JC Penney 4Q16 Earnings Call Notes

Marvin R. Ellison

Elements of the retail environment remain uncertain

” While we were very optimistic on our growth initiatives on 2017 plans, our 2017 guidance is conservative as we expect elements of the retail environment to remain uncertain. Clearly, if we see improvement in the environment relative to our current expectations, we’d expect to beat our sales guidance. But we want to plan the business conservatively based on what we saw in 2016.”

Able to talk about earnings again

” In the past, because we did not have positive earnings, EBITDA was really the only measurement we could track toward. But because we expect to deliver positive earnings for 2017, we’ll continue to talk about earnings as our key guidepost, but EBITDA remains important.”

We were slow to react to the casualization of America

“But I think we were slow to really adjust to some of the trend changes in the – I call it the casualization of America. And we were one of the last retailers to really get into the activewear trend in a big way. We feel great about the changes we’ve made specifically in activewear with Nike and adidas. And also our Xersion private brand activewear category is performing exceptionally well. So, it’s all about transitioning to a good balance between career and casual. It’s also about looking at the fact that we said we were over-assorted.”

No reasons why the consumer should be pulling back

” on more of a big picture perspective on kind of where we are in this industry, I’ll give you my thoughts. I think the state of the consumer from every measurement we look at, I mean, that there are no red flags out there why the consumers should be pulling back. Unemployment is stable. Wages are relatively up. And so, we don’t see anything from a macro standpoint that gives us any concern. There’s been some noise about delayed tax returns in February, but we know that those things will balance itself out throughout this quarter. So, it’s not something we’re spending a ton of time on.”

JC Penney 3Q16 Earnings Call Notes

J. C. Penney’s (JCP) CEO Marvin Ellison on Q3 2016 Results

Up in October

“We would say low single, mid-single digits for October. And because this is such a unique selling period, we are not going to get into inter-quarter results because as you know we have so many huge selling days in front of us. But what I will say is that when we think about 500 plus appliance showrooms net new, 61 net new Sephora locations, 350 net new center core environments, BOPUS in all stores, and I can go on and on and on, just timed for holiday, we feel great about our sales possibilities for the holiday season and the fourth quarter.”

Edward Record

Unseasonably warm weather

“Thank you, Marvin, and good morning everyone. As Marvin said earlier, the third quarter was clearly challenging from a top line perspective given the headwinds we faced primarily from the unseasonably warm weather in September and the in-store disruptions from our appliance rollout. While our apparel businesses were negatively impacted, we had strong performances in several non-weather dependent categories to help offset this softness.”

JC Penney 2Q16 Earnings Call Notes

J. C. Penney’s (JCP) CEO Marvin Ellison on Q2 2016 Results

50% of dot com transactions touch the store in some way

” over 50% of our dot com transactions somehow touch the store and that is before BOPUS, Buy Online, Pick Up In Store Same Day has been fully received by our customers. We’re still early days in that initiative but the early results are significant.”

Better trajectory coming out of July

“I think the most important thing, is you go back to the comments that both Ed and I made, every single division positive comp in the month of July and we had positive customer traffic. So that basically reflects that we had strength across the board. We had strength in home. We had strength in Sephora. We had strength in our custom deck business category which we don’t talk a lot about and we had strength in apparel.

We were not shy in the first quarter discussing the struggles that we face in women’s apparel and jewelry in the first quarter. And not only did those businesses improve dramatically in the second quarter women’s apparel positive comp in the month of July. And so we’re pleased across the board and we think that the trajectory coming out of July is going to be positive for us and hopefully maintain us for the rest of the quarter.”

Starting to think that some of the weather related patterns may be a new normal

“Well, I think, if you go back the last couple of years in apparel retail, I mean, we’ve always appear – assumed that the year that we’re in is an anomaly and I think we’re realizing it may be a new normal from a trend standpoint. So we’re going to plan accordingly as it relates to heavy fall and winter goods to make sure that we don’t put ourselves in a tough position exiting out of the fourth quarter.”

