrandsnotapartoftheJCPumbrella.This,combinedwiththecompany´shighbrandawarenessandalargeproductportfolio,posesopportunities fortheorganizationgoingforw ard.Foracomplete listofstrengths,weaknesses,opportunitiesandthreatscf.SWOT-analysisinExhibit1.

33.PeerComparison3.1Non-FinancialPeerAnalysisAlthoughmultipledepartmentstoresareappropriateforcomparison,includingSears,Target,andWal-Mart,thepeerreviewisnarroweddowntofocusonKohl's,Macy's,andNordstrom,sincethesearethemostsimilartoJCPandfrequentlycitedaspeersinbrokerresearch.JCPconsidersKohl'sitsclosestcompetitor(Ofek,etal.,2016).However,asChiefInformationOfficerTheraceRischnotes,"ourcustomerstendtobemoresimilartothoseofothermid-tierdepartmentstores,butanyonethatsellsthesamestuffwedoisathreat"(Ibid).Kohl's,Macy's,andNordstromarethemostrelevantforJCP,sincetheyoffersimilarproducts,theircustomersareinfluencedbysimilarbroadeconomictrends,andtheiroperationsaremostlydomestic.Therefore,thesethreepeerswillprovideanindicationofJCP'sabilitytotacklethechallengesofthebusinessinwhichtheyoperate.ComparingJCPtothethreepeersintermsofqualitativemeasuresshowsthatJCPscoresatthebottomofthepeergroup,exceptinshoppersatisfaction.Table1summarizesthecomparisononfourparameters;over allexperience,e-commerceexperience,shopp ersatisfaction,andbrandreputation(additionalparametersarefoundinExhibit2.Table1:QualitativepeercomparisonSources:TheHarrisPoll,Foresee,andAmericanCustomerSatisfactionIndex(ACSI)inRetailBusinessMarketResearchHandbook2017-2018(Miller&Washington,2017).Nordstromperformsthebestinthepeergroup,rankingfirstonallfourparameters.ItisinterestingthatJCPidentifiesKohl'satitsclosestcompetitor,whenKohl'sseemstoperformbetterthanJCPinallfourmeasures,indicatingalackofcompetitivenessfromJCPinitsappealtocustomers.Forbusinessesfacingextensivecompetitionfromsubstitutecompanies,customerloyaltyarguablybecomesincreasinglyimportant.Furthermore,withthemarketdecreasingthereisahighlikelihoodofconsolidationintheindustryeitherthroughmergersortheclosingofcompaniesassupplybeingstoexceeddemand.Beingthepreferredcustomerchoicethereforeincreasesthelikelihoodofsurvival.Assuch,JCPisatriskofbecomingredundantunlessitcanmanagetoturnitscustomerexperiencearound.3.2FinancialComparisonAshighlightedintheindustryanalysis,retailersarefacingseveraldisruptionswhichhaveputthefinancialperformanceofcompaniesunderincreasedpressure.ThequestionisthenifthedecliningOverall'ExperienceE.commerce'ExperienceShopper'SatisfactionBrand'ReputationNordstrom81828275.58Kohl's80797775.04Macy's78797372.4JC

4performanceofJCPcanbeattributedtoindustry-ratherthanfirm-specificeffects?ThiswillbeexaminedinthefollowingsectionthroughananalysisofthefinancialperformanceofJCPanditspeers.3.2.1OperationalAnalysisTable2illustratesthedevelopmentinthenetincomeofJCPanditspeersandyieldsseveralinsights.AllpeershaveexperienceddecliningprofitsevidentfromanegativeCAGRofaround13%to17%intheperiod2012to2016thussupportingthethesisthattheentireindustryisfacingchallenges.However,whiletheothercompanieshavemanagedtogenerateprofits,JCPhasincurredlossesthroughoutmostofthe periodon lyturningaslightpro fitin2016of$ 1million.Table2:Developmentinnetincome(USDmillion)Toexamine potentialsourcesofth isnegativeanddeclini ngnetincomeitisusefu ltobreak profitabilityintoitssubcomponentsillustratedintable3.Table3:ProfitabilityratiosProfitabilityratiosJCPKohl'sMacy'sNordstromAverageGrossmargin35.67%36.08%39.40%40.40%37.89%EBITDAmargin7.36%12.35%10.63%11.08%10.36%EBITmargin2.51%7.33%6.53%6.71%5.77%Profitmargin0.01%2.98%2.40%2.40%1.95%JCPperformstheworstoutofallitspeersonallfourprofitabilityratiosthusindicatingthatthecompanyeitherhastoohighcostsorfailstochargesufficientlyhighprices.Fromtable4itisevidentthatJCPhasacost/saleslevelaboveaverageinallfourcategorieswhichimpliesthatonesourceofdecliningprofitabilityisthecompany'scosts.Table4:CostratiosNetincome20122013201420152016CAGR

J.C.Penney(985)(1,388)(771)(513)1n.m.

Kohl's986889867673556-13.3%

Macy's1,3351,4861,5261,072619-17.5%

Nordstrom735734720600354-16.7%

D&A/Sales4.85%5.02%4.10%4.37%4.59%0.27%

5Akeymetricusedintheretailindustryissalesgeneratedperretailsquarefeetandasevidentbyfigure1,JCPrankssignificantlybelowallpeersonthisparameter.Figure1:KeyindustrymetricsSource:Factset(2017)Thecompanygenerated$121perretailsquarefeetin2016comparedtoKohl'sandNordstromwhogenerated$224and$498respectively.ThisimpliesthatJCPdoesnotgeneratesufficientrevenuetojustifythe1,013storesitiscurrentlyoperating,makingitimperativetoclosedownthosethatfailtogeneratesufficientrevenueandprofits.Thecompanyisalreadyintheprocessofclosingdownstoresbutthelowrevenuepersqftimpliesthatadditionalclosuresarenecessarytofurtherimproveprofitabilitybeyondtheminimal$1million.IntermsoftheefficiencyofJCP'sactivitiesthefocusisonthecompany'sassetturnoveraswellasitsinventorymanagement.Theretendstobeatrade-offbetweenefficiencyandprofitabilityascompaniesareeitherhigh-margin,low-volumebusinessesor theopposite.DuetothelowermarginsofJCP,onewouldexpectthefirmtooutperformitspeersintermsofefficiency.JCP,however,ranksbelowaverageintermsofassetturnoverwhichisthesalesgeneratedperunitofassets.Thisisinlinewiththelowrevenueperstore,andthecompanycouldthereforeimproveitsefficiencybyclosingdowninefficientshops.Intermsofinventorymanagementthecompanyhas112daysinventoryoutstandingwhichisbelowthatofMacy'sbutaboveitstwootherpeers,NordstromandKohl's.Thedecisiontoremovesalesandimplement'fairandsquare'lowpriceshadanegativeeffectonthecompany'ssalesandmighthaveresultedinthefirmbeingleftwithobsoleteinventory.Table5:EfficiencyratiosEfficiencyratiosJ.C.PenneyKohl'sMacy'sNordstromAverage

