Penney (J C) (JCP) Earnings Report: Q1 2015 Conference...

CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail

EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71

Penney(JC)(JCP)EarningsReport:Q12015ConferenceCallTranscriptThefollowingPenney(JC)conferencecalltookplaceonMay13,2015,04:30PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

KristinHays;JCPenneyCompany;SVP-IR,CommunicationsMikeUllman;JCPenneyCompany;CEOMarvinEllison;JCPenneyCompany;President,CEO-DesigneeEdRecord;JCPenneyCompany;CFO

OtherPart icipants

NeelyTamminga;PiperJaffrayandCompany;AnalystDavidGlick;BuckinghamResearchGroup;AnalystMatthewBoss;JPMorgan;AnalystLorraineHutchinson;BofAMerrillLynch;AnalystKimberlyGreenberger;MorganStanley;AnalystPaulTrussell;DeutscheBank;AnalystDanaTelsey;TelseyAdvisoryGroup;AnalystMattMcGinley;EvercoreISI;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Goodday,ladiesandgentlemen,andwelcometotheQ12015JCPenneyCompany,Inc.earningsconferencecall.Mynameis[Tivon],andIwillbeyouroperatorfortoday.

(OperatorInstructions)

Iwouldnowliketoturntheconferenceovertoyourhostfortoday,Ms.KristinHays.Pleaseproceed.

Krist inHays (SVP-IR,Communications):

Goodafternoon.Thankyou,[Tivon].

Asareminder,thepresentationthisafternoonincludesforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995,whichreflectstheCompany'scurrentviewoffutureeventsandfinancialperformance.Thewordsexpect,plan,anticipate,believe,andsimilarexpressionsidentifyforward-lookingstatements.

Anysuchforward-lookingstatementsaresubjecttorisksanduncertainties,andtheCompany'sfutureresultsofoperationscoulddiffermateriallyfromhistoricalresultsorcurrentexpectations.Formoredetailsontheserisks,pleaserefertotheCompany'sForm10-KandotherSECfilings.

PleasenotethatnoportionofthispresentationmayberebroadcastinanyformwithoutthepriorwrittenconsentofJCPenney.ForthoselisteningafterMay13,2015,pleasenotethatthispresentationwillnotbeupdatedanditispossiblethattheinformationdiscussedwillnolongerbecurrent.

Also,supplementalreferenceslidesareavailableonourInvestorRelationsWebsite.Whilemanagementwillnotbespeakingdirectlytotheslides,theseslidesaremeanttofacilitateyourreviewoftheCompany'sresultsandtobeusedasareferencedocumentfollowingthecall.

JoiningustodayonourcallisMikeUllman,CEOofJCPenney;MarvinEllison,ourPresidentandCEO-designee;andEdRecord,ourCFO.Followingourpreparedremarks,welookforwardtotakingyourquestions.Withthat,IwillnowturnthecallovertoourCEO,MikeUllman.

MikeUllman (CEO):

Goodafternoon,everyone,andthankyouforjoiningus.2015isofftoagreatstartatJCPenney.Thisyearwe'reswitchinggearsfromdefensetooffense.We'refocusedontakingbackmarketshareandrestoringtheprofitabilityofourBusiness.

Duringthefirstquarter,thestrengthofourstrategicinitiativesandsolidexecutionhelpedusmeetorexceedourexpectationsonanumberofkeymetrics.Same-storesaleswereup3.4%forthefirstquarter,justslightlybelowourrecentguidance.Clearly,wedidseeaslowdowninlateAprilversusourexpectations.

Lastyear,wehadastrongtwoweekspriortoMother'sDayandagreatMother'sDayeventoverall.Lastyearthe15daysofMother'sDaywereupdoubledigits.Thesame15daysthisyearweresplitbetweenthefirstquarterinthesecondquarter,andwereupmid-singledigitsforapproximately15%two-yearstackonMother'sDay.Whileweweredisappointedinthelastweekofthefirstquarter,weareveryhappywithourtotalMother'sDayperformancethisyearandthebeginningofMay.

Our3.4%compisontopofthe7.4%compgrowthsamequarterlastyear,achievingatwo-yearstackof10.8%same-storesalesgrowth.Grossmarginimprovedby330basispointsto36.4%.SG&Awaslowerby220basispoints,to33.8%ofsales,andEBITDAimproved$168millionthisquarterto$79million.That'sa600-basispointimprovementoverlastyear.

Theseachievementsreflectthemomentumthatwecarriedinto2015fromthesuccessfulexecutionofourturnaroundinitiativesin2013and2014.WealsosawnumberofencouragingtrendsinourBusiness,drivenbyourcompellingmixofprivateandnationalbrandsandtheoutstandingvalueweoffertothecustomereveryday.

Marvinwillprovideyousomeperspectiveonwhat'sbehindthesenumbersforthequarteranddiscussthestrategicinitiativesweexpecttofullykickingoingforward.ButfirstI'dliketohighlightthekeyfactorsbehindtheperformanceinthequarter.

Women'sandmen'sapparel,SephoraandHomeweretheCompany'stop-performingbusinesses.Geographically,allregionspostedpositivecompsthisquarter,withthewestandcentralregionspostingthehighestgainsoverayearago.

Easterwasstrongforusacrosstheboard,withtheapparelbusinessesdrivingsignificantgrowthinEastercategories,comparedtoayearago.JCPenneyhashistoricallybeenadestinationfordress-upandI'mhappytoreportwewerebackinbusinessforEasterthisyear.Women'sdresses,men'stailoredclothingandkidsdress-upwereallsolidperformance.

We'veseenastrongresponsetotheinitialchangeswemadeinthecentercoreofourstores.Sephorahascontinuedtoperformextremelywell.And,importantly,we'veseenimprovementinhandbagsandfinejewelry.Weopened23Sephoralocationsthisquarterandexpanded6others,bringingthetotalto515SephorainsideJCPenneylocations.

Home,notablyfurniture,isanotherbrightspot.ThenewHomecatalogwelaunchedinMarchwaswell

receivedandhashelpedustoreconnectwithlapsedcustomersandaccelerategrowthinouronlinebusiness.Basedonthereactiontothisfirstcatalog,weplantoreleaseasecondHomecatalogthisfall.WehavemoreworktodoatHome,butthingsareheadinginanencouragingdirection.

Overall,JCPenney.com'sperformancewasstronginthequarter,withgrowththatacceleratedfromlastyearthankstoourimprovedcustomerexperienceonlineandourinvestmentininventorytodrivetheomnichannelbusiness.Weintegratedourstoresanddot-combuyingteamsoversixyearsagotoenableourmerchantstohaveanenterpriseviewoftheirbusinessandtheircustomer.Thetwofunctionsweretemporarilydisconnectedin2012butwereintegratedthestoresandteamsfordot-comassoonasIreturnedbacktoJCPenneyin2013.

Wealreadyhaveyearsofexperienceinbuying,planningandallocatingmerchandisebetweenstoresanddot-com.Notonlydoesthisgiveusacompetitiveadvantageinthewaywerunourbusiness,itallowsustobettermeetcustomerdemand.

Forexample,weknowwhenandhowtooffercongruentassortmentsandpromotionsbetweenstoresandJCP.com,andwhentohaveextendedsizes,colorsandstylesavailable.Thiscapabilityandexpertiseiswhatgivesusconfidenceinouromnichannelgrowthinitiatives.

Turningtogrossmargin,grossmargingrewsignificantlythisquarterto36.4%.Thiswasduetoseveralfactors.First,wegrewthepenetrationofourprivatebrands.Thisgeneratedhighergrossmargins.Asyouknow,wearefocusedonimprovingthepenetrationofprofitabilityofourprivatebrandsaspartofourstrategytorestoretheprofitabilityofourbusinessinthelongterm.

Second,wealsogrewthepenetrationandmarginofournationalbrandslikeNike,Levi,IZOD,VanHeusenandCarter'sthisquarter.Wecontinuetobetheheadquartersforthesedestinationnationalbrands.

Inaddition,ourclearancesellingmarginsimprovedwhencomparedtothefirstquarteroflastyear.Boththepenetrationandtheprofitabilityofclearanceimprovedthisquarter.Andthisisthelastquarterweexpecttobeupagainsttheheadwindsfromdiscontinuedbrands.Tothatend,clearanceshouldbecomeatailwindfortheremainderoftheyear.

