JC Penney 3Q13 Earnings Call Notes

posted in: Notes | 0

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“Let me start off by saying that the turnaround of J.C. Penney is beginning to take hold. We’re making significant strides toward restoring J.C. Penney to its rightful place in retail”

“Comp store sales improved by 710 basis points from last quarter, ending the period down 4.8% year over year.”

“Importantly, we reported positive comps in October”

“I’m pleased to report that our performance in November to date, fueled in good measure by our biggest sale of them all, is consistent with the improvement momentum we experienced in October.”

“Our margins are not yet improving as much as sales, but we are making progress. For the third quarter, gross margin was 29.5% of sales compared to 32.5% in the same period of last year. However, as with sales, gross margins improved sequentially throughout the quarter.”

“Gross margin in the period was impacted by additional markdowns taken to sell through inventory associated with the company’s previous strategy”

“The good news, however, is we’re putting back in place the components necessary to return to historical gross margin levels.”

“our suppliers and vendors. Their support for us remains strong, and contrary to inaccurate reports, has not wavered over the past several months.”

“Overall, fixing home has been a challenge. That also means it brings opportunity for improvement and there’s upside in this business, and we are pleased we’re moving in the right direction.”

“cp.com is performing very well across the board. Sales for the quarter were up 24.5% year over year ”

“The positive energy in our stores is inspiring, and is the direct result of the strides we are making to bring back our customers. Our associates are feeding off this progress and they’re doing everything they can to help us win.”

“Short term borrowings are $650 million, down from $850 million in the second quarter, due to the voluntary repayment of $200 million under the revolving credit facility. This repayment reflects management’s increasing confidence in the progress of our turnaround.”

“Our operating cash flow for the third quarter was a use of $737 million. This reflects a planned increase of $592 million in inventory, which includes restocking of basic and private branded categories as well as our typical build of seasonal inventory in preparation for holiday as part of our turnaround strategy.”

“n the last several calls, we’ve identified that we had 30 major issues to address, and I’m pleased to say that well over two-thirds of those issues have been addressed.”

“in the previous strategy, depleted a good portion of the private brand proportion, and we now are very close to the desired level. That and editing out the attractions and concepts that didn’t work, we believe are the biggest upside for the margin going forward.”

“Having said that, there’s still several margin components that are weighing us down, the biggest of which is, of course, the discontinuation of some categories and negotiating with various partners to get out of things that didn’t resonate with the customer. These are nonrecurring, and frankly, once they’re out of the arithmetic of margin, we feel quite confident.”

“I would like to point out, since there’s a lot of people saying that we are “giving the merchandise away”, there’s no remarkable difference between the margins we’re attaining on promotional markdowns through our major events than there was in 2011. So that’s just not a fact, and we’re quite comfortable with our promotional markdowns, promotional strategy.”

“I’m not sure, in the history of retail, that anybody’s ever taken the entire assortment and changed it while it’s still open.

And frankly, it’s been very difficult to clear the merchandise that didn’t resonate with the customer the first time. And then obviously our traditional customer coming back, it particularly didn’t resonate with that customer. So it’s been difficult, and some of it’s had to be sold under cost. So that’s what the deterioration has been.”

“customers only come to department stores six to 12 times a year unlike a weekly shopping experience at a big box discounter, so it takes a while for the customer to realize we’re back in business, that we have the aesthetic they’re looking for, the lifestyle that they’re used to, the price promotion that they enjoy.”

“When we looked at the revolver, we had drawn the $850 million and we felt with our cash balances well in excess of $1 billion, that it was time to start to look at the capital structure and the amount of interest expense that we’re paying. And as our confidence continues to improve, we’d like to pay that down. That liquidity is still available to us should we need it, but felt like it was time to begin reducing that revolving balance.”

“it’s been easier to restore the conversion, because we got the inventory back in the store at the beginning of back to school. It’s been hard to keep waiting for the customer who hasn’t been back yet to come to the store. But as we said, the “Biggest Sale of Them All” was probably the first big opportunity we saw the vast majority of customers that traditionally shopped at J.C. Penney.”

“we listen pretty carefully to the customer. The customer will tell us exactly what they want in the store, and they’ll be able to help us on where it should be displayed.”

“So we actually have no basic concerns about the condition of the size of our inventory. We’re quite comfortable. As a matter of fact, at our forecast meeting with all our divisional merchants, I think across the board everybody feels they have the right inventory for holiday and for getting ready for spring.”

“Customers love to shop for home, but they need to understand what’s new, what’s a great value, what’s good/better/best by category. That was blurred and very difficult to really understand as you walked the store.”

“we also are respacing some of the key businesses. We are the number one soft window retailer in America, and we unfortunately had reduced the space for that category. Luggage, another very profitable key category, was underspaced.”

“When we planned the fall season, we really didn’t see home as not contributing. As a matter of fact, we intended to have that be a plus as opposed to something that’s been difficult to manage.”

“Obviously if you lose $4.5 billion of the volume, you wouldn’t immediately go back and put all the inventory back to do $4.5 billion more. So we have to earn it back.”

“The good news is I think our teams are feeling it. Our supplier partners are feeling it, our associates at the store level are really excited about the fact that they see customers they haven’t seen for a while, and we’re consistently getting feedback that our stores look as good as they’ve ever looked. So I think inventory is not an issue for us. It’s an opportunity, not a problem. And we can easily get more inventory as the trend starts to return.”

“The real question in retail, as you well know, is if you overplan the sales, you end up having too high an expense and too much inventory. If you’re a bit cautious with the plan, you can always find a way to leverage the expense and to find additional volume by selling more regular price and promotional price and less at clearance. Those are time true approaches to running a retail business.”

“Our suppliers are more than eager to help us when we ask for help.”

“There’s no other hidden component of gross margin, and that’s why we’re so confident about the fact that they will return to our traditional levels.”