Financial Statement Analysis Project: A Comparative

Analysis of Kohl's Corporationf and J.C. Penny

Corporation
Regina Varnado MSN
ACCT504- Accounting and Finance: Managerial Use and
Analysis
Professor Howerton
Keller Graduate School of Management
Kohl's Corporation first store was opened in Brookfield, Wisconsin in 1962.
Kohl's Corporation was initally positioned between the higher-end
department stores and the discounters, that sold everything from candy to
motor oil to sporting equipment. Kohl's Corporation headquartered in
Menomonee Falls, Wisconsin operates approcimately 1,160 family-oriented
department stores in 49 states with 137,000 employees and a website
(www.Kohls.com). Kohl's Corporation has 13 distribution facilities in nine
states throughout the United States. Kohl Corporation 2010 had net sales of
$18.4 billion and net income of $1.120 million.
http://www.kohlscorporation.com/InvestorRelations/sec-filings.htm
J.C. Penny Company, Inc. (NYSE: JCP), one of the nation's largest apparel
and home furnishing retailers that was founded in 1902 in Kemmerer,
Wyoming. J.C. Penny has over 1200 stors in all 50 states as well as Puerto
Rico, Mexico, and Chile. J.C. Penny Corporation is the largest department
store retailer and catalog merchant in the United States, with licensing
agreements for its products throughtou the world. J.C. Penny Corporation is
headquartered in Plano, Texas with 19,200 employees. J.C. Penny
Corporation net sales was $183,910,000 and the net income was $1,114,000
for the year 2010. http://media.corporate-ir.net
J
Use this Excel spreadsheet to compute ratios; show your computations for all ratios on this tab and also include your commentary.
The financial statements used to calculate these ratios are available in Appendix Aand Appendix Bof your textbook.
Interpretation and comparison between the two companies' ratios (reading
the Appendix of Chapter 13 will help you prepare the commentary).
Earnings per Share of Common Stock (basic - common) As given in the income statement 3.67 $ 1.60 $
Earning per share (EPS) is the portion of a company's profit allocated to each
outstandingf share of common stock. Earning per share serves as an
indicator of a company's profitability. Http://www.investopedia.com
Current ratio is a liquidity ratio that measures a company's ability to pay short term obligations. Current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its produt into cash. Aratio less than 1 suggestf that the company would be unable to pay off its obligations if they came due at that point. Http://www.investopedia.com Kohl's have a current ratio of 2.08 which is lower than 2.41 that JCPennys have. JCPenny's ratio indicates that they are more capable of paying its obligations.
Current Ratio Current assets $5,645,000 = 2.08 $6,370,000 = 2.41
Current liabilities $2,710,000 $2,647,000
Gross profit margin is the excess of sales revenue over cost of goods sold. Gross profit margin give a good indication of an organization's fianacial health by revealing the portion of money left over from revenues after accounting for the cost of goods sold. Http://www.investopedia.com. JCPenny gross profit margin is better than Kohl's profit margin by 1%.
Gross Profit Margin Gross profit $7,032,000 = 38.2% $6,960,000 = 39.2%
Net Sales $18,391,000 $17,759,000
Rate of Return (Net Profit Margin) on Sales Net Income $1,114,000 = 6.1% $389,000 = 2.2%
Rate of return on sales is used to evaluate a company's operational efficiency.
Rate of return on sales is helpful to management by providing insight into how
much profitf is being produced per dollar of sales. An increasing ROS
indicates that an organization is growing more efficient while decreasing ROS
could signal looming finanical troubles. http://www.investopedia.com Kohl's
ROS is greater than JCPenny's ROS and therefore indicate Kohl's is making
more profit per dollar of sales and each organization can evaluate their ROS
over time to evaluate their ROS.
Net Sales $18,391,000 $17,759,000
Inventory Turnover Cost of Goods Sold $11,359,000 3.8 $10,799,000 3.5
Inventory turnover shows how many times a company's inventory is sold and
replaced over a period. Alow turnover implies poor sales and excess
inventory. Ahigh ratio implies either strong sales or ineffective buying.
Http://www.investopedia.com. Kohl's have a higher inventory turnover than
JCPenny by 0.3.