Assetturnover1.261.331.231.741.39

Inventoryturnover3.233.283.035.133.67

Currentratio1.791.931.451.441.65

Quickratio0.480.390.390.700.49

Interestcoverage0.904.404.598.114.50

LTdebtratio(LTD/TA)51%33%34%35%38%

D/Eratio3.110.801.481.791.80

TA/TL1.195.031.301.242.19

7contrast,uponexaminationoftheothercashratios,JCPappearstohaveahighlevelofcashonitsbalancesheetwithahighercashasapercentageofassetsandliabilitiesthanallitspeers.AkeytakeawayfromthefinancialanalysisofJCPisthatalthoughthecompanycurrentlyhasareasonableassetbaseandasubstantiallevelofcashtoserviceinterestpayments,thehighlevelofleverageandcorrespondinglyhighinterestpayments,almostexceedingthecompany'sEBIT,arenotsustainableinthelongrun.4.CausesofDecline4.1ManagementFailureMikeUllmanheadedthecompanyfrom2004to2011(Ofek,etal.,2016).Towardstheendofhistenure,JCPwasunderp erformingmateriallyrelativetoitspeers.Thecompan yperformedsignificantlybelowallpeersintermsofROA,ROE,EBITDAmargin,profitmargin,andinterestcoverageratioin2011asillustratedinExhibit3.ActivisthedgefundmanagersBillAckmanandStevenRothacquired27%ofthecompanyin2010.BothweregivenseatsonJCP'sboard,andAckmanpromptedthefiringoflong-timeCEOMikeUllman(Subramanian,2015).Heendorsedhisreplacement,RonJohnson,in2011,tothenre-hireUllmansixteenmonthslaterandthen,again,pushforhisreplacement.ThefollowingpresentsananalysisoftheleadershipofJCPstartingwiththearrivalofRonJohnson.WithinayearoftakingoverasCEO,RonJohnsonhadreplacedthechieffinancialofficer,chiefoperatingofficer,chieftechnologyofficer,chiefmarketingofficer,andchieftalentofficer(Bhasin,2012).Itiscertainlyadvisableforaturnaroundmanagertoscantheexistingmanagementteamformemberswhounceasinglyworkagainstthenewagenda,butacompleteswitch-upoftheC-suitecouldeliminatevaluableexperienceandinsight,andfeedalienationbetweenthenewstrategyandtheremainderoftheexistingorganization.OneofJohnson'sstrategicfiascoswasthereplacementoffrequentpricediscountsandpromotionswithoutpriortestingonhowtheexistingcustomerbasewouldrespond.In2012,theaveragediscountonsoldproductsreached60percent(Ofek,etal.,2016)Discountswerereplacedwitheverydaylowpricingthroughthe'FairandSquare'campaign,andhigher-endproductlinesanddesignercollaborationswereadded.Johnsonremovedsalescommissionswiththeintentionofincreasingcustomerfocusanddecreasingfocusonsales(and,onecouldspeculate,toincreasethedistressedbottomline),astepwhichfrustratedmanyemployees(Ibid).Despitedouble-digitdecreasesinsales,storeswhichhadbeenupdatedaccordingtoJohnson'sstrategyperformedrelativelybetterthanthosewhichhadnot.Somehavesincearguedthatthestrategicoverhaul,whichcateredtoaratherdifferentcustomer,wasnotgivenenoughtimetocultivateproperly(Ofek,etal.,2016).Ackman,whohiredJohnsontoreplaceUllman,cited'too

8muchchangetooquicklywithoutadequatetestingonwhattheimpactwouldbe'asthereasonbehindthefailureofJohnson'sstrategy,whichAckmandescribedas'veryclosetoadisaster'(Wapner,2013).StrategicfailureunderJohnsonappearstohavebeenanissueofinhabitingthewrongfocus:whileJohnsoncertainlyshowedexceedingcompetenceinpastendeavours,hewassteel-setonafocusonthewrongcustomer-amove,whichculminatedinconfusionamongexistingcustomersaboutwhatJCPstoodfor.WhilestrategicfailuremayhavecontributedgreatlytoJCP'sdemiseunderJohnson,severalsourcessuggestthatalackofbuy-infromtheorganizationalsoaffectedtheturnaroundprocessadversely.Johnsonhadaverycleargroupofafewexecutiveswhomheconfidedin.EmployeescomplainedaboutlackofcommunicationandtransparencyfromRonJohnson'smanagementteam.Asanexample,storemanagersonl yhadaccesstoth eirownsalesnumberswhereasrelativestoreperformancewaskeptunderwraps.Bhasin(2013a)pointstowardsJohnson'spastatApple,acompanywhereconfiden tialityiskeyforverysen siblereasons,asa potentialpartofthe explanation.ButatJCP,themovetowardsopac ityresultedinlossoftrustin management. AccordingtoCovert(2013),JohnsonandeightotherexecutivescontinuedUllman'spracticeandcommutedfromtheirhomesinotherstatestoJCP'sheadquartersbycorporatejet.Johnsonwasrarelyintownfortheentireworkweek,andstayedattheRitz-Carltonhotelonthecompany'sbillwhenhewas.Theuseofcorporatejetsandluxuryhotelsduringtimesofcutbacksandlay-offscreatesavividcontrastandmaysignalthattopmanagementhasnointerestin"sharingthepain".Theperceiveddistancecreatedasaresultlikelyhurtbuy-infromtherestoftheorganizationwhich,duetotheiss ueso flacking transparency,werealread ysubject toastarkcommunicational hierarchy.Therapidspreadofrumors(surrounding,amongotherthings,newroundsoflay-offs,eliminationsofcertainpositions,andshut-downsofdivisionsandstores)alsoultimatelycreatedanenvironmentofuncertainty,distrust,andinsecurity.Lastly,Tuttle(2013)notesthatJohnsonhaddifficultiesrelatingtoandappearedtohavelittlerespectforJCP'sexistingcustomerbase.Forexample,hepublicallysuggestedthatcustomersneededtobe'educated'whentheydidnotrespondwelltothenew'fairandsquare'pricingstrategy.MikeKramerwascarriedoverfromApplebyRonJohnson,takingthepositionasCOOatJCP.KramerwasquotedinintheWallStreetJournalin2013,describingtheJCPcultureatthebeginningofhistenure:'IhatedtheJCPenneyculture,itwaspathetic'suggestingthatJCP'sheadquarterswere'overstaffedandunderproductive'(Bhasin,2013b).ThedemeaningrhetoricwithwhichthenewC-suitedescribedtheJCPculturewasanotherlikelysourceofalienationbetween"old"and"new".WhenUllmanreturnedin2013,hemovedthefocusbacktotheprecedingJCPcustomerandreinstatedheftydiscounts. Largelosseswe reincurredagainin2013,when HomeStores,asoverhauledbyJohnsonathigherpricepoints,wereestablishedanddidnotresonatewellwithcustomers(Ofek,etal.,2016).In2015,UllmanhandedoverthereinstocurrentCEOMarvinEllisonmarkingthetransitiontowardsbettermanagementpractices.EllisonmakesapointoutofvisitingJCPstoresasoftenaspossible,andallseniormanagementisexpectedtodothesame.Whenvisiting

9stores,theyarerequiredtodressinthecompany'sclothinglinestoeliminatevisualcultureclashes(Ibid).Ellisontellsthetaleofhischildhoodinablue-collarfamily,wherethebi-annualvisittoJCPwassomethingtheentirefamilylookedforwardto(Wahba,2016).EllisonappearstorelatetoandtargetthepresentJCPcustomer,whilemakingaclearpointofattemptingtoelicitbuy-infromalllevelsoftheorganizationbybeingpresentandavailableandcompellingalltopmanagementtodothesame.OnJuly10th,itwasannouncedthatJCP'sCFOEdwardRecordwouldstepdown(Rupp,2017).CFOresignationisoftenaredflagindistressedcompanies,takentoimplythatthingsmaybeheadedfortheworse.Hisreplacement,JefferyDavis,istheseventhpersoninhabitingtheCFOrole(includinginterim)inthepastsixyears.Figure2:CEOandCFOturnover,2000-20174.2CorporateGovernancePastboardmemberandactivisthedgefundmanagerBillAckmanlargelyreceivedtheblameascatalystforthedeclinethatfollowedtheimplementationofRonJohnson'sstrategy.Butina60-Minutesinterview,hehighlightedthatallotherboardmemberswereunavoidablycomplicit,too.WhenRonJohnsontookoverin2011,thecompositionofJCP'sboardcertainlyhadroomforimprovementintermsoftherelevan ceofthei rcompetencies. Withanov erweightw ithinelectronics,technology,andlogistics,nonehadextensivedirectexperiencewithintheretailsector(JCP,2011).Narrowvisionontheirareasofexpertisecouldbetoblamefortheirinactionandlimitedinvolvement.Undertheabsenceofapoisonpill,RothandAckmanwereonlyrequiredtodisclosetheiracquisitionof27%ofthecompanyin2010within10daysoftheacquisitionasperSECrules(Subramanian,2015).In2013,thecompanyinstitutedapoisonpillwitha10%threshold,whichwasextendedandloweredto4.9%in2014.T hemove wasintendedtopreve nthostiletake oversandensure preservationofthecompany'snetoperatinglosscarryforwards(NOLs)of$2.2billion(Wahba&Michael(Dastugue20002004201120132015Allen(QuestromMike(UllmanRon(JohnsonMarvin(EllisonRobert(CavanaughEdward(RecordCEOCFO20122014Ken(Hannah20172016Jeffrey(Davis(Interim(CFO:(Mike(KramerInterim(CFO:(Andrew(S.(Drexler

