j.c. penney company (jcp) earnings report: q! 2016 ... · j.c. penney company (jcp) earnings...
Post on 17-Jun-2020
11 Views
Preview:
TRANSCRIPT
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
J.C.PenneyCompany(JCP)EarningsReport:Q!2016ConferenceCallTranscriptThefollowingJ.C.PenneyCompanyconferencecalltookplaceonMay13,2016,08:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
TrentKruse;J.C.PenneyCompany;VP,InvestorRelationsMarvinEllison;J.C.PenneyCompany;CEOEdRecord;J.C.PenneyCompany;CFO
OtherPart icipants
DavidGlick;BuckinghamResearch;AnalystOliverChen;CowenandCompany;AnalystNeelyTamminga;PiperJaffray;AnalystPaulTrussell;DeutscheBank;AnalystSteveRuggiero;R.W.Pressprich;AnalystJeffVanSinderen;B.Riley;AnalystRandyKonik;Jefferies;AnalystOmarSaad;EvercoreISI;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheJ.C.PenneyCompanyfirst-quarter2016earningsconferencecall.
(OperatorInstructions)
Asareminder,thisconferencecallmayberecorded.
IwouldnowliketoturntheconferenceovertoTrentKruse,youmaybegin.
T rentKruse (VP,InvestorRelations):
Thanks,Operator,appreciatethat.Goodmorning,everybody.
Asareminderthepresentationthismorningincludesforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995,whichreflectstheCompany'scurrentviewoffutureeventsandfinancialperformance.
Thewordsexpect,plan,anticipate,believeandsimilarexpressionsidentifyforward-lookingstatements.Anysuchforward-lookingstatementsaresubjecttorisksanduncertaintiesandtheCompany'sfutureresultsofoperationscoulddiffermateriallyfromhistoricalresultsorcurrentexpectations.FormoredetailsontheseriskspleaserefertotheCompany'sForm10-KandotherSECfilings.
PleasenotethatnoportionofthispresentationmayberebroadcastinanyformwithoutthepriorwrittenconsentofJ.C.Penney.ForthoselisteningafterMay13,2016pleasenotethatthispresentationwillnotbeupdatedanditispossiblethattheinformationdiscussedwillnolongerbecurrent.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
Also,supplementalreferenceslidesareavailableonourInvestorRelationswebsite.Whilemanagementwillnotbespeakingdirectlytotheslides,theseslidesaremeanttofacilitateyourreviewoftheCompany'sresultsandtobeusedasareferencedocumentfollowingthecall.
Joiningusontoday'scallourMarvinEllison,CEOofJ.C.Penney,andEdRecord,ourCFO.Followingourpreparedremarkswelookforwardtotakingyourquestions.Withthat,IwillnowturnthecallovertoourCEO,MarvinEllison.
MarvinEllison (CEO):
Thankyou,Trent,andgoodmorning,everyone.Thefirstquarterwasclearlychallengingfromatop-lineperspectiveandweweredisappointedinourresultsrelativetoourownexpectations.
Asyouhaveheardthroughouttheweekfromotherretailers,top-linesaleswerenegativelyimpactedbymanyfactorsoutsideofourcontrol.Havingsaidthat,atJCPenneyIchallengedourleadershipteamtofocusoncontrollingwhatwecontrol.ThereforewhenIlookbackatthefirstquarterandcompareJCPenney'sresultstoourcompetitivespace,Ifeelconfidentthatwearestillwinninginthemarketplace.
Iamalsopleasedthattheteamdidanexcellentjobofappropriatelymanagingourvariableexpensesandeffectivelyadjustinginventorygiventhetrendswe'reseeingonthetopline.Thisquarteronlyfurthersourconfidencethateveninadifficultretailenvironment,wheretop-linegrowthislighterthanexpected,wewillstillachieveourEBITDAexpectationsfor2016andinthefuture.Thisisevidencedbyanover63%increaseinEBITDAduringthefirstquarter.
Nowwhileourcompsaleswereslightlydownforthequarter,wedeliveredatwo-yearstackperformanceof3%.AndasIlookbackatthemonthlycompsforthequarter,wedeliveredpositivecompsinthemonthofFebruary;weexperiencednegativecompsinMarchandinearlyAprilandexperiencedpositivecompsthelasttwoweeksofAprilheadingintotheMother'sDaysellingseason.
TheserecenttrendsprovideconfidenceinourabilitytogrowtoplineandimproveourEBITDAfortheremainderoftheyear,especiallyaswebegintoreapbenefitsofthenewinitiativeswhichIwilldiscusslaterduringthecall.
I'dliketopersonallythankourover100,000associatesfortheircontinueddedicationtodrivinggreatcustomerservicewhilemaintainingfiscaldiscipline.
AlthoughoursalesenvironmentinQ1waschallenging,therewereareasofstrengthinourbusinessduringthequarter.First,wecontinuetoseestrongperformanceinourexistingSephorainsideJCPenneyshops.We'realsoverypleasedwiththeperformanceofour28newlocationsthatopenedattheendofAprilbringingourtotalnumberofSephoralocationsto546.
Thefirstfewweeksofthesellingseasoninthese28newlocationshaveexceededourexpectations.Infact,thiswaveofopeningsisdeliveringourbestevernewopeningperformancefromanaverageofsalesperlocationperspective.
ThisisincrediblyencouragingasweareplacingSephorashopsintosmallermorerurallocationsthaneverbefore,butthepowerofthisgreatpartnershipisclearlyresonatingwithourcustomersinalllocations.Wehaveanother30openingsscheduledformidJuneandwehavetwoopeningsplannedforlaterin2016.
Wewillcontinuetogainmarketsharebyorganicallygrowingsalesinexistingstores,byaddingnewlocationsandbydeliveringnewbrandsinourSephorashops.Infact,thisquarterwelaunchedOrigins,[LaSotaine]plusexpandedKateSomerville,MarcJacobs,FreshandBumbleandbumbleandinthefallwewillbeadding[Pharmacie]andothergreatbrandstothiscompellingbeautyassortment.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
Second,ourfootwearandhandbagbusinessdeliveredstrongcompsalesperformanceduringthequarter.Notonlyisourexpansionofwomen'sshoesandtherelocationofmen'sshoescontinuingtoreapbenefits,wealsocontinuetoseeastrongresponsefromthere-launchofaLizClaiborneassortmentofhandbags.
Third,ouronlinebusinesscontinuestogeneratestrongresults.Onayear-over-yearbasisforthefirstquarterouronlineSKUcountincreasedover50%andouronlinesupplybaseisupnearly20%.Inaddition,ourmobiletrafficcontinuestoincreasedramatically,butevenmoreimportantourconversiononmobileimprovednearly50%inthequarter.
Andfourth,weareexcitedaboutthesalespotentialofourCenterCoreinitiativeandtheirbenefitsforthesecondquarterandthesecondhalfof2016.WehaverolledoutourCenterCoreconceptinapproximately125storesasoftheendofthefirstquarterwithnewlocationscomingonlineeachweek.
WeareverypleasedwithoursalesperformanceofournewCenterCorestoresandremainexcitedtorollthisnewformatouttooverone-thirdofourstoresbytheendofthesecondquarter.
Nowletmetakeamomenttodiscusstheevolutionofourmerchandisingstrategy.AtJCPenneyweknowwemustcontinuetopivotourmerchandiseassortmentstowardlessweathersensitivecategorieswhileprovidingourcustomerswithmorereasonstoshopinourstores.
Andcandidlyouroverrelianceonapparelhurtusintimesduringthefirstquarterwhenweatherpatternswerenotconducivetoapparelsales.Andtheconsumerwassimplyspendingtheirhardearneddollarsonexperiences,entertainmentandtobeautifytheirhome.
WhileapparelwillalwaysbeimportanttoJCPenney,wehaveconductedadetailedreviewofourcustomercurrentandfutureshoppingpatternsandwillstarttostrategicallyshiftourmerchandisingmixtosellmoreproductsandservicesthatcorrelatetowherecustomersarespendingthegreaterpercentoftheirdollars.
JohnTighe,ourChiefMerchant,hastakentheleadinthiseffortandheandhismerchantteamareintheprocessofexploringcategoryrolesandallowingthedatatoguideourdecisionsonwhichcategorieswewillcontinuetogrow,whichcategorieswewilladdandwhichcategorieswewillbegintominimizeinourassortment.Andwewillkeepyouupdated.
