Columbia)Business)School Caroline)Baier Jensen Turnaround)Management Emma) Caroline) Jaksland Final)Project Madelon)K.)Grandjean)Poulsen Professor)Doug)Squasoni Mikkel Holst)Schou Hansen December)15,)2017 Marc)Faarborg Toft Competing for Survival: A Turnaround of Department Store J.C. Penney Competing for Survival: A Turnaround of Department Store J. C. Penney Executive)summary Stock)price)development This paper is centered around J.C. Penney, an 250 Index)100)in)2007 Am erican retailer operating more than 1,000 department stor es across the country. More 200 specifically, the focus is on the financial and operational issues facing the company which has 150 led to declining revenues and the incurrence of losses over the past five years. 100 The analysi s begins with an overview of the company and the industry within which it 50 operates. It is evident that the entire industry has been under pressure due to changing 0 2007))))))))2009))))))))2011))))))))2013))))))))2015))))))2017 dynamics such as the growing popularity of online shopping as well as a general increase in General industry decline evident from stock competition, consequently er oding margins and price performance of four players. J.C. Penney profitability. To improve the quality of any is clearly performing the worst, approaching suggested recommendations, both qualitative index 7 in December 2017 and quantitative tools are used in the paper. In the financial an alysis it is discovered that Key)industry)metric) although most retailers have felt a growing Sales)per)retail)sq.)feet pressure on their operations, J.C. Penney seems 498) to have been affected the most. Th e company thereby underperforms in relation to its main peers both in terms of efficiency and 224) 198 profitability, while simultaneou sly facing a 121) growing debt burden that cannot besu stain ed in the long run. Th e causes for this declining performance ar e sou ght through an ex amination of the company’s operational and strat egic JCP ranks significantly below itspeers in terms activities, where management turbulence and of sales per retail square feet emphasizing the need for store closuresto improvethismetric wrongful strat egic initiatives ar e highlighted as contributing factors to J.C. Penney’s declining performance. A turnaround strat egy is proposed Turnaround) strategy with highlights being stor e closures and a growing online presence to en sure both bottomQ Distribution and top line growth going forw ard. Finally, Revenue Products sever al valuations ar e conducted to ex amine whether the company should i) be liquidated, ii) Service EBITDA) be sold in an M&A process, or iii) continue as a Improvement Costs) related)to)physical) going concern. Th e most valueQcreating option to spac e debt and equity holders is to keep the company Costs as a goingconcern while implementingnecessary Inventory)management turnaround initiatives to place J.C. Penney on a Turnaround strategy aimed at increasing J.C. trajectory of growth and profitability. Penney’s bottomQ and top linegrowth Table of Contents 1. Introduction ............................................................................................................................ 1 2. Company Overview ................................................................................................................. 2 2.1 Key Company Facts ......................................................................................................................... 2 3. Peer Comparison ..................................................................................................................... 3 3.1 Non-Financial Peer Analysis ............................................................................................................ 3 3.2 Financial Comparison ...................................................................................................................... 3 3.2.1 Operational Analysis ........................................................................................................................ 4 3.2.2 Analysis of Capital Structure and Liquidity ...................................................................................... 6 4. Causes of Decline ..................................................................................................................... 7 4.1 Management Failure ...................................................................................................................... 7 4.2 Corporate Governance .................................................................................................................... 9 4.3 Organizational Distress Curve ....................................................................................................... 10 5. Options Available for JC Penney ............................................................................................ 11 5.1 Liquidation ................................................................................................................................... 11 5.1.1 Waterfall Analysis .......................................................................................................................... 12 5.2 Chapter 11 Filing ........................................................................................................................... 13 5.3 Turnaround Strategy ..................................................................................................................... 14 5.3.1 Corporate Strategy ........................................................................................................................ 15 5.3.2 Organizational Arrangements ........................................................................................................ 19 5.3.3 Financial Changes .......................................................................................................................... 20 5.4 Valuation ...................................................................................................................................... 21 5.4.1 Base Case Assumptions ................................................................................................................. 21 5.4.2 Restructuring Assumptions ............................................................................................................ 22 5.4.3 M&A Analysis ................................................................................................................................. 24 6. Recommendation .................................................................................................................. 28 7. Conclusion ............................................................................................................................. 29 Bibliography .............................................................................................................................. 31 Exhibits ..................................................................................................................................... 35 1. Introduction The retail landscape is projected to change more within the next five years than it has done over the past century (MacKenzie, et al., 2013). Looking not only at department stores, but at the retail space in general, the first seven months of 2017 saw 19 bankruptcies, surpassing the record of 18 filings during 2009 (Thomas, 2017). Some attribute the declining performance of retailers to the growing importance of online shopping while others view it as a market correction for those chains that were not properly equipped to compete in the industry in today’s competitive environment. All, however, agree that the concept of a department store as we know it, is about to change (Cohen, 2017). The department store industry has been in decline for the past five years, and this trend is expected to continue with revenue projected to fall at a rate of 4% annually to $156.4 billion in 2017 (Cohen, 2017). Annual growth between 2017 and 2020 is furthermore expected to fall -2.6% (Statista, 2017a). Cohen (2017) projects that the average industry profit margin will be 2.6% in 2017, a decline of 1.4 percentage points from 2012. In addition to declining sales, brick-and-mortar stores incur high operational cost, relative to online competitors, primarily due to salaries and retail space. Trends among physical department stores are lower prices, higher frequency of promotions and more funds allocated to marketing and advertising. In the past decade, brick-and-mortar stores have followed the growth formula of opening stores to acquire and service more customers (MacKenzie, et al., 2013). This growth strategy, however, is no longer valid as consumer purchasing decisions have changed dramatically. Previously, a customer’s purchase decision process started with choosing a store and then selecting a product in that store. This is in line with the design of department stores, who choose brands relevant to their target customer group. However, consumers now research online before going to the stores reducing the need for assistance in the shopping process. Customers are thereby taking charge of the initial screening of brands, making the value proposition of department stores obsolete to a certain extent. Department stores also face the challenge of shifting consumer preferences, as shoppers de-select traditional brands in favor of non-traditional, startup brands, which are rarely present in large department stores (Roeder & Rupp, 2017). In addition,