In The Headlines
J.C. Penney’s 3-Pronged Strategy for Survival
Following J.C. Penney’s brush with death during the past decade, the 113-year-old company’s future boils down to a three-part turnaround strategy overseen by president and CEO-designee Marvin Ellison. The challenge that lies ahead for the chain of department stores cannot be overstated. Since the beginning of 2006, J.C. Penney’s same-store sales, which measure sales at existing locations open at least 12 months, as well as online sales, have dropped by a cumulative 30%. The good news is that J.C. Penney’s customers do not appear to have outright abandoned the retailer. They are instead simply shopping less frequently, and making smaller purchases when they do.
“We had 87 million active customers in 2011. We have 87 million active customers today,” explained CEO Myron Ullman. “The reason the volume is not the same is frankly because the businesses that were impaired under the previous leadership team have not yet been fully restored.” Given this, J.C. Penney’s strategy revolves not around attracting throngs of new customers, but rather around encouraging its existing customers to buy more. This central point is reflected in the first prong of its turnaround plan: to boost sales in its “center core.”
“The center core is really defined as Sephora, handbag, shoes, and fashion jewelry,” noted Ellison. “Those areas of the store that are great for cross-shopping and what we call incremental sales attachments to the core purchases.” J.C. Penney’s primary tactic for turning around its stores, in other words, is to boost the size of customer transactions by seeking to convince shoppers to add smaller items to their larger purchases. It is akin to putting candy bars in front of a register at a convenience store.
The second prong of J.C. Penney’s turnaround strategy is to evolve into a so-called Omni channel retailer—one that allows customers, in-store sales persons, and call-center staff to effortlessly maneuver between multiple distribution channels (in-person, over the phone, online, and from mobile devices). “We are behind in our Omni channel strategy, but we don’t look at that as a disadvantage because I think the second-mover advantage is so powerfully strong,” says Ellison. The key challenge, he noted, is to transform J.C. Penney’s 1,000-plus locations into distribution points for everything the company has to offer, and to make the process “seamless for a customer, anyway, anytime, anyhow she wants to shop.”
Finally, the third prong of J.C. Penney’s turnaround strategy is to invest in its home furnishings department, which had been sidelined in the failed rebranding attempt of 2011-2012. This includes focusing less on so-called hardline goods such as furniture, and more on soft line goods like towels. “We had to change the mix of Home, it was two-thirds hard home, one-third soft home, we’ve made that transition, we’re back to two-thirds soft home, one third hard home,” explained Ullman. He noted that the strategy around home furnishings also encompasses updating its products with exclusive lines from the likes of Eva Longoria, and redesigning the actual home department to take it from more traditional to a much more modern view.
The company is facing broader challenges that are tripping up its department store peers that cater to middle-income shoppers who have not been benefiting much from the economic recovery. Shoppers’ spending is also shifting away from department-store specialties such as clothing and more toward restaurants, autos and smartphones.
Penney’s results in the most recent quarter showed some improvement. J.C. Penney lost $138 million, or $0.45 per share, for the quarter that ended Aug. 1. That compares with a loss of $172 million, or $0.56 per share, a year earlier. At the end of the day it remains to be seen whether the company’s new strategy will be enough to reverse its fortunes. The odds are certainly against the storied retailer. As Warren Buffett has observed in the past, “turnarounds seldom turn.” However, given the considerable odds facing the company, any sense of victory is bound to be that much sweeter.
Citations
1. http://bit.ly/1NamKYa – Investopedia
2. http://bit.ly/1NamKYa – Yahoo Business
LED Light Bulbs Power a Big Carbon Emissions Reduction
Utility and power grid managers in the U.S. are learning that the best way to cut carbon emissions and improve efficiency is the easiest: Just change your lightbulbs. The nation’s largest grid, serving more than 61 million customers from Washington to Chicago, is revising its demand forecasts after recognizing that better lighting has undercut its projections. Swapping all of Thomas Edison’s incandescent lightbulbs with lamps containing light emitting diodes, or LEDs, would save enough electricity to power 20 million American homes, according to the Energy Department.
Energy-conservation efforts by Americans, from switching bulbs to upgrading washing machines and air conditioners, have done more to reduce carbon emissions than the increased use of solar, wind, and natural gas, according to consultant Wood Mackenzie Ltd. Efficiency can help meet half of the emissions cuts sought under President Barack Obama’s Clean Power Plan, the American Council for an Energy-Efficient Economy said. “It’s a total bulb revolution,” Prajit Ghosh, director of power and renewables research at Wood Mackenzie in Houston, said. “The decline in load growth from both macroeconomic factors and energy-efficiency gains is by far the biggest reason carbon emissions fell. At least for the last five years, a majority of these savings came from lighting.”