Andwe'realsofocusedonwinningmarketshare,butwewillintensifyourfocusandcommitmenttoreducingexpenseandbeingamoreoperationallydisciplinedCompany.Forthesecondquarterandfortheremainderof2016wewillfocusonbeinganaggressiveexpensereductionCompanyandwewillfocusonkeyinitiativestomakethatareality.
WeoweittoourshareholderstobeamorefiscallyresponsibleCompanyandwewillnotapologizeforourrelentlesseffortstoreducecostswhileprotectingthetopline.
AsateamwearecommittedtotakeadditionalstepstorightsizeourSG&A,tosimplifyandimproveourstoreenvironment,tomodernizeourmarketing,totakecostofoursupply-chainoperationswhilescrutinizingeverysingledollarofinventoryweadd.Weremaincommittedtogrowthetoplinewhileaggressivelyreducingourcontrollableexpenses.
Welookforwardtosharingmoredetailsonourplansinthemonthstocome.AndwiththatIwillhandthecallovertoEd.
EdRecord (CFO):
Thankyou,Marvin,andgoodmorning,everyone.AsMarvinstated,weweredisappointedinoursales
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page4of21
resultsrelativetoourexpectationsheadingintothequarter.However,wetookactionstoeffectivelymanageexpensesandinventoryandinturndelivereda$68millionincreaseinEBITDAto$176million.
Aswe'vepreviouslystated,wehavemultiplepathwaystoachieveourprofitabilitytarget.ThisquarterclearlydemonstratesourabilitytodriveEBITDAgrowtheveninatepidretailenvironment.WiththatIwillnowtakeyouthroughtheCompany'sfirst-quarterfinancialresults.
Comparablestoresalesdeclined0.4%forthequarter;thiswasclearlyachallengingquarterforretaildrivenbyunseasonableweatherandachangingconsumerspendingpattern.WeexperiencedastrongstarttothequarterinFebruaryfollowedbyasignificantslowdowninMarchandearlyApril.HavingsaidthatsalesimprovedduringthelasttwoweeksofApril.
Ourstrongestperformingdivisionsinthequarterweremen's,Sephoraandfootwearandhandbags.GeographicallytheNortheastandOhioValleyregionswereourbestperformingregions.OurOhioValleyregioniscomprisedofWesternNewYorkthroughIndiana.
Forthequarterconversionandunitspertransactionwereupversuslastyearwhiletransactionsandaverageunitretailweredown.Aswelookaheadweareexcitedabouttheimpactourinitiativeswillhaveondrivingsales.
OurSephorarollouts,CenterCorerefresh,rebrandedsalons,expandedwindowofferingsandtherolloutofapplianceswilldrivetrafficandshareofwallet.Weexpecttheseinitiativestohaveapositiveimpactinthesecondquarterbutamoremeaningfulimpactinthebackhalfoftheyear.Inaddition,theseinitiativeswillallowustobecomelessweathersensitive.
Nowletmeturntogrossmargin.Forthefirst-quartergrossmarginwas36.2%ofsalesandwasimpactedbymarkdownsassociatedwiththeunseasonableweather.HeadingintothequarterweexpectedacoolerFebruarytohelpclearthroughourremainingfallmerchandise.However,temperaturesinFebruarywerewarmerthanexpectednecessitatingadditionalmarkdownsinMarchandearlyAprilinordertoliquidatethesegoods.
Aswelookforwardweknowwehavecontinuedopportunityforgrossmarginexpansiondrivenbyincreasedprivatebrandpenetrationandmargin,improvedclearanceprofitability,reducedshortage,theimpactofournewpricinganalyticsteamandsupply-chainefficiencies.
Aswerecentlyannounced,weareexpandingappliancestoover500locations.Onasquarefootbasisappliancesdrivesubstantiallyhighersalesandgrossmargindollarsrelativetotherestofourhomedepartment.However,aswehavepreviouslystated,applianceswillhaveanegativeimpactonourgrossmarginrate.
Becauseofthisrolloutandthegrowthofouronlinebusinessweareloweringourgrossmarginguidanceforthefullyeartoa10to30basispointimprovement.
Nowturningtoexpenses.Giventhetrendsweexperienced(technicaldifficulty)onthetoplinetheteamsdidanexcellentjobofappropriatelymanagingourvariableexpenses.AsaresultforthefirstquarterSG&Adecreased$93millionto$872million(technicaldifficulty)by280basispoints.
WesawsavingsinallofthemajorSG&Acategoriesofstores,marketing(technicaldifficulty)whichwasdrivenpredominantlybyourdecisiontonolongersponsorthe(technicaldifficulty)ITandcorporateoverhead.
Inaddition,wesawimprovementinourprivatelabelcreditcardincome.CorporateoverheadleveragedthemostandbenefitedfromtheactionswetooklastOctobertocontinue(technicaldifficulty)torightsizethecorporateoffice.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
AswelookaheadweexpectcontinuedSG&Adollarssavingsfortheremainderoftheyear,butnottothemagnitudewe(technicaldifficulty)experiencedinthe(technicaldifficulty)firstquarter.
Ourfocusonfindingefficienciesandreducingexpensesacrossallaspectsofthebusinessremainsasstrongasever.Weremaincommittedtopermanentlyreducingcostandrunningaleanerandmoreefficientorganization.Andwecontinuetoworktoensureourreductionsarenotnegativelyimpactingourcustomers'in-storeoronlineexperiences.
Nowlet'stalkaboutprofitability.EBITDAincreased$68millionto$176million,a63%improvementfromthesameperiod(technicaldifficulty)lastyear.AdjustedEBITDAimproved80%to$153million,alsoa$68millionimprovement.
WearepleasedwiththeprogresswehavemadeinourEBITDAthisquartergiventhechallengingenvironment.WiththecontinuedopportunitieswehavetoimproveouroperationalperformanceweremainconfidentinourabilitytodeliverEBITDAof$1billionthisyear.
(Technicaldifficulty)ourfirstquarterearningspressureimproved(technicaldifficulty)toalossof$0.22versusalossof$0.49inthesamequarterlastyear.
Movingontoourbalancesheetandcapitalstructure.WeareverypleasedwiththecreditratingagencyupgradeswereceivedfromMoody'sandS&Pduringthequarter,whichdemonstratesthattheseagenciesrecognizeourimprovingbalancesheetandfinancialcondition.
Weendedthefirst-quarterwithliquidityof$2.3billion,upapproximately$80millionoverlastyear'sfirstquarter.Followinglastyear'spaydownofmorethan$500millionofdebtweanticipateafurtherreductionof$400millionto$500millionin2016.Evenasthisdeleveragingcontinuesweexpectliquidityatyearendtoexceedlastyear'sliquidityof$2.5billion.
Havingsaidthat,letmeprovideyouwithanupdateonourdebtreductioninitiatives.Duringthequarterwepurchasedandretired$60millionofouroutstandingdebt.Inaddition,weplantousefreecashflowtoretirethe$78millioninnotesmaturingthisAugust.
Throughacombinationofdeleveragingandrefinancingwewillcontinuetoproactivelymanageournear-termdebtmaturitieswhichalso--whilealsoactivelymonitoringmarketstoidentifyfurtheropportunities.Thisincludesrefinancingandextendingthematuritiesofour$2.2billiontermloanandmodernizationofourhomeofficebuildingaswellasselectrealestateproperties.
Ofnote,weareprovidinginformationtoover80prospectivebuyersdemonstratingthesignificantinterestwearereceivingonthehomeofficesaleleaseback.
Nowmovingontocash.Cashandcashequivalentsattheendofthefirstquarterwere$415million,$630millionbelowlastyear'sfirstquarter.AsImentionedearlier,inthefourthquarterlastyearweutilized$500millionincashonhandtoretiretheoutstandingtermloanprincipalpreviouslyissuedunderourABLfacility.
Inventorywas$2.925billion,up4.1%overthesameperiodlastyear.Onatwo-yearbasisinventoryisup3.2%,inlinewithourtwo-yearcompstackof3%.
Wecontinuetomakestrategicinvestmentsininventorytodrivethetopline,includingexpandingouronlineSKUcountswhichwereupover50%yearoveryearinthefirstquarter,andimprovingourin-stockpositionbothin-storeandonline.
OurinventorybuildisheavilyweightedtowardsourkeygrowthinitiativesincludingCenterCore,beauty,athletic,footwearandhandbagsamongothercategories.Weknowtheseinvestmentswillhelpdriveour
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
performancethroughouttheremainderoftheyear.
MerchandiseAccountsPayablewas$995million,down$68millionoverthesameperiodlastyear,primarilyduetothechangeintimingduetothereceiptsassociatedwithlastyear'sportdelays.
