- Tools for Investors
- Stock News
- Investing Ideas
- Econ & Policy
- Personal Finance
On Friday, J.C. Penney Co Inc (NYSE:JCP) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Ken Hannah – CFO: So we’ll expect the normal holiday build the inventory in Q3 and then we’ll see that liquidate in Q4 as those goods move through. So we’re expecting inventory to be down about $500 million at the end of the year, so you are going to get about $0.5 billion of that improvement just with what we’re doing. Mike’s team is working with the inventory very, very hard.
Unidentified Analyst: Ron, you said in the (morning) earlier that traffic was down on the 7% on the first 10 days.
Ron Johnson – CEO: Yes.
Unidentified Analyst: But you said that sales were 2% better than the spring run rate, that’s the down 21%?
Ron Johnson – CEO: Let me try to explain it. For the spring season, we ran down about 20%. During the first 10 days we’re performing a couple percent better, that through yesterday’s store closing. And you might say that’s not very impressive, but I want to remind you we are in an everyday model, where we’re going through seasonal builds, up against the model last year where the sales went like this. Four times last spring, we put every promotional idea we knew to do, to drive the business, and each of those periods we ran our sales down 30% plus. 5 of the 10 days this quarter have been against the periods where we ran down 30 plus. And as you’re aware, we’re really worried, our biggest nervousness is how will we perform during the key shopping periods; Mother’s Day, Father’s Day, back-to-school, holiday, So the fact that we’re only, that we’re two points better than our entire trend against our most promotional activity in the peak of back-to-school. This is our highest volume week of back-to-school, is very encouraging to us. Now, we don’t want to take that number and affect our long-term approach, so we’re going to stick with very conservative. We’re going to assume that we’re not going to perform any better on the top line, than we were on all spring. But the point is, during the second – the only other big peak of the year besides holiday, we’re running better than we had all spring against our highest promotional week. Make sense? That’s all we’re trying to say, and the traffic is materially better. The traffic is down 7%, as Ken showed it was down 10% to 12%, but during the promotional periods it was down as much as 20%. And we’re down 7%. So we’re just encouraged that our marketing changes are getting through and we see that in the numbers but we also hear it from our team on the floor.
Michael Binetti – UBS: Michael Binetti with UBS Michael. So could you go back to the Levi’s numbers you gave, you said the up 25 since you’ve opened it? How much of that is a contribution from incremental square footage? How many stores is that? Is that a system-wide number?
Ron Johnson – CEO: So that’s great number. We put Levi stores I think at 683 – about 683 stores. We’re only comparing the 683 stores to the 683 stores last year, so it’s the same number of stores. That 25% is a comp store increase in the stores that have shops versus prior year. The square footage is about the same, so we didn’t add square footage to Levi. We changed the experience of how to buy a pair of jeans, and we did that through fixturing, through the bars, through putting fitting rooms in the shops, and the customers responding. And it’s what we always believe that when you can prevent a truly unique and innovative experience that connects with the brand I mean that feels like you’re in a Levi store that people would buy differently, and what we’re finding is we used to only sell various shades of blue. We’re selling color, we’re selling a variety of things what we never did before. We’re selling much more fashion. I think our buyers and Levi’s are surprised at the way customers are buying fast in that shop, and that’s been the dream that when you change the experience, you can change what you get to sell. And so our average retail on Levi is up $5 or more versus a year ago, but it’s not just versus a year ago. We’re looking at Levi’s right now in shops against non-shop stores because we’ve got 400 stores that don’t have a shop and we’re comping 25 points different there. And if you look at the shop stores and their trend from spring it’s about 25 – anyway you look at it, we’re running about 25% higher in revenue in Levi, and that’s our hope. We want to be the best place to buy on America’s favorite brands, all right? Now, one of the thought on these shops, it’s really important to understand. We have two shops today, Sephora and Mango. Sephora has been comping really well ahead of the chain for the last four, five years that it’s been in there. Our year-to-date performance of Sephora is very strong in spite of its de-promoting. Why is that happening? Well, the history of retail will tell you. If you open a new store, you get about five years until customers truly discover and find it, and so our shops will go through we believe a comp store trend of inertia like retail stores that when you open a store in a market. So, as we roll out shops, we hope that every shop like Levi’s will get better and better and better as traditionally happens in the specialty stores in a mall. At the same time as we redo all of JCPenney, we hope that drives more traffic, all right? So, we think there is a multiplier from these shops over time that will provide extraordinary growth, but that addresses the Levi’s numbers. Is that helpful?
Michael Binetti – UBS: It is. If I could follow it up, so that’s 683 stores for Levi’s and we haven’t talked a lot about the small stores versus big stores. Any update on how the other stores should potentially come along for the ride?
Ron Johnson – CEO: Our current thinking, so we have about 400 stores that are smaller that are under 50,000 square feet on average, that are located generally in small towns, that continue to perform as well as our chains, so if you get a spring performance, they’re performing as they have in the past. As we said before those stores generate very good cash flow and we love those stores for their cash flow, but we have to develop a strategy to make them win and we have got several ideas, but we haven’t talked about those yet and we’ll talk about those in near future, but we’ve got to make those stores really great as well, but initially we are not rolling our shops out in the stores because we are going to learn about the shop economics, so the shops are going generally into our 700 larger stores and the 400 stores are continuing to benefit from the merchandise changes, the product improvements, the pricing strategy, the marketing. But we haven’t detailed yet what we are going to do to make those store great and we’ll do that in the near future.
