JC Penney Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good day, ladies and gentlemen, and welcome to the J. C. Penney Company JCP First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. If anyone should require operator assistance please press star then zero on your touch tone telephone. As a reminder this conference call maybe recorded. I would now like to turn the conference over to Mr. Trent Kruse. You may begin.

Trent Kruse: Investor Relations Manager:

Thanks Nicole. Appreciate that. Good morning, everybody. As a reminder, the presentation this morning includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflects the company's current view of future events and financial performance. The words expect, plan, anticipate, believe, and similar expressions, identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties and the company's future results of operations could differ materially from historical results or current expectations. For more details on these risks, please refer to the company's Form 10-K and other SEC filings.

Please note that no portion of this presentation may be rebroadcast in any form without the prior written consent of J C Penney. For those listening after May 13, 2016, please note that this presentation will not be updated and it is possible that the information discussed will no longer be current. Also, supplemental reference slides are available on our Investor Relations website.

While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call.

Joining us on today's call are Marvin Ellison, CEO of JCPenney and Ed Record, our CFO. Following our prepared remarks, we look forward to taking your questions.

With that, I'll turn the call over to our CEO, Marvin Ellison.

Marvin Ellison:Chief Executive Officer:

Thank you, Trent and good morning, everyone. The first quarter was fully challenging from a top line perspective with disappointing results relative to own expectations. As you heard throughout the week from other retailers, top line sales were negatively impacted by many factors outside of our control. Having said that at JCPenney challenge our leadership team to focus on controlling what we control.

Therefore when I look back at the first quarter and compare to JCPenney's results to our competitive space, I feel confident that we are still winning in the marketplace. I am also pleased that the team did an excellent job of appropriately managing our variable expenses and effectively adjusting inventory given the trends we're seeing on the top line.

This quarter only furthers our confidence that even in a difficult retail environment, where top line growth is lighter than expected we will still achieve our EBITDA expectations for 2016 and in the future and this is evidenced by over 63% increase in EBITDA during the first quarter. Now while our comp sales were slightly down for the quarter, we delivered a two year stack performance of 3%. As I looked back at the monthly comps for quarter, we delivered positive comps in the month of February, we experienced negative comps in March and in early April, and experienced positive comps the last two weeks of April, heading into the Mother's Day selling season. These recent transactions trends provide confidence in our ability to grow top-line and improve our EBITDA for the remainder of the year especially as we began to reap benefits of the new initiatives which I'll discuss later during the call.

I would like to personally thank over the 100,000 associates for their continued dedication to driving great customer service while maintaining fiscal discipline. Although our sales environment in Q1 was challenging, there were areas of stress in our business during the quarter. First we continue to see strong performance in our existing Sephora inside JCPenney shops. We are also very pleased with the performance of our 28 new locations that opened at the end of April bringing our total numbers of all locations to 546.

The first few weeks of the selling season in these 28 new locations have exceeded our expectations. In fact this wave of openings is delivering our best ever new opening performance from an average sales per location perspective. This is incredibly encouraging as we are placing Sephora shops in the smaller moe rural locations than ever before but the power of this great partnership is clearly resonating with our customers in all locations. We have another 30 openings scheduled for mid-June and we have two openings planned for later in 2016.

We will continue to gain market share by organically growing sales in existing stores, by adding new locations, and by delivering new brands in our Sephora shops.

In fact this quarter we lost -- plus expanded case summer -- march press and bumble and bumble and in the fall we'll be adding pharmacy and other great brands to this compelling beauty assortment. Second, our footwear and handbag business delivered strong comp sales performance during the quarter not only is our expanse to women's skews and the relocation of men's skews continuing to reap benefits, we all continuously a strong response from the relaunch of list favorite assortment of handbags. Third, our online business continue to generate strong results. On a year-over-year basis for the first quarter our online skew count increased over 50% and our online supplier basis up nearly 20%. In addition our mobile traffic continues to increase dramatically but even more important our conversion on mobile improved nearly 50% in the quarter.

And fourth we are excited about the sales potential of our Center core initiatives and our benefit for second quarter and the second half of 2016. We've rolled out our Center core concept at approximately 125 stores as of the end of the first quarter with new locations coming online each week. We are very pleased with our sales performance of our new Center core stores and remain excited to roll this new format out to over one third of our stores by the end of the second quarter.

Now let me take a moment to discuss the evolution of our merchandising strategy. At J C Penney we know we must continue to pivot our merchandise assortment for less weather sensitive category while providing our customers would more reason to shop in our stores. And candidly our over reliance on apparel hurt us in time in the first quarter when weather patterns were not conducive to apparel sales. And the consumer was simply spending the hard earned dollars on experiences, entertainment, and to beautify their homes.

While apparel will always be important to J C Penney we have conducted a detail review of our customer current and future shopping patterns and will start just to shift our merchandising mix to sell more products and services that corrilate to our -- of spending to greater percent of their dollars.

John Tighe, our Chief Merchant has taken the lead in this effort and he and his merchant team are in the process of exploring category rolls and allowing the data to get our decisions on which categories will continue to grow, which categories we will add, and which categories will begin to minimize on our assortment and we'll keep you updated. update and we are also -- on winning market share but we will intensify our focus and commitment to reducing expense and bringing more operationally disciplined company.

For the second quarter and for the remainder of 2016, we will focus on being an aggressive expense reduction company and we will focus on key initiatives to make that a reality. We owe to our shareholders to be more fiscally responsible company and we will not apologize for our relentless efforts to reduce cost while protecting the topline. As a team we are committed to take additional steps to rightsize our SG&A, to simplify and improve our store environment, to modernize our marketing, to take cost out of our supply chain operations, while scrutinizing every single dollar of inventory we add. We remain committed to grow top-line while aggressively reducing our control-able expenses.

