J. C. Penney Company, Inc. (NYSE:JCP)
Piper Jaffray Consumer Conference Call
June 15, 2016 10:00 AM ET
Marvin Ellison - CEO
Neely Tamminga - Piper Jaffray
Alright. We’re going to keep things moving along here. We just had a [plover alley] [ph] of presentations here. And it is such a joy and a privilege to have JCPenney here on stage with us. Marvin Ellison, who is representing the Company, CEO of the Company, has lived through a tremendous amount of change and effected great strategies. We’re going to get into that, but I also wanted to note in the audience, we have CFO, EVP, Ed Record over here as well as Investor Relations guru and everyone -- you know him, Trent Kruse. Hi. So, thank you for being here and thank you JCPenney.
Marvin, you joined us on the stage a year ago and you talked about the JCPenney value proposition. But I am wondering if you could share with us in your words what does JCPenney means to JCPenney customers? And how is JCPenney, even a year later uniquely meeting her and her value proposition needs?
Well, first, it is great to be here representing the Company, and I think for JCPenney, we’re uniquely positioned in this mid- tier consumer space. And we think it’s a really value proposition around three areas. We are very proud of our private brands portfolio. We have sourcing offices around the world; over 200 in-house designers; and we have these great brands from Liz Claiborne to St. John’s Bay to Stafford to Arizona. And what’s great about it is that our private brands are four-star plus rated in over 70% of carrier. So, that’s important to us. So the quality and value is there. So, private brands is one of those ways.
We think the other is these exclusive relationships and experiences we’ve created with Sephora inside of JCPenney is one; we have over 800 salons in our stores. We have these great relationships with partners like Michael Strahan with these Collection by Strahan, [suit] [ph] separate line which did fabulous for us last and this year and our launch of his active brand MSX, which is off to a great start. So, these relationships are powerful. And then, we have what we call these perception shifting national brands; these national brands that when customers understand that we carry them, it elevates our perception of JCPenney. And those brands like Nike and Levi’s, adidas, we have Samsung now in our portfolio and many others.
So, when we think about how we deliver that value to the customer, we think about the private brands, we think about the exclusive relationships and experiences, and we think about these perception shifting national brands. And if we do those things well and we interconnect them with store and ecommerce, we think we can create a unique offering that’s hard to replicate.
Okay. There’s been a lot of rhetoric completely around mall based retailing and the death of the mall; you’ve read it; you’ve heard it. But, I always remind people, you know there are like 80 million people who kind of cross the [indiscernible] over at JCPenney. So, they are looking for something there. Thank you for that. The consumer however, seems to be crossing a [indiscernible] a little bit fewer times this spring. So, what’s JCPenney’s take on kind of broadly what’s going on with the consumer and what is your opportunity in this period of uncertainty with the consumer?
Well, as you can imagine, we’ve spent quite a bit of time doing consumer research and speaking to economists and outside groups to understand what’s their view of the macro of this mid-tier consumer segment. And I mean 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.
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. So, this is almost like limiting discretionary spend because of the unknown. And we don’t have a perfect line of sight of what’s driving that, but there is a lot of data, there is a lot of research that shows when there is a presidential election, without an incumbent, it tends to lower consumer confidence that maybe playing a role. But we talked a lot about controlling what we control at JCPenney. And so, we spend a lot of time understanding what the marketplace is bringing forward but also putting more attention on what are we doing about it, what specifically can we control, what are the initiatives that we have in place. And although the first quarter for us was under our expectations, relative to the marketplace, we outperformed everyone.
So, the negative point forward didn’t feel great for us during the quarter but after we were able to look at the retail landscape and look at all the earnings from the quarter, we felt like we were still taking market share. And that gave us some confidence that even in the face of a very difficult quarter, we’re still winning. And as we think about how we’re winning, we’re trying to pivot. I mean we are a very apparel dependent retailer. We’re never going to get out of the apparel business, but we understand that we have to do things that are more conducive to where customers are spending their money.
Our customers are saying to us that they are spending a lot on home beautification. And we understand that we can do a lot better at that. And so we decided to roll-out appliances to 500 stores. We’ll have that done in the third quarter and we have 1,200 major appliances online, a seamless online process of ordering, delivering, hauling away your old appliance and installing new appliance in one seamless process and we think it’s a best in class process. We also talked about expanding our window treatment area. I mean JCPenney was the most dominant retailer in America just 10 years ago in custom windows and we think we can get a lot of that back. We’re going to expand the space in 500 stores. And we mentioned some strategic pilots we’re doing with Ashley’s Furniture, the number one branded furniture retailer with a wonderful vertically integrated infrastructure, distribution centers and delivery. And also we’re going to look at piloting Empire flooring because our customers say to us, we loved to buy flooring from you as well as window treatments, and so we have the strategic partnership we’re going to pilot to see.