Average Inventory $2,979,500 times $3,118,500 times
Days' inventory outstanding (DIO) 365 days 365 = 96 365 = 105
Days of inventory outstanding (DIO) is a financial measure of fa company's
performance that gives investors an ideaf of how long it takes an organization
to turn its inventory into sales. The lower or shorter the DIOthe better and it
varies from industry to industry. http://www.investopedia. Kohl's days inventory
outstanding is 96 and less than JCPenny;s 105 days indicating it take
JCPenny's longer to turn their inventory into cash.
Inventory turnover 3.8 days 3.5 days
Accounts receivable turnover is used to quantifyf a firm's effectiveness in extending credit as well as collecting debts. This measures how efficently a firm uses it assets. Http://www.investopedia.com JCPenny and Kohl's outsource their accounts
Accounts Receivable Turnover Net credit sales = Not applicable = Not applicable
Average Net Accounts Receivable
Days sales outstanding measures the average number of days that a
company takes to collect revenue after a sale has been made. Alow DSO
number means that it takes a company fewer days to collects its accounts
receivable. Ahigh DSOnumberf shows that a company is selling its productf
to customers on credit and taking longer to collect money.
http://www.investopedia.com JCPenny and Kohl's outsources their account.
Days' sales outstanding (DSO) 365 = Not applicable = Not applicable
Receivable Turnover Ratio
Asset turnover Net Sales $18,391,000 = 1.38 $17,759,000 = 1.39
Asset turnover is the amount of sales or revenues generated per dollar or
assets. The asset turnover is an indicator of the efficiency with which a
company is deploying its assets. Http://www.investopedia.com Kohl's and
JCPenny are making about the same per dollar of asset. The higher the ratio
the better.
Average Total Assets $13,362,000 $12,811,500
Rate of return on total assets measures a company's earning beforef interest
and taxes against its total net assets. This ratio is considered an indicator of
how efficientlyf a company is using its assets to generate earning before
contractual obligations must be paid. The greater the coefficientf the more
effectively that a company is said to be using its assets. This number
indicates the earnings that a company generate for eachf dollar of assets on
its books. http://www.investopedia.com. Kohl's generated 8.3% and
JCPenny's generated 3.0% therefore Kohl's is generating more than
JCPennys.
Rate of Return on Total Assets (ROA) Rate of return on sales times Asset Turnover $1,114,000 = 8.3% $389,000 = 3.0%
$13,362,000 $12,811,500
Debt ratio measuresf the extent of a company's or consumer's leverage. The
debt ratio is defined as the ratio of total debt to total assets, expressed in
percentage, and can be interpreted as the proporation of a company's assets
that are financed by debt. The higher this ratio the more leverage the company
and the greater its financial risk. Adebt ratio of greater than 1 indicates that a
company has more debt than assets. http://www.investopedia.com JCPenny's
debt ratio is 58.1% is greater than Kohl's 40.3% therefore JCPenny has more
debt than assets compared to Kohl's and is considered to be higher is risk.
Debt Ratio Total Liabilities $5,462,000 = 40.3% $7,582,000 = 58.1%
Total Assets $13,564,000 $13,042,000
Time interest earned ratio measures a company's ability to meet the debt
obligations. This also indicate how many times a company can cover its
interest charges on a pretax basis. Http://www.investopedia. Kohl's TIE is 13.6
compared to JCPenny's 3.6 therefore indicating Kohl's can cover their its
interest charges 13.6 times versus JCPenny's 3.6 times interest charges on a
pretax basis.
Times-Interest-Earned Ratio Net Income + Int Expense + Tax Expense $1,923,000 13.6 823,000 = 3.6
Dividend Yield that shows how much a company pays out in dividends each
year relative to its share price. Dividend yield measure how much cash flow
you are getting for each dollar invested in an equity position.
Http://www.investopedia.com
Interest Expense $141,000 231,000
Rate of return on common stockholders' equity is the amount of net income
returned as a percentage of shareholders equity. Return on equity measuresf
a corporation's profitabilityf by revealing how much profit a company generates
with the money shareholders have invested. http://www.investopedia.com
JCPenny common stock 3925 + 3867/2
Dividend Yield Dividend per share of common stock (Yahoo Finance 04/20/2014) $0.32 = 0.6% $1.94 = 2.0%
Market price per share of common stock (Yahoo Finance 04/20/2014) $54.77 $98.85
Rate of Return on Common Stockholders' Equity (ROE) Net income - Preferred dividends 1114000 - 0 = 13.0% $389,000,000 = 66.0%
Average common stockholders' equity $7,977,500 $5,858,500
Free cash flow is the measure of financial performance calculated as
operating cash flow minus captial expenditures.Free cash flow represents the
cash that a company is able to generate after laying out the money required to
maintain or expandf its asset base. http://www.investopedia.com Kohl's had a
higher FCF than JCPenny and therefore Kohl's can pursue opportunities that
enhance shareholder value.
