Kara Stessl, Richard Bohny, Retaish Bharadwaja

Company Background

History Industry and Competition

Past Stock PerformanceCurrent Position

• Founded in 1902 by James Cash Penney in Kemmerer, Wyoming

• Operating 1,600 stores by 1941• Offers products under family

apparel, fashion jewelry, and home furnishings as well as services such as styling salon, optical and custom decorating.

Middle-tier Retail Department Stores

• Operates 1094 stores as of February 2014

• Current Interim CEO: Mike Ullman• The 2013 was a transitional

period where the company tried to stabilize its business and regain a portion of its core customers that moved away from the brand.

Competitor Comparison

ROIC

JCP -8.70%

Macy’s 11.21%

Sears -8.53%

Kohl’s 8.98%

Dillard’s 11.65%

Debt to Equity

JCP 221.21%

Macy’s 46.73%

Sears 161.86%

Kohl’s 53.61%

Dillard’s 17.28%

Gross Profit Margin

JCP 29.45%

Macy’s 40.12%

Sears 24.19%

Kohl’s 36.49%

Dillard’s 36.88%

Value Drivers: Sales Growth

1/30/2010 1/29/2011 1/28/2012 2/2/2013 2/1/2014

-5.03% 1.16% -2.81% -24.77% -8.67%

Past Performance

Forecasted Future Performance

1/30/2015

1/30/2016

1/30/2017

1/30/2018

1/30/2019

1/30/2020

3% 4% 5% 6% 5% 4%

• In the go-forward phase of its rebuilding strategy: bringing back its aggressive promotional strategy and tailoring its products to the individual

• Low sales growth projection factors: increase in online to be offset by JC Penney closing down a number of stores this year.

• Terminal Value in 2020 to grow at 4% with the industry

Value Drivers: Cost of Sales/Sales

1/30/2010 1/29/2011 1/28/2012 2/2/2013 2/1/2014

60.64% 60.81% 63.97% 68.69% 70.55%

Past Performance

Forecasted Future Performance

1/30/2015

1/30/2016

1/30/2017

1/30/2018

1/30/2019

1/30/2020

72.00% 68.00% 66.00% 63.00% 62.00% 61.00%

• Jump in cost of sales margin 2015 due to a high level of clearance sales compared to normal sales.

• Cost of sales margin will then begin declining to normal levels as the company continues to rebrand its image.

Value Drivers: SG&A/Sales

1/30/2010 1/29/2011 1/28/2012 2/2/2013 2/1/2014

30.66% 30.17% 29.60% 34.70% 34.69%

Past Performance

Forecasted Future Performance

1/30/2015

1/30/2016

1/30/2017

1/30/2018

1/30/2019

1/30/2020

33.00% 33.00% 32.00% 32.00% 31.00% 31.00%

• SG&A expenses will experience a slight decline as unprofitable stores are shut down and sold off.

Value Drivers: OWC/Sales

1/30/2010 1/29/2011 1/28/2012 2/2/2013 2/1/2014

4.49% 6.58% 5.93% 2.37% 10.22%

Past Performance

Forecasted Future Performance

1/30/2015

1/30/2016

1/30/2017

1/30/2018

1/30/2019

1/30/2020

8.00% 7.00% 6.00% 6.00% 5.00% 5.00%

• As JC Penney continues to rebuild, the firm will invest heavily towards in-house brands.

• Management projects Accounts Payable to Inventory ratio increasing from 30% to 35% and will be maintained around that number.

• Increasing inventory management efficiency will cause OWC to trend towards normal levels of 5%

Value Drivers: Net PPE/Sales

1/30/2010 1/29/2011 1/28/2012 2/2/2013 2/1/2014

30.51% 29.46% 29.99% 41.22% 47.38%

Past Performance

Forecasted Future Performance

1/30/2015

1/30/2016

1/30/2017

1/30/2018

1/30/2019

1/30/2020

41.00% 37.00% 35.00% 33.00% 31.00% 31.00%

• Increased over the last two fiscal years due to poor sales.• Project an increase in this ratio as JC Penney continues to

close down and sell off unprofitable stores while experiencing increasing sales.

DCF Valuation

Growth Rate 3.0% 3.5% 4.0% 4.5% 5.0%

WACC 9.82% 8,337 8,505 8,702 8,936 9,219

10.32%

7,767 7,882 8,014 8,169 8,353

10.82%

7,271 7,344

7,42

7 7,523 7,636

11.32%

6,834 6,874 6,920 6,972 7,033

11.82%

6,447 6,462 6,478 6,496 6,517 Growth

Rate 3.0% 3.5% 4.0% 4.5% 5.0%

WACC 9.82% 8.34 8.67 9.05 9.51 10.07

10.32%

6.78 6.99 7.25 7.54 7.89

10.82%

5.41 5.55 5.70 5.88 6.09

11.32%

4.22 4.29 4.37 4.47 4.58

11.82%

3.16 3.19 3.22 3.25 3.29

Terminal Value Matrix

Equity Value Per ShareCurrent Market Price: $9.37

Relative Valuation

Growth Rate

3.0% 3.5% 4.0% 4.5% 5.0%

EBIT Multiple

2.5 -3.04 -3.01 -2.99 -2.96 -2.94

3.5 -1.02 -0.99 -0.95 -0.92 -0.88

4.5 0.99 1.04 1.08 1.13 1.17

5.5 3.01 3.06 3.12 3.17 3.22

6.5 5.02 5.08 5.15 5.21 5.28

Growth Rate

3.0% 3.5% 4.0% 4.5% 5.0%

EBIT Multiple

2.5 2,739 2,752 2,765 2,779 2,792

3.5 3,819 3,838 3,856 3,875 3,893

4.5 4,899 4,923 4,947 4,971 4,995

5.5 5,980 6,009 6,038 6,067 6,096

6.5 7,060 7,094 7,129 7,163 7,197

Terminal Value Matrix

Equity Value Per ShareCurrent Market Price: $9.37

Average EBIT Multiple: 4.5

Recommendation

Individual Challenges CEO search Highly leveraged position Repairing tarnished image Gaining back market

share

Industry Challenges Limited growth prospects Declining in-store retail

sales Increasing online

competition

Our Recommendation: SellCurrent Market Price: $9.37

Our Projected Price: $5.70

Going Forward

Focus on online sales growth as opposed to in-store retail

Improve ROIC to a level above WACC before further expansion Sell off unprofitable stores Improve margins and turnover Better inventory management Repairing tarnished image and regaining customer

base