So, we understand the consumer’s pullback a little bit; relative to the market, we did very well. We have some strategic initiatives to get us in a position where we can kind of pivot more toward spending. We can put ourselves in a position where we are not as dependent on the weather being perfectly aligned to our expectations. And while we’re doing that, we think it creates a model that’s more difficult for pure play e-commerce competitors to compete against. So, more to come, but as we mentioned in our press release a couple of weeks ago, sales during Memorial Day was positive. So, we feel good about where we are. It’s environment that is a little more difficult to anticipate, but it’s our responsibility to fight through that environment, and we think we’re doing a good job at that.
And much of that share gain, repeating the fact, where much of the share gain that’s even occurred in Q1 as a result of these initiatives still are rolling out. I mean you got initiatives in center core. I’d love you to talk a little bit more about that as well as expand a little bit on the relationship with Sephora. But more of that is still coming in the back half of this year?
Yes. So, if you think about we’ve delivered a negative 0.4 comp, which again was under our expectations but we held our guidance for sales for the year, which we think would be between, call it 3% to 4% comp. The reason why we held guidance is because as we analyzed our business, we knew that these initiatives will impact us more on the back half of the year. So, we assumed that the negative 0.4 was the baseline for Q1, 2, 3 and 4. And then we simply did the math and asked the question, how incremental will major appliances in 500 stores, 60 Sephora locations, incrementally new center core expansion in a third of our stores, buy online pick-up in-store same-day rolled out chain-wide by the end of August, rolling out Boutique+, which is our first private brand for plus-size clothing and a uniquely designed Boutique shop, a plus-size women shop in 200 stores, those are initiatives that we were able to test and learn from, and we have a very good line of sight on what the expectation from a sales perspective will be. And even with a negative 0.4 baseline, the incremental sales value of those initiatives gave us confidence that we could still deliver within our sales guidance for 2016.
A lot of path to kind of move forward towards profitability.
Well, a lot of path, but I think more specifically, I mean we have very detailed plans and very specific initiatives that we can monetize and we can articulate a financial expression to. This is not hoping things get better. To the contrary, we’re saying, if things stay the same, we still believe that these initiatives are incremental enough that we can deliver within our sales guidance. And we’re pleased with that. And so far, we think that that’s going to hold up.
Excellent. I will be [polling] [ph] for questions, so be thinking about those. JCPenney was among the top four requested 101s out of 65. So, I know you guys have questions, I’m sure. So, there is something I want to touch on a little bit because I feel like it’s been a nuance in your tone, Marvin. There is -- if you look at the math, that’s what we get -- we are all like the last good [indiscernible] in gym class, you know what I mean. We’re really good at math, right? And I’m speaking obviously autobiographically. And we can see the math. You lost like $6 billion in revenue and there is -- what it could be in terms of recovery and you guys have a great plan that you’ve set out there. But there is still this tone that we’re hearing from you around -- it’s not just about going back and recapturing who JCPenney was, you’re taking this Company ahead and forward in a very thoughtful modern way. Could you expand a little bit more? And I think it’s in the technology and the data analysis and implementation that you obviously are very well-versed in coming your background from Home Depot. How are you taking JCPenney and not just for capturing what you guys have lost but actually making it a better company going forward?
Well, 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? But, as I’ve discussed in the past, when I arrived back in November of 2014, I quickly realize that we were heavy on art and very poor on the science of retail.
We spent a lot of time on presentation standards. We spent a lot of time on the esthetics of our environment, but we didn’t spend enough time on the backend process, since that really drives retailer to be efficient, things like supply chain efficiency, things like having a seamless e-commerce connectivity to brick-and-mortar, like having robust information technology, mobile apps and devices that really create a great seamless environment for customer, the way she wants to shop, the time, the place and the opportunity, and not to mention, how we look at and measure productivity across the entire enterprise, whether it’s at home office, in the store or in the supply chain.