10Cavale,2014;JCP,2016).Ifthecompany'sbestshotatsurvivalturnsouttoinvolveputtingitselfupforsale,thepoisonpillwouldofcoursehavetobealtered.PotentiallossofNOLsisanimportantconsiderationinanyscenariowhereachangeofcontrolmayoccur.4.3OrganizationalDistressCurveOftenacatalystfortheinitialdeclineofacompanyisthesimultaneousoccurrenceofnegativeinternalandexternalforces.Inth ecase ofJCP,thei nternalfactorslargelyrevolvearoundmanagementfailureconsistingofhighCEOturnoverandfaultystrategicinitiativescoupledwithdecliningfinancialperformance,ultimatelyleadingtoacompanysplitintoseparatelayersthatdonotworktogether.ThenegativeexternalimpactonJCPisattributedtotheincreasedpressureonalldepartmentstoresbecauseoffiercecompetitionandthegrowthinonlineretail.Theshiftingbusinessdynamicshaveaffecteddepartmentstoresacrosstheindustry,however,itisJCP'sinabilitytoadjusttothisexternalpressurethathasresultedinitsdecline,whichothershavemitigatedthroughswiftandefficientstrategicresponses.TheorganizationaldistresscurveisausefultoolforhighlightingdifferentstagesofJCP's lifecycleandemphasizingthos efactorsthatpush edthecompanyanotherstagedownthecurve.Figure3:OrganizationalDistressCurveAshighlightedpreviously,itwasageneraldeclineandpressureontheentireindustrythatinitiatedJCP'smovedownthedistresscurve.Failuretoadaptproperlytoexternalshocks(inaction)therebyresultedindeterioratingprofitability,whiletheappointmentofnewmanagement,i.e.action,ledtotheimplementationofvaluedistortingstrategieswhichcanbeinterpretedasfaultyaction.Todaythecompanyistosomeextentinastageofcrisiswithextensiveleverageandlowprofitability.Toprevententeringthestageofdissolutionseveralstepsareneeded,includingthedefinitionofafeasiblecorporatestrategy, appropriateorganizationalarrang ementsaswellasanadeq uatefinancialstructurewhichcanbolste racceptancefromcapitalmarkets.Th efollowingsections

CashOnly887100%887

Inventories2,85435%998.9

OtherCurrentAssets35630%106.8

TotalCurrentAssets4,0971992.7

TotalInvestmentsandAdvances137%0.91

IntangibleAssets54010%54

OtherAssets655%3.25

TotalPPE,IntagiblesandOthers5,2172127.71

TotalAssets9,3144,120

13Table8:CreditorOverviewandWaterfallAnalysisIntheliquidationsimulation,firstlien-andsecondliencreditorsaresatisfied.Seniorsubordinateddebtorswill,however,onlyretrieve48%ofthefacevalueoftheirinvestment.Onlyequityholderswouldbeleftcomp letelywith outrecovery.Nevertheless, onewouldexpectthatseniorsubordinateddebtorswouldpushforarestructuringbeforealiquidation,asretrievinglessthan50%wouldnotanoptimalsolutionforanyonewhoperceivesthatthecompanycouldpotentiallybesaved.5.2Chapter11FilingWhenacompanyisindistresstherearestrategicconsiderationsinvolvedinfilingforvoluntaryChapter11.Thethreatofabankruptcyalonecanbeeffective:the'takeitorgetnothing'threatcanbeaneffectivebargainingtoolforwhencreditors,suppliersandemployeesthreatentoexercisetheirclaims(George,etal.,2012).Whileanin-courtrestructuringhasmultiplenegativeimplicationsforacompany,therecanbesignificantbenefitstogainfromtheabilitytorestoreoperatingcashflowstosustainablelevels.SinceanynewobligationsaregivensuperioritytoallotherdebtobligationsunderaChapter11,JCPwouldhaveeasieraccesstocredit.ThiscashboostcanhavesignificantimpactontheabilitytoturnCreditorsRecoveryrateRecoveryValueAssetsLeft

FirstlienDebt

2016TermLoanFacility1,667$100%1,667$

Seondliendebt

5.75%SeniorNotesDue2018265$100%265$

8.125%SeniorNotesDue2019400$100%400$

5.65%SeniorNotesDue2020400$100%400$

6.375%SeniorNotesdue2036388$100%388$

SeniorSubordinatedDebt

7.95%DebenturesDue2017222$48%106$

7.125%DebenturesDue202310$48%5$

6.9%NotesDue20262$48%1$

7.4%DebenturesDue2037313$48%150$

7.625%NotesDue2097500$48%239$

Totaldebt4,667$500$0$

LesscashandEquivalants887$

Netdebt3,780$

EquityMarketValue1,354$

TotalEnterpriseValue5,134

14operationsaround(George,etal.,2012).Howev er,managementactionsmaybe remarkablyconstrainedduetocourtscrutiny,despitethetimegainedtomakedecisionsandproposeasolution(Ibid).Besideshighcosts,lackofcontrol,andthepotentialofpublicizingsensitiveinformationofanin-courtrestructurin g,whatmakesaChapter11filinglessattractiv eforJCPistheaffi liatedreputationalriskthatgivesrisetoskepticismfrombothdownstreamandupstreamstakeholders.Vendorsarelikelytobecomereluctanttosupplyproductsormaterialsinthefearofnotgettingpaid,whileconsumersmaybelessinclinedtobuyproductsthatpotentiallycannotbereturnedorservicedinthefuture.Expensiveproductswithlongexpectedliveswhichhaveafter-salesserviceandembeddedguaranteesattachedwillbeparticularlyaffectedbythisreputationalrisk.Customerslookingforproductssuchashomeapplianceswhicharemeanttobeusedforyearswilllikelybeacutelyreluctanttobuyfromafirmindistress,whichwouldbeexpectedtohaveadiscouragingeffectonsales.AnexaminationofthefinancialsofJCPwillfacilitateansweringthequestionofwhetherthefirm'slevelofdistressindeedqualifiesabankruptcyfilingasabsolutelynecessary.Theessentialquestionstoaskarewhetherthecompanyfacesliquidityproblems,andifso,whenitwillbeunabletoserviceitsdebt.Thenextthreerepaymentsdebtincludeadebentureof$220millionin2017,$265millionofSeniorNotesin2018,and$400millionofSeniorNotesin2019.AquicklookatthecashsituationconsideringthedebtlevelsandperformanceprojectionssuggeststhatJCPmaybeunabletoservicetheSenior Notesin2019.However,JCPhasalreadymitigatedthethreatthrougharecentrenegotiationoftheWellsFargorevolverof$4billion,whichprovidesJCPwithatemporaryoptiontouseitscashholdingstofinancematuringdebt,andtherevolvertofinanceoperations.Butfinancingoperationsthroughincurringmoredebtiscertainlynotasustainablesolutioninthelongterm.JCPmustbeabletoorganicallyfinancetheiroperationsthroughnetincomegrowth.Insummary,astrategicChapter11filingwouldbemoreappropriateinasituationwherecashwassignificantlyandurgentlyconstrained.DuetotheinherentreputationalrisksbankruptcycouldposetotheJCPbrand,bankruptcyshouldbealastresort.JCP'scurrentfinancialsituationdoesnotyetmeritthedrasticmeasure.Thecompanyshouldinsteadassesstheprobabilityofasuccessfulout-of-courtturnaroundstrategy.Ifthecompanyconcludesthatanotherturnaroundisunlikelytosucceed,orthatindustrydeteriorationisultimatelylikelytodrivethecompanyintodissolution,liquidationunderChapter7maybemorerelevant.5.3TurnaroundStrategyToconvertJCPfromafirmindistressintoawell-performingentity,threeingredientsareneeded:i)afeasiblecorporatestrategy,ii)appropriateorganizationalarrangements,andiii)acceptanceby

