J.C. Penney Company (JCP) Earnings Report: Q! 2016 ... · J.C. Penney Company (JCP) Earnings...

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.




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.




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




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.




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




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.


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+.




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.




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




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.


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




introublewithinventory.

Itismuchtooimportantforustomakesurethatwemanageourcashpositionwellandthatweandthatwedon'tgetoverourskis.So,ourholdingthesalesisbasedonthosethingsandweareveryconfidentthatwewillbeabletomanagethebusinessaswellasmanagetheinventory.


Thankyou.Onequickfollowuponmarketing,yousaidyoudiscontinuedtheAcademyAwardsadvertisingcampaign.Justwonderedwhat,ifany,lessonsyoutookfromQ1.Obviouslyadvertisingwasdown,trafficsoundslikeitwasdown.

Werethereanylearningsfromthefirstquarterthatyouhaveusedtocoursecorrectforthesecondquarterback-to-schoolandholiday?Doyoufeellikeyouneedtostepupthelevelofmarketingoranymixedlessons?Thankyou.


Well,justacoupleofthoughts.ThedecisionnottosponsortheAcademyAwardsrepresentedroughly75%ofoursavingsinmarketingforthequarter.SothatwasabigcontributortotheSG&Asavingsinmarketing.Forthequarterourimpressionsareupover3%.Wereceivedincrediblypositivefeedbackonournewbrandingcampaign.

Wewillalwaystweakourmarketingstrategy,butwehavenoplanstomakeanymajoroverhaulinwhatwearegoingtodointhesecondquarter.Wefeelverycomfortablewithourstrategy.Butasalways,wewillmakeadjustmentsalongtheway.


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?


Well,O liver,theonegreatthingaboutretailiseverydayyoucangiveyourselfascorecard.Andwegradedourselvesprettyharshlyinthefirstquarterbecausewebelievedthatweactuallycouldhavedeliveredbetterresultsbutthemarketwasincrediblychallenging.

Aswelistentoourpeersinthecompetitivespaceweactuallyfeelalittlebetterthatwereallyactually




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




seeing.

So,Iamjustcurious,whenwillthathappenandwhatarethekeyfactorsweshouldfocusonasanalystsintermsofunderstandingtheroadtobecominglessweathersensitiveatthedepartmentstore?


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.


WhatIwassayingontheapparelsideinthequarter,Imeaninwomen'sapparel--Imeanwewerereallylightacrosstheboard.Theonlyreallybrightspotwasactivewearwassignificantlyup.AndwearepleasedwiththatandweareverypleasedwithourprivatebrandXersionaswellasourgreatpartnershipwithNike,itreallyhelpedtodrivethat.

AsitrelatestoHome,allofourinitiativesareinour2016capitalplan.Imeanwestrategicallyallocatedcapitalincasethepilotresultsweregood.AndsoIwouldn'tcallitcapitallightorcapitalheavy,butIwouldsaythecapitalisappropriatebut,mostimportant,wearenotholdinginventory.Soitisalowriskstrategicinvestmentforus.

Wearegoingtorolloutappliancesandtheaveragestorewillhavebetween120to230actualappliancesinthestoreandwillhaveover1,200onlinestartingnextweek.Butwewillownnoinventory




inanydistributioncenter.

ThesamewithAshley's,wearegoingtoownonlywhatisinthestore,wearegoingtohavetheproductpulledfromtheirdistributioncentersandtheyhaveabest-in-classlogisticsinfrastructure.AndEmpireisthesameway,sampleproduct,noinventory.

Soonthefinancialarrangementsforappliancesit'sprettystraightforward,weselltheproduct,wemaketherevenue.Fortheothercategoriesoffurnitureandflooringitisapilot.Sowearestillworkingthroughwhatmakesthemostsenseforusandoursupplierpartners.Somoretocomeonthat.Andwindowsobviouslyisacategorythatwehavehadgreathistoryin,wejustwanttoregainitandwethinkwecan.


AnythingonMother'sDayyoucouldadd--weekend?