So, it is not coincidental that we went out and really attracted some very talented individuals as a new Chief Information Officer, new Head of Store Operations, new Head of Supply Chain, new Chief Marketing and Customer Officer just to name a few. These individuals were brought in because we had to modernize our business from a retail perspective. And so, that’s part of it and that is understanding that there are things we do really well and we want to maintain and improve upon. We want to have great presentation in the store. We don’t want to walk away from that, but that great presentation has to be backed up with more sophistication around replenishment, around measuring productivity on the floor and around how we can gain great profitability from the product that we sell.
In addition to that, 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.
So, now, we’ve brought in a great e-commerce leader and we’re in the process of really creating a seamless connection between e-commerce and brick-and-mortar, and that has never existed in any shape, form or fashion in our Company. We’re ready to roll out a new mobile app that’s been in beta for the last few weeks and we’re excited about it because it’s something that we desperately need based on how our customers shop. As I mentioned, I mean we’re one of few retailers today that do not have the ability to have buy online, pick-up in-store same day in our stores; we have roughly 250 stores in the first quarter, we’ll have all stores chain-wide rolled out by the end of August. In our pilot location in the first quarter, roughly 40% of the customers that came into the store to pick up an item that they had purchased, bought something additional. I mean that’s a huge, huge conversion rate. And having rolled this out at a different retailer, understand the benefits of it.
So, to your point, I mean we’re balancing the art and the science of retailing. We’re truly becoming an omni-channel retailer, because you have to be. We have 1,000 store locations. We’re going to be piloting enterprise fulfillment where we’re going to take stores that are in uniquely geographic locations and use those stores as the first choice for online replenishment. That’s going to save time and money from a distance of delivery and from an efficiency, in some cases, same day and next day. And within all of that, we’re going to continue to leverage the things that we historically do well. And those things are private brands, great service, and having array of national brands that really shift the perception of the consumer.
So, we’re excited about these things. And we’re not going to make the same mistake. We may make different mistakes; we’re not going to repeat mistakes. I can guarantee that.
Well said. [Indiscernible] on that statement. We’ll just pull here and see if there’s any questions. Yes, Craig?
Q - Unidentified Analyst
Okay. The question is around -- thank you, Craig, around appliances, and how from a consumer mindshare perspective, are you positioning JCPenney and appliances?
If you think about it for a second, appliances appears to be a huge risk to take on. But the model we’re creating, we think gives us a lot of protection to limit the risk, primarily because we hold no inventory. The only inventory we will own will be the displays in the store. And so because of that we’re not taking huge cash risk by tying up warehouses still with appliances hoping they will sell. We’re not as concerned about market share growth as we all are being disruptive in the marketplace. What we learned in the pilots is that the space that appliances acquired was some of the most unproductive space in the stores from a sales and gross profit per square foot. So, in the pilots we learned that the appliances were significantly more profitable from a sales per square foot and profit per square foot. As an example, sales per square foot was incremental 10 times better and gross profit dollars per square foot was incrementally eight times better. So, even if the competitive landscape becomes more promotional, we’re going to be in a great position because everything we sell is 100% incremental. And our barrier to entry and our hurdle rate to have accretive performance in the space that we acquire is still very low that even in our lowest projections we still will have a really robust business because there’s tons of market share out there. And I think it’s a very obvious statement, I mean there’s a major competitor out there that’s donating share. And we’ll be in a good position to pick up a lot of that share as it continues to deteriorate.
We learned a ton in our pilots. Over 70% of the transactions were purchased on a JCPenney credit card; over third of those customers were new credit customers; and we had over third of customers that purchased appliances were new customers to JC Penny. We had no record that they shopped at JCPenney before. And so, those things informed us that this is a space that we can compete. And we’re going to have a price match guarantee. We’re going to have three brands we’re starting with, LG, Samsung and GE, good, better, best. And so far customers responded well and the online business is off to a good start as well. So, we’re going to stay competitive, we’re going to market, we’re going to get mindshare. But we’re not trying to be number one in market share, we’re just trying to be a little disruptive and create more productive space and leverage what our customer is saying is a category that they want us to be in.
The question back here; yes please? So, the question is really around the strength of the balance sheet and the assets of the Company.