Nowletmewalkyouthroughourupdatedfull-yearguidance.Comparablestoresalesareexpectedtoincrease3%to4%.Grossmarginisnowexpectedtoincrease10basispointsto30basispointsversuslastyear.
SG&Adollarsareexpectedtodecreaseversuslastyear;EBITDAisexpectedtobe$1billion;adjustedearningspressureisexpectedtobepositive;andfreecashflowisexpectedtoimproveversuslastyear.
Inclosing,althoughwefacedpressureonthetoplinethisquartergiventhechallengingenvironment,wewerestillabletodeliverourbottom-lineresults.WeknowwehavemultiplepathwaystoachievingourEBITDAgoalandweremainfocusedondeliveringit.
Andletmeaddthatwhilewefeelverygoodabouttheinitiativesthatwewillrolloutintheremainderoftheyear,webelievewecanachieveourEBITDAtargetof$1billionwithacomparablestoresalesincreaseof1.5%forthefullyear.
Understandingthatourcustomers'discretionaryspendingpatternswilllikelycontinueinthenear-term,weareprudentlymanagingourbusiness.Havingsaidthat,theinitiativeswehaveinplacetodayareconcentratedonwhereourcustomersarespendingtheirdollarsandwillhelppositionustosucceedinthechallengingenvironment.WiththatIwillturnthecallbackovertoMarvin.
MarvinEllison (CEO):
Thankyou,Ed.AndIwouldnowliketotakeanopportunitytoprovideanupdateonourstrategicframeworkfor2016.Asareminder,atJCPenneywe'refocusedonthreestrategicpriorities,thefirstisprivatebrands.
Wewillleverageourtremendoussourcingandprivatebrandsinfrastructuretobecomethemostefficientretaileratproducingaportfolioofprivatebrandswithstyle,qualityandvalue.Wehavesourcingofficesaroundtheworldandover200in-housedesigners.
Wepossessauniqueabilitytogrowourprivatebrandspenetrationandincreaseprofitsbecauseofourlackofdependencyonthirdpartiesasamiddleman.ForthefirstquarterprivatebrandslikeArizona,St.John'sBay,LizClaiborne,Xersion,StaffordandJCPHomeplayedakeyroleinourabilitytodelivergreatvalueforourcustomers.
Andaswepreviouslyannounced,weareverypleasedwiththeexpansionofourcollectionofMichaelStrahantonearly500doorsbythisFather'sDay.
Inaddition,basedonthestrengthofourrelationshipwithMichael,wearelaunchinganexclusiveactivelifestylebrandcalledMSXbyMichaelStrahan,whichisbeingdevelopedbyourbest-in-classsourcinganddesignteam.Wewilllaunchthesegoodsinnearly500storesjustpriortoFather'sDay.
Wealsorecentlybeganrollingoutanewin-storeplussizeconceptcalledBoutiqueinnearly200stores.Thiswillbeaone-stopshoppingdestinationforplussizefashionwhichwillincludecasualsportswear,denimandactivewear.
Additionally,ourmerchantanddesignteamshaveconceivedanddevelopedourfirstplussizeprivatebrandformillennialwomencalledBoutique+.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
WeareexcitedaboutournewcollaborationwithProjectRunwaywinner,AshleyNellTiptonwhowillserveasabrandambassadorandwillalsodesigntwoupcomingcapsulecollectionsforourBoutiqueassortment.
Plussizeapparelrepresentsa$17billionindustryandwewillbeadestinationformillionsoffashionconsciousplussizewomenwhoarenotfindingwhattheyneedintermsofstyle,qualityandvalue.
Second,wearecommittedtobecomingaworld-classomni-channelretailer.Whilethereareopportunitiestoimproveoure-commercecapability,Ibelievewehavethetalentandresourcestocatchupquickly.
OurEVPofomni-channel,MikeAmend,andhisteamhavedoneanoutstandingjobofquicklyclosingthetechnologygapwithourcompetition.Thiswasevidentinthefirstquarteraswedeliveredanothersignificantincreaseinourdigitalbusiness.
InthefirstquarterwecontinuedtorolloutBuyOnlinePickupinStoresamedayandthiscapabilityisnowavailableinmorethan20%ofourstores.AndinthefirstquarterourstoreattachrateonBOPUSwasnearly40%,whichmeansthat40%ofthecustomerswhovisitourstoretopickupaBOPUSorderalsopurchasedadditionalitems.WearepleasedwiththeearlyresultsandhaveplanstorolloutBOPUSchainwidepriortotheback-to-schoolsellingseason.
Andourfinalstrategicpriorityisincreasingrevenuepercustomer.AsIhavesaidmanytimes,wehaveapproximatelythesamenumberofactivecustomerstodayaswedidin2011.However,thereisanopportunitytoincreasetheirfrequencyandtheamounttheyspendoneverytransaction.
AndmorethanevercustomersarespendingtheirmoneytoupdateandbeautifytheirhomesandwebelieveJCPenneyisinauniquepositiontoofferacompellingassortmentwithinmajorappliances,windowtreatments,furniture,andflooring.Andtoaddresstheseopportunitiesletmegiveyouanupdateonournewhomeinitiativethatweannouncedearlierthisweek.
Firstweareveryexcitedabouttheexpansionofourmajorapplianceinitiativestoover500storesthisyear.Asyouknow,wehavebeenrunningapilotofmajorappliancesin22locationssincethebeginningofFebruaryandwe'vebeenverypleasedwiththeresults.
Wewillbeliveonjcpenney.comnationwidenextweekwithover1,200itemsavailabletopurchasefromourpartnersfromSamsung,LGandGE.Theonlineteamisdevelopedabest-in-classonlineexperiencethatwillprovideasimpleprocessforcustomerstopurchaseanappliance,scheduleadelivery,installthenewunitandhaulawaytheoldapplianceinoneseamlessprocess.
Wearealsoveryexcitedaboutaddingthisbusinesstoouromni-channelportfolio.Wehaveanin-storenationwiderolloutbeginninginJulywithallappliancedepartmentsslatedtoopenlaterthisfall.Thiswillputusatover500storessellingmajorappliances.
Duringthepilotsnotonlywereoursalesandcustomerservicescoresphenomenal,welearnedalot.Soletmequicklysharesomeofthekeyfindingsfromourpilots.
First,overone-thirdofourappliancecustomerswerenewcustomerstoJCPenney.Approximately70%ofourappliancecustomerswerefemale.Thesalesproductivitywas10timeshigherthantheproductthenewappliancesetreplaced.
Over70%oftheappliancepurchaseswereontheJCPenneycreditcardand30%ofthosewerenewcreditcustomers.Theaveragetransactionwasover$1,200andthisbusinessaddedlow-single-digitcompsaleslifttotheentirestoreinthepilotlocations.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page8of21
ObviouslyweareveryexcitedaboutthefutureofthiscategoryandweareevenmoreexcitedaboutthenewcustomersitwillbringtoJCPenney.Wewillkeepyoupostedontherollout.
Second,weareexcitedabouttheexpansionofourwindowtreatmentoffering.Thisisalucrativecategorythatrepresentsa$200millionsalesopportunity.Andtheplanistoincreaseandenhancethewindowcoveringspresentationbyanaverageof25%inapproximately500storesbyearlyfall.
JCPenneyhasahistoricallydominantpositioninthewindowbusinesscoveringone-thirdofthewindowsinAmericaasrecentlyas2006.JCPenney'suniqueproductpropositionincludesreadymadecurtains,blindsandshades,rodsandhardwareaswellascustomhomeproducts.
Asweresetthefloorinourstoresforapplianceswewilltakethisopportunitytorestoretheoriginaltreatmentsquarefootageinourstores,givingustheflexibilitytofocusontrendinghardwindowcategoriessuchasready-madeblindsandshades,aswellaslargerselectionsofcurtains,drapesandvalances.
Andthird,wejustrecentlyannouncedourpartnershipwithAshleyFurnitureandwearegoingtotest21oftheirsignaturecollectionsinselectstoresbyMemorialDayweekend.Ashley'sisthelargestfurnituresupplierintheUSandmostrecognizedbrand.
Thisnewassortmentoffersabettervaluetoourcustomerwithaveryrelevantsetoftrendsanddesigns.Ashley'slogisticsinfrastructureishighlyefficientwithfivewarehousesnationallyandthelargestfleetoftrucksintheindustryallowingshortercustomerleadtimesandflexibilityoninventoryownership.
