1EXECUTIVE SUMMARY The retail industry has seen many changes over the decades. Most of the changes have been due to economic recessions and rocky consumer confidence in the past. The trend amongst...

Team C
PPaPage
ACCT600 MAFM CAPSTONE

May 2013

Professor Patrick Be
y








Team C
Samantha Ancell
Angelica Gue
ero
Angelica Melton
Jessica Rootz
Cordez Williams
June 23, 2013
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Table of Contents
1 EXECUTIVE SUMMARY ............................................................................................................................ 7
2 INDUSTRY OVERVIEW ........................................................................................................................... 11
2.1 Industry Snapshot .......................................................................................................................... 11
3 ORGANIZATION AND STRUCTURE ........................................................................................................ 14
3.1 Belk, Inc. ........................................................................................................................................ 14
3.1.1 History .................................................................................................................................... 14
3.1.2 Organizational development .................................................................................................. 14
3.1.3 Marketing Strategies .............................................................................................................. 15
3.1.4 Growth and profitability ......................................................................................................... 15
3.1.5 Acquisition Risks ..................................................................................................................... 15
3.2 Kohl’s Corporation ......................................................................................................................... 16
3.2.1 History .................................................................................................................................... 16
3.2.2 Organizational Structure and Corporate Issues ..................................................................... 17
3.2.3 Executive Officer Overview .................................................................................................... 17
3.2.4 Product Development ............................................................................................................ 18
3.3 J.C. Penney Company, Inc. ............................................................................................................. 19
3.3.1 History .................................................................................................................................... 19
3.3.2 Organization ........................................................................................................................... 20
3.3.3 Product Development ............................................................................................................ 21
3.3.4 Legal Proceedings. .................................................................................................................. 21
4 INDUSTRY LEADERS .............................................................................................................................. 23
4.1 Kohl’s ............................................................................................................................................. 23
4.2 Macy’s Inc. ..................................................................................................................................... 23
4.3 Sears Holding Corporation ............................................................................................................ 24
4.4 J.C. Penney..................................................................................................................................... 25
4.5 Target Corporation ........................................................................................................................ 25
5 SWOT .................................................................................................................................................... 27
5.1 Strengths ....................................................................................................................................... 27
5.1.1 Kohl’s ...................................................................................................................................... 27
5.1.2 J.C. Penney.............................................................................................................................. 29
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5.2 Weaknesses ................................................................................................................................... 30
5.2.1 Kohl’s ...................................................................................................................................... 30
5.2.2 J.C. Penney.............................................................................................................................. 31
5.3 Opportunities ................................................................................................................................ 33
5.3.1 Kohl’s ...................................................................................................................................... 33
5.3.2 J.C. Penney.............................................................................................................................. 35
5.4 Threats ........................................................................................................................................... 37
5.4.1 Consumer Confidence ............................................................................................................ 37
5.4.2 Exhibit 5.4.2 - Trend in Self-Reported U.S. Average Daily Spending ...................................... 38
5.4.3 Shopping Trends ..................................................................................................................... 38
5.4.4 Government Regulations........................................................................................................ 39
5.4.5 Economic Conditions .............................................................................................................. 39
6 RISK ANALYSIS ...................................................................................................................................... 41
6.1 Reputational Risk ........................................................................................................................... 41
6.1.1 Managing Reputational Risk ................................................................................................... 42
6.2 Operational Risk ............................................................................................................................ 43
6.2.1 Exhibit 6.2.1: Sector Risk Radar .............................................................................................. 46
6.2.2 Managing Operational Risk .................................................................................................... 46
6.3 Procedural Risk .............................................................................................................................. 47
6.3.1 Managing Procedural Risks .................................................................................................... 49
6.4 Financial Risk ................................................................................................................................. 50
6.4.1 Managing Financial Risk ......................................................................................................... 52
6.5 Human Resource Risk .................................................................................................................... 54
6.5.1 Managing Human Resource Risk ............................................................................................ 56
7 Valuation- Kohl’s .................................................................................................................................. 58
7.1 Weighted Average Cost of Capital................................................................................................. 58
7.2 Sources of Debt ............................................................................................................................. 58
7.3 Sources of Equity ........................................................................................................................... 60
8 VALUATION – J.C. PENNEY ................................................................................................................... 66
8.1 Book Value ..................................................................................................................................... 66
8.2 Book Value Per Share .................................................................................................................... 66
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8.3 Market Value ................................................................................................................................. 66
8.4 Intrinsic Valuation ......................................................................................................................... 67
8.4.1 Forecasted Financial Statements ........................................................................................... 68
8.4.2 Exhibit 10.4.2: Forecasted Financial Statements for J.C. Penney ........................................... 68
8.4.3 Present Value of Operations .................................................................................................. 70
8.4.4 Exhibit 10.4.4: J.C. Penney Value of Operations ................................................................... 71
9 PERFORMANCE MEASUREMENTS ........................................................................................................ 72
9.1 Asset Utilization ............................................................................................................................. 72