We look forward strength more details on our plans in the months to come and with that, I hand the call over to Ed.

Edward Record: EVP, Chief Financial Officer :

Thank you, Marvin and good morning everyone. Marvin stated we are disciplined in our sales results elative to our expectations heading into the quarter. However we took actions to effectively manage expenses and inventory and in turn delivered a $68 million increase in EBITDA to $176 million. As we previously stated, we have multiple pathways to achieve the profitability targets.

This quarter clearly demonstrates our ability to drive EBITDA growth even in a tepid retail environment.

With that, I will now take you through the company's first quarter financial results. Comparable store sales declined 0.4% for the quarter. This was clearly a challenging quarter for retail driven by unseasonable weather and changing consumer spending patterns. We experienced a strong start to the quarter in February followed by a significant slowdown in margin and early April.

Having said that, sales improved during the last two weeks of April. Our strongest performing division in the quarter were men's Sephora, and footwear and handbags. Geographically the North East and Ohio Valley regions were our best performing regions.

Our higher value region in comprised of Western New York through Indiana. For the quarter, conversion and units per transaction were versus last year while transactions in average unit retail were down. As we look ahead, we're excited about the impact or initiatives we have on -- sales. Our Sephora rollouts, Center Core Refresh, rebranded salons, expanded window offerings, and the rollout of appliances will drive traffic and share wallet.

We expect these initiatives to have a positive impact in the second quarter but a more meaningful impact in the back half of the year. In addition, these initiatives will allow us to become less weather sensitive.

Now let me turn to gross margin. For the first quarter, gross margin was 36.2% of sales and was impacted by marked downs associated with the unseasonable weather. Heading into the quarter, we expected a colder February to help clear through our remaining fall merchandise. However temperatures in February were warmer than expected necessitating additional mark downs in March and early April in order to liquidate these goods.

As we look forward, we know we have continued opportunities for gross margin expansion driven by increased private brand penetration in margin, improved clearance profitability, reduce shortage, the impact of our new pricing analytics teams and supply chain efficiencies.

As we recently announced, we are expanding appliances to over 500 locations. On a square foot basis, appliances drive substantially higher sales and gross margins dollars relative to the rest of our home department. However, as we have previously stated appliances will have a negative impact on our gross margin rate. Because of this rollout and the growth of our online business, we are lowering our gross margin guidance for the full year to a 10 to 30 basis point improvement.

Now turning to expenses. Given the trend we experience on the top line, the teams did an excellent job of appropriately managing our variable expenses.

As a result for the first quarter SG&A decreased $93 million to $872 million and leverage by 280 basis points. We saw savings in all of the major SG&A categories of stores, marketing which was driven predominantly by our decision to no longer response for the academy awards, IT and corporate overhead. In addition, we saw improvement in our private label credit card income. Corporate overhead leverage the most and benefit from the actions we took last October to continue to right size corporate office.

As we look ahead, we expect continued SG&A dollar savings for the remainder of the year, but not to the magnitude we experienced in the first quarter. Our focus on finding efficiencies and reducing expenses across all aspects of the business remains the strong as ever. We remain committed to permanently reducing costs and running a leaner and more efficient organization. We continue to work to ensure reductions are not negatively impacting our customers in store and online experiences.

Now let's talk about profitability, EBITDA increased $68 million to $176 million a 63% improvement from the same period last year. Adjusted EBITDA improved 80% to $153 million also a $68 million improvement. We are pleased with the progress we have made in our EBITDA this quarter given the challenging environment. With the continued opportunities we have to improve our operational performance we remain confident in our ability to deliver EBITDA of $1 billion this year.

Our first quarter earnings per share improved 55% to the loss of $0.22 versus a loss of $0.49 in the same quarter last year.

Moving on to our balance sheet and capital structure, we are very pleased with the credit rating agencies upgrades we received from Moody's and S&P during the quarter, which demonstrates that these agencies recognized on improving balance sheet and financial condition. We ended the first quarter with liquidity of $2.3 billion, up approximately $80 million over the last year's first quarter. Following last years pay down of more than $500 million of debt we anticipate a further reduction of $400 million to $500 million in 2016. Even as this de-leveraging continues, we expect liquidity at year end to exceed last year's liquidity of $2.5 billion.

Having said that, let me provide you with an update on our debt reduction initiatives. During the quarter, we purchased and retired $60 million of our outstanding debt. In addition, we planned to use free cash flow to retire the $78 million in notes maturing this August. Through the combination of de-leveraging and refinancing we will continue to proactively manage our near term debt maturities which also while also actively monitoring market to identify further opportunities.

This includes refinancing and expanding the maturities of our $2.2 billion term loan and monetization of our home office building as well as select real estate properties. Of note we are proving information to over 80 perspective buyers demonstrating the significant interest we're receiving on the home office sale leaseback.

Now moving on to cash, cash and cash equivalents at the end of the first quarter were $415 million, $630 million below last year's first quarter. As I mentioned earlier, in the fourth quarter last year, we utilized $500 million in cash on hand to retire the outstanding term loan principal previously issued under our ABL facility.

Inventory was $2,925 million, up 4.1% over the same period last year. On a two year basis, inventory is up 3.2% in line with our two year comp stack of 3%. We continue to make strategic investments in inventory to drive the top line including expanding our online skew counts which were up over 50% year-over-year in the first quarter and improving our in-stock position both in-store and online. Our inventory build is heavily weighted towards our key growth initiatives including center core, beauty, athletic, footwear and handbags among other categories. We know these investments were help to drive our performance throughout the remainder of the year.

Merchandise accounts payable was $995 million, down $68 million over the same period last year primarily due to a change in timing due to receive associated with last year's portfolio.