ProductwillbedirectlyshippedtoourcustomersandJCPenneywillownthefloorsamplesbutwillcarrynoadditionalinventory.Ashley'scorecustomerisidentifiedasfamilyandvalueorientedandwantsproductstomakelifeeasier.AndtheseattributesalignperfectlywithourkeycustomerdemographicofthemodernAmericanmom.
Inaddition,approximately1,500SKUsofAshleyfurniturewillbeavailableonJCP.comintimeforMemorialDayweekendgrowingtoover4,000SKUslaterthissummer.
Andlastly,weareexcitedaboutournewpartnershipwithEmpireTodayflooring.BeginninginearlyJulywewillstarttestingthisin-storeconceptintwomarketswithinTampaandtheWashingtonDCmetropolitanareas.Thisisauniqueandexcitingopportunityforbothcompanies.
EmpireTodayinsideJCPenneywilloperateindependentlyandwillberesponsibleforstaffing,theenvironment,marketingandcustomerservice.Theywilloccupybetween750to1,000squarefeetoflocationintheHomedepartmentandtheywilldisplaysamplesofhardwood,tile,laminate,vinylandcarpetcompetitivelypricedtofitourcustomerdemographic.
WebelievethisnewcategorywillbesignificantlyaccretivetothecurrentprofitdollarspersquarefootwecurrentlygenerateinthisunproductivespaceinourHomedepartment.Andourdatatellsusthatcustomerstendtopurchasewindowtreatmentsandflooringinsequentialtransactions.ThereforeourplanistodisplaytheEmpireTodayflooringadjacenttoourupdatedwindowpresentation.
WeareveryexcitedabouttherenewedfocusonHomeandbelievethatourstrategicfocusontheseinitiativeswilldriveincreasedsalesinthesecondhalfoftheyearwhilecreatingdifferentiationbetweenJCPenneyandtraditionalmid-tierdepartmentstores.
Wewillalsocontinuetoupdateyouonourstrategicframeworkandkeyinitiativesofprivatebrands,omni-channelandincreasingrevenuepercustomeronfuturecalls.
Wecontinuetomakeprogressinourmissiontore-emergeasaworld-classretailerandourassociates
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page9of21
arehighlycommittedtothiseffort.OurabilitytoimproveprofitabilityinadifficultsalesquarteronlyintensifiesmyexcitementinthefutureofJCPenney.
Ibelievewehavetherightleadershipteam,thecorrectstrategicfocustodeliverJCPenneybacktoprofitableearningsthisyearandachieveourgoalof$1.2billioninEBITDAfor2017.
Withthat,Operator,wewillopenthecallforquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
DavidGlick,BuckinghamResearch.
DavidGlick(Analyst-BuckinghamResearch):
Marvin,justcurioussortoftheinternaldebateyouguyshadonmaintainingthat3%to4%compguidance,obviouslytoughinthefirstquarter.Howareyouguysgoingtomanageinventoriesalongtheway?
Obviously,Edsaid1.5%comptohitthe$1billion.Butifyou'recaughtwithtoomuchinventorywithatooaggressivesalesplanthatcouldputthatinjeopardy.
Ifyoucouldjustkindofwalkusthroughthatdecisionprocess,thechecksandbalancesyouhaveinplaceandhowweshouldexpectthisimprovementoverthecourseoftheyear?
Thanks.
MarvinEllison (CEO):
Thanks.Itisverybasicapproach.Imean,wearetakingahardlookatthetrends.Obviously,aswementioned,thefirstpartofAprilwasverychallenging,butwehadpositivecompstowardtheendofthemonthandwehadapositivesellingenvironmentforthatwholeMother'sDaysellingperiod.
SoweleftthemonthofAprilandenteredthemonthofMaywithsomeconfidence.Soobviouslyforourcurrenttrendwasheadedinthewrongdirectionwewouldhaveupdatedguidance.Sowehaveconfidenceinthetrend.
AlsoasImentionedandEdmentioned,theseinitiativesinthesecondhalfoftheyearareverysignificant.Theseinitiativesarenotsomethingthatwearehopingthatwillwork,butwehavecreatedaverydisciplinedtestandlearnenvironment.
AndthereasonIfeltitwasprudenttogothroughthedataontheappliancepilotwasbecauseIwantedtoarticulatewhyweareaggressivelyrollingitoutto500stores.
So,wethinkthecombinationofrecenttrends,wethinkthecombinationofkeyinitiativesinappliances,CenterCore,windowexpansion,thebenefitsfromourshoeexpansionandsomeofthecategoriesthatremaintobeworkingwelllikethenewSephora,etc.,givesusconfidencethatwecancomeinatthatguidance.
Nowhavingsaidthat,wehaveaverydisciplinedprocessonmanaginginventory.Andonaweeklybasiswearelookingatsalestrendversusreceipts,andJohnTigheandourplanningandallocationteamhavedoneanincrediblygoodjobfromworkingwiththemerchantsmakingsurethatwehaveourkindoffingeronthepulseandweknowwhatwecancancel,weknowwhatwecanchaseandwearenotgoingtoget
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page10of21
introublewithinventory.
Itismuchtooimportantforustomakesurethatwemanageourcashpositionwellandthatweandthatwedon'tgetoverourskis.So,ourholdingthesalesisbasedonthosethingsandweareveryconfidentthatwewillbeabletomanagethebusinessaswellasmanagetheinventory.
DavidGlick(Analyst-BuckinghamResearch):
Thankyou.Onequickfollowuponmarketing,yousaidyoudiscontinuedtheAcademyAwardsadvertisingcampaign.Justwonderedwhat,ifany,lessonsyoutookfromQ1.Obviouslyadvertisingwasdown,trafficsoundslikeitwasdown.
Werethereanylearningsfromthefirstquarterthatyouhaveusedtocoursecorrectforthesecondquarterback-to-schoolandholiday?Doyoufeellikeyouneedtostepupthelevelofmarketingoranymixedlessons?Thankyou.
MarvinEllison (CEO):
Well,justacoupleofthoughts.ThedecisionnottosponsortheAcademyAwardsrepresentedroughly75%ofoursavingsinmarketingforthequarter.SothatwasabigcontributortotheSG&Asavingsinmarketing.Forthequarterourimpressionsareupover3%.Wereceivedincrediblypositivefeedbackonournewbrandingcampaign.
Wewillalwaystweakourmarketingstrategy,butwehavenoplanstomakeanymajoroverhaulinwhatwearegoingtodointhesecondquarter.Wefeelverycomfortablewithourstrategy.Butasalways,wewillmakeadjustmentsalongtheway.
DavidGlick(Analyst-BuckinghamResearch):
Okay,thankyouverymuch.Goodluck.
Operator :
O liverChen,CowenandCompany.
OliverChen (Analyst-CowenandCompany):
Marvin,alotofyourcommentswerereallyinterestingaboutthetransformationoftheshopperandthetransformationofthestoretowardsproductsandservices.How--inyourresearcharethereanyagesordemographicswherethisismorerelevant?
Andwhatisyourhypothesisaboutthemagnitudeandhowthestoremayneedtoshift?Andhowwillyouleveragetheexistingcorecompetenciesjusttonavigatethatchangeasyourethinkhowthe[productsmerch]shouldbemodernized?
And,Marvin,wasthereanything--asyoulookback(inaudible)thisquarteritreallylookslikeyoucontrolledeverythingyoucould.Butwerethereanyfactorsinwhichifyouhadtodooveryouwouldhavedonealittlebitdifferentlyinthistoughenvironment?
MarvinEllison (CEO):
Well,O liver,theonegreatthingaboutretailiseverydayyoucangiveyourselfascorecard.Andwegradedourselvesprettyharshlyinthefirstquarterbecausewebelievedthatweactuallycouldhavedeliveredbetterresultsbutthemarketwasincrediblychallenging.
Aswelistentoourpeersinthecompetitivespaceweactuallyfeelalittlebetterthatwereallyactually
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page11of21
outperformedbasedontheheadwindsthatweareupagainst.SoIwouldsaytherearealwaysthingsthatwelookbackonthatwecouldhavedonedifferentlyasitrelatestotimingofpromotions,asitrelatestotheefficiencyofourexecution.
ButoverallIamincrediblypleasedwiththehardworkoftheteaminordertodelivertheprofitperformancethatwewereabletopresentinthe[tough]offsomeverydifficultheadwinds.
Asrelatestothecustomerandtheshifts,Imeanwespendalotoftimelookingatdata.AndIthinkoneofthegreatlessonsfromthechallengesthatthisCompanyfacedinthepastisthattheleadershipteamdidnotembracedataanddidn'treallyleveragedataasawayofhavingtodevelopstrategy.
