J.C. Penney Earnings Call Insights: Next Priorities and Guidance

On Wednesday, J.C. Penney Co Inc (NYSE:JCP) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Next Priorities

Mike Kramer – COO: It is a net number. Ron and Michael are going to be inventing and we’re going to be investing in the business. So there I do anticipate increased cost structure, but the $900 million is a net number.

Liz Dunn – Macquarie: Then just one more if I may and then I’ll let the rest – for Michael, Francis – sorry that can get confusing. In terms of, it seems like there is a lot on home, a lot on contemporary and a lot on denim. What are sort of your next priorities for merchandise?

A Closer Look: J.C. Penney Earnings Cheat Sheet>>

Michael Francis – President: Those that I shared today do reflect areas where we have had gaps in our assortment in years past and clearly recognize the opportunity at hand to transform home. When we get into the next round of decisions, as it relates to both ideas that we’ve been exploring and some of the newness. I think you can expect to see a thoughtful review of legacy brands and heritage brands that we’ve had in place for years that will simply be reinvigorated or restored within our shop environment, as well as the same degree of thoughtful newness and excitement in every category of the store. So there has been a goal here to reach younger consumers, new consumers, but not at the expense of our loyal J. C. Penney customers and some of the heritage brands that have defined us for so many years. They too will be renewed within this new model as we get into 2013.

Ron Johnson – CEO: I could add on the inventory. Every company has a different philosophy toward inventory. A lot of people in retail have kind of have the old attitude pilot high and watch her fly. You’ve seen that in lot of stores, lot of inventory. This whole theme we all believe like Michael said turning the inventory creates a much better business model and this is a fundamental change for us and so we are tackling the inventory challenge this year. We’ve found the aged inventory, we hope there’s no more which will help us get through, but the big idea is to get the inventory turning faster with more frequency. That’s going to strengthen our balance sheet but it’s given us much more flexibility. And so this inventory is a major initiative of ours and it’s going to be profound how much cash that can generate for us. But when you think of that slide earlier about we are getting higher margin on our regular selling as our inventory goes down we will have less clearance markdowns. So getting that margin over 40% is really tied to an inventory thread, there is much greater flow and much lower absolute levels of inventory. So we are working very hard on that.

Matt Boss – JPMorgan: Matt Boss, JPMorgan. Can you talk about the store-in-store opportunity from the perspective of each of these brands should we expect them to be in all stores or is this a relationship in terms of a brand-by-brand decision.

Ron Johnson – CEO: Everything – we have a little over 1,100. We want to get as much as we can into all stores. But in most cases when we launch a shop it will go under our larger stores what we call our ABC stores, which total just under 700 and so we will go through that as we have the detail of most launches. But they will go into 700 stores in their full glory and the sizes will vary. We have three types of installations will do, our largest are called stores, like we are going to have Martha Stewart, where it’s almost had a complete storefront it feels like a big thing. Those are about 2,000 square feet they are very large and we will do those in home we will do them elsewhere but very selectively. We then do shops, which are a minimum of 500 square feet, and that’s a lot of space in a retail store. The third type of thing we have is called a boutique. A boutique is about 300 square feet and might not have all the walls but it gives you a very nice presentation that’s closer to what you’d see at Selfridges in the U.K. And so we have a variety of shops. We vary by products, things – how many stores that goes into but I count on about 700 stores for most shops.

Matt Boss – JPMorgan: My second question would be, did you see a difference in performance between you’re A and B doors as opposed to your C and D doors and any update on your thoughts around real estate in terms of some of these underperforming stores?

Mike Kramer – COO: Sure if you look at the – we track the performance A, B, C, D all the way down to E our smaller stores. Our best performance in the quarter was in our small time stores. So I think they took the time to really understand the pricing strategy. The performance in all other markets was virtually identical within 1% of the performance. We think that means we have broad-based opportunity to improve people’s understanding of pricing and drive traffic if that makes sense. At this point in time we continue to expect to operate all of our stores. We haven’t spent a lot of time looking at our productivity in stores that’s clearly a long term question. We’ve got to get into with Ben Fay starting next week, he’ll be responsible for store design, real estate and construction. So one of the priorities with his team is to really start to work and evaluate the portfolio. Ken Hanna is here to view that as well. So we’ll be able to provide more of an update on that going forward, but that has not been an area that we have put a lot of cycles into this early in the transformation.

Bill Dreher: (Bill Dreher) from (indiscernible). At the last meeting in January you mentioned one of your members mentioned that J. C. Penney could essentially have any customer demographic they wanted, can you give us a sense as to what you’ve seen over the course of the quarter and where you think that may be headed.

Michael Francis – President: Well I would say as we look at an initial data we are seeing whether it’s through credit card activation or frequency work, we have engaged, a younger customer, where we have seen an offset has been and over guessed particularly those who were so dependent upon the consistent stream of couponing through direct mail programs and our former royalty initiatives. At this early stage, it’s hard to say with precision how that mix is changing, but when we get into the back half of the year with the additional work we are doing to better manage our database and understand what’s happening with consumer preferences as well as changes we are making in assortment we expect will help ensure that we are onboarding new customers, we should be able to provide you with greater detail at our August session.