Have to show the strategic relevance of a 114 year old retailer

“Well, I think Paul, Wednesday is really going to be about outlining the really strategic future of JCPenney. If I’m an analyst or an investor I want to understand the strategic relevance of 114-year-old retailer in this very dynamic marketplace. And so, what I hope to do next week is to introduce what I think is one of the best management teams in retail to our analysts and investors, but also to lay out in a high degree of detail how we think we can win not only in 2016, but over the next two to three years and while we believe that we have some key strategic initiatives that will allow us to be a much better retailer and to be able to take market share and drive profitability in this very dynamic retail environment.”

Edward Record

Run a lower margin in dot com

“Sure. So the first is obviously we run lower margin in dot-com. The actual margin on the product is roughly equal to our brick-and-mortar. But when you put in shipping, it has a negative impact and as we continue to drive dot-com business significantly faster than our brick-and-mortar business, we’re seeing a mix impact there. We don’t think it significant moving forward. But it is there, and I think our retailers continue to experience that. From an EBITDA margin standpoint, fortunately, our dot-com business is profitable. So we feel really good about that. And so as we continue to grow that, we don’t expect it to be terribly dilutive to our EBITDA margins as they continue to improve as well. So we are profitable there and we think we can continue to drive our EBITDA goals while driving dot-com sales.”

JC Penney at Piper Jaffray Conference Notes

Marvin Ellison – CEO

The consumer is in pretty positive shape

” what we’ve determined pretty consistently is that the consumer is in a really positive shape from a financial standpoint. The consumer tells us that their wages are up, their job stability is better than it’s been in many years. They have price appreciation in their home. They have more money in their savings accounts than they have had quite a while and energy prices although up are still down relative to last year. So overall, the consumer is telling us, they feel really good about their personal economic position.”

Consumers are also telling us that they are pulling back on spending because of some of the uncertainty that may exist

“What they’re telling us is that they are pulling back a little bit on apparel related spend because they are spending more on experiences and entertainment but also because of some of the uncertainty that may exist in the broader macro that they can’t predict.”

The JC Penney of 2010 will not win in 2020

“one thing we’re pretty sure of the J.C. Penney of 2010 will not win in 2020. That business model can’t work for the future. There are elements of that business model we are very confident that can work and specifically that element is private brands. It’s a huge competitive advantage that we have as a Company?”

Online is only a modern view of what catalogue was 50 years ago

” we had to create a true omni-channel experience. I know the omni-channel term is overly used in retail but for me it’s very appropriate because JCPenney was once a dominant catalogue retailer. So, you could argue that JCPenney was one of the first omni-channel retailers between brick-and-mortar and catalogue. And online is only a very sophisticated modern view of what the catalogue was 50 years ago. And that was totally lost in the leadership transition and change in philosophy.”

JC Penney 1Q16 Earnings Call Notes

Marvin R. Ellison – Chief Executive Officer & Director

Disappointed in our results

” The first quarter was clearly challenging from a top line perspective, and we’re disappointed in our results relative to our own expectations. As you’ve heard throughout the week from other retailers, top line sales were negatively impacted by many factors outside of our control”

Consumer is spending more dollars on experiences and beautifying their home

“And candidly, our over-reliance on apparel hurt us in times during the first quarter, when weather patterns were not conducive to apparel sales. And the consumer was simply spending their hard-earned dollars on experiences, entertainment and to beautify their home. While apparel will always be important to JCPenney, we’ve conducted a detailed review of our customer current and future shopping patterns, and we’ll start to strategically shift our merchandising mix to sell more products and services that correlate to where customers are spending the greater percent of their dollars.”

Trend got a little bit better in the end of April

“Thanks. It’s very, very basic approach. I mean, we’re taking a hard look at the trend. Obviously, as we mentioned, the first part of April was very challenging, but we had positive comps towards the end of the month, and we had a positive selling environment for that whole Mother’s Day selling period. So we left the month of April and entered (27:35) the month of May with some confidence. ”

We feel like we outperformed our peers in the tough environment

“As we listened to our peers in the competitive space, we actually feel a little better that we really actually outperformed based on the headwinds that we were up against. So I would say, there are always things that we look back on that we could have done differently as it relates to timing of promotions, as it relates to the efficiency of our execution”

Customers spending on entertainment, experiences

“when we look at our categories, and we look at what customers are spending, you’ve heard the data all week, it’s entertainment, it’s experiences, it’s home beautification, and apparel was down because of the share of wallet with other places.”