WewerepleasedwiththeMother'sDaysellingseason.Imean,thatissomethingthatactuallygaveusconfidenceatleastcomingoutofthefirstquartertoholdoursalesguidancefortheyear.Wecontinuetoworkeachdayeachweek,butforthatentiresellingseason,Mother'sDay,wefeelgoodabouttheprogresswemade.


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.


Well,Paul,obviouslyyoucanimaginewespentalotoftimeonthis.Anditreallycamedowntothesimplefactthatwedidn'tbelievethatonequarterwassignificantenoughtobringtheentireyeardown,especiallybasedonthefactthatwewereopening60Sephoras.Wewererollingoutcentercoretoone-thirdofourstores,andtheearlyrolloutshavebeensuccessful,inadditiontoacceleratingtherolloutofappliancesto500stores.

Soaswethoughtaboutthenewinitiatives,wereallyfeltgoodaboutthesecondhalfoftheyearbecauseweknewthatwe'dhavetheseinitiativeskickingin.AndIdidn't--Ifailedtomentionthewindowsinthe500stores,whichinourpilotlocationhasbeenverysuccessful.Sowehadsomeverytangiblethingsthat




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.


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.





Thankyou.

Operator :

SteveRuggiero,R.W.Pressprich.

SteveRuggiero (Analyst-R.W.Pressprich):

Marvin,canyoujustdiscusshowyouaregoingtakingdollarsoutofyourdomestictransportationandlogisticsinfrastructuregivenyou'rehistoricallyscaledtoalargersalesbase?


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.


Well,thankyouforthat.AndjustshiftinggearstotheSalonbyInStyle,justifyoucouldgiveusanupdateonthat,whereyouarewiththestores.Andthosethathaveexperiencedthechanges,haveyouseenanymeaningfuldifferencesincustomertraffic?


Theshortanswerisweareverypleasedwiththechange.Weareseeingincrementaltrafficgrowth,weareactuallyseeingbetterrevenue.Andsurprisinglywhatwedidn'tanticipateisthatweareseeingahigherqualityofassociate.

Itissomucheasierforustorecruithigh-qualitystylistswithanexistingclienteleandbookofbusinesscomeandworkforthatInStylebrandofsalonthanatraditionalJCPenneysalon.Wearestilllearning.

Wearegoingtorolloutalittlelessthan100locationsthisyearforsure.Wearemakingtweaksthroughoutandwearealsoexcitedaboutanewonlineschedulingsystemthatwearerollingoutcompanywidethatwillmodernizethewayacustomercanmakeanappointmentandupdatethat




appointment.

Soallthosethingsareontheway.Butsofarweareverypleasedandwethinkthiswillbeagamechangerforusaswefigureoutwhattheirperfectmodelis.


Great,thanksforthat.

Operator :

JeffVanSinderen,B.Riley.

Jef f VanSinderen (Analyst-B.Riley):

Iwonderifyoucouldjustgiveusalittlebitmorecolorone-com,whatyousawinthequarter,whetherthatacceleratedordeceleratedversusQ4.

Andthenjustrelevanttothediscussiononinventory,toclarifyonthewarmerweatherseasonalinventory,areyouwhereyouwanttobeor,becausethatwasaslowercategory,doyouhavesomeIguessanextra[day]thatmaybeyouneedtotakesomehardermarkdownson?


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.




Andweareintheprocessofidentifyingstoresandtheywillbetheprimaryfulfillmentlocation,whichwethinkwillallowustosavedeliverycostsandalsogiveustheabilitytoshipsamedayandnextdayandsomeexamples.Andthatishowwewanttoleverage1,000storestoreallybeamoreefficientretailer.

So,weareverypleased.Thegrowthhasbeenanincrediblystrongandismaintainingandweseeitonlygettingbetter.So,IwillhanditovertoEdtoansweryourquestionregardinginventory.

EdRecord (CFO):

Yes,withregardstospringseasonal,wefeellikeweareinreallygoodshape.Ourinventorygrowth,asIsaidearlier,ispredominatelyinbasicsandintheinitiativeslikeactive,CenterCoreandshoes.Sowhenyouadjustforthatourspringgo-forwardinventoryinthenon-initiativeareaisreallyflattodown.SowefeellikeweareinreallygoodshapeasweheadintoQ2.