Now let me walk you through our updated full year guidance, comparable store sales are expected to increase 3% to 4%. Gross margin is now expected to increase 10 to 30 basis points versus last year. SG&A dollars are expected to decrease versus last year. EBITDA is expected to be $1 billion.

Adjusted earnings per share is expected to be positive and free cash flow is expected to improve versus last year.

In closing what we see specially in the top-line this quarter given the challenging environment we are still able to deliver our bottom-line results. We know we have multiple pathways to achieve in our EBITDA goal and we remain focused on delivering it. And let me add that what we feel very good about the initiatives that we will rollout in the remainder of the year. We believe we can achieve our EBITDA target of $1 billion with the comparable store sales increase of 1.5% for the full year.

Understanding the inter customer discretionary spending patterns will likely continue in the near term we are prudently managing our business. Having said that the initiatives we haven't place today are concentrated on our customers are spending their dollars and will help position us to succeed in the challenging environment.

With that I will turn the call back over to Marvin.

Marvin Ellison:

Thank you, Ed and I'd now like to take an opportunity to provide an update on our strategic framework for 2016. As a remainder, JC Penney will focused on three strategic priorities the first is private brands. We will leverage our tremendous forcing in private brands infrastructure to become most efficient retailer that producing the portfolio private brands with style, quality and value. We are forcing ourselves around the world in over 200 in-house designers.

We posses a unique ability to grow our private brands penetration and increase profits because of the lack of the Penneys on third parties enrollment.

For the first quarter, private brands like Arizona, St. John's Bay, Liz Claiborne, Xersion, Stafford and JCP Home played a key role in our goal lead to deliver great value for our customers. And as we previously announced, we were very pleased with the expansion of our collection of Michael Strahan in nearly 500 doors by this -- day. In addition, based on the strength of our relationship with Michael, we launching an exclusive active lifestyle brand called MSX by Michael Strahan which is being developed by our best in class sourcing and designs.

We will launched these goods in nearly 500 stores just prior to --.

We also recently begin rolling out a new in-store plus-size concept called the Boutique in nearly 200 stores. This will be a one stop shopping destination for plus-size fashion which will include casual sportswear, denim and activewear. Additionally, our merchant and design teams have conceived and develop our first plus-size private brand for a lineal women called the Boutique plus. We are excited about a new collaboration with Project runway Winner Ashley Nell Tipton who further a brand ambassador will also -- two coming capsule collections for Boutique assortment.

Plus-size apparel represents the $17 billion industry and we will be a destination for millions of fashion contest for plus-size women who are not timing what they need in terms of stock, quality and value.

Second we are committed to becoming a world class omni-channel retailer. While there are opportunities to improve our e-commerce capability I believe we have the talent and resources to catch up quickly. Our EVP of Omnichannel, Mike Amend and his team have done an outstanding job of quickly closing the technology gap with our competition. This was evident in the first quarter as we delivered another significant increase in our digital business.

In the first quarter, we continued to rollout buy online, pickup in store same day, and this capability is now available in more than 20% of our stores. In the first quarter, our stores attach rate on BOPUS was nearly 40% which means as 40% of the customers who visited our store to pick up a BOPUS order also purchased additional items. We are pleased with year-over-year results and have plans to rollout BOPUS chain wide, prior to the back-to-school selling season.

And our final strategic priority is increasing revenue per customer. As I have said many times, we have approximately the same number of active customers to-date as we did in 2011. However, it is an opportunity to increase their frequency and the amount they spend on every transaction, and more than ever, customer are spending their money to update and beautify their homes and we believe J C Penney is in a unique position to offer a compelling assortment within major appliances, window treatments, furniture, and flooring. And to address these opportunities, let me give you a update on our new home initiatives that we announced earlier this week.

First, we are very excited about the expansion of our major appliance initiatives over 500 stores this year. As you know, we've been running a -- major appliances in 22 locations since the beginning of February, and we've been very pleased with the results. We'll be live on jcpenney.com nationwide next week with over 1200 items available to purchase from our partners from Samsung, LG, and GE. The online team has developed a best-in-class online experience that will provide a simple process for customers to purchase an appliance, schedule a delivery , install new units and haul away the old appliance in one seamless process.

We are also very excited about adding this business to our omnichannel portfolio.

We have a in-store nationwide rollout beginning in July with all appliance apartments slated to open later this fall. This will put us at over 500 stores selling major appliances. During the fall not were our sales and custom service scores phenomenal, we learned a lot. So let me quickly share some of the key findings from our pilots.

First over one third of our appliance customers were new customers to J C Penney. Approximately 70% of our appliance customers were female. The sales productivity was 10 times higher than the product in new appliance that -- . Over 70% of the appliance purchases were on the J C Penney credit card and 30% of those were new credit customers.

The average transaction was over $1200 and this business added low single digit comp sales lift to the entire store in the pilot location. Obviously we are very excited about the future of this category and we are even more excited about the new customers that are bringing to J C Penney. We will keep you posted on the rollout.

Second we are excited about the expansion of our window treatment offering. This is a lucrative category that represents $200 million sales opportunity and the plan is to increase and enhance the window coverings presentation about average of 25% in approximately 500 stores about early fall. J C Penney had a historically down position in the window business covering one third of the window in America as recently as 2006. J C Penney's unique product proposition includes readymade -- and hardware as well as custom home products.

As we reset the floor in our stores for appliances, we'll take this opportunity to restore the original treatment square footage in our stores giving us the flexibility to focus on spending hard window categories such as readymade as well as our large selections of curtains, and --. In and third we just recently announce our partnership with Ashley's Furniture and we are going to test 21 of their signature collections in select stores by Memorial Day weekend.

Ashley's is the largest furniture supplier in the US and most recognized brand. This new assortment offers a better value for our customer but a very relevant set of trends and designs. Ashley's logistics infrastructure is highly efficient with five warehouses nationally and the largest fleet of trucks in the industry along with shorter customer lead times and flexibility on inventory ownership.