9.1.1 Sales to Working Capital ......................................................................................................... 72
9.1.2 Days of Working Capital ......................................................................................................... 73
9.1.3 Sales per Person Ratio ............................................................................................................ 73
9.1.4 Asset Utilization Table ............................................................................................................ 73
9.2 Operating Performance ................................................................................................................. 74
9.2.1 Gross Profit Percentage .......................................................................................................... 74
9.2.2 Operating Profit Percentage................................................................................................... 74
9.2.3 Net Profit Percentage ............................................................................................................. 75
9.2.4 Operating Performance Table ................................................................................................ 75
9.3 Cash Flow Measurements ............................................................................................................. 75
9.3.1 Cash Flow from Operations .................................................................................................... 75
9.3.2 Cash Flow Return on Assets ................................................................................................... 76
9.3.3 Cash to Working Capital Ratio ................................................................................................ 76
9.3.4 Cash Flow Measurements Table ............................................................................................ 76
9.4 Solvency Measurements ............................................................................................................... 77
9.4.1 Times Interest Earned ............................................................................................................ 77
9.4.2 Debt to Total Assets ............................................................................................................... 77
9.4.3 Cash Debt Coverage Ratio ...................................................................................................... 77
9.4.4 Solvency Measurements Table............................................................................................... 78
9.5 Liquidity Ratios .............................................................................................................................. 78
9.5.1 Net working capital ................................................................................................................ 78
9.5.2 Cu
ent ratio ........................................................................................................................... 79
9.5.3 Quick or acid test ratio ........................................................................................................... 79
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9.5.4 Liquidity Measurements Table ............................................................................................... 79
9.6 Activity Ratios ................................................................................................................................ 80
9.6.1 Inventory turnover ratio ......................................................................................................... 80
9.6.2 Average age of inventory ....................................................................................................... 80
9.6.3 Average collection period....................................................................................................... 81
9.6.4 Activity Measurements Table ................................................................................................. 81
9.7 Return on Investment Measurements .......................................................................................... 81
9.7.1 Return on Equity (ROE) ........................................................................................................... 81
9.7.2 Dividend Payout Ratio ............................................................................................................ 82
9.7.3 Return on Assets (ROA) .......................................................................................................... 82
9.7.4 Return on Investment Table ................................................................................................... 83
9.8 Market Performance Measurements ............................................................................................ 83
9.8.1 Sales to stock price ratio ........................................................................................................ 83
9.8.2 Price/earnings ratio (P/E) ....................................................................................................... 84
9.8.3 Earnings per share .................................................................................................................. 84
9.8.4 Market Performance Measurements Table ........................................................................... 85
10 CONCLUSION AND RECOMMENDATIONS ............................................................................................ 86
10.1 Optimal Capital Structure............................................................................................................ 86
10.2 How to Fund Acquisition ............................................................................................................. 87
10.3 Growth Plan ................................................................................................................................ 89
11 WORKS CITED ....................................................................................................................................... 90
12 APPENDIX ............................................................................................................................................. 98
12.1 Appendix 1 .................................................................................................................................. 98
12.1.1 Industry Overview Sales per square foot ............................................................................. 98
12.1.2 Kohl’s Income Statements for the past 3 years ................................................................... 99
12.1.3 J.C. Penney’s Income Statements for the past 3 years ...................................................... 100
12.1.4 Growth, Profitability, and Financial Rations for Kohl’s Corporation .................................. 101
12.1.5 Kohl’s Valuation and Industry comparison ........................................................................ 102
12.1.6 Growth Profitability and Financial Ratios for J.C. Penney .................................................. 103
12.1.7 Distribution Centers for Kohl’s Corporation ...................................................................... 105
12.1.8 “Nine-Box Merchandising Grid” ......................................................................................... 106
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12.1.9 J.C. Penney WACC .............................................................................................................. 107
13 APPENDIX 2 FINANCIAL STATEMENTS ................................................................................................ 108
13.1 Kohl’s Income Statement .......................................................................................................... 108
13.2 Kohl’s Balance Sheet ................................................................................................................. 110
13.3 Kohl’s Statement of Cash Flows ................................................................................................ 112
13.4 J.C. Penney Income Statement.................................................................................................. 114
13.5 J.C. Penney Balance Sheet ......................................................................................................... 116
13.6 J.C. Penney Statement of Cash Flows ....................................................................................... 117
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1 EXECUTIVE SUMMARY
The retail industry has seen many changes over the decades. Most of the changes have
een due to economic recessions and rocky consumer confidence in the past. The trend amongst
etailers in 2013 has been utilizing more technology solutions and customer feedback to drive the
direction of the retail industry. The National Retail Federation expects a 3.4% increase in retail
sales across the industry for 2013. Furthermore, they forecast a 9 to 12% increase in online retail
sales for 2013 (Brown & Grannis, 2013).
Belk was not chosen as either the parent or target company. The company has been
showing steady growth of the last 5 years; however, it is determined to only explore new
opportunities where the company is recognized and well known. This would limit expansion to
the three regional areas that the company has established. It would also mean that a new
acquisition by Belk would cause the closing of stores outside the target area if it were the parent
company. Another risk factor is the amount of debt that Belk has in variable rate debt. The
company cu
ently holds $97.8 million in variable debt as well as $80 million in notional swap
ate that is fixed and set to expire in 2013.
Kohl’s was chosen as the parent company. To offer the widest possible variety of
products with price points to meet every family’s needs, Kohl’s employs the use of private,
national, and exclusive
ands. In the beginning, Kohl’s department stores had a wide variety of
offerings. In today’s stores, Kohl’s has limited their product offerings to six areas including
clothing for women (31%), men (19%), and children (13%), accessories (10%), home (18%), and
footwear (9%) (Kohl's Corporation, 2013a).
