Current Challenges
JC Penney is a mid-size departmental store operator that is struggling with a myriad of challenges, among them, a tough operating environment, reduced sales and financial challenges. The retail has seen increased competition with the rise of e-commerce and companies like Amazon and E-Bay. In the last ten years, for instance, JC Penney stock has lost 86% of its value, from a high of $83.43 in March 2007 to a low of $7.70 in May 2016. In May 2016, the company announced a drop in sales in the first quarter, 2016. However, the company cut down on losses, from a $150 million loss in the first quarter 2015 to $68 loss in the same period in 2016 (“Yahoo! Inc. Stock - Yahoo! Finance,” 2016).
JC Penney is also undergoing a financially distressful period that culminated in an expense challenge in April 2016; where employees were forced to cut down on overtime, reduce working hours and departmental managers were encouraged to undertake other cost-cutting measures. The financial distress led to an 8% dip in the shares of the company, hitting a low of $7.70 by the end of May, the lowest in six months (Ramakrishnan, 2016). On 1st June 2016, JC Penney announced a move to refinance a $2.5 billion loan, by restructuring it to suit the current financial situation. The move included extending the maturity of the loan as well as changing the annuity payments on the loan. The micro challenges of the firm – declining sales and financial distress – need to be addressed with urgency, if the company is to bounce back to profitability according to its turnaround plan. The market situation problems – difficult operating environment – should be addressed by the use of strategies that give the company a competitive advantage over competitors.
Financial Status of JC Penney
In the last three years ending January 30, 2016, JC Penney has had a marginal increase in revenues on a year over year basis, from $11.85 billion in 2014 to $12.25 in 2015 and $12.62 in the year ending January 2016. However, the margins on sales get depleted by expenses, a factor that has resulted in operating losses in the last three years. It is important to note that the company has reduced the amounts of operating losses in the last three years, from $1.2 billion in the year ending in January 2014 to $89 million in the year ending in January 2016. Net losses have also declined in the same period, from $1.2 billion to $533 million.
In the balance sheet, the ratio of total liabilities to total assets crossed the 80% mark, sending the company to the brink of insolvency at the backdrop of a high level of leverage. Particularly, long-term debt has averaged at 100% of the property, plant, and equipment, a factor that exposes the company assets to creditors. With a negative return on equity and capital, JC Penney faces challenges of attracting extra capital, raising concerns over the company’s ability to rise from financial distress. These financial problems pose a challenge of the tract to the company, as chances of expansion are limited to the ability to access capital for expansion and financing of operating expenses up to that period when the company will achieve profitability. As expected, the company’s current model is not sustainable because the negative earnings deplete the company’s retained profits, washing away the value to investors (Yahoo Finance, 2016).
Going forward, the strategy to solve the problems faced by JC Penney should rotate around the need to finance operational expenses with internal sources of funds. That means JC Penney needs to generate enough sales net of cost to cover all the major expenses like administrative and advertising. Several measures can be used to achieve this; rigorous marketing, cutting down unnecessary costs and tilting the company model towards online selling and concentration on strong growth products. In that vein, growing the homeware section of the business would take off the pressure from clothing and apparel, and, while at it, boost the company earnings, without the need to pour a lot of capital in the expansion (Garcia, 2016). The move to restructure the $2.5 billion loss will be imperative in reducing the burden of loan repayments on the income statement as it will release the money that could have been used to repay loans for other internal uses.
The strategy will reposition the company, from a traditional departmental store to a modern retailer of choice, by offering a perfect mix of physical shopping experience (to the elderly citizens and baby-boomer generation) and a unique online shopping experience. That will mean staff redistribution and training, with a focus on new skills that will drive the company on a profitable trajectory. As noted above, marketing of the new strategy will be necessary because it will create confidence in investors and creditors. Other measures in the strategy will involve a reassessment of financial allocations with an aim of sealing any cost loopholes that might be swallowing money from the company unnecessarily. That will be done by the use of a due diligence process that will examine the cost centers of the business, and rate their necessity on a scale of one to ten.
Lastly, the strategy will streamline the operational processes to align them with modern business practices. That will involve the adoption of modern technology that can be scaled to expand the playing field and business premise. The idea is to move towards inclusion and offering a diverse range of products to the customers, while sticking to the company cultural practices and ethics.
References
Garcia, T. (2016, May 23). Since no one is buying clothes, here’s what stores are selling instead. Retrieved from http://www.marketwatch.com/story/retailers-follow-the-money-to-home- goods-as-consumers-ditch-clothes-2016-05-20
Ramakrishnan, S. (2016, May 6). JC Penney cuts employee hours after “expense challenge”: NY post. Retrieved June 10, 2016, from http://www.reuters.com/article/us-jc-penney-costs- idUSKCN0XX16Q
Yahoo Finance. (2016). J.C. Penney Company, Inc. Holding Stock - Yahoo! Finance. Retrieved June 10, 2016, from http://finance.yahoo.com/q/bs?s=JCP+Balance+Sheet&annual
Yahoo! Inc. Stock - Yahoo! Finance. (2016, June 10). Retrieved June 10, 2016, from http://finance.yahoo.com/echarts?s=JCP+Interactive#{%22showArea%22:false,%22line Type%22:%22line%22,%22range%22:%2210y%22,%22allowChartStacking%22:true}
