Ali El AhmarAccounting and Finance: Managerial Use and Analysis MAR12 Sec CProfessor Blankenship4/13/2012Financial Statement Analysis Project -- A Comparative Analysis of Kohl’s Corporation and J.C. Penney Corporation

Accounting and Finance: Managerial Use and Analysis MAR12 Sec C

Financial Statement Analysis Project -- A Comparative Analysis of Kohl’s Corporation and J.C. Penney Corporation

J.C. Penney was founded by James Cash Penney in 1902. This Plano, Texas based company is presently providing family apparel and footwear, accessories, jewelries, beauty products and home furnishings via 1,100 department stores as of December 7, 2011 in the United States and Puerto Rico. The company is also taking advantage of technology by making JC Penney's products available online through its Internet Web Site jcpenney.com. This more than a century old company also provides styling salon, optical, portrait photography and custom decorating services. The 159,000 present employees are dedicated in rendering outstanding service in the world of retail.

Kohl's Corporation presently operates 1,127 department stores in 49 states. This Wisconsin based corporation serves the Unites States via traditional and online shopping (kohls.com). It offers private, exclusive and national branded apparel, footwear and accessories for men, women and children. The company was founded by Max Kohl in 1962 in Brookfield, WI. Today, 30,000 employees are dedicated in leading a family-focused and value-oriented store in the United States.

Kohl's Corporation J.C. Penney Corporation

Earnings per share As given in the income statement $3.67

Current ratio Current assets $5,645,000,000 = 2.08 $6,370,000,000Current liabilities $2,710,000,000 $2,647,000,000

Gross Profit Ratio Gross profit $7,032,000,000 = 38.24% $6,960,000,000Net Sales $18,391,000,000 $17,759,000,000

Profit margin ratio Net Income $1,114,000,000 = 6.06% $389,000,000Net Sales $18,391,000,000 $17,759,000,000

Inventory Turnover Cost of Goods Sold $11,359,000,000 3.8 $10,799,000,000Average Inventory $2,979,500,000 times $3,118,500,000

Days in Inventory 365 days 365 = 96 365Inventory turnover 3.8 days 3.5

Receivable Turnover Ratio Net credit sales = Not ApplicableAverage Net Receivables

Average Collection Period 365 = Not ApplicableReceivable Turnover Ratio

Assets Turnover Ratio Net Sales $18,391,000,000 = 1.38 $17,759,000,000Average Total Assets $13,362,000,000 $12,811,500,000

Return on Assets Ratio Net Income $1,114,000,000 = 8% $389,000,000Average Total Assets $13,362,000,000 $12,811,500,000

Debt to Total Assets Ratio Total Liabilities $5,462,000,000 = 40.27% $7,582,000,000Total Assets $13,564,000,000 $13,042,000,000

Times Interest Earned Ratio Net Income + Int Expense + Tax Expense $1,914,000,000 = 13.6 832,000,000Interest Expense $141,000,000 231,000,000

Payout ratio Cash dividend declared on common stock = Not Applicable $189,000,000Net income $389,000,000

Return on Common Stockholders' Equity Net income - Preferred stock dividend 1,114,000,000 = 14% $389,000,000Average common stockholders' equity 7,977,500,000.00 $5,119,000,000

Free cash flow

$915,000,000

=

$915,000,000

($96,000,000)

Free cash flow $915,000,000 = $915,000,000 $158,000,000

Current cash debt coverage ratio Cash provided by operations $1,676,000,000 = 0.66 $592,000,000 Average current liabilities $2,550,000,000 $2,948,000,000

Cash debt coverage ratio Cash provided by operations $1,676,000,000 = 0.31 $592,000,000 Average total liabilities $5,384,500,000 $7,692,500,000

Cash provided by operations minus capital expenditures minus cash dividends paid

Free cash flow per kohl's includes tax benefit from pension contribution, discretionaty cash pension contribution and proceeds from sale

of assets on page 15 of the 10K report

Price/Earnings ratio Market price as of 1/31/2011 $50.78 = 13.84 $32.07 EPS $3.67 $1.44

J.C. Penney Corporation

$1.64

= 2.41

= 39.19% 0.95

Interpretation and Comparison between the two companies' ratios (Reading the Appendix of

Chapter 13 will help you)

Comparing these numbers is not meaningful since the number of shares outstanding differs.

JC Penney has $2.41 in current assets for every $1 dollar in current liabilities while Kohl's has only $2.08. JC Penney is more liquid based on the current ratio.

JC Penney's gross profit ratio is better than Kohl's gross profit ratio by almost 1% (39.19% - 38.24%)

= 2.19%

3.5times

= 105days

= Not Applicable

= Not Applicable

Kohl's is more profitable based on the profit margin ratio because it earns 6 cents for every $1.00 in sales as compared to 2 cents earning per $1.00 of JC Penney.

Kohl's inventory turnover is slightly better by .3 than JC Penney. This might indicate that Kohl's volume of sales in terms of inventory is better than JC Penney.