J.C. Penney was chosen as the target company. Though the company has reported
epeated losses in sales each quarter, J.C. Penney still saw an annual revenue run rate of $2.635
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illion in the first quarter of 2013. J.C. Penney has a long history selling affordable clothing.
When first opened in 1902, the company catered to farmers and their families, selling blue jeans,
lue-collar work clothes, shoes, fa
ics, and sewing needs. Since its opening, J.C. Penney has
established 1,104 department stores in 49 states and Puerto Rico as of Fe
uary 2013.
Some of Kohl’s key competitors are Target, Macy’s and J.C. Penney. Due to recent
struggles, J.C. Penney has fallen behind in the list of industry frontrunners. Kohl’s achievements
have proved to be enough to push them past competitors like J.C. Penney over the years. Their
internet presence can be assisted with the addition of J.C. Penney’s internet marketing presence.
Recent shopping trends have shown that internet shopping is continuing to grow exponentially.
Kohl’s will potentially realize more financial gains with the merger along with an increased
market presence. Kohl’s customer satisfaction focus will point them in a direction to achieve
such gains. They will have to stay aware of future economic conditions and consumer confidence
to maintain their growing annual sales track.
One of the important steps of analyzing a potential acquisition is determining any risks
that may result. During our analysis we identified several risks that require management to plan
accordingly for including reputational, operational, procedural, financial, and human resource
isks. The acquisition of J.C. Penney should require the planning necessary to prevent a drop in
eputation for Kohl’s by implementing Kohl’s philosophies into the J.C. Penney model such as
customer service standards and Kohl’s Cash. Completing an overall analysis of both
organizations supply chain, minimizing overlap, and implementing systems to prevent
disruptions should prevent operational risks, such as supply chain disruptions.
Both organizations have unfortunately faced
eaches of PII from their systems and
Kohl’s will need to implement a corporate wide policy for internal controls and fraud checks to
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prevent catastrophic losses on either side. The acquisition of J.C. Penney will require Kohl’s to
form a plan for the future of the organization to mitigate the overwhelming financial risk it could
face by taking on the failing organization. In addition to all other risks, Kohl’s will be required
to delicately balance the need to overhaul the human capital aspect of J.C. Penney with the need
to revitalize the retail store in order to redirect the pathway of J.C. Penney to a successful
member of the industry.
The valuation of Kohl’s and J.C. Penney is an important part of the merger process. In
order to determine if the merger is viable, we needed to determine the intrinsic valuation of the
Company. The steps involved many ratios and formulas including the weighted average cost of
capital for both Kohl’s and J.C. Penney. The weighted average is needed to determine how
much the company is paying for their use of capital. This resulted with a 6.94% for Kohl’s and
15.42% for J.C. Penney, which is more than double the cost for Kohl’s and thus, makes J.C.
Penney the weaker company.
In our evaluation, J.C. Penney’s intrinsic value equated to $5,337 million and resulted in
the net equity value of $2,469 million by reducing the value of debt of $2,868 million. It’s also
important to point out that we provided a forecasted financial statement for one year which is
also important in the process of mergers and that is to provide Kohl’s management with a sneak
peak of the prospective merger or the inherent risk. We used 2011 figures because J.C. Penney’s
2012 fiscal year end reflected a substantial net loss that we feel is an anomaly and will not occur
again.
There are several ratios that a company can analyze in order to determine how successful
the company will be and whether or not it is a good investment. Some of the most important
atios to take into consideration are the days of working capital ratio, the cash to working capital
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atio, the cash debt coverage ratio, the quick test ratio, the inventory turnover ratio, return on
assets and the earnings per share. When looking at the big picture of an investment it is
important to determine how important each category of these ratios are and what they tell
management and investors about the company. It is also important to gauge the priority that these
atios should be considered since some ratios may show positive results while other may not.
Management also has the responsibility to determine if making reasonable changes among the
company and implementing new policies and procedures can change some of the negative ratios.
With the optimal capital structure for Kohl’s at 40% debt and 60% equity, it is in the best
interest of Kohl’s to finance the acquisition using existing treasury stock inventories rather than
long term debt. While Kohl’s has a higher than optimal amount of debt, the use of treasury stock
to finance the acquisition would
ing the organization back in line with the best interests of the
shareholders in mind. The acquisition of J.C. Penney will benefit Kohl’s in a number of ways
including doubling their footprint across the United States, speeding up fulfillment abilities by
doubling distribution centers, and implementing some of J.C. Penney strategies that have proven
profitable in the past. J.C. Penney will benefit from the success Kohl’s has experienced in
customer service and marketing strategies. Overall, both organizations will mutually benefit
from the acquisition as long as it is adequately planned.
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2 INDUSTRY OVERVIEW
2.1 Industry Snapshot
The retail industry has gone through several changes in climate over the years. Many
etailers have begun to take on a great deal of online sales more than traditional
ick and mortar
sales. The retail industry has seen many changes over the decades. Most of the changes have
een due to economic recessions and rocky consumer confidence in the past. Some retailers have
decided to no longer report monthly sales results such as Kohl’s, Macy’s and Nordstrom (Zacks
Equity Research, 2013). The trend amongst retailers in 2013 has been utilizing more technology
solutions and customer feedback to drive the direction of the retail industry. For example,
Macy’s saw a sales growth of 47.7% for their fourth quarter online sales in 2012 (Russell, 2012).