Okay,good.Andthenasafollow-up,anythingelseyoucouldtellusaboutfurtherexpensecutsyoumightbeabletomakeobviouslywithoutnegativelyimpactingthebusiness?Andthenanyupdateonthedebtreply?Thanks.


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.





Okay,thanks.Andbestofluck.

Operator :

RandyKonik,Jefferies.

RandyKonik(Analyst-Jefferies):

Ireallyappreciatetheobsessionwiththedata.Iguessacouplequestionsaroundthat.Ifyouthinkaboutgroupingthestoresaroundthe524--excuseme,the546withSephora,the125withtheCenterCoreandthenthebalancewithbutsaynothing,howdotheUPTslookfromadifferentialperspectiveacrossthosethreegroups?

Iamjustcuriouson--you'reobviouslypricingaliftinUPTfromtheSephorafortheCenterCore.Iamjusttryingtogetsomeperspectiveofhowdifferentitreallyis.Thanks.


Itisreallyagreatquestion.Idon'thavethedatainfrontofme,butIcanjustgiveyouatahighlevel.WeknowforafactthatwhenweputanewSephoraintoastorewewillgetanoverallsaleslift,wewillseethecustomershopinmoreplacesthanaSephoralocation.

AndasImentionedinmypreparedremarks,whatwearemostpleasedwithisthatearlyoninourSephorarelationshipwehadabeliefthatwecouldnotputthatenvironmentinaruralmarketorasmallerfootprintstore.Andwedecidedtotestthattheoryandwehavebeenincrediblypleasedthatthatbrandworkswhereverweputit.

AndasImentioned,ourbestperformanceinthehistoryofourrelationshipfromearlysalesperlocationisoccurringthisyearinthefaceofaverydifficulttop-lineenvironment.

Andso,Idon'thavethedatainfrontofme,butourpilotresultsandourearlyresultswilltellusthattheCenterCorelocationsareworkingbecausewedoatestversuscontrol.Andweknowinthosestoresthatreceivedthatnewenvironmentsalesareuprelativetotheirpeergroup.

Andwebelievewearegoingtoseetheexactsamethingtohappenwithappliancesandwebelievewearegoingtoseetheexactsamethinghappenwithourupdateforwindows.So,nodatainfrontofme,butanecdotallyandatahighlevelweknowthattheseenvironmentchangesaremakingadifference.


Gotit,that'shelpful.AndthenasIthinkaboutHomeDepotandthewaythey--youhavecategorymanagementorSKUproliferationbasedonturnsinaparticularcategorylikelet'ssaynailsversuspaintversuspowertools.Thatcompany(inaudible)hadacertainnumberofbrandsorSKUsbecauseofthewaythecategorywas.

Howdoyouthinkaboutthatcategory,thedepthoftheSKUorthedepthofthecategoryintheJCPenneyarea?Likewhatneedstobe--doSKUsneedtocomedown,wouldSKUsneedtogoup?IamjustcuriousonhowyouthinkaboutthatandhowyoucomparethatexperienceatHomeDepotandthatcategorymanagementphilosophyandapplyittoJCPenney?


Well,Idon'tknowthatthecomparisonexistsotherthanthefactthatHomeDepotisaworld-classretailerandwearestrivingeverydaytobecomeaworld-classretailer.ButwhatIcansay,Ihavebeenincrediblyimpressedwiththemerchantteamandincrediblyimpressedwiththeirdepthofknowledgeofour




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.


Thatishelpful.IguessmylastquestionisIguessagainI'mthinkingaboutHomeDepotversusLowe's.AndIthinkaboutHomeDepotasthatguy'sguychoicetogoto,itishascementfloorsanditisalmostthepreferredchoiceofthecontractororthePro.

TheydidagoodjobofreallykindofhighlightingthatdifferentialfromaLowe'swhereyougetthechatteraboutmoreforthemomorwhathaveyou.

Whatdoyouwant--whenyoulookatJCPenneyandyouwanttomakeitcontinuetostandoutwithSephora,withthesalon,withtheappliancesnow,whatdoyoureallywant--whenyoulookacrossthespectrumofcompetitionwhatdoyouwantthatstatementorthatdifferentialtobethatyourcustomergoesherebecause?