Ourteamsdidagreatjobexecutingthebusinessthisquarter,whileloweringSG&Aby$44million,a220-basispointimprovementtolastyear.Wewillcontinuetolookforwaystoimproveourprocesses,betterleverageourtoolsandcontrolwhatwecancontrol.I'mverypleasedwithoureffortsthisquarterandweexpectthistocontinuethroughouttheyear.

Wealsosawourcustomerservicescorescontinuetoriseovertheperiod.ThishasbecomeamajordifferentiatorforJCPenneyandisfundamentaltodrivingcustomerloyalty.Ofcourse,thatcanbetrackeddirectlytothewarriorspiritofourassociates,whichisbenefitingJCPenneyonboththetopaswellasbottomlines.

I'mpleasedtoreportthatForbesrecentlynamedJCPenneyasoneofthebestemployersof2015.Wearedelightedaboutitandthinkitbodeswellforthecontinuedexcellenceintheareaofcustomerserviceandinexecutingtheexcitinginitiativesunderway.

WithastrongEasterandMother'sDaybehindus,aswellasourcurrenttrend,weareraisingourannualsalesguidanceto4%to5%growththisyear.Wealsoraisedourgrossmarginguidanceto100to150basispointsofimprovementversus2014.Inaddition,wesetanEBITDAtargetofapproximately$600millionfor2015asweremainontracktoachieveourlong-termgoals.

Onthatnote,I'llturnthecallovertoMarvinwhowillwalkyouthroughsomeofourresultsinmoredetail

andgiveyouanupdateontheworktheteamshavebeendoingtoimplementourstrategicinitiatives.Marvin?

MarvinEllison (President,CEO-Designee):

Thankyou,Mike.Goodafternoon,everyone.

AsMikementioned,we'reverypleasedwithoverallperformanceandexecutioninthefirstquarter,andwe'reexcitedaboutwherethebusinessisheading.Itisclearthatinthefirstquarterourstrategicinitiativesdroveprofitablesalesgrowthbothin-storeandonJCP.com.Withregardstosales,ortop-performingmerchandisingcategoriesweremen'sandwomen'sapparel,especiallytailoredclothinginmen's,andinwomen's,dressesandhandbags.

WealsoexperiencedanotheroutstandingquarterofsalesinSephora.SephorainsideJCPenneyisoneoftheanchorsofourcentralcoregrowthstrategy.ItnotonlydrivestrafficandsalestoJCPenney,italsoservesasapointofdifferentiationthatcannoteasilybereplicatedinourindustry.

SephorainsideJCPenneyisauniquebeautyofferingthathelpsuscreateanemotionalconnectionwithourcustomersthatresultinmoretripstoourstore,withhigherratesofconversionandAUR.Withoutquestion,SephorainsideJCPenneywillcontinuetobeanimportantpartofourlong-termgrowthstrategy.

NotonlyareweplanningtoputSephoraintomorelocationsoverthecomingyears,we'realsoveryexcitedtoannouncethatwearelaunchingJCPenney'sownSephorae-commercebusinessonJCP.comlaterthismonth.YoumayknowthatwecurrentlydonotofferSephoraproductsonourWebsite,sothisisaveryexcitingexpansionofourpartnership.

Now,letmeupdateyouonouronlinebusiness.JCP.comsalesgrowthacceleratedsequentiallycomparedtothefourthquarterof2014,andexceededevenourowninternalexpectations.InadditiontoHome,asMikementioned,onlinesalesgrowthwasdrivenbythefollowing.

First,weexpandedouronlineassortment,improvedsearchandnavigation,andbeganrestoringourinventoryinvestmentstopre-2012levels.Specifically,duringthequarter,weimprovedourdot-comin-stockpositionover600basispointswhichhelpedustoincreasecustomerconversionandcustomersatisfaction.

Second,wesawgainsassociatedwiththecontinueddevelopmentofouromnichannelcapabilities.Forexample,JCPenney'sofferscustomerstheabilitytobuyonlinetoshiptoanystoreintheCompany.Inthefirstquarter,wesawmorecustomerschoosingtobuyonlineandshiptheordertooneoftheirfavoriteJCPenneystores.

Thisresultsinmoretripsandadd-onpurchaseswhentheyvisitthestoretopickuptheirorder.Onaverage,abuyonlineshiptostorecustomerwillpurchaseadditionalmerchandise20%ofthetimewhentheyvisitastore.

Wealsoenhancedourabilitytofulfillcustomers'ordersonlinefromourstorebaseinventory.Wecallthisenterpriseinventory.Thisquarterweexpandedthenumberofstoresusedtofulfillonlineordersbyover160stores.

Ourgoalistocontinuetoexpandourbuyonlineshipfromstorecapabilitiestobetterleverageourinventory,utilizeourexistingstoresasminifulfillmentcenters,andsatisfytheneedsofouromnichannelcustomers.

It'simportanttonotethatanomnichannelcustomershops2.5timesmorefrequentlyinayearthana

traditionalbrick-and-mortarcustomer,soitisessentialthatwecontinuetoconvertstore-onlycustomerstoomnichannel.LaterthisyearwewillberollingoutbuyonlinepickupinstoresamedayinseveralkeymarketswithaCompany-widerolloutplannedfor2016.

Weareverypleasedwiththeprogresswe'remakingonourmobileplatforms.WenowhaveaJCPenneymobileappavailableontheiPhone,theAppleWatch,andtheAndroidappwillbelaterthismonth.JCPenneywasoneofafewretailerswhopartneredwithApplepriortothelaunchoftheAppleWatchandwe'reveryexcitedaboutthisadditiontoouromnichannelexperience.

Now,lookingatgrossmargins,asMikementioned,weachieveda330basispointgrossmarginimprovementinthefirstquarter,andwe'repleasedwiththeprogress.But,weknowthatwecandomore.We'reexecutingagainstaplantogrowmargininavarietyofways.AndI'mespeciallyexcitedabouttheimplementationofournewassortmentplanninganditemplanningtools.

WeareleveragingthesignificantinvestmenttheCompanymadeafewyearsbacktoinstallOraclesystemstoenableustooptimizeoursizing,merchandising,planningandlocalizationofourassortments.Theultimategoalistogettherightproducttotherightplacemoreefficiently,whichwillreducemarkdowns,improveourgrossmarginandgrosssales.

Aswegetthroughmoresellingseason'sandbuildonthehistory,thesetoolswillonlybecomemoremeaningfulasourassociatesgainmoreexperienceinusingthem.Inaddition,weneedtofocusonimprovingtheefficiencyofoursupplychain,whichwillbeakeycomponentofourongoinggrossmarginimprovement.

Equallyasimportant,wealsoarefocusedonSG&Aasameanstohelpusachieveourlong-termEBITDAgoal.Inthefirstquarter,weachieved$44millioninsavingsandweupdatedourSG&Aguidancefortheyeartoreflectthecommitmentthatwearemakingtocontrolexpenses.AdisciplinedfocusonSG&Awillcontinuetobeapriorityforthecountryforthebalanceof2015andbeyond.

NowthatI'vereviewedthelastquarterI'dliketotakeamomenttodiscusssomeofthekeystrategicinitiativesfor2015.Ishouldmentionthatoursolidimprovementinthefirstquarterwasdeliveredwithoutthefullbenefitofthefollowinginitiatives.

Tostartoff,weareveryexcitedabouttheresetofourshoedepartmentinthestores.Basedonourresearch,weknowthatonly26%offemalecustomerspurchaseshoesfromJCPenney,whichclearlyprovidesuswithasignificantopportunity.Wealsoknowthatwehavesignificantlylesssquarefootageallocatedtowomen'sshoesthanmostretailersinourcompetitivespace.Thislimitedsquarefootageminimizedourabilitytodisplaynewbrandsandtrendsand,inturn,impactsourabilitytogrowsales.

Basedonthisdata,weimplementedaseriesofpilotslastyearto,numberone,expandourwomen'sshoedepartmentwithacombinationofsit-and-fitandopen-sellenvironments;numbertwo,wearemovingmen'sshoestothemen'sdepartmentinanentirelyopen-sellenvironment;and,numberthree,insmallerstoresweimplementedanentirelyopen-sellenvironmenttobetterservecustomerneeds.Thesepilotsperformedexceptionallyandwearebeginningtheprocessofresettingallofourstoresnow,andexpecttohaveallstorescompletedbyback-to-school.