Retail giant JC Penny has begun to reevaluate its operations to create sales growth.
Management implemented new company logo, cost reduction and new pricing strategies to
enhance the company’s image and growth potential. As of 2012, JC Penny was ranked 153 on
the Fortune 500. Kohl’s was ranked 146 and Macy’s was ranked 110 on the Fortune 500 in 2012.
The retail industry reported more than 4.7 trillion in total sales for 2011. This was the largest
increase in sales since 1999 (Farfan, 2011).
The U.S. has more than 5 of the top retailers in the world; with Wal-Mart being the
largest retailer in the world. The industry is segmented into hard retailers and soft retailers. Hard
etailers are considered appliances, electronics and furniture for example. Soft retailers often sell
clothing and apparel (N.A., 2013a). Kohl’s, JC Penny and Belk all fall under soft retailers. Also
there are store retailers and non-store retailers. Store retailers have displays that attract customers
to make purchases on site. Retailers such as vending machines and e-commerce are labeled as
non-store retailers. Many store retailers have crossed into both sides of retailing. Two-thirds of
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the United States GDP comes from the retail industry (Brown & Grannis, 2013). The industry
was affected tremendously by the recession in 2007. The recession affected the industry for
nearly two years before beginning a recovery process. Many of the larger retailers are in the
process of recovering and reporting pre-recession sales. Furthermore, the National Retail
Federation expects a 3.4% increase in retail sales across the industry for 2013. They forecast a 9
to 12% increase in online retail sales for 2013 (Brown & Grannis, 2013).
This agrees with the trends that online retail is growing rapidly. The industry has seen a
great deal of their sales coming from the non-traditional method of sales. The retail online sales
grew 11% in the months of November and December. The retail store industry has 38 firms and
16.85% growth rate as of January 2013 (Damodaran, 2013). Consumer spending and economic
conditions affect the retail industry profitability. Consumer spending affected the industry during
the economic recession and drove many retailers’ profits down. This affected retailers and they
egan to use creative ways to increase consumer spending. Consumer confidence has been down
over the years and this has affected the retail industry sector.
Also technology trends have affected the retail industry and retailers’ have used strategic
ways to utilize technology into their business. The National Retail Federation has stated that
―Stores spend $34.5 billion a year on all kinds of technology, from the cables and routers behind-
the-scenes, to in-store devices such as price checkers, self-service checkout stations and
electronic kiosks for customers‖ (Aversa, 2007). For example, retailers such as JC Penny have
egun to use the iPhone during checkout at the sales counter. Consumers use this as the new
signature pad when completing debit and credit sales. The retail industry has several regulations
depending upon the state that the retail store operates. At the moment nineteen states and two
te
itories have regulations in place for unit pricing. Also eight states cu
ently have mandatory
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item pricing regulations. Some of the states included are New York, Connecticut, New
Hampshire and Massachusetts (Sefcik, 2013).
Analysts’
eakdown many retail stores performance by analyzing their inventory
turnover and sales per square feet. Many of the larger retail store chains such as Macys have a
large inventory turnover and a great deal of sales per square feet. Kohl’s as of 2012 had an
average of $190 per square feet in sales and JC Penny had an average of $155 per square feet in
sales (N.A., 2013a). Kohl’s had one of the best sales per square feet amongst their competitors.
Some of their competitors are Nordstrom, Macy’s, JC Penny, and Dillard’s. Dillard’s posted the
lowest amount of sales per square feet amongst the group of competitors.
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3 ORGANIZATION AND STRUCTURE
3.1 Belk, Inc.
3.1.1 History
Belk began in 1888 as a small store in Monroe, NC. William Henry Belk and his
other
Dr. John Belk founded it. The original name was ―New York Racket‖ followed by ―Belk
Brothers‖ and finally shortened to Belk. It has grown into one of the largest privately held
department stores. Belk started from the humble beginnings of a small loan and savings and a
couple of items taken in consignment. In 1908 the headquarters of this growing company were
moved to Charlotte, NC. It is known as a southern style for all members of the family, although
its focus has been women’s’ fashion. Its main product lines are composed of clothing, footwear,
edding, housewares, and beauty products among others (Belk, 2013a).
3.1.2 Organizational development
Belk cu
ently has 306 locations across the southern part of the United States. The largest
concentration of Belk stores is cu
ently in the Atlanta metro area. And the westernmost location
is in Texas. Even though it became a public company, the business is still family-operated with
over 90% of the class A stock still held by the Belk family. Belk looks for opportunity to
continue a steady business. In 2005 they sold their private-label credit card to GE Money Bank.
Following this transaction they purchased 47 Proffitts and McRae’s department stores and
converted 39 of them to their name
and. Furthermore, the following year they purchased 38
Parisian stores and converted most of them as well. Although it has continued to expand its
stores, the department chain has opted to maintain limited online merchandising and does not
offer all of its products online. Belk operates in three regional divisions that are headed by a
division chair followed by a director of stores. The division offices are in charge of
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implementing initiatives to each individual store including support for management and
employees, and maintenance and operations (Belk, 2013b).