Andwhatthedatatellsusaboutcustomersisthatwehavereallytwotypesofcustomers.Wehaveacurrentcustomerandanemergingcustomer.
Nowemergingcustomerisinherearly30s,sheisfemale,sheismulticulturalandshehaskids.Andsowhenwelookatthatcustomerandwelookatourcurrentcustomerit'salittlebitmoremature,sheisalsofemale,butherkidsareoutofthehome.Thosecustomershavedifferentwaysthattheyconsumemediaandtheyhavedifferentdesiresonwhattheyshopandhowtheyshop.
Andso,whatwehavetriedtodoandIthinkwehavedonesuccessfullyismakesurethatweareveryfocusedondigitalmarketingandmodernizingourone-to-onemarketingtoreallyaddressthatmillennialemergingcustomerwhileunderstandingthattraditionalmediastillmatterstothecustomerthatisourcurrentcustomer.
Andwhenwelookatourcategoriesandwelookatwhatcustomersarespending,youhaveheardthedataallweek,it'sentertainment,it'sexperiences,it'shomebeautificationandapparelwasdownbecauseoftheshareofwalletwentotherplaces.
Andso,whatwearetryingtodoisjustbeverytransparentabouthowweviewtheretailbusinessandthatiswehaveareasthatweknowwecanimprovetogetalargershareofourcustomers'wallets.Andthattiesdirectlytoappliances,thattiesdirectlytoourexpansionintheWindowsarea,thattiesdirectlytolookingatAshley'sandEmpireforpilots.
So,wearemakingthoseadjustments.AndalsoIwillclosewiththevalueofexperiences.WethinkourSephorainsideJCPenneyisahugeexperience.Itisanexperienceyoucan'tgetonline.Imeanwearegoingtobecloseto600storesbytheendoftheyearandwearegoingtocontinuetoopennewlocationsnextyear.
Wethinkoursalonenvironmentisanexperienceyoucan'tgetonline.Veryimportanttoourcustomerandsomethingthatwhenwedoitwellcreatesloyalty.
Wethinkspecialsizesisacategorythatourcustomershavesaidtousthattheydon'tlikebuyingspecialsizesonlinebecauseitistoohardtomakesurethattheygettherightfitandstyle.SoitisnoaccidentthatwelaunchedourfirstplussizeprivatebrandforwomenandwearerollingoutourBoutiquein200locations.
Sowearelistening,weareaddressingthosecustomerneedsandwethinkitisgoingtoallowustoperformbetterinthebackhalfandgiveusastrongfutureinservingourcustomersbetter.
OliverChen (Analyst-CowenandCompany):
Thankyou.Justafollowup,afinalone.Doyoureallyfeellikeyoucanmakeyourstorelessweathersensitive?Weather,forbetterorworse,isalargeongoingtopicanditisjustinterestingyoubroughtthatupintermsofreallytryingtocombatthatfactorwhichplaguesthevolatilityofwhatwehavebeen
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page12of21
seeing.
So,Iamjustcurious,whenwillthathappenandwhatarethekeyfactorsweshouldfocusonasanalystsintermsofunderstandingtheroadtobecominglessweathersensitiveatthedepartmentstore?
MarvinEllison (CEO):
Well,O liver,hereiswhatIwillsaytoyou.Ispent12yearsofmylifeinadifferentretailbusinessthathadstrongcorrelationstoweather.AndspendingalotoftimeonthatandalotoftimeonithereatJCPenney,webelievetheonecategorythatwillhelpustominimizeourweathersensitivityisappliances.
Itdoesn'tmatterifitissnowingoutsideorthesunisshining,youaregoingtoneedarefrigerator,awasheranddryerandyouaregoingtoneedastove.Andso,thepredominantpercentofourcustomersarehomeowners,theyhavesaidtousthattheywouldbuyappliancesfromusifwesoldthem.
Ourpilotresultsprovedthattobeaccurateandwethinkapplianceswillisoneofthosecategoriesthatwecanhaveapromotionalcadencearounditthatcanhelpustorespondinasoftsalesenvironmentifweneedto.So,thatisoneexampleofwhatwebelievewillbeaweatherproofcategoryforthefutureofJCPenney.
Operator :
NeelyTamminga,PiperJaffray.
NeelyT amminga(Analyst-PiperJaffray):
Marvin,Iwantedtodigalittlebitmoreintothehomeinitiativeshere.Yousaidappliances,Ashley,Empire--allgreatannouncements.Couldyoujustreminduskindoflikearethesecapitallight,capitalheavy?
Andthenmaybesomeoftheactualtechnicalfinancialarrangements,likewillthesalesofEmpirebefloatedintocompsoraretheynettedoutinsomeotherlineitem?So,IamjusttryingtobetterunderstandkindofthefinancialimplicationintheP&Lasthatrollsout.
Andthenjustaquickfollow-upontheapparelside.Withinappareldidyouseeanydifferences?Wearejustkindofcuriousbecauseweareseeingsometrendsthere.Haveyouseenanydifferencesbetweenlet'ssaywomen'sapparelversusteen?
Likearemomsbasicallypullingbackonthemselvesbutstillspendingonkids?Or--wearejusttryingtofigurethatout.AnysortofcontextyoucouldgivearoundMother'sDayweekendwouldbehelpful.Thankyou.
MarvinEllison (CEO):
WhatIwassayingontheapparelsideinthequarter,Imeaninwomen'sapparel--Imeanwewerereallylightacrosstheboard.Theonlyreallybrightspotwasactivewearwassignificantlyup.AndwearepleasedwiththatandweareverypleasedwithourprivatebrandXersionaswellasourgreatpartnershipwithNike,itreallyhelpedtodrivethat.
AsitrelatestoHome,allofourinitiativesareinour2016capitalplan.Imeanwestrategicallyallocatedcapitalincasethepilotresultsweregood.AndsoIwouldn'tcallitcapitallightorcapitalheavy,butIwouldsaythecapitalisappropriatebut,mostimportant,wearenotholdinginventory.Soitisalowriskstrategicinvestmentforus.
Wearegoingtorolloutappliancesandtheaveragestorewillhavebetween120to230actualappliancesinthestoreandwillhaveover1,200onlinestartingnextweek.Butwewillownnoinventory
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page13of21
inanydistributioncenter.
ThesamewithAshley's,wearegoingtoownonlywhatisinthestore,wearegoingtohavetheproductpulledfromtheirdistributioncentersandtheyhaveabest-in-classlogisticsinfrastructure.AndEmpireisthesameway,sampleproduct,noinventory.
Soonthefinancialarrangementsforappliancesit'sprettystraightforward,weselltheproduct,wemaketherevenue.Fortheothercategoriesoffurnitureandflooringitisapilot.Sowearestillworkingthroughwhatmakesthemostsenseforusandoursupplierpartners.Somoretocomeonthat.Andwindowsobviouslyisacategorythatwehavehadgreathistoryin,wejustwanttoregainitandwethinkwecan.
NeelyT amminga(Analyst-PiperJaffray):
AnythingonMother'sDayyoucouldadd--weekend?
MarvinEllison (CEO):
WewerepleasedwiththeMother'sDaysellingseason.Imean,thatissomethingthatactuallygaveusconfidenceatleastcomingoutofthefirstquartertoholdoursalesguidancefortheyear.Wecontinuetoworkeachdayeachweek,butforthatentiresellingseason,Mother'sDay,wefeelgoodabouttheprogresswemade.
NeelyT amminga(Analyst-PiperJaffray):
Thankyou.Bestwishesoutthere.
Operator :
PaulTrussell,DeutscheBank.
PaulT russell(Analyst-DeutscheBank):
Justwanttocontinuetheconversationontop-lineguidance.CertainlythepositivecompsheadingintoMother'sDayisencouraging,franklyoneofthebetterdatapointswehavehadallweek.ButwealsonotethatJCPenneyisadestinationduringthosekindofkeyshoppingevents.
Andsojustoverall,Iamjustkindofwondering,Marvin,isyourviewinmaintainingthecompguidance,isyourviewthattheenvironmentforapparelspendinghasnotoverallbeenalteredorchanged?Butthatperhapsmid-MarchtoearlyAprilwasweatherinducedorsomethingelsegoingon?
Juststillwonderingabouttheconvictioninmaintainingtheoverall3%to4%compguidance,ormaybeevenaddinsomecolortotheextentthattheappliancerolloutisadditiveversuswhereyourguidancestartedtheyear.
