J.C. Penney Continues to Outperform

This assumption is still below management's expectation of hitting a 9%-9.5% operating margin by 2009. We think J.C. Penney would have to fire on all cylinders for the next five years to hit that target, which, in our view, is unlikely given the competitive pressure it faces from discounters, other department store chains, and specialty retailers. Additionally, the 9%-9.5% target is well above the average publicly traded department store chain's operating margin, which was roughly 7% in 2004. Thus, our fair value estimate does not reflect the same optimism the market or management has for J.C. Penney over the next five years.