Product Overview

The case examines the liquidity issues that J. C. Penney (JCP) experienced in 2012 and 2013 following a decline in sales and profits over several years. Although JCP had been a highly profitable and growing company, the increasing pressures of competition led to changes in strategy and in management that were insufficient to recapture the consistent financial results it had previously enjoyed. While sales and profits waned, the cash balance also suffered, and Wall Street analysts began expressing liquidity concerns as the company wrestled with having enough cash on hand to cover daily operating needs. The case introduces students to the causes of a liquidity crunch for a large, established company. Students are challenged to decide when the company should raise external capital and when it should consider the benefits and drawbacks of raising equity versus debt. Focusing on an iconic retailer, the case provides an engaging context in which to discuss the need for a major capital structure decision due to operational challenges.

Learning Objectives

Use financial ratios to identify a liquidity problem for a company. Demonstrate the cash flow effects of operating losses on a company's financial statements. Analyze cash flow statements to identify the major determinants of ending cash balance. Discuss funding alternatives consistent with creating an acceptable capital structure. Discuss the likely signaling effect of adding more debt or equity for a company in financial distress, whose debt rating is slipping and whose stock sales are at depressed levels. Highlight the leadership challenges of a turnaround situation and the governance issues faced by the board acting on behalf of shareholders during a turnaround.