MarvinEllison (CEO):
Well,Paul,obviouslyyoucanimaginewespentalotoftimeonthis.Anditreallycamedowntothesimplefactthatwedidn'tbelievethatonequarterwassignificantenoughtobringtheentireyeardown,especiallybasedonthefactthatwewereopening60Sephoras.Wewererollingoutcentercoretoone-thirdofourstores,andtheearlyrolloutshavebeensuccessful,inadditiontoacceleratingtherolloutofappliancesto500stores.
Soaswethoughtaboutthenewinitiatives,wereallyfeltgoodaboutthesecondhalfoftheyearbecauseweknewthatwe'dhavetheseinitiativeskickingin.AndIdidn't--Ifailedtomentionthewindowsinthe500stores,whichinourpilotlocationhasbeenverysuccessful.Sowehadsomeverytangiblethingsthat
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page14of21
wefeltgreataboutthatwebelievedwouldgiveusincrementalsalesgrowthinthebackhalfoftheyear.Sothatwaspartoftheequation.
Theotherpartwaswhenwelookatapparelandjustlookatwhathappenedinthefirstquarter,wedobelievealotofitwasdrivenbyweather.Andwethinksomewasdrivenbyjustashiftinconsumersentiment.Wedon'tbelievethatisapermanentshift,butwebelievethatitissomethingthatwe'llbeabletorecoverfromtogettothat3%to4%.
Wealsounderstandthatwearegoingtobeinamuchbetterpositionheadingintoback-to-school,whichisacriticalseasonforusandotherretailers.Andwejustfeltitwouldnothavebeenprudenttomakeaassumptiononsalescomingoutfortheentireyearbasedononequarter.
Havingsaidthat,wehaveenormousdisciplinearoundmanaginginventory.Andwearegoingtolookatitonadaily/weeklybasisandifweseeourtrendnotperformingtothelevelthatitshould,wewillmakethenecessarycoursecorrections.Sowearenotswingingforthefenceshere.
Weunderstandwhatwehavetodo;weunderstandwhatourforecastsourandourreceiptswillreflectthat,andwewillmaketheadjustmentsalongtheway.Butitisreallybasedontheconfidenceofourinitiatives,itisbasedonthecurrenttrendandhowthetrendimprovedcomingoutofearlyApril,andwearehopingthattrendcontinues.
PaulT russell(Analyst-DeutscheBank):
Great,thanksforthat.Asweturntomaybegrossmargins,MarvinorEd,ifyoucanjusthelpuswithsomeofthefactorsthatledtothemodestdeclineherein1Qandhowweshouldbethinkingaboutprivate-brandpenetration,clearancelevelsandmargins,supplychain,shrink;ifyoucanjusttouchonsomeofthosefactorsforgrossmargins,bothinthefirstquarterandgoingforward.
EdRecord (CFO):
Sure,Paul,thisisEd.Iwilltakethat.Ithinkfirstquarterwaspredominantlyimpactedbyouroverpenetrationofclearance.Ourmarginonclearancewasactuallysubstantiallybetterthanitwaslastyear;wejustsoldalotmoreclearance.Wecameintotheyearwithalittlemorefallthanweprobablywanted,butweexpectedittobeacoldFebruaryandexpectedtobeabletosellthat,andfranklysellitbeforeitgottoclearance.
AndwedidnotsellitinFebruary.ThecustomerwantedspringinFebruary.AndaswegotintoMarchandApril,thecustomer--theweathergotcoolerthanseasonal,andthecustomerdidn'twantspringanymore--theydidn'twantspringandtheyweren'tgoingtobuyacoatinMarchorApril.Soweendeduphavingtomarkthatstuffdown.Nowclearancewasupforthequarter,buttheoverpenetrationofclearancewaswhatpredominantlyhitourmargin.
Aswemoveforwardwefeelreallygoodaboutourinitiativestodriveadditionalmargin.Obviouslywefeelgoodaboutthecontentoftheinventorygoforward.Iwouldtellyouthatalmostallofourincreaseininventoryisinbasicgoods.Sowefeelgoodthatwedon'thaveanoverhangonmarkdownsgoingintoQ2.
Andthenwhenyoulookattheefficiencieswehaveaswecontinuetolookatoursupply-chaininitiative,thepricinganalyticsteamwearejustlaunching,wefeelgoodaboutthemarginopportunitieswehave.Andagain,thepredominantreasonforloweringthemarginguidanceisaroundappliancesrollingoutandtheimpactitisgoingtohaveparticularlyinthethirdandfourthquarteronourmargins.
PaulT russell(Analyst-DeutscheBank):
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page15of21
Thankyou.
Operator :
SteveRuggiero,R.W.Pressprich.
SteveRuggiero (Analyst-R.W.Pressprich):
Marvin,canyoujustdiscusshowyouaregoingtakingdollarsoutofyourdomestictransportationandlogisticsinfrastructuregivenyou'rehistoricallyscaledtoalargersalesbase?
MarvinEllison (CEO):
Well,Ithinkasareminder,wehaveanewsupply-chainleaderthatwebroughtinin2015.Andreallywhatishappeningismorenetworkoptimizationandjustbeingmoreefficienton[cube]utilization.
TherearesomeveryspecificinitiativesthatMikeRobbins,ourheadofsupply-chain,andteamputinplacethatisreallydrivingcostdownthatwethinkwillbesignificantforthebalanceoftheyear.Justonerealexample,wewereoneoftheonlyretailersintheUSthatwereshippinggarmentshanginginthephysicaltruck.
AndwhatIlearnedyearsagorunningasupplychainisthatthemostexpensivethingtoshipisairandwewereshippingalotofair.AndsofromthatMikeworkedwithJoeMcFarlandandthestoreoperationsteamandthemerchantstoreallycomeupwithamoreefficientwaytocubeoutatrucktotakethosetransportationcostsdownandimprovethefillrateandthe(inaudible)ofgoodsthatisdeliveredtothestore.
Wehavebeenextremelypleasedwiththeresultsofthatanditissomethingthatwewillcontinuetobenefiton.Mikehasalsobroughtinsomeoutsidehelpandsometechnologytohelpuswiththeoptimizationofthenetwork,makingsurethatwehavetherightDClocations,weareusingtherightovertheroadlanesandthatweareunderstandingtheefficienciesofhowwegetproductfromtheport.
So,thosearejustexamplesbutthoseexamplesaremeaningful.Andforeverydollarwecantakeoutofoursupply-chainexpenseisaccretivetogrossmargin.Andthatisabigdealtous.Andso,Ilookforward,hopefullyinthenextcall,butdefinitelylaterthisyear,tooutliningsomeveryspecificsupply-chaininitiativesthatwearepleasedwiththatwethinkwillreapbigbenefitsinthefuture.
SteveRuggiero (Analyst-R.W.Pressprich):
Well,thankyouforthat.AndjustshiftinggearstotheSalonbyInStyle,justifyoucouldgiveusanupdateonthat,whereyouarewiththestores.Andthosethathaveexperiencedthechanges,haveyouseenanymeaningfuldifferencesincustomertraffic?
MarvinEllison (CEO):
Theshortanswerisweareverypleasedwiththechange.Weareseeingincrementaltrafficgrowth,weareactuallyseeingbetterrevenue.Andsurprisinglywhatwedidn'tanticipateisthatweareseeingahigherqualityofassociate.
Itissomucheasierforustorecruithigh-qualitystylistswithanexistingclienteleandbookofbusinesscomeandworkforthatInStylebrandofsalonthanatraditionalJCPenneysalon.Wearestilllearning.
Wearegoingtorolloutalittlelessthan100locationsthisyearforsure.Wearemakingtweaksthroughoutandwearealsoexcitedaboutanewonlineschedulingsystemthatwearerollingoutcompanywidethatwillmodernizethewayacustomercanmakeanappointmentandupdatethat
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page16of21
appointment.
Soallthosethingsareontheway.Butsofarweareverypleasedandwethinkthiswillbeagamechangerforusaswefigureoutwhattheirperfectmodelis.
SteveRuggiero (Analyst-R.W.Pressprich):
Great,thanksforthat.
Operator :
JeffVanSinderen,B.Riley.
Jef f VanSinderen (Analyst-B.Riley):
Iwonderifyoucouldjustgiveusalittlebitmorecolorone-com,whatyousawinthequarter,whetherthatacceleratedordeceleratedversusQ4.
Andthenjustrelevanttothediscussiononinventory,toclarifyonthewarmerweatherseasonalinventory,areyouwhereyouwanttobeor,becausethatwasaslowercategory,doyouhavesomeIguessanextra[day]thatmaybeyouneedtotakesomehardermarkdownson?