Incentercorewearepilotingimprovementsinthepresentationofourhandbags,fashionaccessories,sunglassesandfashionjewelry.Thusfarthepilotresultshaveexceededourexpectations.Ourresearchtellsusthatcurrentlyaverysmallpercentofourcustomerscrossshopourcentercoreareas.

Asyouknow,centercoreproductsrepresentsomeofthehighestgrossmarginmerchandiseinthestorewithmeaningfulcrossshopopportunitieswithSephora.Thislackofcross-sellingisanopportunitythatweareaddressing.Weareimprovingourin-storeenvironmentandintroducingstylesthatwebelievewill

betterresonatewithourcustomers.

Infact,weareveryexcitedabouttherecentdesignanassortmentchangesofourhandbagsfromLizClaiborneandNicoleMiller.Andourplanistoaddtheseandotherbrandstoournewcentercoreenvironment,whichwebeganrollingoutlaterthisyear.

Finally,Homeremainsoneofourbiggestgrowthopportunities.We'reworkinghardtoensurethatitcontinuestogrowandultimatelyreachesitsfullpotential.Thereareacoupleprioritieswearefocusedon.

First,weareintheprocessofsimplygettingbackinstockoninventory,especiallyinbedding,bath,andwindowcoverings.We'realsomakingchangestothein-storepresentationwithin-stylestackoutsandimprovedkeyvalueitemswithKBIpresentations.Thegoalistoimproveoverallsalesandproductivity.

Inaddition,weknowitisveryimportantthatweplayaroleinexclusiveattractionsinourHomedepartment.We'verecentlyannouncedthatwe'reworkingwithEvaLongoriaonalineofbeddinginHomethatwillbeavailableinapproximately150storesandonJCP.com.WethinkourcustomersaregoingtorespondveryfavorablytoEvaLongoria,andtherewillbemoreintermsofexistingattractionslikethiscominginthefuture.

AsMikementioned,weareverypleasedwiththeresultsofourspringhomecatalog,andwelookforwardtoadditionalcatalogreleasesinthefuture.Wewillkeepyouupdatedontheimpactoftheseandotherstrategicinitiativesonfuturecalls.Andwiththat,IwillhandthecallovertoEd.

EdRecord (CFO):

Thankyou,Marvin.Goodafternoon,everyone.AsMikeandMarvinsaid,wefeelverygoodaboutourperformanceinthefirstquarter.Ourteamdrovesignificantimprovementsinperformanceacrossallkeymetrics,whichresultedinstrongprofitabilityimprovements.

WehadaverystrongEaster,anddespitetheWestCoastportissues,internalheadwindsfromlastyear'selevatedclearancebusiness,andunseasonableweather,wegrewthetopline,droveprofitabilityanddeliveredastrongfinancialperformanceforthequarter.ThisperformancefurthersourconfidenceinachievingourEBITDAgoalof$1.2billionin2017.

Withthat,IwillnowtakeyouthroughtheCompany'sfirst-quarterfinancialresults.Comparablestoresalesgrew3.4%forthequarter.Thisresultbenefitedfromcustomersrespondingfavorablytoouroffering,includingapositiveresponsetostrategicinvestmentswemadetoimproveourassortmentinseveralcategories,includinghandbags.AsMarvinmentioned,theintroductionofnewhandbagsfromLizClaiborneandNicoleMillerhelpedtodeliveraparticularlystrongquarterinthiscategory,withsalesexceedingtheCompanyaverage.

AsMikediscussed,wedidseeaslowdowninlateAprilandwearedisappointedinthefirstweekofMother'sDayshoppingperiod.However,ultimately,wehadastrongMother'sDayperformancewithanalmost15%two-yearstack,includingamid-single-digitperformancethisyear.

Ourbrick-and-mortarbusinesscompeduplowsingledigitsthisquarterandourdot-comresultsacceleratedversusits2014performance.Asmentionedearlier,ourstrongestperformingcategoriesinthequarterweremen'sandwomen'sapparel,HomeandSephora.

Allregionsofthecountrysawsalesgainsduringthefirstquarter,withthewesternandcentralregionsdeliveringthebestcomps.Weareencouragedbytheseresults,especiallygiventheheadwindswefacedthisquarter.

However,weknowwehaveplentyofopportunitiestocontinuetoimproveourperformanceandcustomerexperienceinstoresandonline.Ourtransactioncounts,conversionandaverageunitretailforthequarterwereallupversuslastyear.

Now,letmeturntogrossmargin.Forthefirstquarter,grossmarginwas36.4%ofsales,representingayear-over-yearimprovementof330basispoints.Wesawsignificantimprovementinourclearancemarginsforthequarterandfeelgoodaboutourplanstopositiveclearancemarginsfortheyear.

Privatebrands'penetrationandmarginsbothincreasedduringthequarterandcontributedtotheyear-over-yeargains.Aswelookforward,weexpectcontinuedgrossmarginimprovement,drivenbyimprovedclearanceprofitability,privatebrands'increasedpenetrationandimprovedmargins,and,asMarvindiscussed,improvedefficiencyofoursupplychain.Havingsaidallthat,weareraisingourexpectationsforgrossmarginin2015toincrease100to150basispointsoverlastyear.

Now,turningtoexpenses,wemanagedexpenseseffectivelythroughoutthequarter.SG&Adecreased$44millionandleverageby220basispoints.Theimprovementwasprimarilydrivenbyreductionsinstorecontrollableexpensesandadvertising,andimprovementinourcreditcardincome.

Wedidseesomepressureonexpensesthisquarterfromincreasedincentivecompensation,givenourstrongresultsandfromassociatewagesandbenefits.Thatsaid,evenwiththesepressures,wehavetakenourguidanceuptothehighendofourpreviousrangeandnowexpectSG&Atobe$100millionbelowlastyear.

Ourfocusonfindingefficienciesandreducingexpensesacrossallaspectsofthebusinessremainsasstrongasever.WeremaincommittedtoachievinganexpensestructurethatmakesenseforourBusiness.

EBITDAwasapositive$79million,a$168millionor600basispointimprovementfromthesameperiodlastyear.Thisreflectsa$29milliongainonthesaleofassetsthisquarterversusa$13milliongaininthesamequarterlastyear.Forthefullyear,weareplanningthegainonsaleofassetstobeapproximately$50millioncomparedtoatotalof$170millionlastyear.

WeareextremelypleasedwiththeprogresswehavemadeinourEBITDAandwiththecontinuedopportunitieswehavetoimproveouroperationalperformance.WeremainconfidentinourabilitytodeliverEBITDAof$1.2billionby2017.Weknowwehavemanypathwaystoachievingthisgoalandweremainfocusedondeliveringthislevelofprofitability.

Ourexpectations,asyousawinourupdatedguidance,istodeliverEBITDAofapproximately$600millionthisyear.Inaddition,aswelaidoutinoursupplementalslides,weexpecttoachieveEBITDAof$900millionin2016andultimately,EBITDAof$1.2billionin2017.Ourfirst-quarterearningspersharewasalossof$0.55,a52%improvementversusthesamequarterlastyear.

Letmebrieflytouchoncapitalinvestmentsforamoment.Capitalexpendituresinthequarterwere$46million.Asyousawinourupdatedguidanceweareprovidingarangeforourcapitalexpendituresthisyearwhichisaboveouroriginalplan.

Aswetestandseestrongreturnsonourinitiatives,wewillmakeinvestmentsinprojectsthatdriveprofitablegrowth.Despitethepotentialincreasesinourinvestments,wearemaintainingourfreecashflowguidanceatbreak-even.

Now,letmeclosewithour2015outlook.Ourupdatedandincreasedfull-yearguidanceisasfollows.Wehaveraisedourcomparablestoresalesguidanceandnowexpecttheyeartogrow4%to5%.Wehaveraisedourgrossmarginguidanceandnowexpectthefull-yeargrossmargintobe100to150basispoints

abovelastyear.

WehaveupdatedourSG&AguidanceandnowexpectSG&Atodecreaseby$100million.Capitalexpendituresareexpectedtobe$250millionto$300million.Freecashflowisexpectedtobebreak-even.AndEBITDAisexpectedtobeapproximately$600million.

Withthat,I'llturnitbacktoMike.Thankyou.