3.1.3 Marketing Strategies
The chain embarked on a $70 million marketing campaign with the launch of their new
logo and slogan in 2010. As part of their product development strategy, Belk has implemented
the first phase of Project IMPACT. This consists of restructuring on merchandising,
organizational planning and development of more sophisticated planning processes and tool. In
order to begin this initiative additional planners were hired and teams implemented. These teams
work together to implement stronger merchandise assortments that are tailored to the key players
of Belk’s target market. Also Project SMART was implemented to upgrade the systems and
technological structure of the company. This project has allowed the team to develop and
execute more advanced merchandising practices in the areas of purchasing, planning,
eplenishment, pricing and promotion and financial planning (Belk, 2013b).
3.1.4 Growth and profitability
The company has been showing steady growth of the last 5 years. There was an increase
in total revenue of 5.3% from 2011 to 2012 and an increase of store sales of 5.5%. Belk has
focused its growth strategy on remodeling and expanding their cu
ent stores as oppose to
acquiring new ones in new markets. It is determined to only explore new opportunities where the
company is recognized and well known. This would limit expansion to the three regional areas
that the company has established. It would also mean that a new acquisition by Belk would
cause the closing of stores outside the target area if it were the parent company.
3.1.5 Acquisition Risks
As an acquisition, the area would also limit the expansion of the department store into
other te
itories. Another risk factor is the amount of debt that Belk has in variable rate debt. The
Page 16
company cu
ently holds 97.8 million in variable debt as well as 80 million in notional swap rate
that is fixed and set to expire in 2013. Belk is also not hesitant to close stores. In 2012 the
company had 3.5 million net changes for exit costs due to a single store closing as well as 1.3
million charges. Due to the above limitations our group did not chose Belk for either a parent
company or an acquisition venture (Belk, 2013b).
3.2 Kohl’s Corporation
3.2.1 History
―Super‖ stores are becoming the big trend in the 21
st
century shopping experience for the
average consumer. One stop shopping where consumers can purchase their groceries, furniture,
and auto care needs all in one spot. Kohl’s Corporation has done just the opposite of the intense
movement towards the all in one shopping experience. Mr. Max Kohl established his
and as
the ―largest supermarket chain in the Milwaukee [Wisconsin] area‖ with his Kohl’s grocery
stores prior to opening his first Kohl’s department store in 1962 (Kohl's Corporation, 2013d).
In the late 70s and into the early 80s, Kohl’s food and department stores were bought out
y BATUS, Inc. and the grocery side of the business was sold to an outside party (Kohl's
Corporation, 2013d). In 1986, Kohl’s Corporation was formed when a subset of investors
purchased the company from BATUS, Inc. (Kohl's Corporation, 2013d). In 1992, Kohl’s
Corporation made its initial public offering with over 11 million shares (Kohl's Corporation,
2013d). Since that time the stock has split multiple times vastly increasing the shareholder’s
wealth. As of the cu
ent 2012 SEC 10-K filing, Kohl’s Corporation does not have any material
legal proceedings that would greatly affect the shareholders of the company (Kohl's Corporation,
2013a).
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3.2.2 Organizational Structure and Corporate Issues
While the corporate headquarters are still based in the subu
s of Milwaukee, Wisconsin
(specifically Menomonee Falls), Kohl’s has dramatically expanded their presence across the
nation. As of end of their 2012 fiscal year, Kohl’s Corporation had 1,146 stores across the
country with a presence in every state except Hawaii (Kohl's Corporation, 2013a). In addition
to their physical stores they have several distribution centers strategically located across the
country to service all 1,146 stores and their blossoming online business. The distribution
centers and their areas of coverage are included in 12.1.7 of the Appendix. While they have a
tremendous presence in the state of California with 128 stores, the states with the least amount
of physical presence is in Vermont and Alaska with one store each (Kohl's Corporation, 2013a).
In support of the numerous stores across the country, Kohl’s has a tremendous social
awareness initiative called ―Kohl’s Cares‖ to give back to the communities for which they
service (Kohl's Corporation, 2013d). Not only do they provide quality products for various price
points, they express and act on concern for the health and well being of women, children, and the
environment. Kohl’s Cares has had a tremendous impact on the community by raising over $200
million in support for Kohl’s Kids and $57 million in support of local community service (Kohl's
Corporation, 2013d).
3.2.3 Executive Officer Overview
The executive management of the Kohl’s Corporation has a tremendous amount of
knowledge and experience in the retail industry. Each member of the executive management has
at least 20-30 years of retail experience. The following are members of Kohl’s Corporation
executive management team (Kohl's Corporation, 2013a):
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 Kevin Mansell, Chairman, CEO
 Don Brennan, Chief Merchandising Officer
 John Worthington, Chief Administrative Officer
 Kenneth Bonning, Senior Executive VP
 Peggy Eskenasi, Senior Executive VP
 Wesley S. McDonald, Senior Executive VP and CFO
 Richard D. Schepp, Senior Executive VP, General Counsel, and Secretary
Mr. Mansell has been proudly serving Kohl’s Corporation for over a quarter of a century.