Yes, we spend a lot of time on our capital structure. I think most recently we noted that we were in the market. We have a secured bond; we’re pleased with how that played out from an interest rate standpoint. We feel great about where we are from the process of looking at our term loan. That process is not closed but is priced and we feel like we’re going to get significant interest savings. So, both from a secured bond and a real estate term loan, we think that our capital structure is going to be significantly better. I answered the question a couple of different ways. I’ll answer first on our commitment; our commitment is we got to pay our debt there. We paid down roughly $0.5 billion in debt. Last year, we publicly stated that we want to pay down anywhere between $400 million to $500 million in debt this year. Our goal is to get our debt-to-EBITDA ratio less than three times in 2017-2018. We ended last year a little over five times and we’re working our way down. Our commitment is to be very aggressive. We have publicly stated that we’re looking at a sale leaseback of a home office facility. It’s in Plano, North Dallas, which is a very hot real estate market. We felt it was prudent for the Company and right thing for the shareholders to look at monetizing that asset. And we’re going to continue to look at all of our assets and ask question, is it a better decision for the Company, for the shareholders to monetize those assets. So, we’re in a process of taking necessary steps. And we’re going to use the proceeds of the sale of the home office to pay down mid-term maturities and we think that’s the most prudent use of the dollars. And we’ll continue to find other ways to do that.
Did that answer your question? Excellent. Any other questions out there? Alright. Marvin, I want to go back to this, I don’t want to remain on all what’s going on with private brands and exclusives. And I think those are great, but my interest point, I sit back and I see things like where you are gaining shares, you are growing and some of your department stores are not. If I am a brand and I’m selling in, I think I want to go with the guys growing versus someone who’s not. So, has there been a unique shift going on with the JCPenney conversations with some of these perceptions altering national brands, as you kind of navigate the merchandise landscape?
Well, it’s a very fluid process. Our merchants have done a great job led by John Tighe of costly engaging brands and marry to our customers. The thing that we are trying to do more effectively is just listen to our customers. We can list all the grave mistakes made and the fail turnaround strategy of past but one of the key mistakes made was simply not listening to the customer. We ushered in a large number of brands that in the conference room in Plano a lot of people felt great about. The problem was in the conference room no one was talking to a customer, and customers didn’t embrace them, they didn’t resonate and unfortunately those brands were liquidated and exited. And so, we’re trying to be really careful not to have an elevated view of what we believe our customers want and we’re just simply leveraging focus groups, detail consumer research and we’re asking, and we’re testing and learning. You’ll never see us roll out anything but Center Core as an example, appliances as an example that we’re not going to test and learn.
So, you will see new brands be introduced, national brands, but you will see them introduced after we’ve really understood the value to our customer. We’re pleased within Sephora. Later this year, you’re going to see brands that couple of years ago we had no opportunity to sell. And they’re now coming in because they understand the growth possibilities of J.C. Penney and they’ve altered their entire perception and whether or not they want to be a part of our Company. And that’s exactly to your question. So, the more we improve, the easier will be for us to attract the brands that our customers want. But right now, we feel great about our national brand portfolio, but we’ll stay actively engage or try to find new brands that will resonate with our customers.
Okay. Questions, anyone? So, I have a couple of more. One is key, on capital, it’s observation we’ve made. If I recall correctly, I think you’ve made 10 press release level changes in your leadership team that could be more below the press release. But you’ve really thoughtfully and quietly just pulled together the Marvin team. Could you talk to us a little bit about who are they and feel good about where you are at and then how the team is going?
Well, I can tell you, one of the things I’m most excited about for JCPenney short and long-term is the leadership team that we’ve assembled. And again, we’re very fortunate. Often times when a business is in turnaround, it is difficult to recruit highly talented industry-proven executives. We’ve been very fortunate because the upside potential of JCPenney and the brand itself, because it’s so iconic, has benefited me in going out and signing really talented people to come in.
We recruited a great leader as I mentioned in marketing and in customer data and Mary Beth West, and she brings significant experience from that space. Mike Amend brings enormous e-commerce talent from the Home Depot and he was part of the team that developed all of their online capabilities and the omni-channel connectivity store; great supply chain leader from Target Mike Robbins who understands the entire supply chain international and domestic very, very fortunate to have him in position; great Chief Information Officer; great Store Leader in Joe McFarland.
So, we’ve assembled a really powerful team. The reality is that the team is high caliber, the collaboration is excellent, there is a very collegial environment around sharing learning, but we have to deliver, at the end of the day. And everyone is highly motivated on making this a great Company again. No one feels great about just making sales plan or just making profit plan. We are focused on the necessary steps to bring JCPenney back to the iconic status that it deserves. And we are working in progress. But I feel like we have the right people around the table with the right level of humility and understanding that it is first all about the associates and the customer and then there follow that. And so more to come, but again, I’m very excited about the people I have setting around the table helping me to make these decisions.
That was a great place to end our conversation this morning. Ladies and gentlemen, will you join me in thanking Marvin and JCPenney for being with us today? Thank you.
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