A switch from the incandescent lamps, which were introduced in the 19th century, was prompted by the Energy Independence and Security Act of 2007 that required lighting to become 25 percent to 30 percent more efficient by 2014 from 2008 levels. Lighting accounts for about 5% of a home’s energy budget and switching to more efficient bulbs is one of the fastest ways to cut those costs, according to the Energy Department. LEDs use 75-80% less energy than incandescent bulbs and last 25 times longer. LEDs will account for 83% of the lighting market share by 2020 and almost all of it 10 years later, the Energy Department says. The cost of the bulbs has fallen by more than 85% in six years, according to ACEEE, a Washington-based non-profit that promotes conservation. Bulbs are now available for less than $5.
Use of the new bulbs is catching on. In February, the Super Bowl became the first National Football League championship played under LEDs. Ikea Group, the worldwide furniture retailer, said that it will carry only LEDs starting next month and that they would be sold at the lowest price on the market.
PJM Interconnection LLC, which manages the largest U.S. grid, will for the first time include the effect of more efficient light bulbs and appliances in its long-term demand outlook, Tom Falin, manager of resource adequacy planning, said at the grid operator’s headquarter in Valley Forge, Pennsylvania. The forecast for peak demand, a reflection of supplies needed on the hottest day of the year, will decline in 2016 from this year’s level using a new model, he said. Forecasts will be cut by about 4% each year through 2031 in the 15-year outlook. “Within the last three or four years, our performance model has not been performing as well as it had been,” Falin said. Electricity demand no longer has the same responsiveness to economic growth that it had, he said.
PJM is not alone in recognizing the new efficiency. The Texas grid operator revised demand forecasts as growth lagged behind the economic rebound, easing concern about blackouts in the country’s biggest energy-consuming state. Duke Energy Corp. and American Electric Power Co. say energy efficiency helped them reduce carbon emissions. Exelon Corp. said higher demand from the improving economy in Chicago, Baltimore and Washington is being partially offset as consumers become more efficient. DTE Energy Inc. sees flat growth over the next few years compared with earlier projections of a 0.5% increase.
U.S. power demand reached a record 10.66 billion kilowatt-hours a day in 2007, a level not matched eight years later, according to the U.S. Energy Information Administration. Carbon dioxide emissions from electricity producers declined by 15% to 2.17 billion metric tons in 2013 from 2005, the agency said. Lower demand forecasts mean providers need less power generating capacity and that can result in lower costs for consumers. “Power demand growth that was expected to be reached in 2017 won‘t be achieved before 2030,’’ said Ghosh of Wood Mackenzie.
Citations
1. http://bloom.bg/1DOoweS – Bloomberg
The Good News Is . . .
• U.S. industrial output advanced at its strongest pace in eight months in July as auto production surged in a bullish signal for third-quarter economic growth. Industrial production shot up 0.6% last month after a downwardly revised increase of 0.1% in June, the Federal Reserve said. Economists had looked for a gain of just 0.3% last month. The gain in output reflected a 0.8% increase in factory production that was spurred by 10.6% surge in motor vehicle output.
• Clorox Co., a leading multinational manufacturer and marketer of consumer and professional products, reported earnings of $1.44 per share, an increase of 10.8% over year earlier earnings of $1.30 per share. The firm’s earnings topped the consensus estimate of analysts by $0.07. The company reported revenues of $1.6 billion, a 4.0% increase. Management attributed the company’s results to strong growth in its cleaning products segment and improved operating margins.
• The Sumitomo Life Insurance Company of Japan has agreed to acquire Symetra Financial Corporation, an American provider of insurance and financial products, for about $3.8 billion. The deal is the latest by a Japanese insurer seeking to expand its operations into the United States, the world’s largest insurance market, as an aging Japanese population is expected to cut into results. Symetra would give Sumitomo Life its first real foothold in the United States. Under the terms of the deal, Symetra shareholders will receive $32 a share in cash, and a special dividend of 50 cents a share.
Citations
1. http://1.usa.gov/1Leo9wF – Federal Reserve
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1NxKSkK – Clorox Co.