He began as a low level manager and has gradually worked his way through the ranks of
management to his cu
ently held position of Chairman and CEO. According to his biography
on the Kohl’s Corporation website, Mr. Mansell started his career with Kohl’s Corporation in
1982 and was promoted to divisional merchandising manager in 1987 (Kohl's Corporation,
2013c). Over the following decade, he was selected for Senior Executive VP of Merchandising
and Marketing and then promoted to President in 1999 (Kohl's Corporation, 2013c). His cu
ent
appointments of CEO and Chairman of the Board came in 2008 and 2009, respectively (Kohl's
Corporation, 2013c).
Mr. Brennan and Mr. Worthington have not been with Kohl’s Corporation as long as Mr.
Mansell; however, they both have a tremendous amount of experience in the retail industry
through other department store/corporations. Mr. Brennan started his career with Kohl’s
Corporation in 2001 and has held various management positions throughout his 12 years with the
company (Kohl's Corporation, 2013c). Mr. Worthington started his career with Kohl’s
Corporation in 1993 and has moved up from district level management positions to executive
management in his 20 years with the company (Kohl's Corporation, 2013c).
3.2.4 Product Development
Since the late 80s, Kohl’s Corporation has been gradually crafting their business into a
profitable art form. Over the last 2.5 decades Kohl’s department stores have refined the product
Page 19
offerings and removed the excess products that were weighing the operations of the corporation
down. In the beginning, Kohl’s department stores had a wide variety of offerings. In today’s
stores, Kohl’s has limited their product offerings to six areas including clothing for women
(31%), men (19%), and children (13%), accessories (10%), home (18%), and footwear (9%)
(Kohl's Corporation, 2013a).
To offer the widest possible variety of products with price points to meet every family’s
needs, Kohl’s employs the use of private, national, and exclusive
ands. The private label
ands provide Kohl’s with the opportunity to compare with national and exclusive
ands on the
price point aspect while earning a higher profit off of the individual sale. Kohl’s attracts certain
consumers by ca
ying exclusive
ands such as Jennifer Lopez, Rock & Republic, and Food
Network (Kohl's Corporation, 2013d). Kohl’s has been able to identify three different lifestyles
and three different price points for its consumer base for which they have constructed ―Nine-Box
Merchandising Grid‖ as seen in 12.1.8 of the Appendix (Kohl's Corporation, 2013d).
3.3 J.C. Penney Company, Inc.
As the target company, J.C. Penney can
ing a lot to the table. The recent revolving
door of Chief Executive Officers leaves the company ripe for a new path. Though the company
has had known issues, reporting repeated losses in sales each quarter, J.C. Penney still saw an
annual revenue run rate of $2.635 billion in the first quarter of 2013. The beleaguered company
would do well to come to an agreement with Kohl’s where there exists some synergy, and where
a known method of success has been achieved.
3.3.1 History
J.C. Penney Company (JCP) was founded in 1902 by James Cash Penney. Incorporated
in 1924 as JCP, and then again in 2002 as J.C. Penney Company Inc., when the holding company
Page 20
structure was implemented. J.C. Penney has a long history selling affordable clothing. When
first opened in 1902, the company catered to farmers and their families, selling blue jeans, blue-
collar work clothes, shoes, fa
ics, and sewing needs. Mr. Penney originally refe
ed to his
stores as the Golden Rule, because he wished to treat customers the way he himself would want
to be treated (J.C. Penney, 2013a).
3.3.2 Organization
As of April 2013, top Senior Executives at J.C. Penney consists of: Mike Ullman,
ecently reinstated Chief Operating Officer; Kenneth Hannah, Executive Vice President and
Chief Financial Officer; Janet Dhillon, Executive Vice President, General Counsel and Secretary,
and Mark Sweeney, Senior Vice President and Controller.
J.C. Penney has had several CEOs in the past few years. In June 2011, Ron Johnson
eplaced retiring CEO Mike Ullman. Johnson, a former Senior Vice President of Apple, Inc. had
planned on
inging a newer, hipper vibe to J.C. Penney. However, after a nearly $170 million
loss over the course of Johnson’s tenure, the board of directors could no longer allow the
performance to continue and officially fired him in April 2013. They reinstated former CEO
Mike Ullman, who now has a long battle ahead of him to try to turn the company around.
J.C. Penney operates within: Alabama, Alaska, Arizona, Arkansas, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri,
Montana, Ne
aska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina,
South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia,
Wisconsin, Wyoming, and Puerto Rico (J.C. Penney, 2013b).
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The only state J.C. Penney is not cu
ently conducting business in is Hawaii. There were
several stores in the island state in the 1960s; however, all were closed in 2003 due to the high
cost of maintaining operations combined with low profits (Fujimori, 2002).
3.3.3 Product Development
In the 1960s J.C. Penney expanded outside of clothing and fa
ics and started selling
appliances, sporting goods, garden merchandise, restaurants, and auto parts. The company also
expanded into services like portrait studios and auto centers. In 1963 J.C. Penney issued its first
catalog distributed by the Milwaukee Catalog distribution center. In 1969, the company acquired
Thrift Drug (re
anded Eckerd in 1997) and Supermarkets Interstate, thus starting its ventures
into drugstores, pharmaceuticals, and as a food retailer. Its foray into the auto industry was short
lived however; in 1983 J.C. Penney phased out its hardware and auto departments and sold its
auto repair shops to Firestone (Wikipedia, 2013).