Product will be directly shipped to our customers and J C Penney will own the floor samples but will carry no additional inventory. Ashley's core customers identified as family and value oriented and want products that make life easier and these attributes align perfectly with our key customer demographic of a modern American mall. In addition approximately 1500 skews of Ashley Furniture will be available on jcp.com and in time from Memorial Day weekend growing to over 4000 skews later this summer.

And lastly, we are excited about our new partnership with Empire Today flooring. Beginning in early July we'll start testing this in-store concept in two markets within Tampa and Washington DC Metropolitan areas. This is a unique and exciting opportunity for both companies. Empire Today inside J C Penny will operate independently and will be responsible for staffing the environment marketing and customer service.

They will occupy between 750 to 1000 square feet located in the home department and they will display samples of hardwood , laminate and vinyl and carpet competitively priced with our customer demographic. We believe this new category will be significantly accretive to the current profit dollars per square foot we currently generate in this unproductive space in our home department. And our data tells us, the customer's tend to purchase window and flooring in sequential transactions.

Therefore our plan is to display the Empire Today adjacent to updated window presentation.

We were very excited about the renewed focus on home and believe that our strategic focus on these initiatives would drive increased sales in the second half of the year while creating differentiation between J C Penney and traditional mid-tier department store. We would also contain to update you on our strategic plan working in key initiatives of private brands, omnichannel and increase in revenue per customer on future calls. We continue to make progress in our mission to reemerge as a world-class retailer and our associates are highly committed to this effort. Our ability to improve profitability in a difficult sales quarter only intensifies my excitement in the future of J C Penney.

I believe we have a right leadership team, the correct strategic focus to deliver J C Penney back to profitable earnings this year and achieve our goal of $1.2 billion of EBITDA by 2017.

And with that, Nicole will open the line for questions.

Question & Answer

Operator:

Thank you. Ladies and gentlemen if you have a question at this time, please press star and then the one key on your touch tone telephone. If your question has been answered I wish to remove yourself from the queue please press the pound key. Our first question comes from the line of David Glick of The Buckingham Research. Your line is now open.

David Glick:Buckingham Research:

Thank you. Good morning, Marvin just curious sort of the internal debate you guys had on the May 10 that three to four comp guidance obviously up in the first quarter. How are you guys going to manage inventories along the way? Obviously Ed said one and

Analyst:

half comp a million dollars But you cover too much inventory two aggressive sales plan that could but that equity we can just count, walk us through that decision process that checks and balances you have in place and how we should expect this improvement over the course of the year? Thanks.

Marvin Ellison:

Thanks. It's very, very basic approach, I mean we're taking a hard look at the trend. Obviously as we mentioned the first part of April was very challenging, but we had positive comes towards the end of the month and we had a positive selling environment for as whole Mother's Day selling period. So, we love the month of April than the month of May with some confident.

So, obviously if our current trend was headed in the wrong direction we will update the guidance. So, we have confidence in the trend.

Also as I mentioned, and Ed mentioned, these initiatives in the second half of the year, are very significant. These initiatives are not stopping and we're hoping that we work, but we create a very disciplined test and learn environment and the reason out that it was prudent to go through the data on the appliances pilot was because I wanted to articulate while we are aggressively rolling in that 500 stores. To sold we think the combination of recent brand we think the combination of key initiatives and appliances, center core, window expansion to benefit from our queue expansion and some of the categories that remain be work in more a like the new supporters etcetera, gives us confidence that we can in come in at that guidance.

Having said that, we have a very disciplined process on managing inventories and on a weekly basis we are looking at -- and John and our playing allocation team have done an incredibly good job of working with the merchant making sure that we our kind of finger on the pause and we know what we can cancel, we know we can chase and we are not going to get in trouble within the--.

Much to important for us to make sure that we manage our cash position well and we don't get over see. So our holding the sales is based on those savings and we are very confident that will be able to manage the business as well as manage the inventory.

David Glick:

Thank you. One quick follow up on marketing you said you discontinued the academy awards advertising campaign just wondered what if any lessons you took from Q1 obviously advertising was down, traffic sounds like it was down or there any learnings from the first quarter that if used to course correct or the second quarter back school and holiday. You feel like you need to step the level of marketing or any mixed lessens. Thank you.

Marvin Ellison:

We just couple of Steve. The decision not the responsibility academy award representing roughly 75% of our savings in marketing for the quarter. So that was a big contributor to the SG&A savings in marketing. For the quarter our expressions are over 3% we receive incredibly positive feedback on our new branding campaign.

We will always tweak our marketing strategy but we have no plans to make any major overall hall and what we are going to do in the second quarter we feel very comfortable with our strategy, but as always we will make adjustments along the way.

David Glick:

Okay. Thank you very much good luck.

Operator:

Thank you. And our next question comes from Oliver Chen of Cowen and Company. Your line is now open.

Oliver Chen:Cowen and Company:

Thanks a lot. Marvin I think your comments are really interesting about the transformation of the shopper and the transformation of the stores where products and services . How can you research are there any edges or demographics or this is more relevant and what's your thoughts about how the magnitude and how the store may needs the shift and how are you leverage your existing core confidence just to navigate that change as you rethink color the month the part should be modernize and Marvin was there anything as you look back past in this quarter it really -- like you controlled everything you could but did you where there any factors in which that you have to deliver you would have done a little bit differently in the tough environment.

Marvin Ellison:

Well I'd one great thing about retail is everyday you can give yourself a scorecard and we grated ourselves pretty harshly in the first quarter, because we believe that we actually could deliver better results but the market was incredibly challenging. As we listen to our peers in a competitive space we actually feel look better. That we really actually outperform based on the headwinds that we are up again. So I would say there always things that we looked back on that we could been differently as relate to timing of promotions, as it relates to the efficiency of our institution.