Bill Dreher: Just connected with that, you’ve announced the Tourneau store and that might have percentages of your stores they are really high demographic compared to your preferred customer. Will you skewing that merchandise selection towards the lower end like you do in the Sephora stores now.

Mike Kramer – COO: Yeah I think with all of the shop concepts, we are engineering the assortments that will be relevant and consistent with expectations for our customers. So yes, as pricing becomes an integral piece of the way we are building assortments and all of the examples I shared today including Tourneau.

Ron Johnson – CEO: We shared – we are kind of selective in which shops to share, because a lot of this we are keeping very confidential, but we want to show you the range of types of shops. So Tourneau is kind of going to do for watches as Michael said what Sephora did for cosmetics. It got us access to all the brands and a really wonderful shopping environment, we all know Tourneau, there’s no place to buy watches like here on 57th Madison. Everything is present right brand you have great assortments. The Tourneau team is working with all their suppliers and talking about which ones want to be connected with J. C. Penney and which were the right ones for us. We were clearly getting their price points we’d never been in before but we won’t be as high as 57th street. But again it’s a relationship there that brings us to watches, the same kind of benefit which has importance in our core strategy that we had in cosmetics, does that make sense. So we can do our retailer partners, we can be design partners. We take a design partner like (Indiscernible) and we do the sourcing, right. We can do big brands and that’s a real big part of our focus. Levi, Nike that want to put in strong statements. We can do shops in categories we are not in today and we will tell you about those going forward. There a variety of categories we are not in whether that’s in food and beverage or other hard line categories. So as we go forward you will learn more about our shop strategy but it’s really pretty unlimited once you create separate spaces for products and we are very excited about that. But for competitive reasons we only do too much of that today.

Carla Casella – JPMorgan Securities: Carla Casella, JPMorgan. Just one clarification. You mentioned you intended to generate about $1 billion of cash flow and you are going to put about $800 million into the shops. Is that $1 billion is that before CapEx or is that after?

Mike Kramer – COO: Before.

Ron Johnson – CEO: Before.

Carla Casella – JPMorgan Securities: Would shops be included in the CapEx?

Ron Johnson – CEO: Correct. What I’m trying to – well I want to make sure people understand this, during the transformation we are still generating significant amounts of free cash flow and we are investing in things that we think will provide extraordinary returns going forward, like our shop strategy. And so we think it’s really pretty – a pretty big accomplishment that during a year of so much change to the business model we generate cash that we can invest in the business and that’s the point we are trying to make.

Guidance and Comps

Charles Grom – Deutsche Bank: Charles Grom, Deutsche Bank. Just sort of on the same page on guidance, what’s the expectation for comps for the balance of the year? Are we thinking still down 15% plus given the SG&A pull forward of the $900 million?

Ron Johnson – CEO: We are not providing any sales guidance. What we said very clearly is we expect sales to improve as we go through the year and the reasons we have confidence in that is we are going to update our marketing meaningfully, which we think will get our message across. We think over time it’s just going to get better as people understand. Half the assortments will be new. The customer is already voting for fashion in the store. We see that in these first three months. Most of Michael talked about are changes in our content that update the fashion. Fewer key items because we are not driving the business promotions like you do with key items. We think that will help. We think inserting 10 shops – free standing shops in our stores will help the volume. So for those reasons we believe our sales will improve in the back half. But we are not going to provide guidance as to the pace of how that will improve or the exact number for the fall.

Mike Kramer – COO: And let me add to that, with the illusion that we are cutting more expenses because we anticipate, they are mutually exclusive. We are looking at efficiencies in the organization and simplification of processes. And we are going to go at the pace that we can to execute well and with the resources that we have. I’m confident based on what we have uncovered and the resources that I have to actually accelerate.

Charles Grom – Deutsche Bank: Can you maybe just shed some light on employee morale at the Company given all the job cuts and the changes to commissions?

Ron Johnson – CEO: Yes. I will take that. It is really – it is hard to know from where I sit. My instinct is there are a lot – I think most people embraced the change. The store employees love working in the store. It is a much better place to work. They talk about it every day. It is easier to take care of customers. They are not fighting at the registers. The stores are cleaner. Without the big Saturdays, like from the coupon days, we don’t have as much recovery. The employees love it in the store. As we went through the commission change, it is very clear that most employees are thrilled with that because during this year of transformation our sales are down. They were earning less money. We have reinstated their pay at last year’s run rate in 2011, so it is like giving them a raise in the middle of a transition. And they are now starting to work in teams. Most people love that. But they are going to be a percentage, whether it is 10% or 20%, who might see that as I missed the chance to earn even more. But I know with every bone in my body that a noncommissioned force will create better customer service, better teamwork over time. So I think anytime you go through a lot of change, you are going to have challenges morale. But overall, I’m pretty pleased with how the teams are doing and the ones I work with are very excited about where we are headed. You can talk to them here, but I’m not going to pretend that it’s easy at all, because we are putting through a lot of change.