MarvinEllison (CEO):
Okay,Iwilltakethee-commercequestionandIwillletEdtaketheinventoryquestion.Imeanweareverypleasedwithoure-commercegrowthand,aswementionedinthecall,partofthatisjustaggressiveSKUexpansion.
WhenIarrivedatJCPenneyduringtheturnaroundeffortse-commercewasdramaticallyimpactandreallywehadaphilosophythate-commerceshouldjustreflectwhatwehadinthestore,justextendedsizesandcolors.AndasImentioned,webroughtMikeAmendonboardandhehasrecruitedsomegreattalentandreallyinheritedsometalentedleadersandthey'vereallyacceleratede-commerceinabigway.
Wearepleasedwiththemobilestrategy;wearegoingtobelaunchinganewmobileapphereinthenextcoupleofweeksthatwethinkwillbeagamechangerforus,itisinbetaanditisperformingexceptionallywell.
WearegoingtoberollingoutBuyOnlinePickupinStoresamedaywithinthenextcouplemonths.AndasImentioned,thepilotresultshavebeenexceptional.Anytimeyougeta40%attachratewithcustomerscominginthatisexceptional.
Weareverypleasedwiththenavigation,wearepleasedwiththefactthatwehaveincreasedoursuppliersby20%andourSKUsby50%.Soe-commerceisreallyworkingwellforus.Wearestillbehindandweknowthat.
ButIwillaskeveryonetogoonlinenextweekandlookatournewappliancesitethatwillgiveyouaviewofthetalentandtheskilllevelofoure-commerceteambecausetheybuiltthatsitefromscratch.Andwe'regoingtobenationwidesellingappliancesonlinestartingnextweek.
AndsoIthinkthatgivesyouaglimpseintoourconfidenceinthatteamandhowwebelievethatwillbeacontinuedintegralpartofourfuture.
Inaddition,weareexcitedaboutcreatingtruefulfillmentlocationsfromourstores.Todayourstoresarebasicallyinthesavetosellmode,meaningifweareoutofstockinadot.comDCtheorderreversestoastoretopickitandshipit.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page17of21
Andweareintheprocessofidentifyingstoresandtheywillbetheprimaryfulfillmentlocation,whichwethinkwillallowustosavedeliverycostsandalsogiveustheabilitytoshipsamedayandnextdayandsomeexamples.Andthatishowwewanttoleverage1,000storestoreallybeamoreefficientretailer.
So,weareverypleased.Thegrowthhasbeenanincrediblystrongandismaintainingandweseeitonlygettingbetter.So,IwillhanditovertoEdtoansweryourquestionregardinginventory.
EdRecord (CFO):
Yes,withregardstospringseasonal,wefeellikeweareinreallygoodshape.Ourinventorygrowth,asIsaidearlier,ispredominatelyinbasicsandintheinitiativeslikeactive,CenterCoreandshoes.Sowhenyouadjustforthatourspringgo-forwardinventoryinthenon-initiativeareaisreallyflattodown.SowefeellikeweareinreallygoodshapeasweheadintoQ2.
Jef f VanSinderen (Analyst-B.Riley):
Okay,good.Andthenasafollow-up,anythingelseyoucouldtellusaboutfurtherexpensecutsyoumightbeabletomakeobviouslywithoutnegativelyimpactingthebusiness?Andthenanyupdateonthedebtreply?Thanks.
MarvinEllison (CEO):
So,ontheexpensecuts,Ithinkitisallaboutbeingoperationallydisciplined.JoeMcFarlandcameintorunstoreoperationsandreallythestoryteam.Andoneofthefirstthingshewantedtodowascreateefficiencyinhowweusedourstorepayroll.Meaningwhatpercentofourpayrollareweusingforserviceandsellingandwhatpercentareweusingtodothingsthatdon'timpactthecustomer.
Andwithinthefirstquarterheandhisteamidentifiedover0.5millionhoursthatwewerespendingthathadnothingtodowithcustomerservice,justtotallyinefficient.Andwiththeimplementationofimprovedsystemsandprocessesweareabletoreduce0.5millionhours,over0.5millionhoursinQ1justbasedonefficiency.
Anditmadenoimpacttothetopline,itmadenoimpacttodegradatingsales,itwassimplybackofficeactivitythatwemodernizedandputtechnologyinplacetosupplement.
NowasEdmentioned,wearenotexpectingtoreplicateourQ1SG&Asavingsthroughouttheyear,butIthinkwhatweprovedinQ1isthatwehavealotofefficienciesremainingthatwecangoandwecancaptureandthatisjustoneexampleofanareathatwethinkisopportunityrich.
AndaswelookaroundtheentireCompanyandweimplementtechnologyweknowwhattechnologywillallowustoreduceexpensebecausewe'llgainefficiency.
Soalotmoretocome.Andagain,Iamnotgoingtoapologizethatwearegoingtoberelentlessontakingourcostbecauseweoweittotheshareholders.Andforourrevenuebasewecanbeamoreefficientandhavingalowerexpensebaseandwecandothatwithoutputtinganyofourtop-linesalesatrisk.SoIwillletEdtakethesecondpartofyourquestion.
EdRecord (CFO):
Sure,regardingdebt,refi--aswehavesaid,wecontinuetokeepaneyeonthemarket.InthelastIdon'tknow,sixweeks,eightweeksmarketshavecontinuedtoimprove.So,wefeeltheyareprettyconstructiverightnow,sowe'llcontinuetotakeareallyhardlookatthat.AndhopefullywewillhavemoretosayaboutthatattheendofQ2.
Jef f VanSinderen (Analyst-B.Riley):
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page18of21
Okay,thanks.Andbestofluck.
Operator :
RandyKonik,Jefferies.
RandyKonik(Analyst-Jefferies):
Ireallyappreciatetheobsessionwiththedata.Iguessacouplequestionsaroundthat.Ifyouthinkaboutgroupingthestoresaroundthe524--excuseme,the546withSephora,the125withtheCenterCoreandthenthebalancewithbutsaynothing,howdotheUPTslookfromadifferentialperspectiveacrossthosethreegroups?
Iamjustcuriouson--you'reobviouslypricingaliftinUPTfromtheSephorafortheCenterCore.Iamjusttryingtogetsomeperspectiveofhowdifferentitreallyis.Thanks.
MarvinEllison (CEO):
Itisreallyagreatquestion.Idon'thavethedatainfrontofme,butIcanjustgiveyouatahighlevel.WeknowforafactthatwhenweputanewSephoraintoastorewewillgetanoverallsaleslift,wewillseethecustomershopinmoreplacesthanaSephoralocation.
AndasImentionedinmypreparedremarks,whatwearemostpleasedwithisthatearlyoninourSephorarelationshipwehadabeliefthatwecouldnotputthatenvironmentinaruralmarketorasmallerfootprintstore.Andwedecidedtotestthattheoryandwehavebeenincrediblypleasedthatthatbrandworkswhereverweputit.
AndasImentioned,ourbestperformanceinthehistoryofourrelationshipfromearlysalesperlocationisoccurringthisyearinthefaceofaverydifficulttop-lineenvironment.
Andso,Idon'thavethedatainfrontofme,butourpilotresultsandourearlyresultswilltellusthattheCenterCorelocationsareworkingbecausewedoatestversuscontrol.Andweknowinthosestoresthatreceivedthatnewenvironmentsalesareuprelativetotheirpeergroup.
Andwebelievewearegoingtoseetheexactsamethingtohappenwithappliancesandwebelievewearegoingtoseetheexactsamethinghappenwithourupdateforwindows.So,nodatainfrontofme,butanecdotallyandatahighlevelweknowthattheseenvironmentchangesaremakingadifference.
RandyKonik(Analyst-Jefferies):
Gotit,that'shelpful.AndthenasIthinkaboutHomeDepotandthewaythey--youhavecategorymanagementorSKUproliferationbasedonturnsinaparticularcategorylikelet'ssaynailsversuspaintversuspowertools.Thatcompany(inaudible)hadacertainnumberofbrandsorSKUsbecauseofthewaythecategorywas.
Howdoyouthinkaboutthatcategory,thedepthoftheSKUorthedepthofthecategoryintheJCPenneyarea?Likewhatneedstobe--doSKUsneedtocomedown,wouldSKUsneedtogoup?IamjustcuriousonhowyouthinkaboutthatandhowyoucomparethatexperienceatHomeDepotandthatcategorymanagementphilosophyandapplyittoJCPenney?