Pleased with the Mother’s Day selling season

“We were pleased with the Mother’s Day selling season. And that’s something that actually gave us confidence, at least coming out of the first quarter, to hold our sales guidance for the year. We continue to work each day, each week. But for that entire selling season, Mother’s Day, we feel good about the progress we made.”

JC Penney 4Q15 Earnings Call Notes

J. C. Penney (JCP) Marvin R. Ellison on Q4 2015 Results

4.1% comp

“Comparable sales were up 4.1% in the quarter and accelerated to a two-year stack of 8.5%. In fact, this represents our ninth consecutive quarter of growth, when you take into account that our flat comp from Q3 of last year was positive.”

Regaining market share lost form 2011 through 2013

“we’re regaining market share from that was lost from 2011 through 2013. Our intense focus on value is bringing these customers back to JCPenney.”

Have invested in better data processes

“And fifth, we’re using data to our advantage. Although many results will cite big data as a growth vehicle, I would argue that no modern retailer was as far behind with using data as JCPenney between 2011 and 2014. In the first half of 2015: our store assortments and pricing were not localized; our credit penetration was at an industry low; and our marketing strategy was outdated, which resulted in a low return on ad spend. Therefore, we recruited talented leaders in 2015 and began taking steps in the fall season to modernize our approach to customer and pricing data.”

Mid tier consumer has continued growth possibilities

“Before discussing 2016, I’d like to take a moment to discuss the moderate and mid-tier consumer. This is the U.S. consumer with a household income of approximately $60,000 per year, and a very important customer to JCPenney. Contrary to some of the negative macro data that’s been discussed in the marketplace, our data shows that this mid-tier consumer has continued growth possibilities in 2016.”

In the process of localization

“we are in the early stages of what I call localization, from a true assortment plan that is customized from a pricing and from a locale. We put some structure in place. We have leaders on board that’s kind of been there, done it before, that will work for our existing team.’

Digital is more efficient way to communicate with customers

“Mary Beth West and her team have done a really nice job of taking us from a more traditional, not very modern, view of how we market and talk to customers to shifting to more one-to-one communication with more digital advertising, more focus on social media, paid search, direct mail, et cetera. And, as we all know, that a more efficient way to communicate and it’s less costly than traditional print or TV.”

Price competition online is very competitive

“I think you are very well aware that the most aggressive pricing environment in retail exists online, because of all the dynamic price scraping that exists and the numerous times, specifically pure-play e-commerce sites can change prices throughout the day. ”

We think private brands gives us an advantage online

“The good news for us is that, as we talk about private brands and the importance of private brands, we believe that it gives us a tremendous advantage of going up against pure-play e-commerce competition because we are going to be exclusive sellers of certain categories. And as we ramp that up, and we are aggressive online, we’re not going to face the same pricing pressure that other retailers will face. So we’re excited about it. We have a lot of work to do, and we’re going to be really focused on that.”

Edward J. Record – Chief Financial Officer & Executive Vice President

Don’t need to pay Visa or Mastercard for our credit customer

“Credit is a huge driver of both profitability and sales for us. As I mentioned, our credit customer spends about two and a half times more than our non-credit customer. They attrite half as much. They like us twice as much as the non-credit customer. And obviously, we get revenue from it and we don’t have to pay Visa or MasterCard for that transaction. So it is really a win-win-win for us, so we continue to be focused on driving our penetration. We know we lag the industry. We’re slightly under 40% and the industry is high 40%s to low 50%s, depending on who you want to benchmark.”

JC Penney 3Q15 Earnings Call Notes

J. C. Penney (JCP) Marvin R. Ellison on Q3 2015 Results

3Q very challenging macro

“The third quarter was clearly challenging from a macro perspective. But at JCPenney we focus on controlling what we control, and this focus is represented by our ability to grow sales by 6.4% in the face of unprecedented warm temperatures”

We were pleased with back to school performance

“we were very pleased with our sales performance over the all-important back-to-school selling period.”

Improving in the science of retailing

“we’re focused on improving and enhancing the science of retail at JCPenney. As I mentioned before, we are great at the art of retailing, areas of design, styles, store aesthetics, and merchandise presentation. And we’re not very good, but improving, in what I call the science of retailing, areas of data analytics, inventory replenishment, assortment and item planning, and process execution.”