But overall I am incredibly pleased with the hard work of the team in order to deliver the profit performance that we were able to present in the tough or some very difficult headwind.

As relates to the customer and the industry as we spend a lot of time looking at data and I think one of the great lessons from the challenges that this company faced in the past is that the leadership team did not embarrass data and didn't really leverage data as the way of helping to developed strategy. And what the data tells us about customers is that we have really two types of customers. We have a current customer and emerging customer. Our emerging customer is been early 30s the female she is multi-- she has kids.

And so when you look at that customer, when we look at our current customers little bit more mature she is also female, but in case out of the home those customers have different ways they consume media and they have different desires on what they shop and how they stop.

And so what we have try to do and I think we have done it successfully is make sure that we've ready to focus on digital marketing and modernizing on one-on-one marketing to really address that millennial emerging customer while understanding that traditional media still matters for the customer thus our current customer. And when we look at our categories and we look at what customers were spending you heard that data always gives entertainment, its experiences, its home beautification and apparel was down because of the share of -- other places. So what we are trying to do is be very transparent about how we view the retail business and that we have areas in we know we can improve to get our largest share of our customers wallet and that task directly to appliances, that task directly to our expansion in windows area, that task directly to looking at Ashley's and the unpowerful pilots.

So we are making those adjustments and also I'll close with the value of experiences. We think us before inside J C Penney is a huge experience, experience you can get online. I mean we are going to be close to 600 stores by the end of the year and we are going to contain to open new locations next year. We thank our salon environment is in experience you can't get online.

Very important to our customer and something that when we do it well creates --. We think special-sizes is a category that our customer set to us but they don't like buying special sizes online because its to hard to make sure that they get right fit in style. So is now accident that we launched our first Plus Size private brand for women and we are rolling out our boutique in 200 locations. So, we're listing, we're addressing those customer needs and we think its going to allow us to perform very in the back half and give us strong future in serving our customers better.

Oliver Chen:

Thank you. Just a follow up, a final one is. Do you really feel like you can make your store less weather sensitive? Weather for better or worse is business is a large on going topic and it is just interesting you brought that up in terms of really trying to come back that factor which is playing to the volatility of what we've been seeing. So, I am just curious of when will that happen and what are the key factors we should focus as analysts in terms of understanding the roads becoming less weather sensitive at the department store?

Marvin Ellison:

Well, Oliver here's what I will say to you. I spent 12 years of my life in a different retail business that had strong correlation to weather and spent a lot of time on that a lot of time on it here at J C Penney. We believe that one category that will help us to minimize our weather sensitivities is appliances. It doesn't matter if it is snowing outside or sun's shining you are going to need a refrigerator, a washer and dryer and you are going to need a stove.

And so the predominant percent of our customers are home owners. They said to us that they would buy appliances from us if we sold them. Our power proved that to be accurate and we think appliances is one of those categories that we can have a promotional cadence around it that can help us to respond in a soft sales environment if we need to. So, that's one example of what we believe weather proof category for the future business.

Operator:

Thank you and our next question comes from the line of Neely Tamminga of Piper Jaffray. Your line is now open.

Neely Tamminga:Piper Jaffray:

Great. Marvin I wanted to take a little bit more into the home initiatives here, you said appliances, Ashley, Empire, all great announcements. Could you just remind us kind of are these capital light, capital heavy and then maybe some of the actual technical financial arrangements like will the sales of Empire be floated in to comps or they headed out other line items to just kind of better understand in terms of financial implications in the P&L that rolls out and then just a quick follow up on the apparels side within apparel, did you see any differences or just kind of curious because we are seeing some trend there did you see any any differences between women's apparel versus teen like -- but opening kids or we are kind to figure that out any sort of context could give around Mother's Day weekend will be helpful. Thank you.

Marvin Ellison:

Well that we are seeing on the apparel side in the quarter I mean in women's apparel we very like on the -- only really bright spot for Active wear was significantly up and we are pleased with that and we are very pleased with our private brand -- and as well as our great partnership with Nike. It really helps to drive that. As it relates to home all of our initiatives are in our 2016 capital plan. I mean we have strategically allocated capital in case the pilot results were good and so I wouldn't call it capital light or capital heavy but I will say the capital is appropriate but most important we are not holding inventory.

So its a low risk strategic investment for us. We are going to roll out appliances and the average store will have between 120 to 230 actual appliances in the store and we'll have over 1200 starting next week. We will own no inventory in any distribution centers. The same will Ashley's we are going to own only what's in the store, we are going to have the product store from their distribution centers and they have a best in class logistics infrastructure and Empire is the same way, sample product no inventory.

So on the financial arrangements, for appliances -- we sell the product, we make the revenue for the other categories of furniture and flooring it's a pilot so we are still working through what makes the most sense for us in our supply partners so more to come on that in windows obviously is a category we've had great history and we just want to regain it and we think we can.

Neely Tamminga:

Anything on Mother’s Day you could add, weekend.

Marvin Ellison:

We were pleased with the Mother’s Day selling season and that’s something that Ashley gave us confidence at least coming out of the first quarter to our hold our sales guidance for the year. We continue to work each day each week but for that entire selling season Mother's day we feel good about the progress we made.

Neely Tamminga:

Thank you.

Marvin Ellison:

Thank you.

Operator:

Thank you and our next question comes from the line of Paul Trussell of Deutsche Bank. Your line is now open.

Paul Trussell:Deutsche Bank:

Good morning gentlemen. Just want to continue the conversation on top line guidance. Certainly the positive comps heading into Mother's Day is encouraging. Frankly one of the better data points we've had all week but we also know that J C Penney is a destination during those kind of key shopping times and so just overall I am just kind of wondering Marvin, is your view in maintaining the comp guidance, is you view that the environment for apparel spending has not overall been altered or changed but that perhaps mid-March to early April was weather induced or something else going on.