MikeUllman (CEO):

Thankyou,Ed.2015isofftoagoodstartaswebuildonourmomentumcomingoutoftheturnaround.Webelievethatwehavetherightstrategiesinplacetoachieveourlong-termEBITDAtarget.

Ouruniquecustomerproposition,whencombinedwithindustry-leadingcustomerservicessetsusapartfromthecompetition.Nootherretailerinourspaceofferstheprivate,nationalorexclusivebrandsatourpricepoints.TheteamsarefocusedonimprovingallaspectsofourbusinessasweachieveourvisiontobecomethepreferredshoppingchoiceforMiddleAmerica.

Withthat,wewouldliketoopenthelineforyourquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

NeelyTammingawithPiperJaffray.

NeelyT amminga(Analyst-PiperJaffrayandCompany):

Goodafternoonandniceprogressontheturnaroundhere.

Aquestiontoyouaboutgrossmargin.

Ed,firstforyou.Couldyouhelpconceptualizealittlebitagainthetailwindopportunitythroughthebalanceoftheyearinreversingtheheadwindthathadbeenclearance?Ithinkthatmightbehelpfulforsomefolks.Howmuchofthatgrossmarginexpansionoveralliscushionedbythat?

Andthen,specifically,kidsapparel,itsoundslikeyouguyshavebeenmakingsomepositiveprogresstherewithdress-upandEaster.Ithinkthatcategorywasnegativelastyearandisprobablyoneofthelastmajorcategoriestogetaturnaroundtouchonit.Whatissomeoftheopportunityyouhaveforkidsapparelyetthisyear?

Andthenjustahigh-levelmodelingquestion,grossmarginrate,shoulditbeupineachquarteryearoveryearthisyear?Thanks.

EdRecord (CFO):

Yourfirstquestionongrossmargintailwind.Clearlywehadalotofbenefitinthefirstquarter,andachunkofthatwaswemadesignificantprogressonourclearancemarginandourprivatebrandpenetrationsinmargin.Butalsoapieceofthatwastheoutsizedclearancesaleswesawlastyearandthepoormarginswesawontheclearancesaleslastfirstquarter.

Aswemoveforward,weexpectclearancemarginstobebreak-evenforthefullyear.Lastyear,theywerelowteensmargins.Westillthinktherearetailwindsaswemoveforwardinthat.

Inadditiontothat,wecontinuetoseeprivatebrandspenetrationandprofitabilityimprove.Sowethinkthat'salsoatailwindaswemoveforward.AsImentionedinmycomments,supply-chainandshortagearealsoopportunitiesaswemoveforwardthroughouttheyear.

MikeUllman (CEO):

Neely,Iwillanswerthekidsapparelquestion.Youarequitecorrectthatkidshasbeenoneofthecategoriesthat'sbeenthemostdifficulttoturnaround.Italsohadaverylargepenetrationofthediscontinuedbrandsthatwehadtoworkourwayoutof.Thelastofthatreallywascompletedinthislastquarter.Currently,weareonapositivetrendwithkids.

Oneofthebigdrivershasbeenastrongreturnofprivatebrand.Momreallywantsthepricepoints,quality,andstylethatwehaveinprivatebrand--OkieDokie,TotalGirl,Arizona,Xersion.Thesebrandsarereallyresonating,andthey'returningquitenicelyatourpromotionalpricepointswithverylittleclearance.Wefeelverygoodaboutthekidsbusiness,andthinkwe'reontherighttrend,havetherightideas.

Andwe'realsointroducingDisneyinanother116stores,whichalsowillbenefitthekidsbusiness.AndDisneyBabywillbelaunched,aswell.

That'shelpful.Thanks,MikeandEd.

Andthenjustafollow-upquestionforMarvin,ifImay.Someoftheinitiativesyouweretalkingaboutaroundassortmentplanningtools,etcetera,itsoundslikethathaspotentiallyreallydeepimpacttothebusinessoverthelonghaulwiththemerchantorganizationandtheplanningteam.

Butthatalsofeelslikethatisn'thappeningmaybethisyear,thatyougetthemomentumgoingthisyearandthenintonext.Couldyoujusttalkalittlebitmoreabouttheopportunitythereandthetimelinerelatedtojustcapitalizingsomepriorinvestmentsthatyouhavealreadymadeandjustputtingideasintoaction?Thatwouldbehelpful.

Sure,Neely.

Ihavehadtheopportunitytogothroughatransformationlikethisinapastlife,andIwouldsaythatwe'reprobably25%ofthewaythroughtherolloutandimplementation.Whatwe'reexcitedaboutontheassortmentplanning/itemplanningsideispackandsizeoptimization.

AstheMerchantandPlanningTeamsstarttoputinthebuysforthefallandultimatelyspringof2016,webelievethatwearegoingtohavewhatIwouldcalltherightproduct,intherightplace,therightsize,intherightquantities,intherightstoreswhich,asImentioned,willhelpustoreducemarkdowns,willimproveourgrossmarginsand,ultimately,drivesales.

There'schangemanagementattachedtothis.Buttheteamisreallyfocusedondoingittherightway,listeningtotheenduser,andmakingthenecessaryadjustmentstofitourcustomersandourculture.Weareexcitedbutweareinearlydays.And,asyousaid,thisimplementationandtheresultswillhappenoverperiodsoftime.

Butatleastweareatthebeginningofthejourney,andwehopetoseebenefitsinthefallbutwithmorebenefitsstartingin2016.

That'sexciting.Thanksandbestofluckoutthere.

Operator :

DavidGlickwithBuckingham.

DavidGlick(Analyst-BuckinghamResearchGroup):

Thankyou.Andmycongratulationsontheprogressyouaremaking.

Ijusthadaclarificationquestionfirstandthenafollow-up.ItsoundsliketheMother'sDaybusinessgaveyoualotofconfidence.Yousaidthatthe15-dayperiodwasupmid-singledigits,butyouweredisappointedinthelastweekofApril.

AreyousayingthatyousawbetterperformancethanthatinthefirstpartofMay,andthatoverallforthattimeperiodyouwereupmid-singledigits?That'sthefirstquestion.

Thesecond,youhavelaidoutanicepathwaytothe$1.2billioninEBITDA.Youalsoarestartingtotalkaboutotheropportunitiesbesidessales,whichyoulaidoutinyourInvestorDay.Iwaswondering,perhapsMikeorMarvin,ifyoucouldwalkusthroughwhataretheSG&Aopportunities,thesupplychainopportunities.Ithinkgrossmargin,you'velaidout.

Arethereadvertisingsavings?Aretherethingsthatcanhelpgiveyoumaybeanotherpathwaytothesameendresultifsalesdon'tturnoutthewayyouhavethemlaidout?

MikeUllman (CEO):

Iwilltakeonthefirst,andMarvincanaddressthesecond.

ThewayMother'sDaylaidoutbetweenthelastweekforthefirstquarter,week13,andthefirstweekofMay,whichisweek14,itwasprobablymorepromotionalintermsofourcompetitiveclimateinthelastweekofAprilthanwehadanticipated.WeactuallymadeupforitbyastrongweekinthefirstweekofMay.

Wefeelverygoodaboutthetrendweareonacrosstheapparelbusinesses--men's,women'sandkids--comingintoMay.Whilethebig-ticketbusinessesaren'treallyallthatimportantatthebeginningofMay,wethinkthosearegoingtokickinaswellbecausewehaveplannedpromotions.

Oneofthereasonswefeelgood--and,asyoumayremember,wesaidthatfirstquarterwouldbeourmostdifficultcomparebecausewewerebasicallyupagainstaprettystrong2014,7.4%.Wefeelbetterandprogressivelythroughthequarters.Asweaddthegrowthinitiatives,weexpecttoseecompstoincrease.

Marvincanaddresssomeoftheissuesthatyoupointout.

Thankyou.

David,ontheSG&Asavings,Ithinkyoutalkedabout,too,thatweknowthatwecangainefficienciesonadvertising.Wejustthinkit'sallaboutmoreefficiencyinhowwegetthemessagetothecustomer.

Weknowthatinthefirstquarterwewereabletoreduceouradvertisingspendbyhavingmoreimpressionstoourcustomersbecauseweleverageddigitalmediamoreefficiently.That'satransitionfor

us.Butit'salsoconnectedtothenewleaderthatwenamedafewweeksbackinMaryBethWest,whoisgoingtocomeonboardnotonlyastheChiefMarketingOfficerbutalsotheChiefCustomerOfficer.

