How JC Penny Survived the Economic Downturn

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How JC Penny Survived the Economic Downturn

Posted On : Sep-08-2010 | seen (587) times | Article Word Count : 754 |

Like many retail businesses around 2003, the retail giant J.C. Penny was suffering from a slow economy and households having less expendable income. In response to the downturn, the store brought in a third party to help them analyze the price of their goods versus the state of the economy to help move more product.

In the early 2000s JC Penny (NYSE: JCP), like most other companies, was hurting from a slowdown in the economy. Retail sales were declining across nearly all industries and even large merchants such as JC Penny were seeing problems. Discounting items was one way companies sought to increase profit, but it is difficult to assess which products to discount and by what amount, especially when a retailer has thousands of items like JC Penny. ProfitLogic was brought in by JC Penny to help with pricing their goods. By using software to calculate the optimal price of an item by analyzing sales history, they hoped to fuel additional sales.

The year 2003 was important for JC Penny for a number of reasons. A major reason was that the U.S. economy, declining since around the year 2000, had hit a low and began to improve during this time. This is important to consider when assessing if their use of ProfitLogic in pricing was effective. Another important event for JCP was their discontinuing of certain operations. These included the closing of its Mexican department stores as well as its direct marketing services. Most significant, however, was its decision to sell its Eckerd Drugstore operations.

Although JC Penny posted a net loss of $928 million; this includes a $1,288 million recognized loss due to discontinued operations. $450 million of this loss is to reflect investment in Eckerd at its estimated fair value less the costs to sell it, and $875 million to recognize (estimated) deferred tax liability for the excess of (estimated) fair value over the tax basis of Eckerd’s net assets. Basically Eckerd had a tax basis of less than its book basis and now that JC Penny was about to sell, it anticipated having to pay taxes on this difference.

Aside from the factor of discontinued operations, JCP had an income from its continuing operations of $360 million. This value, and its subsequent increase or decrease, is what is relevant in assessing the performance of ProfitLogic-assisted discounting. Investments in discounted operations are sunk costs, so any recognized losses, tax savings, gains from selling assets, etc. of its discounted operations are irrelevant to this analysis.

Income from continued operations per year increased from $360 million in 2003 to $1,105 million in 2007. Part of the reason is that sales increased by about 13%, from $17,513 million in 2003 to $19,860 in 2007. A very important factor was that selling, general and administrative expenses as a percentage of sales declined during this time from about 33% to about 27% per year. This represents a savings of over 11% in that area and may be indicative of increased efficiency from using ProfitLogic. This increased efficiency meant an average savings of $957 million per year from 2004 to 2007, which is about $3.8 billion total during this time.

Net income (of continuing operations) as a percent of sales increased from 2.06% in 2003 to 5.7% and 5.56% in 2006 and 2007, respectively. This would suggest JC Penny has, for the most part, increasingly made more money from its sales. Lowering prices too much and selling a lot more product, but making less per item and not lowering prices enough and making more per item but not selling a lot of them are both issues. In 2003 and before the company was faced with this problem, discounting heavily but still just netting around 2% of its revenue. The expansion of this ratio to 3.63% in 2004 (and above 5% in subsequent years) after implementing ProfitLogic suggests it has lead to the improved performance.

The company’s Pre-opening expense, which is from opening new stores, increased every year between 2003 and 2007. Although having more stores would reasonably mean more revenue, it doesn’t account for the decrease in operating expenses and the increase in net income as percentages of sales. There is more evidence that ProfitLogic helped JC Penny optimize their pricing, calculating price points closer to the intersection of supply and demand curves.

The decrease in operating expenses would naturally result from this price optimization in a number of ways. Optimized pricing would mean less overhead, less expense storing merchandise and for a shorter period of time. Less would have to be expended on selling because with the improved price point less expense is required. For these reasons, there is strong evidence for the claim that ProfitLogic’s smart discounting lead to the improved performance it promised in 2004.

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<h1>How JC Penny Survived the Economic Downturn</h1> Author: <a href='http://www.articleseen.com/profile_Nick DAlleva.aspx'>Nick DAlleva</a> In the early 2000s JC Penny (NYSE: JCP), like most other companies, was hurting from a slowdown in the economy. Retail sales were declining across nearly all industries and even large merchants such as JC Penny were seeing problems. Discounting items was one way companies sought to increase profit, but it is difficult to assess which products to discount and by what amount, especially when a retailer has thousands of items like JC Penny. ProfitLogic was brought in by JC Penny to help with pricing their goods. By using software to calculate the optimal price of an item by analyzing sales history, they hoped to fuel additional sales.

The year 2003 was important for JC Penny for a number of reasons. A major reason was that the U.S. economy, declining since around the year 2000, had hit a low and began to improve during this time. This is important to consider when assessing if their use of ProfitLogic in pricing was effective. Another important event for JCP was their discontinuing of certain operations. These included the closing of its Mexican department stores as well as its direct marketing services. Most significant, however, was its decision to sell its Eckerd Drugstore operations.

Although JC Penny posted a net loss of $928 million; this includes a $1,288 million recognized loss due to discontinued operations. $450 million of this loss is to reflect investment in Eckerd at its estimated fair value less the costs to sell it, and $875 million to recognize (estimated) deferred tax liability for the excess of (estimated) fair value over the tax basis of Eckerd’s net assets. Basically Eckerd had a tax basis of less than its book basis and now that JC Penny was about to sell, it anticipated having to pay taxes on this difference.

Aside from the factor of discontinued operations, JCP had an income from its continuing operations of $360 million. This value, and its subsequent increase or decrease, is what is relevant in assessing the performance of ProfitLogic-assisted discounting. Investments in discounted operations are sunk costs, so any recognized losses, tax savings, gains from selling assets, etc. of its discounted operations are irrelevant to this analysis.

Income from continued operations per year increased from $360 million in 2003 to $1,105 million in 2007. Part of the reason is that sales increased by about 13%, from $17,513 million in 2003 to $19,860 in 2007. A very important factor was that selling, general and administrative expenses as a percentage of sales declined during this time from about 33% to about 27% per year. This represents a savings of over 11% in that area and may be indicative of increased efficiency from using ProfitLogic. This increased efficiency meant an average savings of $957 million per year from 2004 to 2007, which is about $3.8 billion total during this time.

Net income (of continuing operations) as a percent of sales increased from 2.06% in 2003 to 5.7% and 5.56% in 2006 and 2007, respectively. This would suggest JC Penny has, for the most part, increasingly made more money from its sales. Lowering prices too much and selling a lot more product, but making less per item and not lowering prices enough and making more per item but not selling a lot of them are both issues. In 2003 and before the company was faced with this problem, discounting heavily but still just netting around 2% of its revenue. The expansion of this ratio to 3.63% in 2004 (and above 5% in subsequent years) after implementing ProfitLogic suggests it has lead to the improved performance. 
 
The company’s Pre-opening expense, which is from opening new stores, increased every year between 2003 and 2007. Although having more stores would reasonably mean more revenue, it doesn’t account for the decrease in operating expenses and the increase in net income as percentages of sales. There is more evidence that ProfitLogic helped JC Penny optimize their pricing, calculating price points closer to the intersection of supply and demand curves.

The decrease in operating expenses would naturally result from this price optimization in a number of ways. Optimized pricing would mean less overhead, less expense storing merchandise and for a shorter period of time. Less would have to be expended on selling because with the improved price point less expense is required. For these reasons, there is strong evidence for the claim that ProfitLogic’s smart discounting lead to the improved performance it promised in 2004.
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Keywords : department store, economic downfall, recession, sales,

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