We’re winning, taking back market share

“the exciting takeaway for me is that we’re winning versus the competition. We are reclaiming market share despite significant opportunities that remain to improve the way we use data and customer analytics.”

Reducing pension plan obligations by 1/3

“We recently announced a series of pension transactions that materially reduced the company’s pension obligation by between $1.250 billion to $1.750 billion. These proactive actions further the company’s objective of de-risking the plan and reducing pension volatility while improving our long-term risk profile.”

We already have 5m square feet of distribution center space thanks to our heritage as a catalog retailer

“At JCPenney, we have a rich heritage of being a catalog retailer. Therefore, most of our Omnichannel infrastructure is in place. As an example, we have three large .com distribution centers strategically located with approximately 5 million square feet of space.”

Transaction and traffic was up despite macro

“transaction and traffic was up, so we’re excited about that. What I can tell you is although we don’t give in-the-quarter sales guidance, where we have more moderate weather, we’re performing better. ”

Working hard to reduce labor activity in stores that is not going to serving customers

“we are working very hard to make sure that we are reducing the non-value-added activity that exists in our stores, the tasks that have nothing to do with serving customers or driving sales. As we reduce those tasks, we’ll have the ability to reallocate those activities to the sales floor to drive improved service and to make sure that we continue to take advantage of conversion opportunities.”

We really believe in radio

“digital impressions are up dramatically over prior years. But so are radio. We really believe in radio and radio impressions will be up dramatically as well. TV is up slightly and then, direct mail and preprints are down a little bit to help pay for the digital and radio impressions.”

It’s good to tie instinct with data

“we are going through the process of building a team and building a database so that we can have a more thoughtful approach to elasticity, to liquidation schedules, to promotional cadence and understanding the true value of promotions. A lot of things that we do are from pure instinct. The good news is we have a lot of instinctive knowledge here. But what I’ve learned in retail is instinct, that tie with data is very powerful. And we have instinct without data and we’re building data to leverage the instinct.”

JC Penney 2Q15 Earnings Call Notes

Betting on Sephora to anchor center core growth

“we have said many times before that Sephora anchors our center core growth strategy comparable store sales through our Sephora inside J. C. Penney locations grew double digits in the second quarter. We have Sephora in over a half of our stores now and is also available on jcp.com. I’m very pleased with this new digital expansion of our partnership that we launched this past quarter. Sephora not only drives traffic in sales of J. C. Penney it serves as a point of differentiation that cannot easily be replicated in our industry.’

Home Depot and Target execs joining

“I’m also thrilled that we just attracted two key executives at J. C. Penney as part of our Omnichannel efforts. Mike Amend formerly the Vice President of online, mobile and omnichannel for The Home Depot joined our team on August 4 as Executive Vice President of Omnichannel. Additionally Mike Robins formerly the Senior Vice President of Global Supply Chain for Target’s U.S. stores joined our team this week as Senior Vice President of Supply chain”

Committed to becoming omnichannel retailer

“we are committed to become a world class Omnichannel retailer. We understand the change in dynamics of retailer, we also understand that attempting to recreate a free 2011 J. C. Penny would not work in this new Omnichannel world, therefore are adjusting our business model and our leadership team to compete on this new Omnichannel retail landscape.”

We need to work on the science of retailing

“Where we need work is and what I call the science of retailing. Our size optimizations is not good, our replenishment in flow back is not efficient. We have significant improvements we have to make in the supply chain to lower the cost and increase the efficiency. We have to make sure our marketing is less broad and more one-to-one which is a cost effective and also creates a high return on ad spend.’

Going to reap the benefits of our Oracle systems

“I can’t overstate the importance of merchandizing systems that we are going to reap the benefits from Oracle because it’s going to provide a lot more efficiency”

I come from a world where the low cost retailer will always win

“We know that we have to aggressively look at cost and we started I think the second quarter performance should reflect that we are taking it very serious stands on making J. C. Penny a more efficient in low cost operator. I come from a world where low cost retailer will always win and so we are taking a very hard look at everything that we are doing to ensure that we are focused on an SG&A percent and SG&A spend that is relevant for the business model that we currently operate, not that we operated pre-2011.”