15capitalmarkets(Harrigan,2012).TheimpactofthefollowingstrategicelementsonthefinancialsofJCPareelaboratedinsection5.4.5.3.1CorporateStrategyTheobjectiveoftheturnaroundstrategyistobringJCPbacktoprofitabilitywithastrategythatsecuressustainableprofitsandfirmsurvivalinadynamicmarket.Includedinafeasiblecorporatestrategyareimprovementsinoperationswhichinvolvebothcostcuttingandrevenuegeneratinginitiatives.Animportantpointtokeepinmindisthatafirmcannotcutitswaytogrowth;itisinsteadnecessarytoinvestintop-linegrowthtomaketheturnaroundsustainable.ElementsthatimproveJCP'schancesofsurvivalandincreaseprofitabilitybothintheshortandlongtermaresuggested.Theturnaroundstrategyincludesactionstobothincreaserevenueanddecreasecosts,withthesharedpurposeofimprovingthecompany'sbottomline.Figure4:StrategicactionstoimproveEBITDA5.3.1.1RevenueGeneratingActionsForJCPtosecureitslong-termsurvivaltroughgrowthitshouldprioritizethreerevenuegeneratinginitiativesmovingforward,which maybuildandsustaincompe titiveadvantage;i) furtherdevelopmentofitsOmni-channel,ii)focusonprivatelabelproductlines,andiii)improvementoftheJCPcustomerexperience.First,theshiftinconsumerpreferencesfromphysicaltodigitalshoppingexperiencesemphasizestheneedforJCPtodevelopitsonlinepresence.Digitalconsumers,ande-commerceingeneral,areontheris e;USe-commercesaleshaveincreased by13.75%since 2015andUSsmartphonepenetrationis68.9%whileexpectedtohitalmost81%by2020(Statista,2017b).Astechnologywillcontinuetoincreasethesophis ticationofconsumers,JCPmustcreateaseamless sho ppingexperiencewheredigitalsolutionssupportthein-storeexperience,forinstancethroughmobilepaymentsandeaseofsearch(MacKenzie,etal.,2013).Theexpansionofitsonlinepresencehasthreeimmediateimplications:i)itrequiresinvestmentinonlineinfrastru cture,ii) itmustbeIncrease(focus(on(online(sales(and(the(omni2channel(experience(EBITDA(ImprovementCostsCosts(related(to(physical(spaceInventory(managementImproved(inventory(management(to(decrease(inventory(levels(and(ultimately(improve(net(income(through(lower(COGSClose(unprofitable(stores,(reduce(floor(space,(renegotiate(rental(price(per(square(feet,(and(increase(subleasing(rent(price(for(store2within2store(shops((ActionRevenueOnline(channelCustomer(serviceIncrease(focus(on(the(Private(Label(to(reap(higher(profit(margin(and(exploit(successful(core(segmentPrioritize(customer(service(to(compete(with(peers(through(sales(associate(training(and(optimized(incentive(structurePrivate(Label(focus

16executedsystemicallyacrosschannels,andiii)marketingeffortsmustbealignedaccordingly.First,thecapitaltoinvestinatechnology-driveninfrastructureshouldbefreedupthroughtheclosingofanu mberofcurrentstores,which willbeelaboratedbelo w.Secondly,key tothesucces sofexpandingitsonlinepresenceistoexecutesystemicallyacrosschannels.ProductsorderedonlineshouldbeavailableforpickupinthenearestJCP,tosavethecustomershippingcostsandtoencouragespontaneouspurchases.Thecompanymustalsobeconsistentintermsofthequality,priceandproductselectionitoffersin-storeandonlinetostreamlineitsoffering.Third,JCPshouldleveragephysicalstoresasamarketingtooltomaintainbrandawarenessandachievehigheronlinesalesvolumes.SomeofJCP'scurrentlocationscouldserveasstorageunitleasesforitse-commercebusinesstosupportgrowingvolumethroughthischannel.Throughitssubstantialnetworkofstorageunits,i.e.olddepartmentstores,JCPwouldpotentiallybeabletooffershippingdealscomparabletoAmazonbothinspeedandprice,whichareimportantvaluedriversforconsumers(Gulisano,2017).However,thefirmcanextractcheapersolutionsbyrentingorbuyingsquarefeetinlessattractiveshoppingareasandbycentralizingdistributioninlargerhubs.Theconversionofphysicalstorespaceshouldthereforeonlysupportonlinepurchaseswithin-storepickup,whoseneedforspacemustbeevaluatedcontinuously.Additionally,JCPshouldleveragetheimmenseamountofdataavailablethroughitsonlineplatformstopersonalizemarketing. Anenhancedfocusonprivatelabelbrandsshouldbeundertakenaswell,asthisproductlinealreadyperformswellandexhibitssignificantsalesvolumepotentialforJCP.Privatelabelproductsshowhighergrossmarginpotentialrelativetodistributedproductsduetotheabsenceofdouble-margins.ThebelowthreesegmentsarerecommendedastargetsforR&Dandpromotionaleffortsgoingforward:• Millennials,thefirstgroupwhogrewupwiththeinternet,socialmediaandmobilephones,isagedbe-tween13-30,andmakesup15%oftheUSconsumers.Thesegmentisexpectedtoaccountfor1/3oftotalspendingintheUSby2020(MacKenzie,etal.,2013).• BabyBoomers,appro ximately47mil lionhouseholdsintheUSalon e,areprojectedtoaccountforthelargestspendingproportionswithincategoriessuchashousewares(73%)andapparel (56%)inthecomin gyears.Thesheersi zeofthesegmentunderlinestheimportanceoftargetingthegroupgoingforward.However,shoppingpatternsneedtobeevaluated,asthesegmentisexpectedtospendalargerproportionoftheirincomeonexperiencesrelativetooff-the-shelf-products(MacKenzie,etal.,2013).• HispanicsspendingisexpectedtodoubleoverthenexttenyearsandaccountforonefifthoftotalspendingintheUS(MacKenzie,etal.,2013).Inadditiontogrowingbuyingpower,theirshoppingpatternsareinterestingfordepartmentstores,asthesegmentspends1.5timesmoreonchildren'sapparel,footwear,andfreshfoodthannon-Hispanicconsumers-providingsubstantialopportunitiesfordepartme ntstoresandbrandsthatsucceedintargetingthesegment.