Just still wondering about the conviction in maintaining the overall 3% to 4% comp guidance, or maybe even adding some color to the extent that appliance rollout is added to versus where your guidance start at the year.

Marvin Ellison:

Paul I mean obviously you could imagine we spend a lot time on this and it really came down to the simplified that we didn't believe that one quarter was significant enough to bring the entire year down especially based on -- that we are opening 60 Sephoras, we're rolling out Center Core to a third of our stores and the early rollouts have been successful in addition to accelerating the rollout of appliances to 500 stores. So as we thought about the new initiatives, we really felt good about the second half of the year because we knew that we have these initial demand and I thought I mentioned windows in 500 stores which in our pilot locations has been very successful. So we had some very tangible things that we felt great about that we believe would give us incremental sales growth in the back half of the year. So that was part of the equation.

The other part was when we look at apparel and just look at what happened in the first quarter, we do believe a lot of it was driven by wealth and we things almost driven by just a shift in consumer sediment. We don't believe that's a permanent shift but we believe that is something that will be able to recover from to get to that 3% to 4% we also understand that we're going to be in a much better position heading to back-to-school which is a critical season for us and other retailers and we just felt start if would not have been prudent to make a assumption on sales coming for the entire year based one quarter. Having said that, we have enormous discipline around managing inventory and we are going to look at it on a daily weekly basis and if we see our trend not performing to the level that it should, we will make the next third cost corrections. So we are not doing it for the senses here.

We understand what we have to do, we understand what our forecasts and our receipts will reflect that and we will make adjustments along the way but it is really based on the confidence of our initiatives. It based on the current trend and how the trend improved coming out of early April and we are hoping that trend continues.

Paul Trussell:

Great thanks for that. As we turn to maybe gross margins, Marvin or Ed, if you can just help us with some of the factors that led to the modest decline here in 1Q and how we should be thinking about private brand penetration clearance levels and margin supply chain shrink if you can just touch on some of those factors for gross margins both in the first quarter and going forward.

Marvin Ellison:

Sure Paul. I will take that. I think first quarter was predominantly impacted by our over penetration of clearance. Our margin on clearance was actually substantially better than it was last year.

We just sold a lot more clearance. We came into the year with little more fall and we probably wanted but we expected it to be a cold February expected to be able to sell that and frankly sell it before it got to clearance and we did not sell it in February. The customer wanted to bring in February and as we got into March and April, the customer weather got cooler than seasonal and the customer didn't want spring anymore they didn't want they were going to buy a coat in March or April so we ended up having the market gets up down and clearance was up for the quarter but the over penetration of clearance predominantly hit our margin. As we move forward we feel really good about our initiatives to drive additional margin.

Obviously we feel good about the content of the inventory go forward. I will tell you that almost all of our increase in the inventory is in basic goods so we feel good that we don't have an overhang or mark downs thrown into Q2.

And then when you look at the efficiencies we have as we continue to look at our supply chain initiative, the pricing analytics were good launching we feel good about the margin opportunities we have and again predominantly we have been flowing the margin guidance is around appliances rolling out and the impact it’s going to have particularly during the fourth quarter on our margin.

Paul Trussell:

Thank you.

Operator:

Thank you. Our next question comes from the line of Steven Ruggiero of R.W. Pressprich. Your line is now open.

Steve Ruggiero: R.W. Pressprich

Marvin can you just discuss how you were taking dollars out of transportation and logistics infrastructure given you are historically scaled to a larger sales base.

Marvin Ellison:

Well I think as a reminder we have a new supply chain that brought in 2015 and really what’s happening is more network optimization and just being more officiate on utilization. There are some very specific initiatives that Mark Robbins, Our a Head of Supply Chain and team put in place that's really driving cost down that we think we would be significant for the balance for the year just one real example we don't want to be only retailers in the US that were shipping garments hanging in the physical truck and what I learned years ago running a supply chain is that the most expensive thing to ship is air and we were shipping a lot of air and so from that my work is to really come up with a more efficient way to queue about a truck the take those transportation costs down and improve field rate and the quantity of good that's delivered to the store.

We've been extremely pleased with the results of that and is something that we will continue to benefit on. Mike also brought in some outside help and some technology to help us with the optimization of the network making through the week like DC locations we're using like over road lanes and we are understanding the efficiencies or we get product from the port.

So those are just examples but those examples are meaningful and for every dollar we can take out of our supply chain expense is accretive to gross margin and that is a big deal for us and so I look forward hopefully in the next call definitely -- outline specific supply chain initiatives that we're pleased with that we we'll reap big benefits in the future.

Steve Ruggiero:

Thank you for that and just shifting gears to the salon by in styles can you give us an update on that where are you with the stores and those that have experienced the changes, have you seen any unique differences in customer traffic.

Marvin Ellison:

The short answer here is we're very pleased with the change. We are seeing incremental traffic growth seeing better revenue and surprisingly what we didn't anticipate that we're seeing a higher quality of associates is so much easier for us to recruit high quality stylist with an existing clientele sell and book of business coming to work but at in style brand than a traditional J C Penney salon. We're still learning. We're going to roll out a little less than 100 locations this year for sure.

We are making suite -- and we're also excited about a new online scheduling system that we're rolling out company wide that will modernize the way a customer can make an appointment and update that appointment. All those things are underway. But so far we're very pleased and we think this will be a game changer for us as we figure out what the perfect model is.

Steve Ruggiero:

Great. Thanks for that.

Marvin Ellison:

Thank you.

Operator:

Thank your. Our next come from Jeff Van Sinderen of B. Riley. Your line is now open.