In 1984 J.C. Penney acquired the First National Bank and began issuing its own
MasterCard and Visa cards. In 1993 J.C. Penney became the largest catalog retailer in the
United States when Sears closed its catalog business. In 2004 J.C. Penney exited the drug store
and pharmaceutical division with the sale of Eckerd. In 2007 J.C. Penney launched its own
lingerie label, Am
ielle, and partnered with Sephora, a cosmetics company, to set up ―stores-
within-a-store‖ inside some J.C. Penney locations. The catalog business remained strong until
January 2011, when J.C. Penney announced it would be phasing out of catalogs in favor of
furthering its online business (Wikipedia, 2013). Since its opening, J.C. Penney has established
1,104 department stores in 49 states and Puerto Rico as of Fe
uary 2013.
3.3.4 Legal Proceedings.
J.C. Penney is involved in a couple of cu
ent legal proceedings. A bond litigation suit
claims that J.C. Penney filed to prevent debt holders from claiming that it defaulted on a bond.
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J.C. Penney had received a letter from Brown Rudnick on Fe
uary 4, 2013 on behalf of bond
holders, stating that J.C. Penney had
eached a covenant of the a bond indenture agreement by
granting lien on its inventory. CFO, Ken Hannah gave an official statement that the default was
invalid and without merit, and that J.C. Penney was filing lawsuit to protect nearly $3 billion of
debt from being due within months of the letter (Hals, 2013). On March 18, 2013 the courts
ordered a hearing for summary judgment; immediately following the hearing J.C. Penney
eceived a withdrawal of the notice of default from the Bondholders’ Counsel (J.C. Penney,
2013b).
In addition, there is a Macy’s litigation that concerns an ongoing and escalating battle
etween J.C. Penney and Macy’s over the rights to sell Martha Stewart merchandise. On August
16, 2012, Macy’s intensified the battle by filing a lawsuit that accused J.C. Penney of interfering
with its contract with Martha Stewart Living Omnimedia, Inc. As of April 2013, there has been
no resolution and both companies have been ordered into mediation during a month long recess.
Though J.C. Penney is not sure what the ultimate outcome will be, the company does not feel
that it will have an adverse material effect on their operations, financial position, liquidity, or
capital resources (J.C. Penney, 2013b).
Page 23
4 INDUSTRY LEADERS
This section will focus on Kohl’s key competitors in the multiline retail industry.
According to Fo
es, the key competitors are Macy’s, Sears Holding Corporation, and J.C.
Penney; however the main competitor is Target. (Fo
es, 2012). We’ve chosen these companies
ecause of their well-known status in the community and their rankings in the industry.
4.1 Kohl’s
The financial data obtained from Morningstar and reflected in the charts in the appendix
shows that in 2012 the revenue was $18 million with operating income of $2,158 million and net
income of $1,167 million. Even with the economic crisis, according to the charts in the
appendix, Kohl’s has steadily achieved small but persistent growth in revenue and net income
even though in 2009 and 2010 there was a minor decrease, in 2011 the Company started
increasing again (Morningstar, 2013c). Kohl's overcame J.C. Penney, which is significant since
the two chains are considered to be in direct competition for the same customer base.
4.2 Macy’s Inc.
Macy’s, Inc. has not always been known as Macy’s, Inc. Up until June of 2007 it was
known as Federated Department Stores, Inc. (Macy’s, Inc., 2013a). In 1929, a group of 4
department stores banded together to form Federated Department Stores, Inc.: A
aham & Straus
of Brooklyn, Filene’s of Boston, F&R Lazarus & Co. of Columbus, OH, and Bloomingdale’s of
New York (Macy’s Inc., 2013a). While all 4 department stores kept their individual names and
appearances, they combined their financial aspects to become a solid competitor during World
War II and the Great Depression (Macy’s, Inc., 2013a). Federated Department Stores, Inc.
acquired Macy’s in 1994 and Broadway Stores in 1995 (Macy’s, Inc. 2013a).
Page 24
Macy’s operate under two different names for their storefronts: Macy’s and
Bloomingdales with $27.7 billion in sales in fiscal year 2012 (Macy’s, Inc., 2013b). They have
over 840 stores between the two
ands that span across ―45 states, the District of Columbia,
Guam and Puerto Rico‖ (Macy’s, Inc., 2013b). In addition to their standard stores, Macy’s also
has outlet and website sales. They maintain 12 Bloomingdales outlet stores spread out amongst
9 states with Florida have 3 (Macy’s Inc., 2013b). Macy’s also has a wide presence on the
internet with both storefronts having respective websites for access to previously inaccessible
areas of the U.S. and around the globe (Macy’s, Inc., 2013b).
4.3 Sears Holding Corporation
Sears Roebuck & Co. and Kmart Holding Corporation merged in 2005 when Sears
Holding Corporation was formed. We all recognize the name Sears and Kmart; however they
are subsidiaries of the Sears Holding Corporation. According to the Sears Holding website, it ―is
a leading integrated retailer with more than 2,500 full-line and specialty retail stores in the
United States and Canada. Sears Holdings is the leading home appliance retailer as well as a
leader in tools, lawn and garden, fitness equipment and automotive repair and maintenance
(Sears Holding Company, n.d.).
