Penney (J C) (JCP) Earnings Report: Q1 2015 Conference...
Transcript of Penney (J C) (JCP) Earnings Report: Q1 2015 Conference...
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
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.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
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
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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.
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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.
NeelyT amminga(Analyst-PiperJaffrayandCompany):
That'shelpful.Thanks,MikeandEd.
Andthenjustafollow-upquestionforMarvin,ifImay.Someoftheinitiativesyouweretalkingaboutaroundassortmentplanningtools,etcetera,itsoundslikethathaspotentiallyreallydeepimpacttothebusinessoverthelonghaulwiththemerchantorganizationandtheplanningteam.
Butthatalsofeelslikethatisn'thappeningmaybethisyear,thatyougetthemomentumgoingthisyearandthenintonext.Couldyoujusttalkalittlebitmoreabouttheopportunitythereandthetimelinerelatedtojustcapitalizingsomepriorinvestmentsthatyouhavealreadymadeandjustputtingideasintoaction?Thatwouldbehelpful.
MarvinEllison (President,CEO-Designee):
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.
NeelyT amminga(Analyst-PiperJaffrayandCompany):
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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.
DavidGlick(Analyst-BuckinghamResearchGroup):
Thankyou.
MarvinEllison (President,CEO-Designee):
David,ontheSG&Asavings,Ithinkyoutalkedabout,too,thatweknowthatwecangainefficienciesonadvertising.Wejustthinkit'sallaboutmoreefficiencyinhowwegetthemessagetothecustomer.
Weknowthatinthefirstquarterwewereabletoreduceouradvertisingspendbyhavingmoreimpressionstoourcustomersbecauseweleverageddigitalmediamoreefficiently.That'satransitionfor
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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.
DavidGlick(Analyst-BuckinghamResearchGroup):
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?
DavidGlick(Analyst-BuckinghamResearchGroup):
Soincludingthecashyougeneratein2017,youseeareductionof$300millionto$500millionthroughtheendof2017?Oristhatnotincluding2017?
EdRecord (CFO):
Endof2017.
DavidGlick(Analyst-BuckinghamResearchGroup):
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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.
MarvinEllison (President,CEO-Designee):
Matt,thisisMarvin.
I'lljustaddtwopointsonthetrafficversusticket.Ithinkit'salsoimportanttonotethatourpoint-of-saletransactionswerepositiveforthequarter,whichisveryimportantbecausewhethertrafficinthemallisupordown,it'simportanttoknowournumberofpurchasesthatoccuryearoveryearandquarteroverquarterinourstore.Andwe'repleasedwiththefactthattheywerepositive.
AndIthink,justgoingbacktomypreparedcommentsonHome,itcan'tbeoverstatedtheimportanceofjustbeinginstock.Homeisahugecategoryonline.Whenthatbusinesswasimpairedinthepreviousstrategy,itdirectlyaffectedtheonlinebusiness.Sogettingbackinstockinstoreandonline,willbekeycomponentstogettingthatbusinessbacktofullhealth,andweareheadedintherightdirection.
MatthewBoss (Analyst-JPMorgan):
Andthenjustonequestionfromapricingstandpoint.Iknowprivatelabelmarginswerecutversusthehistoricalspreadwithnationalbrands.Howshouldwethinkaboutthisopportunityasweconsidersomeofthecompetition--whetherit'soff-price,fastfashion?Doyoustillfeelcomfortableinrecapturingthat
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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.
MatthewBoss (Analyst-JPMorgan):
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.
MarvinEllison (President,CEO-Designee):
Lorraine,thisisMarvin.
AndthepointI'lladdontheomnichannelandCapEx,ifyoutakeMike'spointaboutbeingaformercatalogretailer,thereisnotalargebrick-and-mortarretailermakingtheomnichannelconversionthat's
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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.
LorraineHutchinson (Analyst-BofAMerrillLynch):
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.
LorraineHutchinson (Analyst-BofAMerrillLynch):
Thankyou.
Operator :
KimberlyGreenbergerwithMorganStanley.
KimberlyGreenberger (Analyst-MorganStanley):
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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.
KimberlyGreenberger (Analyst-MorganStanley):
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.
MarvinEllison (President,CEO-Designee):
Kimberly,thisisMarvin.
ThepointI'lladdtothatcommentisifyouthinkabouthaving1,000-plusstoresgeographicallylocated,whethertheyaremalloroff-mall,whenyoucanprovidebuyonlinesame-daypickup,thosestoresbecomemorevaluableassetstothecustomer.Aswethinkaboutenterpriseinventoryandfulfillingoutofstores,aswementionedinthepreparedremarks,thosestoresbecomeamorevaluableassettotheCompanyandtothecustomer.
ToMike'spoint,wearenotignoringmalltrafficinourtraffictrends.We'rejustsayingasomnichannelbecomesamoresignificantpartofourbusiness,thosenumbersaregoingtostarttohaveadifferentlevelofimportanceinhowweassortthesestores.Howweallocateinventoryfortheomnichannelgrowth
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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.
KimberlyGreenberger (Analyst-MorganStanley):
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
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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.
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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
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EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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thebeginningoftheyear.Wenowhavetheconfidencetoputintoourguidance;wefeelgoodaboutexecutingthat.Weknewwehadtoperformaboveourguidancetohitthefreecashflowearlierandexpectedtodothat,andnowwearewithintheguidancerange.
Butinadditiontothat,wecontinuetomakeinvestments,asyousawintheCapExnumbers,butalsoininventoryaswerolloutinitiatives.Theshoeinitiativewetalkedabout.Aswegomoretoopen-sell,weexpectaverypositiveconsumerresponsethere.Andweboughtitthatway.
Sowearemakinginvestments.MarvintalkedaboutgettingbackintostockintheHomestore.Wecontinuetomakeinvestmentsininventorywhereweseeresponseorareturnonthat.
Soit'stwofold.Oneis,weknewitdidn'tquiteaddupwhenwedidittobeginwith,andnowwe'reupinsomeoftheinvestmentsbecausewehavemoreconfidence.
MattMcGinley(Analyst-EvercoreISI):
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.
MarvinEllison (President,CEO-Designee):
CompanyName:JCPenneyCoIncCompanyTicker:JCPSector:ServicesIndustry:Retail
EventDescription:Q12015EarningsCallMarketCapasofEventDate:2.71BPriceasofEventDate:8.71
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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.
MattMcGinley(Analyst-EvercoreISI):
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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