London Graves

Summer Capstone

Alexis Downs

Assignment #2

6/20/15

Stein Mart Vs JC Penny’s

Introduction:

The two firms I have chosen to compare are Stein Mart and JC Penney’s. These two firms

operate in the department store industry and sell relatively the same merchandise. JC Penney’s however

tends to try to sell more name brands than Stein Mart does. The five forces of this industry are all

relatively moderate, except for the threat of substitutes which is defined as weak. The main reason for this

is counterfeit clothing can be a significant threat to revenues in some countries. However, the socio-

political environments those individuals operate within, coupled with the need for individual and group

identity, make retail clothing essential to consumers (Marketline). For graphical representation of five

forces, see appendix A.

Part I: More information on ratio calculations see appendix B.

Size: The size of these two firms is vastly different. Stein Mart has larger amounts of assets and

sales than JC Penney’s does for both years. This was surprising because for me JC Penney’s is

better known in my geographical area, but Stein Mart is a larger by a considerable amount.

Debt Structure: The debt structure for JC Penney’s has gotten worse from 2013-2014. As for

Stein Mart their debt ratios also got worse from 2013-2014, however they are better than the debt

of JC Penney’s comparatively. Stein Mart has less debt to equity and their debt ratio is lower as

well. Stein Mart also had significantly more working capital for both years than JC Penney’s did.

Operating Results: Operating results between the two firms are different as well. For JC Penney’s

they have a negative profit margin, return on assets, and return on equity for both years.

However, it does look like they are trying to turn it around because they are beginning to rise

closer to the positive side. As for Stein Mart, their profitability is not too bad. It is on the positive

side, which is better than JC Penney’s is. Considering that Stein Mart is a low cost provider of

merchandise, the low profit percentage is okay for them. This is because they are not marking up

their merchandise as JC Penney’s is. They are low cost, so they will be lower on profit as well.

What was a little interesting is that both firms inventory turnover were relatively close for 2014.

This is interesting because if Stein Mart is a lost cost provider, then their turnover should be

higher than a provider that marks up their inventory.

Sources and uses of cash: I was unable to find JCP’s financials for 2014 on their website, and I

only have what was given to us in class. Therefore, I can only compare the two firms 2013 cash

flows. Major uses and sources of cash for JCP include an acquisition, inventory, capital

expenditures, and proceeds from issuance of long-term debt. Stein Marts uses and sources of

cash include depreciation and amortization, capital expenditures, and dividends paid.

Part II:

SWOT: Some of the strengths of Stein Mart include the capability to offer low prices on

merchandise through a low cost buying strategy. They also have the strength with the

convenience based locations and attractive store appearances to their customers. The main

weakness of Stein Mart is their geographic location concentration. They have limited locations in

limited states. Therefore, they are not marketing to all geographic areas within the US. Thus, they

are less known in certain geographic locations. Opportunities of Stein Mart include growing

appeal market in the US and the growth of online shopping. Threats include intense competition

in their market, and the increasing cost of labor.

Symptoms, Problems, Root Causes, and Diagnosis

A symptom that jumps out at me in Stein Marts financials is their quick ratio and inventory turnover are

too low for the type of company they are. If their merchandise does not sell then they are no longer liquid.

In addition, their inventory turnover indicates that this could become an issue in the near future because it

is falling. This means that inventory is not selling as quickly as it has in the past. The main problem is

Stein Mart, as too much inventory in stock and it is not selling quickly. The causes of this problem are one

of two things: first, they have ordered too much inventory for their stores. While it is sitting waiting to be

bought, it has the potential to be damaged and thus could be unable to sell after all. Second is their

inventory turnover is low. Meaning it is not selling quickly enough. When this turnover is compared to

JCP, it does not look that bad. However, Stein Mart is a low cost provider and therefore should be selling

merchandise quicker than a name brand company should. My diagnosis is Stein Mart has misinterpreted

their consumer market and has too much inventory on hand.

Alternatives

1. Stein Mart could do nothing.

a. This could result in lots of inventory left over if the company does go

under. The inventory could also be stolen or damaged before it has time

to sell. Thus, resulting in a loss of money that was spent for it.

2. Stein Mart could reduce the amount of inventory per store, and order more

inventory as needed.

a. This could result in having to purchase inventory more often, but it is less

likely to sit on the shelf very long before it is sold. This allows the

company to better fallow fashion trends. In addition, if the company goes

under, there will be less inventory left over.

Conclusion:

The overall health of JCP is in trouble. They will need to make improvements in order to keep up

with competition. Stein Mart on the other hand is in good health. However, improvements could still be

made to improve their health even more. The alternative I would suggest for Stein Mart is number two.

This will allow Stein Mart to better understand their current market by not having an abundance of

inventory on hand. The downside to this is that they will have to order inventory more often. The Pros and

Cons to option 1 include: having too much inventory on hand makes them vulnerable if they go under, but

they do not have to order inventory as often.

Appendix A: Five Forces

Figure 5: Forces driving competition in the apparel, accessories and luxury goods market in the United States, 2012

Source: MARKETLINE

Appendix B: Ratio Calculations

JCP Ratio Calculations:

Calculations 2014 2013Liquidity

Current Ratio 4,331/2,241=1.933 4,833/2,846=1.698Quick Ratio 4,331-2,652/2,241=0.749 4,833-2,935/2,846=0.667Working Capital 4,331-2,241=2090 4,833-2,846=1987

ProfitabilityGross Margin 4,261/12,257=0.3476 3,492/11,859=0.2945Profit Margin Ratio (771)/12,257=(0.063) (1,388)/11,859=(0.117)Return on Assets (771)/11,102.5=(0.069) Did not do because of lack on

informationReturn on Equity (771)/1,914=(0.403) (1,388)/3,087=(0.450)

ActivityInventory Turnover 12,257/2,652=4.622 11,859/2,935=4.041

LeverageDebt Ratio 8,490/10,404=0.816 8,714/11,801=0.738Debt-to-equity 8,490/1,914=4.4 8,714/3,087=2.82Times Interest Earned (748)/23=(32.52) (1,886)/(498)=3.787

Stein Mart Ratio Calculations:

Calculations 2014 2013Liquidity

Current Ratio 357,171/196,213=1.820 333,433/197,081=1.692Quick Ratio 357,171-261,517/196,213

=0.488333,433-243,345/197,081 =0.457

Working Capital 357,171-196,213=160,958 333,433-197,081=136,352Profitability

Gross Margin 367,353/1,263,571=0.291 342,630/1,232,366=0.278Profit Margin Ratio 25,555/1,263,571=0.020 25,027/1,232,366=0.020Return on Assets 25,555/507,983.5=0.050 Did not do because of lack of

informationReturn on Equity 25,555/264,401=0.097 25,027/234,034=0.107

ActivityInventory Turnover 1,263,571/261,517=4.832 1,232,366/243,345=5.064

LeverageDebt Ratio 259,857/524,258=0.496 257,675/491,709=0.524Debt-to-equity 259,857/264,401=0.983 257,675/234,034=1.101Times Interest Earned 40,568/15,013=2.70 35,998/10,971=3.281

ReferencesMarketline. "United States - Apparel, Accessories & Luxury Good." Industry Five Forces. 2013. Web.

<http://advantage.marketline.com.ezproxy.lib.ou.edu/Product?pid=MLIP0952-

0006&view=d0e351>.