Market Overview

J.C. Penney First Quarter Conference Call Summary

Related JCP
Tech Specialist: Overstock An Attractive Takeout Target, Way To Play Bitcoin
J C Penney Jumps To The Top Of The Short Seller List
Are Ongoing Store Chain Liquidations Necessary? (GuruFocus)

J.C. Penney (NYSE: JCP) on Friday reported its first quarter earnings.

Shares of the company were up 16.25 percent or $1.36 per share to $9.73. Shares are down nearly three percent at $9.44 in Monday's trading session.

Below are some key takeaways from the company's conference call.

Mike Ullman, CEO:

• As I mentioned during the last quarterly call, the turnaround of JCPenney is taking place in three stages. First, the stabilization phase, which we initiated immediately after I returned last April. That was followed by the phase of rebuilding in the third and fourth quarters of last year. And now we're in the third and final stage, which we call the go-forward phase, during which we are positioning JCPenney for long-term profitable growth.

• We completed the first two phases of our turnaround by strengthening our team, stabilizing the company operationally and financially, and by rebuilding parts of the business that were key to our long-term success. This year, we've begun progressing through the go-forward phase and I'm pleased to report that we're making excellent progress, and I believe the results we announced today demonstrates the case.

• During this phase, we are focused on refining our merchandising and marketing strategies in order to steadily grow sales and significantly improve gross margins, while continue to tighten and manage our expenses, all with an eye toward returning to profitable growth.

• Our first quarter results are positive step in that direction. Despite the unusually challenging, if not unprecedented weather conditions in February and March, we are gratified to have exceeded our sales guidance and delivered 6.2 percent same-store sales growth for the quarter or 7.4 percent growth under the new sales reporting methodology.

• In addition, sales improved sequentially in each month of the quarter. Our strongest performance was in April, especially during the Easter holiday period, which helped to produce our better than expected results. Customer came back to JCPenney in the first quarter and based on our favorable conversion trends, she likes what she saw.

• We also delivered gross margin improvement over the first quarter of last year and sequential improvement from the fourth quarter of 2013. Gross margin improved 230 basis points to 33.1 percent of sales when compared to the same quarter last year. While we're pleased with our gross margin progress this quarter, we recognize there is still a lot of room for improvement. Looking ahead, we anticipate further gross margin expansion in the second quarter.

• Expenses were well managed during the quarter with SG&A coming in below last year's levels and better than we planned. We will continue to tightly manage cost, as we institute important disciplines and processes across the stores in the home office. Overall, our first quarter performance was in line with our plans to grow the business and take back market share from our competitors. And I want to personally thank our 117,000 dedicated associates throughout the organization, who delivered these exceptional results and gave great customer service every day.

• With that, I'd like to provide an update on the continued progress of our turnaround. On our fourth quarter call, I told you we were focusing on several key priorities including merchandising our stores and dot-com in a way that better engages the customer and it's easy and inviting to shop, improving our marketing to reconnect with customers and further enhancing our seamless omni-channel customer experience across all channels and devices. First, our merchandising assortments.

• For the quarter, Women's and Men's apparel, Home and Fine Jewelry were the company's best performing merchandise divisions. In Women's apparel, casual and career dressing performed especially well, which shows our outdated merchandise assortments are really resonating with our core customer. We've made great strides in ensuring the customer find what the fits and styles she wants from JCPenney including key private and national brands as well as exclusive brands like Liz Claiborne and Modern Bride.

• Private brands such as St. John's Bay, Worthington, Stafford, J.Ferrar and Xersion are outperforming. We have a distinct competitive advantage with our in-house design teams. We truly understand each private brand, its target customer lifestyle, and price point.

• Finally, we opened 30 new Sephora inside JCPenney locations, bringing the total to 476. We also expanded eight existing stores of our strongest performing Sephora locations this quarter to increase their footprint inside the store. Our Sephora stores continued to perform exceedingly well. I'd like to thank our Merchant and Planning, Allocation teams, led by our Chief Merchant, Liz Sweney; and our head of Planning and Allocation, Frank Lucania. Under their leadership, the teams have helped deliver this very successful quarter.

• On the financing front, we also announced today that the company proactively obtained a fully committed and underwritten $2.35 billion senior security via credit facility to replace the company's existing bank line. Now with that, I'll turn it over to Ed for additional detail on our Q1 performance and a look forward to what we're expecting for Q2 in the balance of the year.

Edward J. Record, CFO:

• We're particularly pleased to have exceeded our comp guidance in the first quarter in spite of what is still a very challenging retail environment. We feel very good about our first quarter results.

• However, we know that there is still a lot of work to be done to get JCPenney to where it needs to be. With that, let me walk through the results. Comparable store sales increased 6.2 percent for the quarter or 7.4 percent under the new comparable stores sales calculation. As we said in the press release, we are simplifying our calculations to better reflect year-over-year comparability by removing items, such as sales return estimates and liquidation sales.

• Our sales growth was achieved despite the difficult weather conditions in February-March and indicates market share gains relative to our competitors' performance. Of note, sales improved sequentially each month of the quarter and our total brick and mortar merchandise sales were up 6.5 percent, demonstrating the progress and success of our merchandising and marketing initiatives.

• In total, sales increased 6.3 percent to $2.801 billion for the quarter compared to $2.635 billion in the same quarter last year. Total online sales through continued to show significant growth this quarter, increasing 25.7 percent year-over-year under our new methodology. While still negative for the quarter, store traffic improved sequentially versus the fourth quarter of last year and was positive during the month of April, as well as during key promotional and holiday periods.

• For the first quarter, gross margin was 33.1 percent of sales compared to 30.8 percent in the same period last year, representing a year-over-year improvement of 230 basis points. Gross margin was negatively impacted by increased clearance sales as a percent of total in February-March as well as negative clearance margins on those clearance sales.

• As we look forward, we are continuing to build a compelling mix of private, exclusive, and national brand merchandise that will result in higher sell-throughs and better clearance margins. As a result, we expect our gross margin in the second quarter of 2014 to continue to improve sequentially when compared to the first quarter of 2014.

• Our operating profit improved 50 percent for the quarter to a loss of $247 million compared to a loss of $486 million last year. When compared to last year's first quarter, our net income was negatively impacted by $207 million or $0.68 due to the change in reported taxes. Our first quarter earnings per share is a loss of $1.15.

• Our suppliers' payables at quarter end were $841 million compared to $1.248 billion last year. This large decrease year-over-year is driven predominantly by last year's ramp up of receipts as we worked to get back into a more typical stock position coming out of 2012.

• This reduction is in no way indicative of any changes in payment terms to our vendors. Our vendors continue to be very supportive of our turnaround efforts. We expect our ratio of payables to inventory to normalize throughout the year. Other accounts payable and accrued expenses were $1.167 billion compared to $1.524 billion last year. This reduction is primarily driven by accrued and unpaid capital expenditures in the first quarter of 2013.

Posted-In: Edward J. Record Mike UllmanEarnings Guidance


Related Articles (JCP)

View Comments and Join the Discussion!