Sohavingcustomerdataandcustomeranalyticstiedtomarketingwethinkiswhereweneedtobe.Wehaverichcustomerdata.Wedon'tnecessarilydothebestjobofusingthatdatatocommunicatewithourcustomers.Wethinkmoreone-to-onemarketing,leveragingdigitalmoreinaddressingourcustomers,anddrivingexcitementandaninspirationthroughthatmediaversusthetraditionalmediawillsaveusmoneyandgiveusmoreimpressions.

Onthesupplychainside,anyretailer,justatraditionalbrick-and-mortarretailer,that'stransitionedtoomnichannelwillfindefficienciesinsupplychain.Iranthesupplychaininthepast,andI'veworkedforlargecompaniesthathavemadebigstridesinreducingcostswhileimprovingefficiency.

Thisislessaboutanythingotherthanfindingwaystobemoreproductiveandmoreefficientoncardpower;oncubedensityofhowyoutransferfreight;ontheendcostfromsuppliertostorebecausealotoftimesyoucansavecostandsupplychain,butyoudon'twanttopushthosecoststothestore;onhowyoustagecomponentsoverseas,sothatyoucanhaveafasterleadtimeandgettingproductstothestore.Inadditiontothat,justmakingsurethatweareleveragingthefulfillmentcapabilitiesofourstoresinthiswholeomnichannelstrategy.

So,there'salotofworktodo,buttheteamisupforit.Weareexcitedaboutidentifyingthoseopportunitiesbecauseweknowthatwehaveagreatchancetocontinuetobuildonourgrossmarginimprovementfromthefirstquarter.

Great.Thankyou.

IfIcouldaddjustonemoreforEd.Intermsofthebalancesheet,ifyouachievethegoalsthatyou'velaidoutfor2016and2017,howmuchdoyouseeyourdebtlevelscomingdown?Andatthat$1.2billion,whatdoyouseeastheopportunityonanannualbasistobeabletoreduceyourleveragefurther?

EdRecord (CFO):

David,attheendof2017,obviously,thisyearwearegoingtobefreecashflowneutralwithoutmanymaturities.Nextyear,thematuritiesgoup.Obviously,ourexpectedfreecashflowdoes;andweexpecttobeabletocoverthatoutofEBITDA,thosematurities.

Andthenasyougetinto2017,weexpecttostartthrowingoffasignificantamountoffreecashflow.Wewouldexpectthattobesomewherebetween$300millionand$500millionlessthanitisnowaswetakeoutthenear-termmaturitiesandthenthrowoffcashin2017,atleastonanetdebtbasis.

I'msorry,whatwasthesecondpart?

Soincludingthecashyougeneratein2017,youseeareductionof$300millionto$500millionthroughtheendof2017?Oristhatnotincluding2017?

EdRecord (CFO):

Endof2017.

Endof2017,okay.Thankyouverymuch.Goodluck.Iwillletsomeoneelsegetinthequeue.

Operator :

MattBosswithJPMorgan.

MatthewBoss (Analyst-JPMorgan):

Canyoujusthelpbreakouttrafficversusticketinthequarter?Andthenaswethinkabouttop-lineopportunities,howwouldyouranksomeofthecategories--Home,kids,centercore--intermsofmarketsharerecapturefromhere?

MikeUllman (CEO):

I'llstartwiththemarketshareissues.Wekeepcomparingourselvesbacktothe2011levelsbecauseweknowthatwearestillmissingasignificantamountofvolumefromthoseperiods.Ourapparelcategoriesareveryclosetothoselevelsnow,particularlymen'sandwomen'sapparel;andkidsisgrowing.So,wefeelverygoodaboutthat.

Westillfeelweareimpairedinthecentercoreaccessoriesareas,althoughfinejewelryisdoingwellandcertainlySephoraisanoutstandingperformance.Homeisclearlystillalaggard.Butwedoholdourselvesaccountabletothosepreviouslevels.It'sagoodwayforustounderstandwherewearedeficient.

Intermsofthetraffic,weknowwearebacktothe87millionactivecustomersinthestore,whichisprettymuchthesamelevelas2011.Thedifferenceisthatsomeofthecategoriesthatarestilldeficientarenotgettingthelevelofspendthatwethinkthatweneedtogetbackinallcategories.Soatourrecentstoreleadersconference,oneofthebiginitiativeswashowdowegetbetterloyaltyfromourcustomers--meaninghowdowegetadditionalspend,howdowegetadditionalpurchaseconversion?

Iwouldsayintermsoftraffic,wearestartingtosee,wearegappingmorefavorabletrafficthanthemallis;soweareseeinganimprovementthere.Intermsofticket,intermsofconversion,we'vehadpositiveconversionthroughoutthequarter.SoIthinkwe'remakingtherightkindofstridesonthemetrics.And,obviously,itallcomestogetherwhenyourepairthebusinessesthatwere,insomecases,mortallywounded.

Matt,thisisMarvin.

I'lljustaddtwopointsonthetrafficversusticket.Ithinkit'salsoimportanttonotethatourpoint-of-saletransactionswerepositiveforthequarter,whichisveryimportantbecausewhethertrafficinthemallisupordown,it'simportanttoknowournumberofpurchasesthatoccuryearoveryearandquarteroverquarterinourstore.Andwe'repleasedwiththefactthattheywerepositive.

AndIthink,justgoingbacktomypreparedcommentsonHome,itcan'tbeoverstatedtheimportanceofjustbeinginstock.Homeisahugecategoryonline.Whenthatbusinesswasimpairedinthepreviousstrategy,itdirectlyaffectedtheonlinebusiness.Sogettingbackinstockinstoreandonline,willbekeycomponentstogettingthatbusinessbacktofullhealth,andweareheadedintherightdirection.

Andthenjustonequestionfromapricingstandpoint.Iknowprivatelabelmarginswerecutversusthehistoricalspreadwithnationalbrands.Howshouldwethinkaboutthisopportunityasweconsidersomeofthecompetition--whetherit'soff-price,fastfashion?Doyoustillfeelcomfortableinrecapturingthat

margin?

MikeUllman (CEO):

Weareverycomfortablewiththepricepointsthatweareshowingthecustomertoday,andthey'rerespondingverywelltoourpricepoints.We'verestoredtheprivatebrandpenetrationtowhatitusedtobe,andit'srightwherewewantittobe.Wethinkhavingapropermixofnationalbrandsthatarethemostrecognizedanddesirable,andhavingthebestheadquarterpresentationforthosebrands,isimportant.

Rightnow,I'veneverbeenmoreproudoftheprivatebrands.Virtuallyeverysingleoneisturningwellatthepromotionalprices.WehaveKVIs,whicharethekeyvalueitems.They'returningwell,whicharehigh-margin,high-velocityitems.

Ithinkpartofourencouragementeveninthecategorieswherewe'restillabitdeficient--likekidsandfootwear,handbags--thesearestartingtorespond.Andprivatebrandsisabigpieceofeachofthosecategoriesgettingbackintobusiness.SoIthinkit'sahugeadvantageforustohavetheproductdevelopmentanddesigncapabilityin-houseandalsosourceourowngoodsataveryhighpenetrationtothetotal.

That'sgreat.Goodluck.

Operator :

LorraineHutchinsonwithBankofAmerica.

LorraineHutchinson (Analyst-BofAMerrillLynch):

CanyoutellusalittlebitmoreaboutwhatspecificinvestmentsaredrivingtheincreaseinCapEx?Andshouldweexpectupwardpressureonthislineitemoverthenextfewyears?

MikeUllman (CEO):

Firstofall,Ithinkifyoulookontheslidesweprovided,youwillseewemadeanenormousinvestmentinCapExoverthelastsevenoreightyears--about$4billionbetweentheOracletools,theinvestmentinHomeremodel,andthevisualclaritythatweaddedtothestores,aswellasthenumberofITinvestmentsindigital.Theotheradvantageiswe'vehadtheinfrastructurefromourcatalogoperation,andwehaven'thadtoinvestinwarehousingandadditionalcapacitythatsomeothershavehadtoinvestin.

Toansweryourquestion,we'rereallyfocusingourCapExprimarilyonenablingthegrowthinitiativesincentercore,inthefootwearchanges,intheSephorainvestments.Wethinktheseareultimatelypaybackinvestments.Andwe'vepacedthoseoverthenextseveralyearstobesurethatweareaheadoftheplantogettothe2017EBITDAnumber.