We don’t have to build DCs because we were a catalogue retailer

“From a CapEx stand point we have a tremendous advantage, many retailers that are ramping up into an omnichannel world, they have to make significant capital investments in constructing dot.com distribution centers, because we are former catalogue retailer. We already have the supply chain infrastructure in place to leverage. ”

Going to start looking at a growth dollars per square foot basis

“We’re going to also take a hard look at every single thing that we sell and we’re going to start look at the business not only from the sales per square foot for growth dollars per square foot to ensure that we are very efficient, but at the end of the day the ultimate goal is can we create shareholder value with every decision we make to ensure that it is accretive to the overall business.”

Spending more time listening to how customers think of us

‘we spend a lot of time since we brought on our new Chief Marketing Officer Mary Beth West asking customers what they think rather than the leaders of the company sitting around in a conference room deciding what we think the company should be.”

Private label is increasingly important in omnichannel

“I can’t minimize the importance of private brands as we strive to be a world class omnichannel retailer, again any retailer that is increasing their penetration on national brands while increasing their percent of online business will have to deal with some very capable, very capital intensive competitors of who are great at price analytics but as we continue to focus on making our sourcing and private brands more efficient, we believe we can become on omnichannel retailer and protect yourself of a profit and from a value standpoint unlike most retailers in our space.’

Even though investments weren’t accretive to the business, the stores don’t look tired

“although some of the capital investments were not well thought out and they have not been accretive to the business, they have done a really nice job of cleaning the stores, brimming the stores and making them more modern. So we had an advantage that we put a lot of capital into the business over the course of last five years and so we are not so committed to going in and fixing stores that are broken out in all because we fix a lot of areas.”

JC Penney at Piper Jaffray Conference

Why the new CEO is there

“I grow up very modestly. So I have a keen understanding of the customer segment. We are mid-tier department stores serving, moderate household incomes and having grown up in a very modest household with quite a number of siblings, my mother spend a lot of time trying to find ways to make intimate as she would call.

So the customer segmentation resonates very well with me. There was a J. C. Penney’s in my nearest town from my home and small town in Western Tennessee’s. So I’ve always been acquainted with the company and the culture means something to me.

I think secondly you always look for upside opportunity. And for me I couldn’t find a greater upside opportunity for my advantage point. And then a company were the financial downturn had been specifically driven by poor strategic decisions. I’m not a disruptive competitor, not a change in the economic landscape, but strategic decisions that simply did not work.

So my advantage point and my thought was very simple, you have an iconic 113-year old company with a strong dominant brand that still exists. You have a wonderful portfolio of private branded product, which for any brick-and-mortar retailer competing against pure dotcom companies of private branded portfolio is significantly important, but also there was upside opportunity to correct the problems of the past and implement some strategic initiatives that will help the company transform itself to the future and I felt like it was an opportunity to good to pass all.’

We have the same number of active customers today as we did in ’11

“we had 87 million active customers in 2011. We have 87 million active customers today. The reason the volume is not the same as frankly the businesses that were impaired have not yet been fully restored”

Second mover has its advantages too

“We are behind in our omnichannel strategy, but we don’t look at that as a disadvantage because I think the second-mover advantage is so powerfully strong. Having worked for Home Depot where we literally started from scratch in developing an omnichannel and I’d argue now that Home Depot has one of the best omnichannel experiences of any brick-and-mortar retailer.

I learned a lot of lessons on the things that worked and did not work in a retail environment. All of those things are not transferable to J.C. Penney because we have different types of retails, but retail it’s fundamentally retail. And so finding a seamless connection between dotcom to store, mobile and desktop is critically important ‘

Private brands are a big asset

“J.C. Penney is very fortunate that our private brands in most cases from our customer are viewed at the equal status and some kind of superior status on national brands. And the good news is we have great national brands, it’s not a key national brand that customers really desire that we don’t have the ability to sell in our stores.”

Mike and his team saved the company

“I think it goes about saying that Mike and many of the executives will never receive the credit they deserve for the work that they put in place in the last two years. To say that he was handed a very difficult situation would be and understatement. And I don’t think there are too many executive leaders that could have stepped into that situation at the time he did to literally save the company.”

