J. C. Penney Company

Abstract

The case examines the liquidity issues that J. C. Penney (JCP) experienced in 2012 and 2013 following a decline in sales and profits over several years. Although JCP had been a highly profitable and growing company, the increasing pressures of competition led to changes in strategy and in management that were insufficient to recapture the consistent financial results it had previously enjoyed. While sales and profits waned, the cash balance also suffered, and Wall Street analysts began expressing liquidity concerns as the company wrestled with having enough cash on hand to cover daily operating needs.The case introduces students to the causes of a liquidity crunch for a large, established company. Students are challenged to decide when the company should raise external capital and when it should consider the benefits and drawbacks of raising equity versus debt. Focusing on an iconic retailer, the case provides an engaging context in which to discuss the need for a major capital structure decision due to operational challenges. Excerpt UVA-F-1720 Rev. Nov. 14, 2018 J. C. Penney Company On Friday, February 8, 2013, J. C. Penney (JCP) CEO Ron Johnson was facing the unenviable task of turning around one of America's oldest and most prominent retailers. The previous three years had seen variable financial results for the company (Exhibits1–5) and the cash balance had been gradually declining. According to Johnson, “as we execute our ambitious transformation plan, we are pleased with the great strides we made to improve J. C. Penney's cost structure, technology platforms and the overall customer experience. We have accomplished so much in the last twelve months. We believe the bold actions taken in 2012 will materially improve the Company's long-term growth and profitability.” Despite Johnson's plans, there were rumors among Wall Street analysts that the company was facing significant liquidity issues and perhaps the possibility of bankruptcy. Sales and profits were continuing to decline and the dividend had been eliminated. Just two days earlier, a Wall Street equity analyst had recommended investors sell their JCP stock by stating, “Cash flow is weak and could become critical. At current burn rates—and absent any further asset sales—we estimate that J. C. Penney will be virtually out of cash by fiscal year-end 2013.” On top of that, JCP was dealing with allegations that the company was defaulting on its 7.4% debentures, which were due in 2037. Although JCP management had responded that the default allegations were invalid, the rumors of the company's liquidity problems continued to circulate and analysts wanted assurance that JCP had a financing plan in place in the event that an injection of cash became critical to the company's survival. History of J. C. Penney . . .