Wefeellikewe'resomewhatconstrainedbecause,obviously,we'remanagingourcashflowcarefully.Butwefeelwecandoallthethingsnecessarytogettotheobjective.

Lorraine,thisisMarvin.

AndthepointI'lladdontheomnichannelandCapEx,ifyoutakeMike'spointaboutbeingaformercatalogretailer,thereisnotalargebrick-and-mortarretailermakingtheomnichannelconversionthat's

notgoingtohavetomakeasignificantcapitalinvestmentinwhatIcallomnichannelinfrastructure.

Andthat'safancywayofsayreallylargedistributioncenters.Ifyouaregoingtogetintoomnichannelandtrytogetclosetothecustomer,youhavetoleverageyourphysicalstructures,yourbrick-and-mortarstores,forfulfillment.ButyouarealsogoingtohavetohavecentralizedlargeDCssothatyoucanholdandshipproductefficiently.

JCPenneyisaCompanythathasagreatcataloginfrastructure.SoaswethinkaboutCapExforomnichannel,we'respendingmostofthatondigitizingtheinfrastructure.Sowe'renotbuildingDCs.We'rejusttryingtocreateplatformstodigitallyconnectthoseDCstothecustomersforwhatwecallseamlesstransactionsforthemtopurchasein-store,online,etcetera.

Theinvestmentmaylooksmallerrelativetoourcompetitiveset,butyouhavetotakeintoaccountthatwehaveanexistinginfrastructurethatwedon'thavetobuildfromscratch.Wesimplyhavetodigitizeit.Andwearecatchingup.

We'reslightlybehindonsomeofthetechnology.Thegoodnewsis,beingasecondmovercangiveyouasecond-moveradvantagebecausetechnologychangessodramatically.Sowe'reputtinginmoderntechnologythatwethinkwillresonate.Andwethinkthatwearegoingtomakealotofstridesinashortperiodoftime.

YoumentionedassociatewagesasapressuretoSG&A.Arethoseincreasesinlinewithwhatyouexpectedcomingintotheyear?Orhaveyouseenfurtherupwardpressurefromsomeofthemorerecently-announcedbroaderwageincreasesfromcompetitors?

MikeUllman (CEO):

Iwouldsay,firstofall,wedidnothavemeritincreasesforourpeopleduringthedifficultperiod.Wedidhaveanhourlywageincreaselastyearaspartofourmeritprogramforourassociates.Wearecommittedtobeingcompetitiveinthemarketplace.Wewantthebesttalent,andweintendtocontinuetocompeteforit.

Wearesensitivetothefactthatpeople,obviously,wanttoworksomeplacethattheyareproudof.AndbeingselectedbyForbesasoneofthebestemployers--thosepollsaredonebycanvassingemployeesofthosecompanies.Thereareonlytworetailersthatwererecognized,sowefeelverypleasedthatourpeoplearerespondingtothewarriorspirit.It'sreallygrassroots-driven.Butwedon'ttakelightlythefactthatwewanttomakesureourpeoplefeelwellcompensated.

Wehaveveryfewpeoplethatworkattheminimumwage,justbythenatureofourbusiness.It'sagreatplacetostartacareer,andpeoplegettomoveprettyquicklythroughtheprocess.Wearesensitivetoit;butthereasonit'sonthechart,frankly,isthatwearestayingcompetitive,andwedidmakeameritincreaselastyear.

Thankyou.

Operator :

KimberlyGreenbergerwithMorganStanley.

KimberlyGreenberger (Analyst-MorganStanley):

I'mwonderingifyoucantalkabouttheaccelerationincompthatyouareexpectinghereforthesecondthroughthefourthquarter.Itsoundslikeit'saresultoftwofactors,andletmeknowifthereisanadditionalfactor.Thetwofactors--easiercomparisons,firstly'and,secondarily,lessclearance-drivensellingintheprioryearperiod,whichshouldallowcompstogrowabitmore.

Isthereanythingelseinthatmixthatshoulddrivecompaccelerationfromhere?Andoyouseeanysortofvariationonaquarterlybasisthatweoughttokeepinmindaswearemodeling?Thanks.

MikeUllman (CEO):

Iactuallythinkyoushouldconsiderittobeaccretingaswegobecause,frankly,thegrowthinitiatives--theshoe,Bigfootproject,forexample,andadditionalcentercoreinitiatives--arebeingplannedforandarestartingtogrowintotheassortmentsbeginninginthefall.Ourfirstremodelsontheshoebusinessactuallybeganaweekago,andtheywillbefinishedbyback-to-school.Sowe'llseemuchofthatbeingaplustothecomp.

Wedidhavealotofclearancelastyearinthethirdandfourthquartertodiscontinuedbrands.Sowedothinkthatyourmentionofclearance--it'snotjustlessclearance,butit'sabettersell-throughonclearance,which,frankly,it'sabetterpricepoint.Thatalsoispartofthecompimprovement.

Great.Thankyou.

Onefinalquestion--itsoundedlikeyoumentionedyourtrafficinstoresarebetterthanthemalltraffic.I'mwondering,istrafficpositive?I'mnotsurewhatmalltrafficwashereinthefirstquarter.Ifyouhavethatnumber,thatwouldbereallyhandy.

MikeUllman (CEO):

Likeeverybodyelse,wehavemetricsandsurveysthatareindustrysurveys.I'mjustsayingintermsoflookingattheindustrysurveyformalltrafficversusourmalltraffic,wetendtobeabitbetterthanthemetric,whichsaysthatwearemoreofadestination,insomerespects,thanthein-lineretailers.

Ithinkweallknowthatomnichannelisthekeytogettingcustomerloyaltyandgreaterspend.It'salmostnotasimportantastoexactlywherethetrafficis,whethertheyshop--weknowthatsomebodywhoshopsomnichannelislikelytobethreeorfourtimesmorevaluableasacustomerthansomebodythatjustcomestothemallorjustshopsonline.

Wetrackit,clearly.Wepreferobviouslytohavesuccessacrossallchannels,butultimatelyit'stheomnichannelcustomerthat'sgoingtobethebestcustomerforus.

Kimberly,thisisMarvin.

ThepointI'lladdtothatcommentisifyouthinkabouthaving1,000-plusstoresgeographicallylocated,whethertheyaremalloroff-mall,whenyoucanprovidebuyonlinesame-daypickup,thosestoresbecomemorevaluableassetstothecustomer.Aswethinkaboutenterpriseinventoryandfulfillingoutofstores,aswementionedinthepreparedremarks,thosestoresbecomeamorevaluableassettotheCompanyandtothecustomer.

ToMike'spoint,wearenotignoringmalltrafficinourtraffictrends.We'rejustsayingasomnichannelbecomesamoresignificantpartofourbusiness,thosenumbersaregoingtostarttohaveadifferentlevelofimportanceinhowweassortthesestores.Howweallocateinventoryfortheomnichannelgrowth

willbeveryimportanttoutilizethegeographiclocationstoouradvantage.

MikeUllman (CEO):

Onementionontrafficthatpeopletendtooverlook--andwecertainlyaren'toverlookingit--wehave850beautysalonsthatwearerepositioningasSalonbyInStyle.Thiswillbeveryaccretivetotheaestheticofwhatweofferinthesalon.AlmostlikeitwaswithSephora,wetendtoinvestinthem.

Apersonwhocomestothesaloncomesasmuchaseighttimesayear,whichismaybealmosttwiceasmuchastheaveragecustomer;andtheyshopwhiletheyareinthestore.Youwillhearmoreaboutthesalonbusinessaswestarttorollout.Wehaveaprototypeof15storesthatarebeingrepurposedthisfall.Thisisanotherwaytodrivebricks-and-mortartraffic.

AsI'vesaidanumberoftimes,it'sverydifficulttogetyourhairdoneonline.Wearetheonlymajorstorethathasthatattraction.Wethinkthat,plusSephora,makesitverycompellingineveryneighborhoodtheyarelocated.

Thankyousomuchforthedetail.

Operator :

PaulTrussellwithDeutscheBank.

PaulT russell(Analyst-DeutscheBank):

Justcontinuingtheconversationonthetopline,clearlyyou,fromyourguidance,areoptimisticaboutsalesopportunity.Butperhapsifwecouldjusttakeastepback,justtothecoreconsumeroverallandtheirhealth.