Have to get better at targeting e-marketing campaigns

“I receive a lot of email marketing I delete most of it. Because it is not targeted to me is just a blast. What effective companies and there are companies out that are really good at this. Can take your buying patterns and they can get into a predictive modeling. If you bought these things in the past you will also like these things and make it really truly intimate and one-to-one. And that’s something that we have to get better at and we are very conscious sort of fact we have to get better at it. “

JC Penney 1Q15 Earnings Call Notes

Switching from Defense to Offense

“2015 is off to a great start at JCPenney. This year, we are switching gears from defense to offense. We’re focused on taking back market share and restoring the profitability of our business.”

Strong across all regions

“Geographically, all regions posted positive comps this quarter, with the West and Central regions posting the highest gains over a year ago. Easter was strong for us across the board, with the apparel businesses driving significant growth in Easter categories compared to a year ago.”

Saw more customers shopping online shipping to store

“we saw gains associated with the continued development of our omnichannel capabilities. For example, J.C. Penney offers customers the ability to buy online to ship to any store in the Company. And in the first quarter, we saw more customers choosing to buy online and ship the order to one of their favorite JCPenney stores. This results in more trips and add-on purchases when they visit a store to pick up the order. And on average, a buy online ship-to-store customer will purchase additional merchandise 20% of the time when they visit a store.”

Omnichannel customer shops more frequently than brick and mortar

” an omnichannel customer shops 2.5 times more frequently in a year than a traditional brick-and-mortar customer. So, it is essential that we continue to convert store-only customers to omnichannel. And later this year, we’ll be rolling out buy online pick-up-in-store same day in several key markets with a Company-wide roll out planned for 2016.’

Using Oracle for better inventory planning

“We’re leveraging this significant investment the Company made a few years back to install Oracle Systems to enable us to optimize our sizing, merchandizing planning and localization of our assortment. The ultimate goal is to get the right product to the right place more efficiently which will reduce mark downs, improve our gross margin and gross sales.”

We’ve spent a lot of money on technology. We didn’t have to spend as much on infrastructure because of our catalogue business

“if you look in the slides we provided, you will see we made an enormous investment in CapEx over the last seven or eight years, about $4 billion between the Oracle tools, the investment in home remodel and the visual clarity that we added to the stores, as well as the number of IT investments in digital. So the other advantage is, we’ve had the infrastructure from our catalog operation. We haven’t had to invest in warehousing and additional capacity that some others have had to invest in.”

Refocusing CapEx on center core growth initiatives

“we are refocusing our CapEx primarily on enabling the growth initiatives in Center Core, in the footwear changes, in the Sephora investments and we think these are relatively quick pay back investments and we pace those over the next several years to be sure that we are ahead of the plan to get to the 2017 EBITDA number”

We have a great catalog infrastructure already

“JCPenney is a company that has a great catalog infrastructure and so as we think about CapEx for omnichannel we are spending most of that on digitizing the infrastructure. So we are not building DCs, we are just trying to create platforms to digitally connect those DCs to the customers for what we call seamless transactions for them to purchase in-store, online, et cetera.”

The omni-channel customer is the best customer

“I’m just saying in terms of looking at the industry survey for mall traffic versus our mall traffic, we tend to be a bit better than the metric which says that we’re more of a destination in some respects than the inline retailers. I think we all know that omni-channel is the key to getting customer loyalty and greater spend. So it’s almost not as important as to exactly where the traffic is where do they shop, we know that somebody shops omnichannel slightly be three or four times, valuables of the customer that somebody just comes to the mall or just shops online. So we track it clearly, we prefer obviously success across all channels, but ultimately it’s the omni-channel customer that’s going to be the best customer for us.”

Real estate portfolio is not a top priority for us right now

“we continue to look at what’s happening in the industry between the sale leasebacks and the REITs that our competitors are doing. We spend a lot of time looking at that and we’ll continue to look at it, but given the real estate turmoil and just the overall complexity of those deals, there is a tremendous amount of complexity there. As Mike said, it’s not top of our priorities right now. We’re focused on driving EBITDA and driving topline results and we’ll continue to look at it and there may be an opportunity for us down the road, but it’s not top priority right now.”