Price earning ratio is a valuation ratiof of a company's current share price
compared to its per share earnings. Ahigh P/E suggests that investors are
expecting higher earning growth in the future compared to companies with a
lower P/E. http://www.investopedia.com
Free cash flow = $107,000 836,100 $
=
Price/Earnings Ratio (Multiple) 6/30/2011 ycharts.com $54.77 = 15 $8.15 = 5
(please see the instructions for the dates to use for this ratio) EPS as of 06/30/2011 $3.67 $1.60
The comparison of the ratios is an important part of the project. Agood approach is to briefly explain what the ratio
tells us. Indicate whether a higher or lower ratio is better. Then compare the two companies on this basis.
Remembereach ratio below requires a comparison.
Kohl's Corporation J.C. Penny Corporation
Net cash provided by operating activities minus cash payments
earmarked for investments in plant assets
$959,000 $959,000
You all get the chance to play the role of financial analyst below. The summary should
be a comparison of each company's performance for each major category of ratios
(liquidity, solvency, and profitability) listed below. Focus on major differences as you
compare each company's performance. A nice way to conclude is to state which
company you feel is the better investment and why.
Measuring Ability to Pay Current Liabilities: JC Penny has the advantage for the current ratio. JC Penny
has $2.41 in current assets for every dollar in current liabilities while Kohl;s has only $2.08 in current
assets for every dollar in current liabilities. JC Penny is more liquid than Kohl's based on their current
ratio.
Measuring Turnover: Kohl's has the advantage for the inventory turnover over JC Penny. Kohl's turns over
their inventory 3.8 times to JC Penny's 3.5 times. Kohl's volume of sales in terms of inventory is greater
than JC Penny's volume of sales in terms of inventory.
Measuring Leverage- Overall Ability to Pay Debts: Kohl's has less debt than JC Penny's as evidenced by
Kohl's 40.3% debt to asset ratio as compared to JC Penny's 58.1% debt to asset ratio. Kohl's can cover
their interest expense 13.6 times with income before interest and taxes while JC Penny can only cover
their interest expense 3.6 times with their income before interest and taxes. Kohl's has the advantage for
each of these ratios.
Measuring Profitability: Kohl's has the advantage for each of the profitability ratios. JCPenny's has a
significant edge in return on common stockholders' equity with a 66% return on common stockholders'
equity as compared to Kohl's 13% return on common stockholders' equity. JCPenny also has a higher
gross profit margin than Kohl's.
Analyzing Stock as an Investment: JCPenny returns a 2% dividend yield to their investors while Kohl's
yield is 0.6%. Kohl's has positive free cash flow of $959 million while JCPenny has positive free cash flow
of $836 million. Free cash flow can be used to undertake acquisitions, pay additional dividends, pay down
debt, or buy back stock.
Conclusion: JCPenny is the safer investment when you examine their ability to pay current liabilities and
overall liabilities; however, Kohls has the edge for all of the profitability ratios. For the conservative
investor, Kohls looks like the way to go because of their strong current and times-interest-earned ratios.
For the growth-oriented investor, Kohls is the way to go because of their stronger profitability ratios and
large amount of free cash flow.
The Appendices of your textbook and any information you use to profile the companies should be cited as a reference below.
Harrison, W.T., Horngrenm C.T. & Thomas, C.W. (2013). Financial Accounting, 9th ed. Upper Saddle River, NJ:
Pearson Education, Inc.
Investopedia. (2014). Glossary. Retrieved April 1, 2014 from http://www.investopedia.com
JC Penney (JCP) Stocks. (2014). Retrieved from http://www.ycharts.com
JCP Profile (2014). Retrieved April 20, 2014 from http://www.finance.jcpenney.com
JCPenney. (2013). Retrieved April 1, 2014 from http://www.jcpenney.com
KHP Profile (2014). Retrieved April 20, 2014 from http://www.finance.yahoo.com
Kohl's (2014). Retrieved April 1, 2014 from http://www.kohlcorporation.com
KSS Kohl's Stock (2014). Retrieved April 20, 2014 from http://www.ycharts.com
The Appendices of your textbook and any information you use to profile the companies should be cited as a reference below.