Well,Ithinkforusitallstartswiththeexperienceinthestore.WerolledoutanewservicetrainingprogramledbyJoeMcFarlandandhisteamandwehaveretrainedeverysingleassociateinthestoreandthattrainingisdrivenbythegeneralmanager.Andwejustcompletedthat.

Andthegoodnewsiswehaveseenservicescoresgouponaweeklybasisinthestorebasedonthetrainingandbasedonhowitisresonating.Sotheexperienceinthestorematters.

Forusitreallycomesdowntoacouplefundamentalthings.Wewanttobethenumberonechoiceforcustomerslookingforstyle,qualityandvalue.Andwethinkthatwecandothatbyincreasingourprivatebrandpenetration.

WethinkwecandothatbycontinuingtoexpandSephorainsideJCPenney,createanexperiencewithsalonand,moreimportantly,allowthecustomertocomeinandbeautifyherhomewithournewvisionofourHomedepartment.Andsostyle,quality,valueisourgoalforourcustomersandwewanttobethepreferredchoicewhentheywanttocomeintobuyanything.





Great,thatisveryhelpful.Thankyou.

Operator :

OmarSaad,EvercoreISI.

OmarSaad (Analyst-EvercoreISI):

Marvin,Iwantedtodiginalittlebitfurtheronsomeofyourcommentsaroundtheprivate-labelcreditcard.Itsoundslikethatisacceleratingalittlebitespeciallywiththeexpansionintotheappliances.

Ialsothinkthereis--correctmeifIamwrong,therehasbeenaslightchangeintheloyaltyrewardprogramandhowtheconsumergetstheirrewardsinthatprogram.Maybeyoucouldelaborateonthatifyouareseeinganykindofearlyresultsonthatsideaswell.

Andwiththeaccelerationofappliances,doesitchangeyourtimeframeofwhenyouthinkyoucouldgettothemoreindustryaverageprivate-labelcreditcardpenetration?


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.


Andthen,Marvin,couldyoumaybeelaboratejustalittlebitmoreonthechangesintheloyaltyprogramfromtheconsumer'sperspective,howitisdifferentthanitwasbeforeandthenwhyyoumadethosechanges?





Well,Ithinkoneofthekeychangesistheexpirationofpoints.Inthepastourprogramwasveryconfusing,wedidn'tleveragethedatarealwell,ourpointsexpiredandthecustomersdidn'treallyembraceit.Soitwasanexpensiveprogramtooperate,itwasaconfusingprogramtoarticulateandthatisabadequationforanyretailertohavewithaconsumerbase.

Theotherpartthatwechangedwaswewantedtogainmorebenefittoourcreditcustomers.Soifyouareacreditcustomerwewantedyoutohaveagreaterportfolioofbenefitswhichisalsoveryimportant.Andcandidly,wearepilotingdifferentprogramsaroundthecountryjusttocontinuetogetareadonit.

ThatisoneofthereasonswhyIamhesitanttogetintoatonofdetailbecausewearestilltryingtounderstandwhichcomponentworksandwhichdoesnotwork.Butoverallthebiggestchangeispointsnotexpiringanddramaticallymorebenefitsforourcreditcustomerssowecanincentthemtousecredit.

Butmoretocomeand,again,wearepleasedwiththeearlyresults,butwewanttomakesurethatwedesignaprogramthatwillreallyresonatewellwithourconsumer.


Thankyou,goodluck.

Operator :

Thankyou.Andthatisallofthetimewehaveforquestions.IwouldnowliketohandthecallbackovertoCEO,MarvinEllison.Youmaybegin.


Thankyou.Again,thankyouforthequestions.Welookforwardtoupdatingyouonthecontinuedperformanceofourbusinessonournextearningscall.Thankyou.

Operator :

Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.

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J.C. Penney Company (JCP) Earnings Report: Q! 2016 ... · J.C. Penney Company (JCP) Earnings...

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Transcript of J.C. Penney Company (JCP) Earnings Report: Q! 2016 ... · J.C. Penney Company (JCP) Earnings...