Couldyoujustspeakfromyoursurveywork--orperhaps,Mike,youcouldputyourDallasFedhaton--andjustcommentonhowyouviewtheconsumer'sabilityandwillingnesstospendonapparelandHomecategories,orthetimingortheextentthattheconsumersarelookingtospend,anywageincreases,orgashpricesavings?

Also,onthetopline,youmentionedinyourslidesafewheadwindsthatoccurredinthefirstquarter,includingtheWestCoastportdisruptions;theweakermalltraffic;thelatearrivalofspringweather;andthepromotionalenvironment.Ifyoucouldatalljusthelpusclarifytheimpact,perhaps,ofthoseitemstothefirstquarter,andjusthowweshouldthinkaboutthoseimpactsgoingforward,particularlythepromotionalenvironment.Thankyou.

MikeUllman (CEO):

Letmestartwithyourfirstpoint,Paul.

Weloveourcustomer.Wethinkthemid-tiercustomerreallyappreciateswhatweoffer.Thatwe'reabletomaintaina$15pricepointisthepricethattheyneedtobeabletomeetalltheirfamilyneeds.Theyareadiversecustomer;theytendtobeafamily;oneortwomembersofthefamilyemployed.Itisclearthatthereisalotofpressuresonthatcustomer,butwebelievewehaveanopportunitytogainshareoftheirspending.

Rightnow,weknowthattherearecategoriesthattheydon'tspendwithus.Eventhoughthey'respendingonsportswear,they'renotbuyingaccessoriestothelevelthatwethinkthatwecanearn.Ratherthantalkaboutthedemographicsortheconsumerintermsoftheeconomy,wefeellikewehave

anopportunitytogainsharewithaverylargeconsumersegment.

Thetwomiddlequartiles,duringtherecession,were20%unemployment.That'sdramaticallychangedforthatgroupasemployment'simproved.

Intermsoftheheadwinds,IthinkwemanagedtheWestCoastportthingprobablyaswellasanyone.Wegotaheadofit.Itdidhaveanimpact,butwewereabletomanagethroughit.

We'vealreadytalkedaboutmalltraffic.Wethinkwe'redoingbetterthantheaveragemallstatistic.Wewerealmostadestinationinsomemalls.Theweatherimpactedallofus.

Again,Ithinkthethingsthatimpairedourvolumeinthefirstquarterwereprettymuchthediscontinuedbrandsthatwestillhadleftover,plusavery,verystrongcompthepreviousyearandobviouslyalittlebitoftheport.Butthefactthatmen'sandwomen'sapparelareourstrongestcategoriestellsyouthecustomerlikeswhatwearedoing.That'sover50%ofourbusiness.Ifyoucanrunthatbusinesssuccessfully,Ithinkitgivesusalotofconfidencethatwe'regoingtoattractthatcustomeroverandoveragain.

Weknowwehaveanopportunityforthatcustomertoshopwithusonlineforapparel.Rightnowweknowthatapparelcustomerinthestoreisnotnecessarilyshoppingusonlineforthesamecategory,whichismaybejustafunctionofthemnotreallygettingbackonlinewithusasmuchastheywereseveralyearsago.

Sowelikethecustomer.Wethinkit'sthediversecustomerwhohasbeenveryloyaltous.IthinkwedidagreatjobwithHispaniccustomers.Ourfashionresonateswiththem,oursizing,ourcommitmenttosize,andwhatthey'relookingfor.

PaulT russell(Analyst-DeutscheBank):

Thankyou.Goodluck.

Operator :

DanaTelseywithTelseyAdvisoryGroup.

DanaT elsey(Analyst-TelseyAdvisoryGroup):

Congratulationsontheprogress.

Asyouthinkofthatcatalogtestthatyoudid,howwasit?Whatdidyoulearnfromit?Andwouldyoubedoingitagain,andwouldyouexpandittoothercategories?

Andthenonyourrealestateplans,howareyouthinkingaboutrealestate?Anydifferentintermsofeithermonetizationorsale/leaseback?Anydifferentwaysasyouthinkaboutwaystomonetize?Thankyou.

MikeUllman (CEO):

Dana,wewerereallypleasedwiththeHomecatalog.It'sincremental.Wesent88%ofthemtolapsedcustomers.Sothefactthatwegotsuchagreatresponse,itwasacustomerthatwewantedtocomeback;buttheydidn'tparticularlyhaveaninvitationuntiltheygotthecatalog.Sowearerepeatingitagaininthefall.

We'renotgoingbacktothe1,000-pageseveraltimesayearbook.That's,frankly,withpaperandpostage,notagoodproposition;and,frankly,that'snotthewaythecustomerwantstoshop.

TheadvantageoftheHomecatalog,iswemayhave150bedsonlineandonly25bedsinthestore.Oneadvantageofthecatalogisyoucanshowmoreimagingandletthecustomerusethecatalogasaguidetoshoppingonline.That'swhatwe'velearned.

Wethinkit'sgoingtopayoffnotonlyintermsofgettingthecustomerbacktousonline,butalsomightencouragethemtocomeintothestores.Soweareverypleasedwiththat.Wedon'tseeitgoingintoalotmorecategoriesatthemoment;butwewillobviouslytestandifwefindsomethingthatresonates,we'lldoit.

Ontherealestateside,IwillletEdspeaktothatoverall.Butgenerally,ourrealestateisencumberedatthispoint.Wedon'treallyhaveabigrealestateplay,sotospeak.It'snotabouttherealestateforusasmuchasitisgettingbackouroperatingbusiness,andthat'swherewearefocused.

Ed,dowanttoaddanythingelse?

EdRecord (CFO):

Yes,Dana,thisisEd.

Iwouldjustaddthat,asMikesaid,itisencumberedbyarealestatetermloan.Ourno-callprovisionactuallyrollsoffthismonth.That'ssomethingwecontinuetolookat.Weknowitisprobablyover-collateralized,andtheremaybesomeopportunitythere.Wealsoknowthatitdoesn'tcomedueuntil2018,sowedon'thaveaguntoourheadtohavetodoanythinganytimesoon.Wewillcontinuetomonitorratesandseeifthere'sanyopportunitytodosomethingthere.

Obviously,wecontinuetolookatwhat'shappeningintheindustrybetweenthesale/leasebacksandtheREITsthatourcompetitorsaredoing.Wespendalotoftimelookingatthat,andwe'llcontinuetolookatit.Butgiventherealestatetermloanandjusttheoverallcomplexityofthosedeals,there'satremendousamountofcomplexitythere.AsMikesaid,it'snottopofourprioritiesrightnow.

We'refocusedondrivingEBITDAanddrivingtop-lineresults.We'llcontinuetolookatit.Andtheremaybeanopportunityforusdowntheroad,butit'snottoppriorityrightnow.

DanaT elsey(Analyst-TelseyAdvisoryGroup):

Thankyou.

Operator :

MattMcGinleywithEvercoreISI.

MattMcGinley(Analyst-EvercoreISI):

ThefirstoneIhaveisonyourfreecashflowguidance.IfIlookatthemidpoints,youincreasedyourcompbyabout50bps;yourgrossmarginis50bpshigher.You'regoingtodo$25millionbetteronSG&A,andyouoffsetthatwithsomeCapExinvestment.Butyoukeptyourfreecashflowatthesame,atbreak-even.

What'sdifferent?Areyouchasinginventory?Orwhyaretheresomanymetricsintherightdirection,butyourfreecashflowisn'tcomingthrough?

EdRecord (CFO):

Iwilltakethat,Matt.

Therearetwothingsreallygoingon.Oneisourplansfortheyearactuallywereaboveourguidanceat

thebeginningoftheyear.Wenowhavetheconfidencetoputintoourguidance;wefeelgoodaboutexecutingthat.Weknewwehadtoperformaboveourguidancetohitthefreecashflowearlierandexpectedtodothat,andnowwearewithintheguidancerange.

Butinadditiontothat,wecontinuetomakeinvestments,asyousawintheCapExnumbers,butalsoininventoryaswerolloutinitiatives.Theshoeinitiativewetalkedabout.Aswegomoretoopen-sell,weexpectaverypositiveconsumerresponsethere.Andweboughtitthatway.

Sowearemakinginvestments.MarvintalkedaboutgettingbackintostockintheHomestore.Wecontinuetomakeinvestmentsininventorywhereweseeresponseorareturnonthat.

