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

Evaluates market trends and financial feasibility of Kohl�s acquisition.

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    Strategic Considerations in the Potential Acquisition of Kohl’s by J.C. Penney: Analyzing Industry Trends, Market Dynamics, and Long - Term Investment Potential Keller Graduate School of Management FINANCIAL MANAGEMENT CAPSTONE 600 Executive Summary: JC Penny - Kohl’s merger In your analysis of the potential merger between J.C. Penney and Kohl’s, what are the key strategic factors that should be considered to ensure the acquisition supports J.C. Penney's long - term goals? Discuss the implications of current industry trends, the competitive landscape, and the 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 Barrett June 25, 2014 INDUSTRY AS A WHOLE In the United States alone, the retail sector includes over one million stores and accounts for four trillion dollars of revenue in fiscal year 2013. To allow for more a detailed analysis, the retail industry is broken down into subcategories including foo d and beverage retail, motor vehicle dealers, drug and cosmetic retail, and apparel and accessory retail. Apparel retail, the largest of these sectors, generates most of its profits from women’s clothing, which accounts for 53% of total revenues. Also of g reat importance is the retailers’ ability to keep up - to - date on the trends because “being behind on what’s hot can lead to losing sales, reputation, and leftover inventory” (“Retail…”). Kohl’s Corporation falls under the department stores category of retai l, the main focus of this industry overview. Department stores such as Kohl’s were hit especially hard during the Great Recession that began in December 2007 and ended in June 2009. During those 18 months, real GDP fell a whopping 8.9%, and the department store industry was adversely affected by the declines in household consumption . Over the next five years, industry value added, which measures the Department Stores industry’s contribution to the overall economy, is projected to decline at 0.2% annually. Concurrently, U.S. GDP is expected to increase 2.1% annually. When industry growth is less than GDP growth, as in this case, the industry is said to be in a de clining stage of its life cycle. Causes for this disparity can largely be attributed to the Great Recession, after which many companies have failed to adapt to changes in the retail environment. Indeed, post - recessionary trends suggest that consumers now c ompare prices with greater 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 provide international E - Commerce business services. Shipping only to domestically located destinations, Kohl’s is particularly 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 business because the online medium (which is marked with shipping costs, lower margin merchandise, and expensive investments for growth) can unfavorably yield lower p rofits than can the retail stores. In an effort to counteract this trend, Kohl’s Corporation remains committed to growing its exclusive and private brand sales as a percentage of total sales. In 2011, the “penetration” increased approximately 240 basis poi nts to 50.3% of total sales for 2011. Among the new brand launches were Jennifer Lopez in the women’s, accessories, and bath & bedding departments and Marc Anthony in the men’s department. Kohl’s has found great success with its ELLE and Simply Vera: Vera Wang brands and is the exclusive U.S. retailer of Rock & Republic apparel (launched in early 2012). To keep up with the competition, 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 the total revenue. The industry is moderately concentrated and bigger stores have advantages of getting better deals from suppliers, but the individualiz ed nature in which stores compete not simply on price but on type and style, of which there are many, leaves room for smaller stores to succeed as well. In addition, because of the nature of clothing, many stores market to specific demographics based on p rice and style. Trends are also particularly important here - being behind on what's hot can lead to losing sales, reputation, and leftover inventory. Kohl’s Overview Kohl’s Department Store was founded by Max Kohl in 1962. After growing a small grocery store in the Wisconsin area, Max decided to open the first department store in Brookfield, Wisconsin selling everything from candy to engine oil to sporting goods. At th is 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 hundred and sixty department stores, and also offers their customer the option of purchasing products online. Today, Kohl’s offers everything their customers need f or 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 store offering quality exclusive and national brand merchandise to their customers in an environment that is convenient, friendly, and exciting ("Kohl's Factbook") . Their goal is to continue to offer exceptional value, 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, Do ckers, 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’s apparel, ten percent of other accessories, and nine percent o f footwear. Their sales mix is currently ninety - 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, they completed an initial public offering in one of Wisconsin’s largest public offering. Also in 1998, Kohl’s joined the Standard and Poor 500. Target Weakness Over the last two years, Kohl's has 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 its sales volume disappear. Yet Kohl's failed to take advantage of this golden opportunity to grow its market

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