17Asapartofaprivatelabelstrategy,storesacrossthecountryshouldbedesignedtopromoteandshowcaseprivatelabelproductsinmoreoptimalwaysrelativetodistributedbrands.Inrelationtoanincreasedfocusontheprivatelabelproductportfolio,privatebrandsnotownedbyJCPwouldandshouldnotbeditched,astheseproductsdrivetraffictoJCPstores.Byimplementingtheinitiativesabove,JCPwill'shootwheretheducksare'(Whitney,n.d.),i.e.continueitsfocusonitscorebusiness,whilealsoinitiatingtargetingofnewsegments,adaptingtothefuture.Finally,JCPshouldprioritizeanimprovementofitscustomerexperienceduetogrowingcompetitionforsurvivalintheindustrywhereexperienceisadriverofrepeatpurchases.AsshowninTable1,JCPperformsworstinoverallcustomerexperiencerelativetoitspeers,andinthelowendinrelationtoshoppersatisfactiononlybeatingMacy'swhoalsohappentohavealowernumberofemployeespersquarefeet.Twomaindriversforanimprovedcustomerexperienceshouldbeconsidered:i)thephysicalspaceandii)theserviceprovidedbyemployees.First,thetidinessofthephysicalspaceisimportantforastimulatingshoppingexperience,withmessytablesandlowin-storeinventorie scurrentlydiscouragingsales(Loeb,2016).Awayto improveefficien cyistoeliminatenarrowjobdescriptionsandtraineveryemployeeinthestoretoassistandcheckoutcustomers,torestock,andtomaintaintidystorespaces.Second,sincein-storeemployeesaretheonesinteractingwithcustomers,customerserviceconstitutesacrucialpartoftheexperience.Excellentcustomerservicecandriveimmediateandrepeatpurchases.JCPshouldstimulateintrinsicmotivationthroughi)increasedandcontinuousemployeetraining,ii)movingawayfromtaskspecializationandtowardsareaspecialization,andiii)jobadvancementopportunities.Continuoustrainingandareaspecial izationwillmakeemployeesmoreco mpetentinthepro visionof exceptionalcustomerservice,stimulatepersonallearningaspirations,andincreasethedegreetowhichtheyfeelvaluedbycompanythroughitswillingnesstoinvestinthem.JobadvancementopportunitiesshouldincreaseemployeecommitmenttoJCPandwillinthelong-runresultincostsavings,asre-trainingofexistingemployeesistypicallycheaperthantrainingnewpersonnel.Assuch,JCPshouldaimatchangingthepeople,ratherthanchangingthepeople.5.3.1.2CostCuttingActionsAlthoughacompanycannotcutitswaytogrowth,reducingunnecessarycostscandowonderstoastrategicallyviablecompany'sprofitability.ForJCP,twothingsinitsoperatingcostsstandout:i)thehighnumberofphysicalstoresandii)aneedforimprovedinventorymanagement.JCPhasalargenumberofstoresbothrelativetotheirpeergroupandinwhenconsideringthattheretailindustryisshowingaclearshiftfromphysicaltoonlineshopping.Theoveralldecliningperformanceofdepartmentstoresresultingfromshiftingconsumerpreferencesawayfromphysicalandtowardsonlineretail,meritsadiscussionoftheoutlookfordemandandanassessmentofhowJCPmaystrategicallyrepositionitselfinthealteredmarket.JCPmustacknowledgethatreaching

18pastrevenuelevelsmaybeimpossibleinthefuture,simplybecauseoveralldemandforphysicaldepartmentstoresisshrinki ng.Acceptingthis potentialtr uthaboutthefuturemarketwouldsuggestaneedtofollowastrategyof'shrinkingselectively'(Harrigan,1980).LookingatacompanylikeNordstrom,whichturnsaprofitwithapproximatelyathirdofthenumberofstoresJCPhasand31%feweremployees,onecouldinferthatclosingJCPstorescouldbeaningredientfortheturnaroundrecipeforprofitability.However,astrategicconsiderationtokeepinmindisthehigherexclusivityofthebrandsNordstromdistribute:Alimitednumberofstoresiswell-alignedwithanimageofexclusivity.ForJCPwhotargetsalowerincomesegmentthanNordstrom,imitatingNordstrom'sstorestrategytooextensivelycouldbackfire.WerecommendthatJCPsupplementsthedecreaseinphysicalstorespacewithanincreasedfocusonthevisibilityandqualityoftheire-commerceofferingasdiscussedaboveinsection5.3.1.1.Decreasingrentexpensescanbeachievedthroughfouractionsasillustratedinfigure5below.JCPmustdecreasetheirpricepersquarefoot,eitherthrougharenegotiationoftheirleasingcontractswithlandlordsforrentedstores,orbyincreasingtherentchargedforstore-within-storespacesuchastheirSephorastores.Sincetheoverallretailindustryisindecline,andbuildingonJCP'slargesize,thecompanyshouldhavematerialleveragetosuccessfullyrenegotiaterentterms.Additionally,JCPcandecreasetheirrentexpensethroughareductioninsquarefeet,eitherthroughareductioninthenumberorthesizeoftheirstores.Consideringtheoutlookoftheretailindustry,JCPshouldcloseanumberofstoresaltogether,bystrategicallyidentifyingunprofitableanddecliningstores,customerreach,andp roximity tootherstores.The closingof physicalstoresandlowerrentexpenseswillallowJCPtoinvestthefreedupcashinimprovementoftheremainingstoresanddevelopmentoftheironlinepresence.Figure5:DecreaseofrentexpenseNext,withmediocreperformanceoninventoryturnoveranddaysofinventorycomparedtopeers,alongwiththepr oposedincreasedfocusontheirpri vatelabeloperations, JCPhasroomf orimprovementininventorymanagement.ImprovedinventorymanagementwillresultinlowerinventorylevelsandaconsequentlylowerCOGS.Thiswillultimatelyleadtoanimprovementofthebottomline,i.e. netincome.Furthe rmore,JCPshouldleveragetheirimprovedinventorymanagementintheirpricediscountstrategy;withahistoryofanexcessivenumberofpromotionalsalesevents(Ofek,etal.,2016),JCPcouldlearnfrombrandssuchasUniqlo,whichuseinventoryRenegotiation)with)landlordSubleasing)of)floor)spaceSquare)feetPrice)per)square)feetRent)expenseNumber)of)stores:)closingSize)of)stores:)reduction

19levelstodeterminepricediscounts(Yen,2016).Withsophisticatedinventorymanagementsystemsinplace,JCPcouldquicklyrespondtoproductpopularityanddiscountslowsellingproducts.5.3.2OrganizationalArrangementsConsideringJCP'shistoryofC-suiteturnover,currentmanagementshouldbekeptstableduringtheturnaroundtopreventfurtherconfusionandalienationamongemployees.Ellisonappearsmoreadeptatmotivatingandrelatingtotheworkforcethanhispredecessor.Hiseffortstoemphasizehispresencethroughouttheorganizationandhisenforcementofheightenedtransparencytocounterinsecurityinducedbyprevious managementteamsshou ldsupportmanagement'sabilitytomaintainorganizationalcohesivenessthroughouttheturnaroundprocess.Thesecondingr edientinasuccess fulturnar oun dstrategyisappropriateorganizationalarrangements(Harrigan,2012).AninternalforceaffectingthedeclineofJCPareemployeesandtheirlevelofmotivation.Buy-infromemployeesatallorganizationallevelsandinallfunctionsiscrucialtoasuccessfulturnaround.Lookingatcompensation,JCPsalesassociatesearnaround$9anhour,indicatingthatJCPispayingin-storeemployeesclosetominimumwage,whichrangesbetween$7.25and$11anhourinUSstates(DeSilver,2017).Payingsuchalowwagecandirectlydemotivateemployees.Figure6:HourlysalarycomparisonSources:(Glassdoor,2017a;Glassdoor,2017b;Glassdoor,2017c;Glassdoor,2017d)Additionally,studi esshowthat56%ofnear minimumwagew orkers onlyhaveah ighscho oleducationorless(DeSilver,2017).Limitededucationrestrictsjobopportunitiesfortheindividual,andthekeymotivationalfactorbehindthechoicetoworkatJCPwilllikelybethepaycheckforquiteafe wemployees.ThismaymakeitevenmorechallengingforJCPmanagementtomotivateemployeesintrinsicallyandencouragethemtotakeownershipoverandresponsibilityforthecustomerexperiencetheyprovide.ThecurrentlevelofmotivationamongemployeescanbeanalyzedassalesperemployeerelativetoJCP'speers.Astable9shows,JCPhasthelowestsalesperemployee,indicatingrelativelylowemployeemotivation.Hourly'salary'comparison'PositionJC'PenneyKohl'sMacy'sNordstromAverageCashier8.9*9.18*9.04Sales'Associate9.028.749.1711.379.575