4. http://nyti.ms/1f5nCi6 – NY Times Dealbook
Planning Tips
Guidelines for Protecting Your Estate from Creditors
An important estate planning goal for many individuals is to be sure that their money ultimately passes to their heirs, rather than their creditors. When you pass away, the tax man is not the only one who can take a bite out of the assets that you leave behind for your loved ones. Whether it is cash, real estate, retirement money, or other funds, inherited assets can suddenly come up for grabs in a number of scenarios when creditors and others come calling. You can often make your estate creditor-proof by avoiding probate, which is designed to pay off creditors. Here are some guidelines to help you avoid probate and prevent outsiders from getting the money you have left for your heirs. Always consult with a trusted financial advisor when considering any changes to your estate plan.
Use a trust instead of a will to transfer assets – Establishing a trust is not only a key way to skip probate court, it can also prevent the assets you have spent a lifetime accumulating from going to predators who might slap your heirs with lawsuits. A trust can specify that the money only be used for certain purposes, like the education, care or support of a specific beneficiary. This way, there can be no payout to creditors. Trusts can contain specific language and provisions that prevent your beneficiaries’ creditors from seizing any trust assets. Unlike wills, trusts are not a matter of public record. They are a tool for maintaining privacy. In addition, trusts are much more difficult to contest than a will. A final advantage of a trust over a will is that a will has to go through probate, which is expensive and time-consuming. Probate costs can eat up more than 3% of an estate. So if you bequeath $1 million through your will, your heirs could pay more than $30,000 in probate expenses and wait a year or more for their inheritances.
Handle retirement assets appropriately – Be careful with how you pass along retirement assets such as IRAs and 401(k) plans. Creditors can sometimes go after those monies if one of your loved ones winds up in bankruptcy court. To prevent this, leave IRAs to beneficiaries in a separate IRA trust to keep the funds away from creditors. The Supreme Court ruled in 2014 that any time a child or grandchild inherits an IRA, it is no longer protected from creditors. By creating a stand-alone IRA trust for children or grandchildren to inherit an IRA, your offspring will have access to the money, but creditors will not. Fortunately, married couples do not have to worry about this problem. Under current law, if one spouse dies with an IRA, the surviving spouse is allowed to receive the IRA assets as a “spousal rollover” and the funds are protected from outsiders.
Safeguard life insurance proceeds – Money held in a life insurance policy is protected from creditors, so any death benefit or cash value is protected and will go directly only to the individuals or organizations you name as beneficiaries. But once life insurance proceeds are distributed as cash to your beneficiaries, the funds are open to attack from anyone. To prevent this, safeguard the life insurance by putting it an irrevocable life insurance trust (ILIT). An ILIT is a tool specifically designed to own life insurance. Just like other trusts, the ILIT has a trustee, beneficiaries and precise terms for distributions. You can add protective provisions, like a spendthrift clause and a discretionary distribution clause, to keep the insurance proceeds from your beneficiaries’ creditors. A spendthrift clause prohibits the trustee from transferring trust assets to anyone other than the beneficiaries. That includes an ex-spouse, creditors or even the IRS. A spendthrift clause also says no beneficiary is permitted to assign, pledge or sell any interest in the trust—whether trust principal or income. If the trustee believes the distribution would be wasted or claimed by the beneficiaries’ creditors, a discretionary distribution clause gives your trustee the right to withhold income and principal distributions that would otherwise be payable to the beneficiaries.
Title bank accounts and assets properly – If you own joint assets or name beneficiaries on your accounts and assets, a creditor cannot seize what you leave behind after you die. Instead, the money will go directly to the person(s) listed on the accounts. If you are married, make sure your spouse is named as a beneficiary on the bank account, which keeps the asset from having to go through probate. Adding beneficiaries to financial accounts is another creditor-busting move, since those assets avoid probate upon the death of the first account owner. But in this instance, it is the deceased person’s creditors that will not get access to the money, not the creditors of the beneficiaries. Instead of having a joint owner listed on the title of certain accounts, a variation on this technique is to have a named beneficiary listed on your accounts, such as a 529 plan that may be for the benefit of a grandchild’s college education.
Payable-on-death accounts – Another way to bypass probate and pass along the money to your heirs is to choose a payable-on-death (POD) or transfer-on-death (TOD) account designation. This differs from a joint tenant or co-owner arrangement because your heirs only have access to the fund after your death. Joint tenant and co-owners have access to the funds while you are alive.
Citations
1. http://bit.ly/1J873ty – Nolo.com
2. http://bit.ly/1MqSsie – EstatePlanning.com
3. http://bit.ly/1DibG8t – AARP
4. http://bit.ly/1MuoUlk – NuWireInvestor.com
5. http://bit.ly/1NjqINq – Investopedia
