J.C. Penney (JCP)

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J.C. Penney (NYSE: JCP) is a leading department store retailer of apparel, accessories and home furnishings. They produce their own private brands in addition to selling products from other companies.

The company has faced changing consumer tastes in the past years--consumer traffic is being drawn to Wal-Mart (WMT) and Target (TGT) at the expense of department stores such as J.C. Penney and Macy's Inc. (M). In addition, J.C. Penney relies heavily on private labels^[1] Although private label products--in order to appeal to as many customers as possible--are not unique enough to compel fashion-conscious consumers to purchase them, they are still a viable option for customers who do not follow trends. JCP also faces lower profit margins in the due to rising commodity costs which will increase its clothing costs.

Business Overview

The company divides its merchandise into several categories which include: men's, women's and children's apparel, accessories and cosmetics; home furnishings; leisure and recreational equipment; jewelry and watches.^[2]

Business Segments

• Women's apparel: 24% of sales
• Home furnishings: 19% of sales
• Men's apparel and accessories: 19% of sales
• Children's apparel: 11% of sales
• Women's accesories: 11% of sales
• Family footwear: 7% of sales
• Fine jewelry: 4% of sales
• Services and other: 5% of sales

^[3]

Business Growth

FY 2010 Results (ended January 29, 2011)

Net sales increased 1.2% to $.1 billion. Net income increased 55% to $389 million.^[4]

Trends and Forces

Private Brands Not Unique Enough to Differentiate from Cheaper Alternatives

Private label brands are produced exclusively for a particular store. For example, J.C. Penney has a number of private label brands including Arizona Jeans Co. and Stafford.^[5] Retailers such as Macy's and J.C. Penney find private labels very attractive because the pieces often have higher margins than branded merchandise from other companies. However, the economic crisis of 2008-2009 has made people more reluctant to spend. When consumers have less money to spend, they will be more inclined to spend it on something that excites them. Private label brands, in an effort to appeal to as many consumers as possible, are less likely to spur a person to buy them when disposable income is already scarce.^[6] Also, the proliferation of discount retailers such as Wal-Mart, Target and Kohl's (some with their own exclusive brands) means that consumers can trade down to another store if they can no longer afford prices at J.C. Penney. Private label merchandise, by its nature, is not differentiated enough to keep fashion-conscious consumers purchasing them in lieu of lower-priced alternatives.

Increases in Commodity Prices Will Raise Clothing Retailer Prices

Cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.^{[7] [8]} Natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. ^[9][10] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs. In addition, raising commodity prices in other areas will also raise costs for retailers. While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.^[7]

Competition

J.C. Penney's main competition is mid-tier department stores such as Macy's Inc. (M) and Kohl's (KSS).

• Macy's Inc. (M) has a higher price point than J.C. Penney and sells more exclusive brands. Although both companies produce private labels, they make less of a contribution to Macy's total sales than they do J.C. Penney. ^{[11] [12]}
• Kohl's (KSS) is slightly smaller than J.C. Penney, both in terms of sales and locations Kohl's also operates at a slightly lower price point. Kohl's position as a discount retailer makes it more attractive for recession-stricken consumers who are looking to save money. Although it has fewer locations than J.C. Penney the fact the company sells its goods online means it is not at a large disadvantage to the larger retailer in terms of accessibility.^[13]

News

• On July 27, 2011 marketing chief Mike Boylson retired after 32 years working with JCP and 8 years serving in his former position. This will be first time Ron Johnson, who was appointed chief executive of JCP in November 2010, makes a senior-level appointment.^[14]

References

1. ↑ JC Penny 2009 10-k p.22
2. ↑ JCP 2008 Annual Report pg. 2  
3. ↑ http://media.corporate-ir.net/media_files/irol/70/70528/10K2009/10K_2009/HTML2/jc_penney-10k2009_0024.htm JCP 2009 10-k p.20
4. ↑ http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=1533035&highlight=
5. ↑ JCP 2008 Annual Report pg. 2  
6. ↑ Alexandria Sage. ANALYSIS - Private label eclipsed by brands in US retail slump.
7. ↑ ^{7.0 7.1} http://seekingalpha.com/article/238731-more-evidence-of-inflation-retailers-report-escalating-commodity-prices
8. ↑ Gap, Wal-Mart Clothing Costs Rise on ‘Terrifying’ Cotton Prices
9. ↑ http://www.thegovmonitor.com/world_news/asia/recession-drought-hail-reduce-cotton-acreage-in-china-12256.html
10. ↑ CNN Money - Cotton Shortage Could Inflate Clothing Prices
11. ↑ M 2009 Annual Report  
12. ↑ JC Penny 2009 10-k p.22
13. ↑ Discount Retailers Thriving in Recession.
14. ↑ [1]