Soit'stwofold.Oneis,weknewitdidn'tquiteaddupwhenwedidittobeginwith,andnowwe'reupinsomeoftheinvestmentsbecausewehavemoreconfidence.

Gotit.

MysecondquestionisontheHome.Thisiscertainlyabigopportunityrelativetowhereyouusedtobeinthiscategory.IthinkMarvintalkedalotaboutcentercoreandomnichannel.Ithinkmostofushaveagoodsenseoftheinitiativeyouhavebehindthattogetthatrecovered.

ButitsoundedlikealotoftheissuewithHomeisstilljustnothavingtherightinventory.WhereareyourelativetowhereyouwanttobefromamerchandisingstandpointversusjustfixingHomewithhavingtherightstuffactuallyinstock?

MikeUllman (CEO):

It'salittlebitofacomplicatedsetoftopics.Firstofall,wehadtochangethemixofHome.Itwastwo-thirdshardhome,one-thirdsofthome.We'vemadethattransitionandwe'rebacktotwo-thirdssofthome,one-thirdhardhome.That'sone.

Second,itwasaverymodernaesthetic.Ourcustomerisreallyprettymuch80%traditional.Thathasbeenchanged.Wearetryingtomakebetteruseofthespace.Spaceallocationwasdisguisedbyaseriesofshopsthatmakeitdifficultforthecustomertoseethewholeassortment.

SothereareavarietyofthingsincludingHomeisaverypromotionalcategory.SogettingbackintosuccessfulpromotionsthatcustomersrecognizeHomeasanattraction,thosearestartingtoworkforus.Thefurniture,mattress,windowcoveringbusinessisaveryspecialized.Wehappentobeverystronginsoftwindow.Thatspacewasdiminishedduringthepreviousstrategy,sowe'reputtingspacebackintothosebusinesses.

We'reusingsomeoftheexcessspacethatexistsinHome.It'sjusttakinglongerthananyofuslike.Thegoodnewsisthatit'strendingverywellonline.It'salsotrendingverywellinthestoresthatdidnotreceivethemajorremodels.

Asfrustratingasitis,becauseweknowthecustomerlikesourproducts,it'sjustgoingtotakelongerthansomeoftheothercategories.Itjustdoesn'trespondasquickly.

Wehaveastrongteamthere,andtheyareverymotivatedtomakeitanattraction.WeknowthatpeopleliketocomeandshopHomewhiletheyshopforothercategories.Sothefactthatwe'renotaspenetratedasweusedtobetellsyouthecustomerisnotreadytoreturntofullspendingatthispoint.

Matt,thisisMarvin.

AndIwillbeveryhonest,itwasoneofthekeyquestionsIhadinjoiningtheCompanybecausetheconventionalwisdomisthebusinessshouldrespondbackquickly,justgoinandfixtheissues.ButIthinkMikejustoutlinedthecomplexityofgettingthebusinessbacktowhereitshouldbesoitresonateswiththecustomers.

WhatIcantellyouisthattheothercomplexpartis,asyoustarttofixthebusiness,thenyouhavetoforecastthesalestrends.Andthat'skeybecauseyouhavetobuyintotheinventoryeffectively.

Inmypreparedcomments,ItalkedaboutoneofthekeyinitiativesinHomeissimplygettingbackinstock.Andpartofthatisbecausethecomplexityofsolvingtheproblem,gettingtheassortmentcorrect,gettingtherightbrands,therightprices,andthenpredictingthesalessothatyoucanmaketheproperbuys.And,asyouknow,thesearenotshortleadtimepurchases.

Allofthosethingshaveaddedtothecomplexity.Butthegoodnewsis,isthatitwasoneofourbestgrowthcategoriesforthequarter.Wehaveareallygoodteaminplace.Wearecontinuingtoaddtalentinthatarea,andwereallybelieveweareheadedintherightdirection.

ThekeycomponenttoHome--oneofthekeys,Ishouldsay--isthedot-combusinessandtheomnichannelpiecebecause,youhavetorealize,Homewassignificantlypenetratedonlineprethestrategythattookitinthewrongdirection.It'sstillsignificantlypenetrated,andthat'sgoingtoonlygrow.Butwethinkthecombinationofdot-com,instore,omnichannelisgoingtohelpusgetitbackontrackinthenearfuture.

Thanksalot.Veryhelpful.

Operator :

IwouldnowliketoturnthecallovertoMikeUllman.

MikeUllman (CEO):

Thankyouforjoiningthecall.Asyoucantell,we'requitepleasedtobeabletoshiftgearsandmoveintogrowingthebusiness.Theteamisverymotivated.Ourengagementscoresforourassociatesareupdoubledigitsoverayearago.Andourcustomerexperiencescoresareup48pointsoneverymetric.

Wefeellikewe'rebackinbusiness;we'rereadytocompete.Weoffernoexcusesforanyoftheissuesinthequarter.Wefeellikeweexecutedwell,andwelookforwardtothenextfewquartersdoingevenbetter.Thanksforjoiningthecall.

Operator :

Ladiesandgentlemen,thatconcludestoday'sconference.

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Penney (J C) (JCP) Earnings Report: Q1 2015 Conference...

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Transcript of Penney (J C) (JCP) Earnings Report: Q1 2015 Conference...

Splunk (SPLK) Earnings Report: Q4 2015 Conference Call ...s.t.st/media/xtranscript/2015/Q1/13061339.pdf · welcomed a record 600 new customers to Splunk in Q4 and had a rocking quarter

Panera Bread (PNRA) Earnings Report: Q1 2015 Conference ...s.t.st/media/xtranscript/2015/Q2/13131535.pdf · Panera 2.0 conversions and delivery hub openings in late Q4 and Q1. Moving

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Celgene (CELG) Earnings Report: Q1 2015 Conference Call ...s.t.st/media/xtranscript/2015/Q2/13134085.pdf · in the rapidly emerging and evolving immuno-oncology market. To date, we

Laboratory Corporation Of America Holdings (LH) Earnings …s.t.st/media/xtranscript/2015/Q1/13053596.pdf · 2015-04-10 · diagnostics, and healthcare delivery. This merger creates

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Linear Technology (LLTC) Earnings Report: Q2 2015 Conference Call …s.t.st/media/xtranscript/2015/Q1/13011795.pdf · 2015. 4. 10. · conference call to questions to be directed

Raytheon (RTN) Earnings Report: Q1 2015 …s.t.st/media/xtranscript/2015/Q2/13125043.pdfto harness rapid growth in the global cybersecurity market. Overall, we've made a considerable

Eastman Chemical (EMN) Earnings Report: Q4 2014 Conference ...s.t.st/media/xtranscript/2015/Q1/13029793.pdf · Company Name: Eastman Chemical Co Company Ticker: EMN Sector: Basic

Novartis AG (NVS) Earnings Report: Q4 2015 Conference Call ...s.t.st/media/xtranscript/2016/Q1/13438716.pdf · Now at the beginning of the year, I laid out five priorities for the

Starwood Hotels & Resorts Worldwide (HOT) Earnings Report ...s.t.st/media/xtranscript/2015/Q1/13041799.pdf · You can find a reconciliation of the non-GAAP financial measures discussed

CONSOL ENERGY INC (CNX) Earnings Report: Q4 2014 …s.t.st/media/xtranscript/2015/Q1/13030304.pdf · Of the total, we had record Marcellus Shale production of 111.7 Bcf in 2014. That

Southern Company (SO) Earnings Report: Q1 2015 Conference ...s.t.st/media/xtranscript/2015/Q2/13133555.pdf · welcome everyone to the Southern Company's first-quarter 2015 earnings

Abbott Laboratories (ABT) Earnings Report: Q1 2015 ...s.t.st/media/xtranscript/2015/Q2/13122402.pdf · as in the past, non-GAAP financial measures will be used to help investors understand

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Valeant Pharmaceuticals (VRX) Earnings Report: Q4 2014 ...s.t.st/media/xtranscript/2015/Q1/13056166.pdf · Valeant Pharmaceuticals (VRX) Earnings Report: Q4 2014 Conference Call Transcript

Splunk (SPLK) Earnings Report: Q1 2016 Conference Call ...s.t.st/media/xtranscript/2015/Q2/13167909.pdf · The following Splunk conference call took place on May 28, 2015, 04:30 PM