Jeff Van Sinderen: B. Riley:

Good morning. I wonder if you could just give us a little bit more color on e-com what you saw in the quarter, whether that accelerate or decelerated versus Q4 and then just relevant to the discussion on inventory to clarify on the warmer weather seasonal inventory are you where you want it be or because that was the slower category, do you have some I guess, -- that maybe you need to take some part of --

Marvin Ellison:

Okay, I'll take the e-commerce question and I'll let Ed take the inventory question. I mean we're very pleased with our e-commerce growth and as we mentioned in the call, part of that is just aggressive skew expansion. When I arrived to J C Penney, doing the turnaround efforts e-commerce was dramatically impacted and will we have philosophy that e-commerce should just reflect what we had in the store. Just extended sizes and colors and as I mentioned we brought Mike on Board and he has recruited some great talent and really inherited some talented leaders and they've really accelerated our e-commerce in a big way. We are pleased with the mobile strategy we are going to be launched in a new mobile app here in the next couple of weeks that we think will be game changer for us is in data and is perform exceptionally well.

We are going to be rolling our online pick up and store same day within the next couple of months and as I mentioned the part of this also been exceptional intend to get a 40% of tax rate with customers coming in that's exceptional. We are very pleased with the navigation, we are pleased with sites we increase our suppliers by 20% and our skews 50. So e-commerce really working well for us. We are still behind and we know that, but I will ask everyone to go online next week and look our new client site that will give you a view of the talent in and the skill level of our e-commerce theme because they build that site from -- and we are going to be nationwide selling appliances online starting next week and so I think that gives your glimpse into our confidence in that team and how we believe that will be a continued the integral part of our future.

In addition, I mean we are excited about creating full fulfillment locations from our stores. Today our stores are basically in the sale to sale more meaning we are out of stock in the -- DC. The order reverse to the store to pick it and skip it and we are in a process of identifying stores and they will be the primary fulfillment location which we think will allow to save delivery cost and obviously will give a stability to shift same day and next day and some examples and that's how we want to leverage a 1000 stores to really be more efficient retailer. So we are very pleased the growth has been incredibly strong and has maintaining and we see it only getting better.

So I had Ed to answer your question regarding inventory.

Edward Record:

Yes with regards to spring season. We feel like we are in the really good shape and our inventory growth as I said earlier is predominantly in basis and the initiatives like active center core introduce. So when you adjust for that our spring go forward inventory in the non-initiative areas is really flat to down. So we feel like we're in really good shape as we head in to Q3.

Jeff Van Sinderen:

Okay good and then as the follow up anything else that you could tell us about further expense cost you might be able to make obviously without negatively impacting the business and then any update on the debt--. Thanks.

Marvin Ellison:

So on the expense cost I think it's all about being operationally disciplined. -- came in to run store, operations and really the store team and one of the first things he wanted to do is create efficiency and how we used our store payroll. Meaning what percent of our payroll are we using for service and selling, what percent are we using to do things that don't impact the customer and within the first quarter -- identified over 0.5 million hours that we were spending that had nothing to do with customer service. Just totally inefficient and with the implementation of improved systems and processes we're able to reduce a 0.5 million hours over 0.5 million hours in Q1 just based on efficiency and it may no impact to the top line, it may no impact to degrading sales it was simply back office activity that we modernize and put technology in place to supplement.

As Ed mentioned, with are not expecting to replicate our Q1 SG&A savings throughout the year. While I think what we improved in Q1 is that we have a lot of efficiencies remaining that we can go away and we can capture and that is just one example of an area that we think is opportunity to reach and as we look around the entire company and we implement technology, we know with technology will allow us to reduce expense because we're gaining efficiencies. So a lot more to come and again we are not going to apologies that we are going to be relentless on taking our cost as order to the shareholders and for our revenue base we can't be a more efficient and are having a lower expense base and we can do that without putting any of our top-line sales at least. So Ed will take second part of your question.

Edward Record:

Sure regarding debt, as we've said we continue to keep an eye on the market I mean in last 6 to 8 weeks market is continuing to improve. So we feel them pretty constructive right now and continue to take a really hard look at that and hopefully we will have more to say about that at the end of Q2.

Jeff Van Sinderen:

Okay. Thanks.

Edward Record:

Thank you.

Operator:

Thank you. Our next question comes from the line of Randy Konik of Jefferies. Your line is now open.

Randy Konik:Jefferies:

Yes. Thanks a lot. I really appreciate the projection with the data. I guess couple of questions around that. Could you think about grouping the stores around the 524 excuse me 546 to support the 125 at the center core and then the balance with I will say nothing. How that the -- keys looks on the differential perspective across those -- I am just curios on obviously pricing or lifting -- key from the before order and of course just trying to get some perspective of how different it really is. Thanks.

Marvin Ellison:

It's really a great question. I don't have the data in front of me, but I can just give at a high level we know for fact that when we put a news before into a store we will get overall sales lift will. We will see the customer shop and more places than is four location and as I mentioned in my prepared remarks that we are most pleased with is that early on in our -- relationship we had to believe the we could not put debt environment in a role market or a smaller footprint store and we decided to test that vary and we've been incredibly pleased that brand works whatever we putted and as I mentioned our best performance in the history of our relationship from early sale per location is occurring this year in the phase of a very difficult a top-line environment. And so I don't have the data in front of me, but I'll follow the results from our early results will tell us that the center core locations are working because we do a test versus control and we know in those stores that received that new environment sales are up relative to their pair group, and we believe we are going to see the exact same thing to happened with appliances and we believe we are going to see the exact same thing happened with our update windows.

So, no data in front of me, but abruptly in that high level we know that these environment changes are making it different.