20Table9:EmployeemotivationSources:(J.C.PenneyCompany,Inc.,2017;Kohl'sCorporation,2017;Macy'sInc.,2017;Nordstrom,Inc.,2017)Thisindicatorhasitsflawsduetolimitedinformationavailability;thenumbersofemployeesincludebothbackandfrontofficepeople,salesaredrivenbymorethanjustsalesassociateeffortssuchasstoredesignandinventoryonshelf,andthesalesfiguresreflectbothin-storeandonlinepurchases.However,itdoesprovidesomeindicationofemployeeefficiencyorlackthereof,particularlywhentakingJCP'sunderperformanceintoaccount.JCPshouldfocusondriversofintrinsicmotivationsuchastraininganddevelopmenttotargetemployeedrivetogeneratesales.JCPshouldfocustheadjustmentofitsorganizationalstructurearoundflatterhierarchies;aquicksearchonJCP'sonlinejobportalandonGlassdoor.comshowsthehighnumberofjobtitles,whichareallnarrowintheirjob responsi bilities.Thiswillalso haveaspillover effectoncu stomersatisfaction,sinceemployeescantakespeedyactiononcustomerrequestsinsteadreferringthecustomertoanotheremployee.Italsostimulatestheflowofinformation,whichisimportantforimplementationandintrackingthesuccessoftheturnaroundstrategy.5.3.3FinancialChangesTheturnaroundstrategyforJCPaddressesthethirdelementofasuccessfulturnaround(Harrigan,2012),i.e.acceptancefromcapitalmarketsthroughpropermanagementofdebtobligations.Thiswillalsobenefitthebottom-lineofJCPthroughadecreaseinitscurrentlyastronomicalinterestexpenses.WhenglancingoverJCP'sbalancesheet,itquicklybecomesevidentthatthecompanyisinahabitofheavilyfinancingitsassetswithdebt(seesection3.2).ComparingJCP'sdebtlevelswiththepeergroupandlookingattheinterestcoverageratiocreatesanevenbleakerpicture.Thecompany'shighlevelofindebtednessresultsinaremarkablyhighinterestexpense.Itshighleveloflong-termdebt,whichsignificantlyincreasedin2014,couldindicateanefforttoturnthecompanyaround.However,thesedebtlevelshavenotbeenjustifiedintheROAnortheROE,whereJCPhasbeenunderperformingsince2011,andincreasinglysosince2014,testifyingfurthertotheexcessivenessofitsdebtlevels.Consideringtheabovediscussiononsystemiccausesofdecline,itseemsthatJCPhastakenonexcessivedebt.Ontheotherhand,theremaybeanargumentforkeepingthemoneytheyalreadyborrowedasabufferforturbulenttimes,sincethecompany'sabilitytoborrowat

21reasonableinterestmaydeteriorateiftheirperformancedoesnotimproveinthenearfuture.However,webelievethecurrentdebtlevelisexcessiverelativetoJCP'scurrentrevenues,andwethereforerecommendthatJCPloweritsinterestexpensebydiligentlypayingdownexistinglong-termdebtandrefrainingfromtakingnewloans.5.4ValuationThefollowingsectionpresentsavaluationofJCPbasedonaprojectionofthecompany'sfuturecashflows.Twovaluationsar epresented, namelyabasecasevaluationandapost-restructuringvaluationwheretheturnaroundinitiativesareimplementedandaccountedforintheprojections.5.4.1BaseCaseAssumptionsThevaluationofJCPisconductedusinganall-equitymethodbasedoncashflowsratherthanearningsandnottakingintoaccountthecompany'scapitalstructureinthevaluation(Shefter,n.d.).TodiscountprojectedfuturecashflowsforJCP,itisnecessarytoestimatethecompany'sWACCandallthesubcomponentsusedinthecalculationillustratedinthefollowing:!"##=%&∗1-*+∗,-+/0∗1-Forthebasecaseanalysis,allcomponentsarebasedonthecompany's2016financialstatementexceptforthemarketpremium,riskfreerateandtaxratewhicharebasedonthemostrecentestimates.Thecostofdebtisestimatedbydividing2016interestpaymentswithtotalleverageyielding/&=7.2%.TheD/VandE/Vratiosarebasedonthecompany'senterprisevalueandlevelofdebtandequity.Therisk-freerateisbasedonthe10-yearUSTreasuryRate(U.S.DepartmentoftheTreasury,2017)andthemarketriskpremiumisderivedfromareportbyKPMG(2017).JCP'sbetaisobtainedfromGoogleFinance(2017)butadjustedusingtheBloombergmethodwiththeformula:adjustedbeta=2/3*rawbeta+1/3*1,inordertogeta'cleaner'beta,lesssensitivetoanyshocksormarketriseswhichcouldproducemisleadingresults(NYUStern,n.d.).Followingthisadjustment,abetaof0.7isobtained.Usingtheseinputsresultsinacostofequityof6.5%,whichyieldsaWACCof5.6%.OnemightbeinclinedtothinkthataWACCof5.6%seemstoolowforacompanyinneedofaturnaround.However,similarandevenlowerresultsfortheWACCareobtainedwhenconsultingexternalsources.Gurufocus(2017)estimatesaWACCforJCPof5.11%andbasedonthisdata,theaverageWACCamongJCPanditspeersis6.55%.TheWACCfoundusingthemethodologyabovethereforeappearstobeareasonableinputinthevaluation.Theprojectionsinthebasecasearebasedonmeanbrokerestimatesfortheperiod2017-2020forSales,COGS,SG&A,interest,Capexandnetworkingcapital(Factset,2017).Sincebrokerprojectionsareonlyavailablefortheperiod2017to2019andforsomeitems2017-2020,threeyearrollingaveragesareusedfortheremainingyears.

23average,privatelabelproductshavea25to30%highergrossmarginthanbrandedproducts(Kumar&Steenkamp,2007).Theannualgrowthrateoftheprivatelabelsegmentasapercentageoftotalsalesof5%appearsslightlyoptimistic.Tobalanceouttheoptimisticgrowthrateaconservativeassumptionconcerningthegrossmarginofprivatelabelproductsisimplemented.25%ratherthan30%isassumedtobethegrossmarginimprovement.Thecurrentgrossmarginofprivatelabelproductsis40%,asimpliedbytheoverallCOGSandusingtheassumptionofa25%grossmargin.Undertheassumptionofa5%annualgrowthofthepercentageofprivatelabelsales,thefollowingdevelopmentinthegrossmarginandCOGScanbeestimatedforthecoming10years:Table10:PrivatelabeldevelopmentSecond,sincewarehousingcostsareincludedinJCP'sCOGScalculation(JCPenneyInc.,2017),improvedinventorymanagement willaffectCOGSthroughwareh ousing.Basedonindustryinformation,warehousingcostsareestimatedtoconstitute3.4%ofCOGSanda10%improvementininventorymanagementisassumedequivalenttoa10%decreaseininventory,realizableoverthenextthreeyears.CombiningthetwoCOGSimprovementsyieldsthefollowingCOGSasapercentageofsalesforthenextfiveyears:Table11:Privatelabelimprovement5.4.2.3SG&ASG&Aisexpectedtofallasapercentageofrevenuefollowingstoreclosures,whichwillnotonlyreducethecompany'srentexpensebutalsofutureaccruedsalaries.AlthoughadditionalstaffisrequiredtoincreaseJCP'sonlinepresenceintermsofdevelopingtheonlineplatformandhandlingdistribution,thiswillnotbalanceoutthedecreasefromstoreclosures.Distributionwillbecoordinatedviathecompany'scentraldistributionhubswhicharemoreefficient201620172018201920202021Percentage0private0label0of0total0sales51.0%53.6%56.2%59.0%62.0%62.0%Improved0COGS0(product)64.3%64.1%63.9%63.7%63.5%63.5%Gross0margin35.7%35.9%36.1%36.3%36.5%36.5%201620172018201920202021Private/Label/Improved/COGS64.3%64.1%63.9%63.7%63.5%63.5%Warehousing/improv.00.08%0.17%0.25%0.34%0.34%Overall/Improved/COGS64.3%64.0%63.7%63.4%63.1%63.1%Gross/margin35.7%36.0%36.3%36.6%36.9%36.9%

