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WIKI ANALYSIS
J.C. Penney 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. Due in large part to the recession, the company's sales decreased by 8.1% during the 2008 holiday season. However, widespread discounts and strict inventory control were able to prevent the company's sales from decreasing even further.
In addition to the recession, which has hit retailers hard during 2008, the company also faces changing consumer tastes--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). The amount of money spent at department stores as a fraction of total consumer spending decreased from 11% in 2002 to 6% in 2008.[1] In addition, J.C. Penney relies heavily on private labels--52% of the company's 2008 revenue came from private brands.[2] 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. In addition, their higher margins(3-5% higher than national brands), combined with the company's strict inventory control, has actually lead Morgan Stanley to increase their rating of the company on confidence they will exceed Wall Street earnings expectations.[3]
Business Overview
J.C. Penney is a leading department store retailer with 1,093 stores in the United States and Puerto Rico.[4] The company divides its merchandise into several categories which include: men's, women's and children's apparel, accessories and cosmetics; footwear; home furnishings; leisure and recreational equipment; jewelry and watches.[5]
Business and Financials
In June 2009, Morgan Stanley upgraded its rating of JCP from equal weight to overweight, due to confidence the company will exceed Wall Street earnings estimates. This new confidence is due to the company's high reliance on private-label goods. Private-label products are produced by J.C. Penney itself as opposed to national brands, which are produced by separate manufacturers. Private label products benefit the consumer and the company because they are usually priced lower than national brands and their profit margins are 3 to 5 percent higher than national brands as well. 52% of J.C. Penney's 2008 sales came from private labels[2], which means it benefits highly from their benefits. The upgrade caused J.C. Penney shares to increase by 1.7%.[3] Morgan Stanley's upgrade comes in the midst of a slump in the retail industry. The 2007 Credit Crunch as well as the recession in the American economy have led to decreasing sales in 2008 and 2009. Consumers who are unsure of their futures or their financial security have cut back on their spending, especially on nonessential items such as clothing and accessories. The holiday season, which is a time when many retailers make the majority of their sales, did not provide any relief from decreasing sales during the rest of the year. Same-store sales for December 2008 decreased by 8.1%.[7]
J.C. Penney has shown strength since this summer, as the firm is getting ready for a crucial 2009 Holiday Season. JCP posted a Q3 fiscal 2009 (ended 10/31/09) EPS of $0.11, which was $0.44 lower than Q3 fiscal 2008.[8] Although, JCP outperformed analyst estimates ranging from -$0.05 to $0.05.[8] JCP Chairman and CEO Myron E. Ullman, III, stated that the firm committed to improve the firm's operating margin after the weak summer season. Improving operating margins helped JCP beat earnings estimates, and will allow them to sell merchandise at competitive prices during the Holiday Season. After the earnings release, the firm also raised its fiscal year earnings estimate from $0.90 to $1.08.[8]
Trends and Forces
Amount of Consumer Spending at Department Stores Continues to Decrease
According to a nine-year study conducted by Cavallino Capital LLC, the amount of money consumers spent at department stores as a fraction of total spending during the holiday season from 2002 to 2008 decreased from 11 to 6%.[1] Also, in the above graph the percentage of survey participants who visited department stores decreased from 2005 to 2008, whereas the percentage of participants who visited discount stores such as Wal-Mart (WMT) and Kohl's (KSS) increased each year.[1]
Consumers consider everyday low prices (similar to what one would find in Wal-Mart) as much more important than discounts and well-advertised sales (similar to what one would find in J.C. Penney). What this means is J.C. Penney's decreasing sales are partly a result of the U.S.'s economic downturn and partly a result of changing consumer buying patterns, which has been moving away from department stores for at least four years. The big name discount retailers such as Wal-Mart (WMT) and Target (TGT) show no signs of shrinking. This means that even when the American economy rebounds J.C. Penney and other department stores will face decreasing sales due to changing consumer tastes.
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.[9] 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.[10] 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. Since 52% of J.C. Penney's 2008 sales came from private labels[6] a decrease in sales of private brands will have a large adverse effect on its income.
J.C. Penney Responds to Slowdown in Consumer Spending
Retail sales in 2008 have decreased greatly from previous years. The 2007 Credit Crunch made it more difficult for consumers to secure a line of credit. In addition, large numbers of layoffs have made consumers uncertain of their financial security. Therefore, consumers are not spending as much in stores as they did when the economy was in better shape. J.C. Penney's sales decreased by more than $1 billion from 2007 to 2008[2], and its operating income was cut in half. The company has responded to this decrease in consumer spending by cutting costs. It has kept its inventories lean in order to prevent further promotions that will only decrease its profit margin even more. In addition, the company's slight reliance on private labels over national brands will help its bottom line through the lower costs and higher profit margins associated with private label products. The company also has more control over production of private brands, meaning it is able to adjust sourcing and inventory to suit its specific needs. Although the company's private label brands are not differentiated enough for a fashion-conscious consumer, they still have a market in consumers who are not as heavily invested in trends.
Competition
| Company | 2008 Sales ($millions) | 2008 Comp Store Sales Change |
| J.C. Penney | 18,486[2] | (8.5%)[2] |
| Macy's | 24,892[11] | (4.6%)[12] |
| Kohl's | 16,389[13] | (6.9%)[13] |
J.C. Penney's main competition is mid-tier department stores such as Macy's Inc. (M) and Sears Holdings (SHLD) in addition to Kohl's (KSS).
- Macy's Inc. (M) has 847 stores to J.C. Penney's 1,093. Also, its 2008 sales were $6,406 million higher than J.C. Penney's. Macy's 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. 19% of Macy's 2008 sales came from private brands[12] whereas private brands constituted 52% of J.C. Penney's 2008 sales.[6]
- Kohl's (KSS) is slightly smaller than J.C. Penney, both in terms of sales and locations (Kohl's made $16,389 in revenue and has 1,004 stores). Kohl's also operates at a slightly lower price point. The company has seen a lower decrease in sales from 2007 to 2008--total sales for Kohl's decreased by $85 million whereas J. C. Penney's total sales dropped by $1.4 billion. 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.[14]
References
- ↑ 1.0 1.1 1.2 1.3 1.4 Cause of Department Stores' Decline: Changing Spending Habits.
- ↑ 2.0 2.1 2.2 2.3 2.4 JCP 2008 Annual Report pg. 11
- ↑ 3.0 3.1 Retail stocks were mixed Monday in a holiday-shortened week as J.C. Penney Co. was upgraded to overweight from equal weight by Morgan Stanley.
- ↑ JCP 2008 Annual Report pg. 8
- ↑ JCP 2008 Annual Report pg. 2
- ↑ 6.0 6.1 6.2 JCP 2008 Annual Report pg. 19
- ↑ J.C. Penney's holiday sales down, jewelry 'soft'.
- ↑ 8.0 8.1 8.2 Bloomberg, "JCPenney Reports Third Quarter Results," 11/13/09
- ↑ JCP 2008 Annual Report pg. 2
- ↑ Alexandria Sage. ANALYSIS - Private label eclipsed by brands in US retail slump.
- ↑ M 2009 Annual Report pg. 15
- ↑ 12.0 12.1 M 2009 Annual Report pg. 18
- ↑ 13.0 13.1 KSS 2009 Annual Report pg. 18
- ↑ Discount Retailers Thriving in Recession.
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