Randy Konik:

Got it. That's helpful and then as I think about Home Depot and the way these -- category managed in our Q4 proliferation based on current in the particular category like what say now versus power tools because that company -- you had a certain number of brands or skews because of the way the category there was. How do you think about that category sets of few or the depth of the category in the J C Penney area but what needs to be -- come down -- to be go up I am just curious on how you think about that and how you compel that experience in Home Depot in that category management philosophy and apply to a J C Penney?

Marvin Ellison:

Well, I don't know, that the comparison exist or is in the fact that Home Depot is world-class retailer and we're striving everyday to become a world-class retailer. But what I can't say, I have been incredibly impressed with the merchant team and incredibly impressed with their depth of knowledge of our assortments and how is the mix with the customers. I mentioned John who's been our Chief Merchant since fall of last year is taken the lead and really going through our own version category management and just asking very simple question what's the role and intent of every single category we have in our store and you can't do that unless you truly understand your customer.

And so Mary, our Head of Marketing and Chief Customer Outfit and her team has done a really nice job of working with John in the merchant team to bringing clarity to who is our customer. One of the key reasons why we changed our branding platform was because we felt that our old brand platform was not addressing the true needs of our customer because we did not know who the customer was. Now we have a very clear understanding so John and his team are taking the necessary steps of looking at the data, looking at our existing category, looking at consumers current and future spending and buying patterns and asking a simple question. What do we grow, what do we add and what do we eliminate and so that work is underway and that we are excited about the possibilities but we are very confident John and his team will help us to understand what works for J C Penny so more to come will keep you all update in on the progress.

Randy Konik:

That's helpful and I guess my last question is again I guess again I am thinking about Home Depot versus Lowe's and I think about Home Depot as that guy that guys go to get to men's -- and it's almost the preferred choice of the contracts or the -- they think its a job of really kind of highlighting that differential from Lowe's where you get more in this chatter about more from the -- when you look at J C Penney you wanted to make it continue to stand out with these support with the salon, with the appliances now, what's you really want, when you look across the spectrum of competition , what do you want that statement for that differential proceed that your customer goes to your cost?

Marvin Ellison:

Well I think for us, it all starts with the experience in the store. We rolled out a new service training program led by Joe and his team and we have re-trained every single associate in the store and that training is driven by the general manager and we just completed that and the good news is, we have seen service stores grow up on a weekly basis and the store based on the training and based on how is -- so the experience in the store matters. For us it really comes down to a couple of fundamental thing we want to be the number one choice for customers looking for star quality and value and we think we can do that by increasing our private brand penetration, we think we can do that by continuing to expand the fall inside J C Penney creating experience for salon and more importantly a lot of the customers come in and beautify our home our new vision of our home department. And so its star qualities value is our goal for our customers and we want to be the preferred choice when they want to come into buy.

Randy Konik:

Thanks very helpful Thank you.

Marvin Ellison:

Thank you.

Operator:

Thank you and our next question comes from the line of Omar Saad of Evercore ISI. Your line is now open.

Omar Saad:Evercore ISI:

Thanks for taking my question. Good morning. Marvin I wanted to dig in a little bit further on some of your comments around private label credit card. It sounds like that's accelerating a little bit associated with expansion on the appliances.

I also think there is correct me if I am wrong is been a slight change in the loyalty reward program and how that consumer gets rewards in that program maybe you could elaborate on that if you are seeing any kind of early progress also on that side as well and with the acceleration of appliances to the change your time frame of when you think you get more industry average private label credit card penetration .

Marvin Ellison:

Saad, great question. On credit because the quarter was down and we still are very pleased with the progress that we are making on the number of applications, new accounts and penetration was up so again we are excited about that. We are also pleased with the approval rates and all headed in the right direction so penetration up roughly 240 basis points in a tough top-line quarter we are very pleased with that.

Regarding loyalty we launched the new program in the first quarter still early days but we hope to have a more detail view of the data but early that's resonating and is a much more receptive program for customers been the previous program but again its still early and I look forward to updating you more in the future and regarding appliances, one of the key learning from the appliance part is the number of customers that made a purchase with their JC Penney card and the number of new customers that joined us to -- make a appliances purchase. Is one of the reasons why we did accelerate it because look without question, our penetration still remains significantly lower than our competitor. So we have a huge opportunity to get our penetration up. That being said we think appliances will play a key role in not only driving up the penetration but also getting our average ticket up dramatically and driving gross profit dollars per square foot in an area that desperately needs this.

So more come but we are committed to credit and we know the credit will be a significant benefit not only from SG&A standpoint but from a customer loyalty from the top-line revenue.

Omar Saad:

And then Marvin could you maybe elaborate a little bit more on the changes in the loyalty program from the consumer perspective how it's different in the than it was before why you made those changes?

Marvin Ellison:

Well I think one of the key changes is the expiration of points I mean in the past our program was very confusing. We didn't leverage the data very well. Our points expired and the customers didn't really embrace it so it was an expensive program to operate. It was a confusing program to articulate and that's a bad equation for any retail that have a consumer base.

The other part that we changed was we wanted to gain more benefit to our credit customers. So if you are a credit customer, you want you to have greater portfolio of benefits which is also very important. And candidly we are piloting different programs around the country just to continue to get a read on one of the reason why I am hesitant to give into a ton of detail because we are still trying to understand which component works and which does not work but overall the biggest change is points is not expiring and dramatically more benefits for our credit customers so we can set them to use credit. But more to come and again we are pleased with the early results but we want to make sure that we design a program that will really resonate.

Omar Saad:

Thank you. Good luck.

Marvin Ellison:

Hey thank you.

Operator:

Thank you and that is all time we have for questions. I would now like to hand the call back over CEO Marvin Ellison you may begin.

Marvin Ellison:

Thank you. Again thank you for the questions. We look forward to updating you on the continued performance of our business on our next earnings call. Thank you.

Operator:

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.