24andrequirelessstaffcomparedtoitsphysicalstores.Developmentoftheonlineplatformwillrequireanexpansionofbackofficeemployeesandwillincludeoutsourcingofcustomerservicetoe.g.India,wherecostoflaborischeaper.Thus,theneteffectoftherelocationofresourceswillnotcounterweightheimmensedecreaseinSG&Afromstoreclosures.Additionally,thestrategicfocusonimprovedcustomerservicerequiresconsequentinvestmentinemployeetraining,development,andspecialization,thusincreasingSG&A.TakingthesethreeSG&Aincreasedriversintoaccount,JPC'stotalcostsareestimatedtobelessthanthedecreaseinSG&Afromstoreclosures.Hence,anoveralldecreaseinthecompany'sSG&Aoversalesisexpected.AlthoughJCPdidnotranksignificantlyaboveaverageintermsofSG&Aexpense,onemightexpectthecompanytohavelowerexpensescomparedtoahigh-endretailersuchasNordstromandBloomingdales(partofMacy's)whomightofferpersonalshoppersandrelatedservicesandchoosemorehigh-endlocationsfortheirstores.JCPshouldthereforetargetanSG&Aratiobelowtheindustryaverage,andfollowingstoreclosuresSG&Aasapercentageofrevenuewillthereforebereducedto28%,andshouldbedecreasedfurtherovertime.5.4.2.4InterestPaymentsIntherestructuringplan,agoalforreducingthecompany'soutstandingdebtwasdefined,whichwillaffectthecompany'sinterestpaymentsdownwards.Partofthecashgeneratedfromthesaleofphysicalstoresandlowerrentpaymentswillthusbeallocatedtorepayingtheprincipaloftheoutstandingdebt.Lowerinterestpaymentswillincreasethecompany'sbottomlineandfreeupmorecashtofinanceongoingoperationsandhelpexpandthecompany'sonlinepresence.Itwill,however,notaffecttheFCFofthemodelasthevaluationisbasedonNOPATratherthanNetincometoremovetheeffectofcapitalstructureonthevaluation.5.4.2.5CapitalExpendituresTheincreasedcommitmenttoitsonlineplatformislikelytorequireaninvestmentinITsoftwaresuchascloudspace,whichwillleadtoanincreaseinCAPEX.However,theCAPEXsavingsrealizedfromclosingstoresareassumedtocounterbalancetheincrease,resultinginaneteffectonCAPEXofzero.5.4.3M&AAnalysisAfinaloptiontobeevaluatediswhetherJCPmightserveasanattractiveacquisitiontarget(orbidder),andwhether thiswouldgenerateadd itionalvalueto shareholders.As emphasized continuously,traditionalretailerstodayfaceseveralchallenges,includingstagnatinggrowth,thegrowingpressurefromonlineretailers,andfiercecompetitionerodingprofitability,allofwhichpushesfirmstoseeknewwaysofachievinggrowth(Friedman,etal.,2016).In2016,consolidationintheretailindustryreachedanall-timehighsincetherecession,allegedlydrivenbystrongbalancesheets,cashaccumulationaswellasstagnatinggrowth-allofwhichareexpectedtocontinuegoing

25forward(A.T.Kearney,2017).Therehasbeensignificantmergeractivityintheretailindustryinthepastfiveyears.Conductingasearchontransactionswithintheconsumerretailindustrythusyieldsthefollowingresult(Mergermarket,2017):Figure7:Mergeractivitywithinconsumerretail,2013-2017.Althoughthisdoesnotrepresentalldealsthathavetakenplace,itdoesgiveanindicationofthesignificantvolumeoftransactions completedrecently.BCGhasadditio nallyfoun dthatapproximately150M&Adealswithavalueabove$150millionwereconductedintheperiod2014-2016whichamountedtoa45%increaseoverthepreviousthreeyears(Friedman,etal.,2016).Thequestionisthenwhatdrivesthisfiercepursuitofconsolidation,andwhetheritservesasavaluableoptionforJCP?Exhibit7andfigure8highlightssomeofthekeytransactionsthathavetakenplaceintheconsumerretailindustryfrom2012to2017.Thetypeofbuyer(PEorstrategic)andtherationalebehindthemer gerhavebeenemp hasized.Basedonananalys isofamu ltitude oftransactions,fouroverallrationale-categorieshavebeendefinedinordertogetagraspofwhatisreallydrivingthe consolidation.The fourrationales aregeographicexpansion,productdiversification,growthandconsolidation&synergies.

26Figure8:M&AanalysisofprecedenttransactionsinconsumerretailThetworationalesappointedtothemosttransactionsareconsolidation&synergiesaswellasgrowthwhichisinlinewiththetheorythatfirmsaremergingtobeinabetterpositiontomanagedeclininggrowthandfiercecompetition.Lackoforganicgrowthintraditionalbrick&mortarstoresisfrequentlyhighlightedasastrongtriggerofacquisitionsthusservingasanalternativemeansofensuringfuturegrowth(Hurley&Hadad,2017).Ashighli ghtedinthefinancialanalysisandvaluation,JCPanditspeershaveexperienceddecliningsalesinthepastyears,andthoseofJCPareexpectedtocontinuedecliningforthefirstfewyearsofthebudgetperiod.JCP,however,alsoexperiencedproblemsonitscostsidestemmingfromexcessiveCOGSandSG&Aputtingpressureonthecompany'sprofitability.Intheprecedingtransactionanalysis,severalfirmshighlightedpotentialsynergiesandcostsavingsarationaleforenteringintoamerger.Byincreasingscaleand

27operationalefficienciesorobtaini ngbetterinventoryandsup plychainmanageme nt,thesecompaniestherebysawmergingasawayofimprovingtheircompetitiveness.Basedontheabove,itappearsthatmergingcouldsolvemanyoftheproblemsfacingJCP.Thecompanyhasstruggledwithbothtoplineandbottomlinegrowth,anditmustmakeeffortstoincreasebothitsefficiencyandprofitability,andthiswouldperhapsbeachievedthroughsynergiesderivedfromcombiningitsoperationswithanothercompany.Mergingis,however,acomplicatedprocessandseveralquestionsmustbeansweredbeforeoptingforthissolution.Thefirstrelatestopotentialbuyers.Anobviouscandidatewouldbeoneofthecompany'sclosecompetitors,toincreasescaleandefficienciesandconsolidatetheirpositionwithintheretailmarket.ThedeclininggrowthofseveralpeersimpliesthattheseplayersmayalsobeexaminingalternativeoptionsforobtainingfuturegrowththusincreasingthelikelihoodofthembeinginterestedinJCP.A.T.KearneyhasputforwardthreekeytrendsthatwilldominateM&Aintheretailsectorintheforthcomingperiod,onebeingthegrowin gacquisitionactivityofpr ivateequityandotherfinancialbuy erslookingforcomplementaryfirmsthatbringsynergie stotheircurrentportfoliobusinesses.Based thetransactionanalysisbiddersinconsumerretailmergershavebeenamixofstrategicandprivateequitybuyers,andbothcategoriescouldthereforeserveaspotentialbiddersforJCP.Thesecondissueinrelationtoamergeristhedifficultyinrealizinganticipatedsynergies.Post-mergerintegrationforretailfirmscanbeparticularlychallengingbecauseofthedifficultiesofclosingdownstores,duetoleaseo bligatio ns,thecomplex ityofsupplychainsaswellasthechallengeinrelationtointegratingorupdatingoutdatedITinfrastructures(Friedman,etal.,2016).Torealizeexpectedsynergies,companiesmustproperlyplanforsuchintegrationtopreventthemergerfrombeingacostincreaserratherthanacostandefficiencyenhancer.ThethirdaspectwhichmustbeconsideredisthepriceshareholdersofJCPwouldrealizefollowingitsacquisition.ToestimatethevalueobtainedifJCPweretobeacquired,theaverageandmedianEV/revenue,EV/EBITDAandEV/EBITmultiplesforthehighlightedprecedenttransactionanalysishavebeencalculated.Themedianisusedinthevaluationofthecompanyasitislesssensitivetopotentialoutliers.ThevaluationofJCPiscalculatedbothusingthebasecaseandtherestructuringvalueforboth2017and2021andyieldsthefollowingresults:

