J.C. Penney Dilemma

Well, What Would YOU Do?!

There's not a more compelling retail dilemma going on right now than the J. C. Penney turnaround. "Will they or will they not survive?!" Surely, 116,000 employees (down from 150,000 a year ago) are anxious to find out.

Before you quickly answer, "Here's what I would do to turnaround Penneys" (everybody's a retail consultant, after all...), consider some facts:

• Brain drain: A high percentage of the best brains have either been fired or decided to quit in the last year;
• Sales have been declining 25% or more for the last six months;
• Gross margin dropped in 2012 to 31.3% from 36% the year before;
• A monster operating loss in 2012 eroded 20.9% of the owners' equity.

Now, let's read their financial status the way it is taught at The Retail Owners Institute:

• The Current Ratio ("the ability to pay vendor bills on time") dropped from 1.8 to 1.4. Hmmm; no wonder they are begging for loans at ANY cost!


• The Debt-to-Worth ratio ("the number one measurement of financial strength") rose from 1.8 to 2.1.  Ahhh; of every three dollars in assets, two dollars are "owned" by OPM, other people's money.


• GMROI (Gross Margin Return on Inventory Investment, the #1 inventory productivity measurement) dropped from $2.13 to $1.74.  Oh my; both profits and cash flow have been hammered.

But, look at a few, but very major, intangibles:

• Mike Ullman, the ex-CEO that the Board brought back, is reputed to have remarkably good relations with key vendors and factors. Question: Can he restore enough confidence that the Back-to-School orders now being placed will get shipped?!!  

• With 1400 stores, there are a huge number of landlords that will do all they can (that's a key word) to prop up Penneys.  

• There may well be some equity in the Penney name and 100+ year history. But, only if the "value" of the name and history as an asset is greater than any "liabilities" associated with the name and heritage; the Balance Sheet MUST balance!   

(For more perspective on JCP's performance compared with the Department Store retail segment, see this Retail Benchmarks page on The ROI site.)

So, if you had a billion dollars sitting around, would you be inclined to loan it to Penneys?!!