J.C. Penney Earnings Call Nuggets: In Depth Review for Investors

On Friday, J.C. Penney Co Inc (NYSE:JCP) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Ron Johnson – CEO: I don’t know the specifics of the story of McDonough store and clearly we have different productivities. One of the things that’s interesting for us is that we hear anecdotally that people really love the new JCPenney – even the JCPenney they walk in today. All of our data I didn’t over today, but what we’ve historically measures is significantly improved to last year. The customer who buys says the value is 3 to 4 points higher. The store environment is 10 points higher. The presentation is 12 points higher. The availability of help is 7. So if everyone loves what you are doing, why are the sales down? I think we’re in a long-term process of people discovering the new JCP. The store looks very different, the products look different in the store, the presentation looks different and I think some of our long-term customers are even kind of shocked, wow, this doesn’t feel like JCPenney they are rediscovering and we got a lot of new people like you maybe Mark, who are coming out and saying, this is kind of interesting and…

Mark Nuserra: (indiscernible) that demographics, they were as well (indiscernible). So I feel like at times as more financials will be analyzed they do not necessarily understand what resonates with those (indiscernible). I think they look at it as like (indiscernible) that time should go.

Ron Johnson – CEO: Thank you, Mark. We said this before, mind share always precedes the market share and we think where people are starting to discover that, we’re changing. But it takes a long time to change habits because there are a lot of places to shop. Thank you, Mark. Mark, we’re going to have to keep moving, but thank you.

Liz Dunn – Macquarie: Liz Dunn, Macquarie. My question is – actually two questions, first, I was wondering if you could provide any sort of break out of what the sales per square foot productivity was? Where the comp in the home category. Just so we can know what sort of directional opportunity there is there? Then also I was interested – I know you’re kind of want to be a little tightlipped about what’s happening for the fourth quarter in terms of marketing but just what were your learnings for the third quarter. I see you’re back on TV and it seems like you’re sort of explaining a bit more what change is happening to the customers. So just some update on marketing…

Ron Johnson – CEO: Let me start with the first. Our plan – I know I commit to this yet, but I think what I’d like to do is when we break out at the end of this next quarter to help you analyze going forward, we’re going to breakout our productivity of sales for home, apparel, perhaps kids and other because not all categories perform the same. Home is the lowest productivity area in store for us. It’s closer to that $69 square foot shop one I showed you and we think there is a huge opportunity in the home area and there will be other categories that are higher, our kids, Men’s and Women’s are about the same. But out hope is break that out for you as we move into next year. So you’ll be able to anticipate better what the productivity will be as we go forward. As we into holiday, you’ll see starting as soon as next week our marketing change to be very product-specific, event-specific. So we’ll be marketing heavily Black Friday via traffic and at the store. So by television, we’ll start to talk about Black Friday. We’ll start to talk about how the promotion and how it provides direct value to the customer. So a lot of the marketing we’ve done do far this year has been brand building, now it’s time to get customers in the store, just see much more direct response type marketing even on TV and that starts off next week and we’ll run through the holiday season.

Unidentified Analyst – Credit Suisse: (Indiscernible) Credit Suisse. Could you provide an update on your CapEx plans for this year next year?

Ken Hannah – CFO: Sure. I think we’ve been kind of running in the $800 million to $850 million range for 2012 and so the shops that we were planning to build-out this year are complete and so the majority of that CapEx was all coming through in the third quarter and then the remaining capital that we’re spending is primarily associated with some of the technology investments that we’re making to put in our new Oracle platform, to go and do some of the things in the stores with the mobile POS and then the Wi-Fi and those sorts of things.

Ron Johnson – CEO: Just as an aside, I’ve been delighted with the customer response to our new technology. We just rolled out mobile POS. As much as we loved to be further ahead, there aren’t many retailers really doing this, we had five stores yesterday do over 20% of their transactions on an iPod. We went from 1% four days ago, to 3.2% of all transactions done on a handheld device and we expect as they we move into February 1, well we know, February 1, every employee on the floor, will be equipped with an iPod. So as we’ve gone through this transformation, we’re spending on shops, but we’re also spending on technology and it’s going to payoff big time for us, because everyone who checks out of the mobile device, guess what we get, their email. We know who they are. In long-term the ability to build a relations with the customer, starts with knowing who they are how do you communicate to them, so we’re delighted with the early results from our mobile POS that we’ve been rolling out.

Carla Casella – JPMorgan: Two questions. One on the $1 billion of cash at year end, does that include any potential asset sales of non-core assets and can you give you give us an idea of what are some of the other non-core assets you could potentially sell?