28Table12:M&Avaluation,basecasevs.restructuredBasedonthebasecasewithoutanyimprovementsingrossmarginorSG&Aexpenses,thevaluationofJCPrangesbetween$697millionand$10.7billionwiththelowerboundattributabletoalowEBITasaresultofexpensesremainingahighpercentageofrevenue.AsignificantlyhighervalueisobtainedfromtherestructuredcaseastheinitiativesbringsignificantimprovementtoJCP'sfutureEBITDAandEBITresultinginavaluationrangeof$5.3to$10.7billion.Anothertakeawayisthedifferencebetweentherestructuredvaluein2017and2021basedonEBITandEBITDA.Thevaluationtherebyincreasesbyaround1billionfrom2017to2021whichisinlinewiththeideathatrestructuringisatime-consumingprocess.ThisfurtherimpliesthatifoneweretooptfortheM&Aoption,itwouldbesensibletoimplementtherestructuringplanbeforeattemptingtosellJCP.Thefinalaspe cttobeconside redspecificallyinrelationtoasaleofJCP isthec ompany'saccumulationofnetoperatinglosses(NOLs)whichqualifiesasanassetbecauseitcanbeusedforfuturetaxdeductions.AccordingtoJCP,thecompany'sabilitytousethetaxcreditwouldbeseverelyimpairedintheeventofatakeoverwhichhasledthecompanytoimplementaso-calledpoisonpill,makingitdifficultforoutsiderstoacquirethebusiness(Investopedia,2017).Ratherthanprotectingmanagement,theaimofthepoisonpillistoensurethecompany'sabilitytousethetaxbenefitgoingforward.Fromtheaboveanalysis,thereappearstobeseverallooseendswhichmustbefurtherexaminedbeforeembarkingonanM&Aadventure.Therefurthermoreappearstobeagreatdifferencebetweenthevaluewithandwithoutrestructuringinitiatives,andtheperformanceofJCPshouldincreaseovertimeiftheinitiativesindeedturnouttowork.6.RecommendationUptothispoint,severaloptionshavebeenevaluatedforJCP,andtheintentionisnowtooutlinetheone(s)thatwillgeneratethemostvaluetoshareholdersandplaceJCPonatrajectoryoffuturegrowthandprofitability.Fouroverallvalu ationshavebeenconducted,namelyaliquidatio nanalysis,abasecas ean drestructuringvaluationaswellasanM&Aanalysis,theresultsofwhicharehighlightedintable13.

29Table13:ValuationscenariosBasedontheabove,itisclearthatmaintainingJCPasagoingconcernwhileimplementingthepreviouslyhighlightedrestructuringinitiativesappearstobethesolutionwhichwouldgeneratethehighestvalue.From theM&Aanalysis italsobecameevidentthatwai tingafewyearswhilerestructuringsolutionsareimplementedsignificantlyimprovesJCP'sEBITandEBITAresultinginahighervaluationbasedonthesemultiples.Inthefuture,astheperformanceofJCPimproves,amergercouldthereforebeaviablesolutiontoincreasescaleandimprovethecompany'sabilitytooperateinanincreasinglycompetitiveindustrygoingforward.7.ConclusionThispaperhassoughttoexamineandoffersolutionsintendedtoimprovetheperformanceofJCP,acompanywhichhasbeenstuckinastageofdistressoveranumberofyears.JCPis,however,notaloneinexperiencingdecliningsalesandprofitability:Itisageneraltrenddominatingtheretailindustry,stemmingfromagrowingimportanceofonlineretailandincreasedcompetitionforcingfirmstolowerpricesandraiseadvertisingexpenses.WhileexternalforceshaveaffectedJCP,amajorpartofitsdeclineisattributabletointernalfactorsandafailuretoproperlyadapttothechangingdynamicsoftheindustrywithinwhichitoperates.ThroughananalysisofJCPanditspeersusingbothquantitativeandqualitativemeasures,itbecameclearthatthecompan ysig nificantly underperformsinterm sofbrandvalueandcustomersatisfaction,andranksfarbelowaverageintermsofkeyefficiencyandprofitabilityratios.Whenlookingatliquidityratios, tho seofJCPappearedsurprisin glyrobust,butthistrendwas onlyobservedwhenexaminingbalancesheetitemswhichhaveaccumulatedoveralongerperiodoftime.Ratiosbasedonrecentfirmperformancesuchasinterestcoverageandcashflowtocurrentliabilitiesyieldedcompletelydifferentandmoreconcerningresults.AfterhighlightingthefinancialdifficultiesfacingJCP,focusshiftedtowardstheuncoveringofkeyreasonsbehindthecompany'sdecliningperformance.Theimplementationofuntested,unsuitable,andattimespoorlyexecutedstrategiesbytopmanagementwerehighlightedasonecontributortothedemiseofJCP.Thecompanyalsofacedseveralproblemsintermsofmorale.Itwasasifaninvisiblewallatsomepointemergedbetweentopmanagementanddifferentsalesdepartments,thwartingcollaborationandrepressingteamspirit.Liquidationvaluation4.1billion

Basecasevaluation7.0billion

Restructuredvaluation15.7billion

30LiquidationandChapter11filingsweredeemedlessviablesolutionsforJCP,andrestructuringinitiativeswereinsteadhighlightedasawayofimprovingperformance.Bothinitiativestargetingtoplinegrowthandcostreductionswerepresentedwithkeyaspectsbeingstoreclosuresandagrowingonlinepresence.Giventheincreasingneedforcostreductionandachievinghigherscale,amergerwasdiscussedasapotentialoptiontoconsolidateJCP'spositioninthemarket.However,basedonpreviousindustrytransactionsandthecurrentoperatingprofitofJCP,thisappearstobealessvaluableoptiontoday,butcouldserveasanopportunityinthefuturewhenthefirm'sperformancehasstabilized.Failingtoinnovateandcontinuouslyadapttotheexternalenvironmentisoneofthebiggestmistakesacompanycanmake.JCPfellintothedangeroustrapofassumingthat'we'vealwaysdoneittha tway 'wasareason able argument,andf aultyaction sfurtherdeterioratedperformance,lettingthefirmspiralanotherstepdowntheorganizationaldistresscurve.Toreturntoprofitability,JCPmustlookinwardsandimplementthehighlightedstrategicandorganizationalchangesandintroduceasustainable,lessriskycapitalstructure.Thefollowingquoteshouldserveasaguidingpillarforthecompanyinthefuture:"itisyourjobtomakeeveryproductyoumakeobsolete.Ifyoudon'tsomeoneelsewill".JCPshouldbealeadershapingtheindustrydynamicsratherthanmakingex-postadaptationsandbecomingthevictimofcreativedestruction.

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