The retail industry is very competitive and throughout the long rich history of Sears, it
has flourished, emerged from Bankruptcy and now in 2012, the ―Adjusted EBITDA of $429
million for the fourth quarter of 2012 and $626 million for the year, which were both in line with
our guidance provided on January 7, 2013. Adjusted EBITDA for the prior year fourth quarter
and year were $351 million and $277 million, respectively; Gross margin rate increased 130
asis points for the fourth quarter of 2012 and 90 basis points for the year from the comparable
prior year periods; Sears Domestic's comparable store sales improved 0.8% in the fourth quarter
Page 25
of 2012 and declined 1.4% for the year. Kmart's comparable store sales declined 3.7% in the
fourth quarter and for the year. Sears Canada's comparable store sales declined 3.8% in the
fourth quarter and 5.6% for the year (Sears Holding Company, n.d.).
4.4 J.C. Penney
In 1902 JC Penny opened as a dry goods store and has emerged as one of the leading
etailers in its early years having more than 2000 chains. 2012 has not been kind to the retailer
with the hiring of Ron Johnson; the Company has suffered, according to a story on Yahoo,
J.C. Penney’s dwindling, aging customer base left in droves. Sales
were down a jaw- dropping 32% in the 4th quarter of 2012; an
almost impossible feat for a company like J.C. Penney. The
company was boring but not widely feared to be heading for a
financial meltdown as recently as 2011. Now it’s pure excitement
ut not of the right kind (Macke, 2013).
4.5 Target Corporation
According to Fo
es, Target is Kohl’s main competitor in the retail industry (2012).
Target started as a dry goods store in Dayton, Ohio in 1902. In 1967 the Company expanded to
ecome a national retailer and the following year it created the now famous logo of the bull’s-
eye. The Target store hit a major milestone when it became the #1 revenue producer of the
Dayton-Hudson Corporation and the following year the Company achieved an organizational
milestone by reaching $1 billion in sales. Throughout the years the Company expanded
nationally by opening stores and purchasing other retailers like Marshall Fields and Mervyns,
however they were later sold. In the year 2000, the Dayton-Hudson Corporation changed its
name to the Target Corporation to better reflect its core business. Target reached a major
milestone in 2005 by exceeding $50 billion in annual sales.
The Company has grown even through the economic downturn and has emerged as a top
industry leader in the retail business. According to Morningstar, in 2012, the Company was very
Page 26
close to reaching $70 million in revenue with 30% gross profit and $3 million in net income
(Morningstar, 2013b).
The aforementioned retailers have been innovative to maintain a profit especially in the
last few years with the economic downturn. According to SAS.com:
Throughout 2012, retailers will continue to adapt and adjust their
ands and operations to fit with different cultures. Through store
openings and
and expansion, US retailers are opening their arms
to international shoppers like never before. Domestic and
international expansion was another strategic initiative for retailers
last year, as one-quarter of respondents in our Retail Horizons
eport said global expansion would be a major focus for their
company (Shay, 2012).
Page 27
5 SWOT
5.1 Strengths
5.1.1 Kohl’s
Customer Satisfaction
Kohl’s builds its
and out of a commitment to family, good values and national
ands.
The stores ca
y a variety of items to satisfy the needs of every shopper. From clothing to
accessories to small electronics and housewares, Kohl’s strives to make it an easy one-stop shop
for the entire family. They are an innovative company that is cu
ently committed to developing
the convenience of shopping by expanding their online selection and making it simple to shop.
Part of this initiative is the layout of their stores, which includes centralized checkout aisles and a
acetrack style layout that circles the entire store (Kohl’s Corporation, 2013b).
Quality Merchandise and Competitive Edge
Kohl’s is committed to offering quality merchandise at a great price. As a company, their
marketing strategy focuses on setting a
and standard. They remove products that are not
profitable and offer a wide variety. They limit their product selection to six key areas. These
areas include men’s, women’s, and children’s clothing as well as accessories, housewares and
footwear. Kohl’s focuses on using national, private and exclusive
ands to attract their target
clientele. By doing this, it provides the buyer with the option of obtaining the desired product at
a variety of prices to fit every budget. The exclusive
ands like Jennifer Lopez, Mark Anthony,
and Rock & Republic, attract the consumer that likes to have a certain standard in their fashion.
The private
and gives Kohl’s a competitive edge. The consumer can compare prices and value
etween the three options. If the consumer chooses the private
and it gives the company a great
advantage while it earns a higher profit due to the price point of the items sold. The variety is
Page 28
one of the key strengths of this company. The consumer is free to choose one of the three key
price points to fit their budget and lifestyles. (Kohl's Corporation, 2013d).
Store Expansion
Another notable strength of this company is their management team and their expansion
of stores. Kohl’s cu
ently has over 1,100 nationwide and, with the exception of Hawaii, it does
not limit its expansion to a certain geographical area. This gives this company a tremendous
marketing advantages since they are able to develop clientele across the nation and online.
Furthermore, the locations of their distribution centers nationwide make the products available in
a timely manner to all their stores and their online customers (Kohl's Corporation, 2013d).
Kohl’s executive management team is composed of members with more than 20 years of
experience. The cu
ent CEO, Kevin Mansell, has been a part of the Kohl’s family for over
twenty-five years and worked his way up from lower management. This allows him to have a
perspective and understanding of the company that could otherwise be overlooked by someone
new to the industry.
Social Responsibility
Another important strength of this company is...