Strategic Considerations in the Potential Acquisition of Kohl�s by J.C. Penney

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Strategic Considerations in the Potential Acquisition of Kohl’s by J.C. Penney: AnalyzingIndustry Trends, Market Dynamics, and Long-Term Investment PotentialKeller Graduate School of ManagementFINANCIAL MANAGEMENT CAPSTONE 600ExecutiveSummary: JC Penny-Kohl’s mergerIn your analysis of the potential merger between J.C. Penney and Kohl’s, what are the keystrategic factors that should be considered to ensure the acquisition supports J.C. Penney's long-term goals? Discuss the implications of current industry trends, thecompetitive landscape, andthe financial challenges faced by both companies. In your response, also address how J.C.Penney can leverage Kohl’s strengths to enhance its market position and financial performance.Word count requirement: 1,500 words

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Professor Thomas BarrettJune 25, 2014INDUSTRY AS A WHOLEIn the United States alone, the retail sector includes over one million stores and accounts for four trilliondollars of revenue in fiscal year 2013. To allow for more a detailed analysis, the retail industry is brokendown into subcategories including food and beverage retail, motor vehicle dealers, drug and cosmeticretail, and apparel and accessory retail. Apparel retail, the largest of these sectors, generates most of itsprofits from women’s clothing, which accounts for 53% of total revenues. Also of great importance is theretailers’ ability to keep up-to-date on the trends because “being behind on what’s hot can lead to losingsales, reputation, and leftover inventory” (“Retail…”). Kohl’s Corporation falls under the departmentstores category of retail, the main focus of this industry overview.Department stores such as Kohl’s were hit especially hard during the Great Recession that began inDecember 2007 and ended in June 2009. During those 18 months, real GDP fell a whopping 8.9%, andthe department store industry was adversely affected by thedeclines in household consumption.Over the next five years, industry value added, which measures the DepartmentStores industry’scontribution to the overall economy, is projected to decline at 0.2% annually. Concurrently, U.S. GDP isexpected to increase 2.1% annually. When industry growth is less than GDP growth, as in this case, theindustry is said to be in a declining stage of its life cycle. Causes for this disparity can largely beattributed to the Great Recession, after which many companies have failed to adapt to changes in theretail environment. Indeed, post-recessionary trends suggest that consumers now compare prices withgreater ease and take advantage of online retail alternatives.Although Kohl’s is similar to its competitors (Macy’s, J.C. Penney, Sears, and Nordstrom) in that it offers

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only domestic retail locations, Kohl’s is the only retailer out of the five that does not provideinternational E-Commerce business services. Shipping only to domestically located destinations, Kohl’s isparticularly vulnerable to deteriorations in the U.S. economy, perhaps more so than its competitors.Along with its competitors, Kohl’s Corporation must be careful in growing its E-Commerce businessbecause the online medium (which is marked with shipping costs, lower margin merchandise, andexpensive investments for growth) can unfavorably yield lower profits than can the retail stores. In aneffort to counteract this trend, Kohl’s Corporation remains committed to growing its exclusive andprivate brand sales as a percentage of total sales. In 2011, the “penetration” increased approximately240 basis points to 50.3% of total sales for 2011. Among the new brand launches were Jennifer Lopez inthe women’s, accessories, and bath & bedding departments and Marc Anthony in the men’sdepartment. Kohl’s has found great success with its ELLE and Simply Vera: VeraWang brands and is theexclusive U.S. retailer of Rock & Republic apparel (launched in early 2012). To keep up with thecompetition, Kohl’s competitors are introducing their own top brands.Sales of women’s clothing are the most profitable area in this sector-accounting for 53 percent of thetotal revenue. The industry is moderately concentrated and bigger stores have advantages of gettingbetter deals from suppliers, but the individualized nature in which stores compete not simply on pricebut on type and style, of which there are many, leaves room for smaller stores to succeed as well. Inaddition, because of the nature of clothing, many stores market to specific demographics based on priceand style. Trends are also particularly important here-being behind on what's hot can lead to losingsales, reputation, and leftover inventory.Kohl’s OverviewKohl’s Department Store was founded by Max Kohl in 1962. After growing a small grocery storein the Wisconsin area, Max decided to open the first department store in Brookfield, Wisconsin sellingeverything from candy to engine oil to sporting goods. At this time, Kohl’s was positioned between the

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higher end department and discount stores. Currently, Kohl’s operates over one thousand one hundredand sixty department stores, and also offers their customer the option of purchasing products online.Today, Kohl’s offers everything their customers need for themselves and their homes such as apparel,shoes, and accessories for everyone in the household, and home products such as small electrics,bedding, luggage, and more.Kohl’s mission is to be the leading family-focused, value oriented, specialty department storeoffering quality exclusive and national brand merchandise to their customers in an environment that isconvenient, friendly, and exciting("Kohl's Factbook"). Their goal is to continue to offer exceptionalvalue, quality, and convenience("Kohl's Factbook"). They currently offer private and exclusive brands.They are said to be the number one retailer in the United States of many national brands such as Levi’s,Dockers, and Columbia. Their current merchandise mix consist of thirty percent women’s apparel,nineteen percent of men’s apparel, eighteen percent of home products, thirteen percent of children’sapparel, ten percent of other accessories, and nine percent of footwear. Their sales mix is currentlyninety-one percent of stores and nine percent of E-commerce.During the years, Kohl’s had major events that contribute to their success. In 1992, theycompleted an initial public offering in one of Wisconsin’s largest public offering. Also in 1998, Kohl’sjoined the Standard and Poor 500.Target WeaknessOver the last two years,Kohl'shas missed the opportunity of the decade. In that short time,J.C. Penney--one of Kohl's key rivals in the low-to-mid-price department store segment--has watched 30% of itssales volume disappear. Yet Kohl's failed to take advantage of this golden opportunity to grow its market

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