MarvinEllison (CEO):
Well,Idon'tknowthatthecomparisonexistsotherthanthefactthatHomeDepotisaworld-classretailerandwearestrivingeverydaytobecomeaworld-classretailer.ButwhatIcansay,Ihavebeenincrediblyimpressedwiththemerchantteamandincrediblyimpressedwiththeirdepthofknowledgeofour
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page19of21
assortmentsandhowitconnectstothecustomer.
AsImentioned,JohnTighe,whohasbeenourChiefMerchantsincethefalloflastyear,hastakentheleadinreallygoingthroughourownversionofcategorymanagementandjustaskingaverysimplequestion,whatistheroleandintentofeverysinglecategorywehaveinourstore.Andyoucan'tdothatunlessyoutrulyunderstandyourcustomer.
AndsoMaryBethWest,ourHeadofMarketingandChiefCustomerOfficer,andherteamhavedoneareallynicejobofworkingwithJohnandthemerchantteamtobringingclaritytowhoisourcustomer.
Oneofthekeyreasonswhywechangedourbrandingplatformwasbecausewefeltthatouroldbrandplatformwasnotaddressingthetrueneedsofourcustomerbecausewedidn'tknowwhothecustomerwas.Nowwehaveaveryclearunderstanding.
SoJohnandhisteamaretakingthenecessarystepsoflookingatthedata,bylookingatourexistingcategories,lookingatconsumers'currentandfuturespendingandbuyingpatternsandaskingthesimplequestion,whatdowegrow,whatdoweaddandwhatdoweeliminate?
Andso,thatworkisunderwayandweareexcitedaboutthepossibilities,butweareveryconfidentthatJohnandhisteamwillhelpustounderstandwhatworksforJCPenney.Somoretocome;wewillkeepyouallupdatedontheprogress.
RandyKonik(Analyst-Jefferies):
Thatishelpful.IguessmylastquestionisIguessagainI'mthinkingaboutHomeDepotversusLowe's.AndIthinkaboutHomeDepotasthatguy'sguychoicetogoto,itishascementfloorsanditisalmostthepreferredchoiceofthecontractororthePro.
TheydidagoodjobofreallykindofhighlightingthatdifferentialfromaLowe'swhereyougetthechatteraboutmoreforthemomorwhathaveyou.
Whatdoyouwant--whenyoulookatJCPenneyandyouwanttomakeitcontinuetostandoutwithSephora,withthesalon,withtheappliancesnow,whatdoyoureallywant--whenyoulookacrossthespectrumofcompetitionwhatdoyouwantthatstatementorthatdifferentialtobethatyourcustomergoesherebecause?
MarvinEllison (CEO):
Well,Ithinkforusitallstartswiththeexperienceinthestore.WerolledoutanewservicetrainingprogramledbyJoeMcFarlandandhisteamandwehaveretrainedeverysingleassociateinthestoreandthattrainingisdrivenbythegeneralmanager.Andwejustcompletedthat.
Andthegoodnewsiswehaveseenservicescoresgouponaweeklybasisinthestorebasedonthetrainingandbasedonhowitisresonating.Sotheexperienceinthestorematters.
Forusitreallycomesdowntoacouplefundamentalthings.Wewanttobethenumberonechoiceforcustomerslookingforstyle,qualityandvalue.Andwethinkthatwecandothatbyincreasingourprivatebrandpenetration.
WethinkwecandothatbycontinuingtoexpandSephorainsideJCPenney,createanexperiencewithsalonand,moreimportantly,allowthecustomertocomeinandbeautifyherhomewithournewvisionofourHomedepartment.Andsostyle,quality,valueisourgoalforourcustomersandwewanttobethepreferredchoicewhentheywanttocomeintobuyanything.
RandyKonik(Analyst-Jefferies):
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page20of21
Great,thatisveryhelpful.Thankyou.
Operator :
OmarSaad,EvercoreISI.
OmarSaad (Analyst-EvercoreISI):
Marvin,Iwantedtodiginalittlebitfurtheronsomeofyourcommentsaroundtheprivate-labelcreditcard.Itsoundslikethatisacceleratingalittlebitespeciallywiththeexpansionintotheappliances.
Ialsothinkthereis--correctmeifIamwrong,therehasbeenaslightchangeintheloyaltyrewardprogramandhowtheconsumergetstheirrewardsinthatprogram.Maybeyoucouldelaborateonthatifyouareseeinganykindofearlyresultsonthatsideaswell.
Andwiththeaccelerationofappliances,doesitchangeyourtimeframeofwhenyouthinkyoucouldgettothemoreindustryaverageprivate-labelcreditcardpenetration?
MarvinEllison (CEO):
Well,greatquestion.Oncredit,becausethequarterwasdown,Imeanwestillareverypleasedwiththeprogressthatwearemakingonthenumberofapplications,newaccounts,allwereupandpenetrationwasup.Soagainweareexcitedaboutthat.
Wearealsopleasedwiththeapprovalratesandeverything.Soweareallheadedintherightdirection.Sopenetrationuproughly240basispointsinatoughtop-linequarter,weareverypleasedwiththat.
Regardingloyalty,welaunchedanewprograminthefirstquarter,it'sstillearlydays,butwehopetohaveamoredetailedviewofthedata.Butearlyreadsisthatit'sresonatinganditisamuchmorereceptiveprogramforcustomersthanthepreviousprogram.
Butagain,it'sstillearlyandIlookforwardtoupdatingyoumoreinthefuture.
Andregardingappliances,oneofthekeylearningsfromtheappliancepilotisthenumberofcustomersthatmadeapurchasewiththeirJCPenneycardandthenumberofnewcustomersthatjoinedustoacquirecredittomakeanappliancepurchase.
Itisoneofthereasonswhywedidaccelerateitbecause,look,withoutquestionourpenetrationstillremainssignificantlylowerthanourcompetitors.Sowehaveahugeopportunitytogetourpenetrationup.
Thatbeingsaid,wethinkapplianceswillplayakeyroleinnotonlydrivingupthepenetrationbutalsogettingouraverageticketupdramaticallyanddrivinggrossprofitdollarspersquarefootinanareathatdesperatelyneedsit.
Somoretocome,butwearecommittedtocreditandweknowthatcreditwillbeasignificantbenefitnotonlyfromanSG&Astandpointbutfromacustomerloyaltyandfromatop-linerevenue.
OmarSaad (Analyst-EvercoreISI):
Andthen,Marvin,couldyoumaybeelaboratejustalittlebitmoreonthechangesintheloyaltyprogramfromtheconsumer'sperspective,howitisdifferentthanitwasbeforeandthenwhyyoumadethosechanges?
MarvinEllison (CEO):
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q!2016EarningsCallMarketCapasofEventDate:2.42BPriceasofEventDate:7.8
©2014TheStreet,Inc.Al l R ightsReserved Page21of21
Well,Ithinkoneofthekeychangesistheexpirationofpoints.Inthepastourprogramwasveryconfusing,wedidn'tleveragethedatarealwell,ourpointsexpiredandthecustomersdidn'treallyembraceit.Soitwasanexpensiveprogramtooperate,itwasaconfusingprogramtoarticulateandthatisabadequationforanyretailertohavewithaconsumerbase.
Theotherpartthatwechangedwaswewantedtogainmorebenefittoourcreditcustomers.Soifyouareacreditcustomerwewantedyoutohaveagreaterportfolioofbenefitswhichisalsoveryimportant.Andcandidly,wearepilotingdifferentprogramsaroundthecountryjusttocontinuetogetareadonit.
ThatisoneofthereasonswhyIamhesitanttogetintoatonofdetailbecausewearestilltryingtounderstandwhichcomponentworksandwhichdoesnotwork.Butoverallthebiggestchangeispointsnotexpiringanddramaticallymorebenefitsforourcreditcustomerssowecanincentthemtousecredit.
Butmoretocomeand,again,wearepleasedwiththeearlyresults,butwewanttomakesurethatwedesignaprogramthatwillreallyresonatewellwithourconsumer.
OmarSaad (Analyst-EvercoreISI):
Thankyou,goodluck.
Operator :
Thankyou.Andthatisallofthetimewehaveforquestions.IwouldnowliketohandthecallbackovertoCEO,MarvinEllison.Youmaybegin.
MarvinEllison (CEO):
Thankyou.Again,thankyouforthequestions.Welookforwardtoupdatingyouonthecontinuedperformanceofourbusinessonournextearningscall.Thankyou.
Operator :
Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.
Allrightsreserved(c)2014TheStreet,Inc.
Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.
THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.
THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.
top related