The result of the days' in inventory is consistent with the inventory turnover. The result is in favor of Kohl's. Kohl's has the ability to sell its inventory 9 days (105-96) ahead compared to JC Penney.

Not applicable - there is no accounts receivable on the annual report of both companies.

Not applicable - there is no accounts receivable on the annual report of both companies.

= 1.39

= 3%

= 58.14%

= 3.6

= 48.59%

The result of this particular ratio is almost identical; JC Penney is irrelevantly better than Kohl's.

Kohl's efficiency in the usage of its resources is reflected on the return on assets ratio as it earns 8 cents for every dollar of assets as compared to JC Penney's 3 cents earning for every dollar of assets. Therefore, Kohl's is more profitable based on this ratio.

Kohl's require to liquidate 40.27% of its assets at their book value to satisfy their obligations while JC Penney must liquidate 58.14% of its assets at their book value to satisfy their obligations. This ratio tells us that the stockholder's interest is larger at Kohl's compared to JC Penney.

Kohl's ability to pay its obligation is in a better position compared to JC Penney based on this ratio. Kohl's times-interest earned ratio is significantly higher than JC Penney.

Not Applicable - Kohl's did not declare and pay dividend on 2010.

= 8%

= ($96,000,000)

= $158,000,000

= 0.20

= 0.08

Kolh's earning for every dollar invested by common stockholders is better by 6 cents as compared to JC Penney so Kohl's is more profitable based on this ratio.

Kohl's has $915M in free cash flow while JC Penney has -$96M based on the provided solution but $158M if based on the computation provided by the annual report. Regardless, Kohl's has the advantage on this particular ratio.

Kohl's 66 cents in cash provided by operation in relation to average current liabilities is better than JC Penney's 20 cents so Kohl's is more liquid based on this liquidity ratio.

Kolh's 31 cents in cash provided by operating activities for every dollar in average total liabilities is stronger that JC Penney's 8 cents for every dollar of average total liabilities. Therefore, Kohl's is more solvent as compared to JC Penney based on this ratio.

= 22.27JC Penney is more marketable and the public is more optimistic based on the price earnings ratio.

Liquidity: Based on the result of the liquidity ratios like free cash flow and cash debt coverage Kohl's has better liquidity. Kohl's $915M free cash flow is significantly more than JC Penney's $158M free cash flow so this a solid basis of Kohl's advantage in liquidity as compared to JC Penney. The result of current cash debt coverage ratio is also siginificantly in favor of Kohl's compared to JC Penney. However, JC Penney's current assets in relation to current liabilities is more by 33 cents as compared to Kohls.

Solvency: The results of the debt to the total assets ratio and the times interest earned ratio are both in favor of Kohl's. These two ratios project a significant margin in favor of Kohl's; 40.27% vs 58.14% 13.6 vs 3.6 for debt to the total assets ratio and the times interest earned ratio respectively. The free cash flow and the cash debt coverage ratio are both good measurements as well because both results significantly favor Kohl's with $915M free cash flow as compared to JC Penney's $158M and 23 cents advantage in cash provided by operating activities for every dollar in average total liabilities. Therefore, Kohl's state of solvency is better than JC Penney.

Profitability: The profit margin ratio, return on assets and return on common stockholder's equity are all in favor of Kohl's. Kolh's profit margin ratio of 6.06% is significantly higher than JC Penney's 2.19% and the difference of 5 cents in the return on assets ratio by Kohl's over JC Penney is also significant. Kohl's earnings for every dollar invested by common stockholders is better by 6 cents as compared to JC Penney. Overall, Kohl's is more profitable than JC Penney. JC Penney's gross profit ratio is slightly higher than Kohl but this is not sufficient measurement compared to various ratios that are in favor of Kohl's.

Conclusion: Kohl's is more liquid and solvent compared to JC Penney based on the analysis and I can also safely conclude that Kohl's profitability is stronger than JC Penney because majority of the profitability ratios are in favor of Kohl's. The price earnings ratio might indicate that JC Penney is more marketable and that the public is more optimistic about the future of JC Penney but this ratio is lacking in many elements compared to the ratios that are in favor of Kohl's. Overall, the financial standing of Kohl's is better than JC Penney based on my evaluation of these two companies. If I were to invest, I would have to go with Kohl's at this point in time based on thie financial evaluation.

The Appendixes of your textbook and any information you use to profile the companies should be cited as a reference below.

http://finance.yahoo.com/q/pr?s=JCP+Profile

http://finance.yahoo.com/q/pr?s=KSS+Profile

http://www.kohlscorporation.com/PressRoom/PressRoom02C.htm

http://bigcharts.marketwatch.com/historical/default.asp?symb=kss&closeDate=01%2F31%2F2011&x=27&y=18

http://bigcharts.marketwatch.com/historical/default.asp?symb=jcp&closeDate=1%2F31%2F11&x=37&y=19

http://www.jcpenney.com