Ken Hannah – CFO: Sure. Right now the non-core assets that are remaining on the books, the Company are primarily associated with ownership positions in mall partnerships, so there is a couple of hundred million dollars of those where we own 25%, 30%, 40% ownership in a mall. We’ve got a bunch of tire and battery centers that are out there that we have that we’re certainly looking at, whether or not that’s something that we need to retain or not. We’ve got the 400 stores and going through and looking at not necessarily in the sale of those, but looking at from cash flow standpoint, as we seep productivity in these shops, can we put more of that merchandise into those stores, and what opportunities do we have there. So, we have several hundred million dollars more opportunities in the non-core. Now, the year-end number, what we’re assuming is that we have similar results as we close out the year, and working capital continues to be managed, we’re working very hard on the inventory side to make sure that we exit this year very clean, so that as we move into 2013, the overhang of that inventory is behind us, and so there is a lot of working capital improvements that we’re working on currently that we think are going to allow us to continue to bolster the cash position.

Carla Casella – JPMorgan: I forgot to give my name. It’s Carla Casella from JPMorgan. And I had one business question on – you gave some nice stats on the eight shops and their performance. Does it vary dramatically when they’re being advertised versus when they’re not being advertised? I’m assuming that all of your advertising budget has gone towards those eight shops?

Ron Johnson – CEO: Yeah, it’s interesting. The shops have continued to improve their performance through their 12-week life, and so we think customers are starting to discover them. But our advertising that really drives people in the shops – so I think we do a direct mail mailer to our existing customer base. So, for example, when we did a beautiful direct mailer on the new JCP brand, that brought a lot of people in. But the lift when you don’t offer a discount is pretty modest, and we might lift 10% over the previous week and then it continues to grow. And so the advertising helps, but it’s a pretty minor lift. The most important thing is these things have good everyday business and that they continue to grow. And as we get them in stock better, as we update the assortments, we hope that their productivity will be improving. But I don’t believe the – like the television ad, for example, you’ve seen talking about the new shops. I don’t know if that’s distorted the numbers we see, because all of our marketing going forward is that new shops. You go to spring and you’ll see all kinds of marketing for home. You’ll see all kinds of marketing for kids. You’ll see all kinds of marketing for the new things we launched like Joe Fresh. So, our effort is to get the newness out to the market to bring people into the stores, and albeit your social and other types of media.

Graham Tanaka – Tanaka Capital Management: Graham Tanaka, Tanaka Capital. A few questions on – you have a portfolio approach on your shops, and I’m wondering now with 10 data points, we have more data shop to shop. I am wondering what’s your view is on gross margins longer term in terms of variability from shop to shop, what sales productivity from shop to shop, and then, if you could hazard a guess longer term what that might suggest for long-term steady-state comps and gross margins?

Ron Johnson – CEO: Well, we’ll learn together, but as you know, Ken just mentioned, we expect long-term 40 plus point gross margins. We said that last January 25th. The reason for it is if you look at the performance of specialty stores in the mall, they tend to have well above 40 point gross margins, and as we learn to operate like a specialty store, we ought to be able to yield those kind of benefits. Department stores traditionally like Macy’s or Nordstrom are right around 40%. That’s where JCPenney has been historically in a good year, right. So, we think our model is set up to be 40% plus long-term, and that assumes an entire mix of shops that have home and other things involved with them. Not every shop will have the same margin rate, but we’re targeting to get our total margin rate above 40%.

Graham Tanaka – Tanaka Capital Management: So you’re suggesting there is upside in terms of if you are up more like in mall environment with the specialty shops and you can actually be at that level?

Ron Johnson – CEO: I don’t want to – I mean all I am trying to say is we’re committed to 40 points plus, and the reason we have the plus is the specialty store retail industry earns over 40%, and we want to work towards taking advantage of that. But I wouldn’t want to forecast anything. I’m just trying to give you sense of how we think about gross margins in our model long-term.

Graham Tanaka – Tanaka Capital Management: Then the comps longer term, and you’re long ways from getting to 100 shops, but once you get to that are you in a different environment or…?

Ron Johnson – CEO: If you are a dreamer, you’re going to have productivity improvements when you’re putting a shop. We’ve already seen $60 improvement on shops of brands that are currently in the store. But those shops today are islands. And you walk through the store you go, hey, those are kind of neat, but there aren’t many. It takes time. We believe when they start to work together, there will be a network effect. People coming for Joe Fresh and they go, well JCP’s pretty nice and that’s a pretty cool way buy Levi’s. We think that might help the comps. But we’ll find out. We also hope we go through that experience that Sephora has had at JCPenney and that other retailers go through, which provides a network effect to comps. So, if we do this right, we get a boost in productivity as we move in the shops. We get a boost in productivity from the network effect and then we get a boost in productivity from the overall comping of our specialty stores. Joe Fresh, year two should be better than year one and then we get to a point where we can start adding stores. In 2015 we got it all built out and now we’re in demand by the malls, we can go do that. We’ve already got a lot of exciting stores planned for 2014, ’15. So time will tell, but we think we’re in the direction of accelerating performance, but we go to go execute to achieve that and that’s what we’re working really hard to do.

Walter Lobe: My name is (Walter Lobe) and I’m wearing an IZOD sweater today. We went through a very terrible storm here in New York, New Jersey, Pennsylvania and I wondered what that affect it had on your stores throughout the area and what it means for the fourth quarter?