Paul Lejuez – Nomura: Paul Lejuez at Nomura. Just a question on the markdown reserve, just thinking ahead about the home brands that are launching in the first quarter, does your markdown reserve account for any expected disposal of goods that are going to happen around the home launch in the first quarter?
Ron Johnson – CEO: The intent was for that to take into consideration all of the known shops that we have on our schedule, looking out at all the brands that have been decided to be discontinued. So yes the intent there was to take all of the shops that we are aware of that are coming into future and taking that reserve today.
Paul Lejuez – Nomura: What’s the prevailing margin rate, when you take a markdown on inventory, what margins do you assume those goods get sold out?
Ron Johnson – CEO: Well if you look at our history, that it’s been about 13% and then its moved down to as a negative number in Q1 and up to just under 6% in Q2. So I mean a lot depends on the strategy but are you referring to on those goods or what we would expect it to be in the future.
Paul Lejuez – Nomura: Just in general when you take a markdown you have to take a hit for a certain dollar amount, but you are still looking to sell the goods at some point. So do you write them to zero or do you write them down to.
Ron Johnson – CEO: We are writing it down based on the value that you think is going to be required to flow all of those goods through in a timely manner.
Phasing Out the Checkout
Paul Lejuez – Nomura: Then just one last quick one. Ron, I think you mentioned the JCPenney bar as a place where customers could go to purchase things in cash. Will that be the only place that they can go to purchase things in cash and what percentage of your business is done in cash?
Ron Johnson – CEO: Yeah, currently, we do about 25% to 35%, it varies by store, in cash. Now, as we transition away from the checkout, we want overnight just eliminate it. We’ll retail – right now, we have 11 centralized checkouts. We’ll transition there and take the customer on a ride, but there will be four of those in the store. So, we have 10 today because we (reduced) a couple, there will be four locations, one in home, men’s, women’s, kids very convenient for someone who wants to use cash. (You know around) place, can walk them right there. So, we are not at all worried about a customer is not ready for incoming ways to buy, but we’ll cover that through the bars. On the home thing, just so you know, there is going to be a material change in home. Typically, we updated our assortment about 15% to 20% of the merchandise changes. The markdown reserve allows us to change about 60% of the merchandise in our home assortment and that’s our number of opportunity category to get our business going because we’ve been struggling at home and we’re really excited about that, but the reserve we talk about prepares for all of the change we plan to make next sprint in home.
Deborah Weinswig – Citigroup: Deborah Weinswig from Citigroup. So, can you discuss how your performance has been in fashion versus basics? Obviously, the customer who is buying basics is much more used to buying those items on sale. So, can you may be just talk about the go-forward in terms of how you might be communicating your value to the customer on those specific items?
Ron Johnson – CEO: That’s a great question. One of the things Penney has been known for is great basics and one of our challenge in the spring is all of our marketing was fashion, it was lifestyle and we talked about it the first quarter that our fashion was performing better than our basics, and that trend continued all the way through the second quarter. We got to fix that. So number one, you got to price the goods right, which we’ve adjusted; number two, you got to present the goods better and if you walk in our stores, if you go down to Manhattan Mall and look at dress roots in underwear in men’s for example, or women’s intimates, you’ll see the dramatic change in presentation, but more importantly we got to market it. So you’ve already seen direct marketing toward basics, right? So if you look at our preprints every week now, you’ll see underwear and socks and brands like Maidenform and Levi heavily product-oriented presentation. We did it back-to-college preprint last Sunday and the items in the preprints are now starting to accelerate. So, it’s a combination of everything you do, pricing, presentation, direct marketing that will improve our basic businesses. But they will continue to suffer relative to fashion throughout the year. Why? Because when you get 10 free dollars in a coupon you are going to buy something, and if you don’t find the fashion, you’re going to stock up on a towel, a pair of underwear, something for your kids. So, the decrease in coupons is the biggest driver of our basic challenge. We’ll offset that by the reasons I talked about.
Deborah Weinswig – Citigroup: Then can you talk about how your might utilize your credit card going forward, whether it might be through gamification strategies or otherwise in order to drive traffic and also as a loyalty tool for your customer?
Ron Johnson – CEO: Yeah, I personally believe it’s a very big opportunity. We do, in our peak we’ve done at about 40% credit card share, that’s dropped a little bit, it gets down 2 points year-to-date. That’s been a managerial change, but it’s down. But if you look at traditional promotional market companies, whether it is Mervyn’s and there are Kohl’s, they all run as much as 60% on credit, right, and that’s what drives their business, right. So we’ve got to build the loyalty program for credit card customers that becomes a must-have credit card to carry and we’re going to tie that into our new interface, the streets and the square and the experiences you have and so we’re on the process of redesigning that, but I think long-term, how we use our proprietary card is a big opportunity. I know there are few on the side, that we’re not seeing because of the lights, so let’s make sure we move around, why don’t you go this way and then that way?
Bill Dreher – Newedge USA: Bill Dreher, Newedge USA. I want to applaud you for creating one of the most exciting stories in retail write-down. Talk about trying to create a favorite shop for the consumers that have some of their favorite brands. As we look at some of the brands that you brought in recently, not all of them are the top tier brand, many of them sort of sub brands within that vendor. Can you help us understand, how you consumer feels about that top brand versus the sub-tier brand. Maybe to put some meat on the bones, how were sales affected when you moved from Liz & Co. to Liz Claiborne for example. What was the difference there?
Don't miss one of the biggest bull markets in history! Covers Gold, Silver, Gold & Silver stocks, and miners.
There's always a bull market in some sector! Find the best opportunities in commodities.