This summary is based on the second quarter fiscal 2007 earnings call conducted by JC Penney Corporation, Inc. (JCP) on August 20, 2007.
Chairman & Chief Executive Officer: Myron Ullman
President & Chief Merchandising Officer: Kenneth Hicks
Chief Financial Officer: Robert Cavanaugh
Key Investors Issues
- Operating income increased 17.5% to $329 million.
- Revenue was $4.4 billion compared to $4.2 billion last year.
- The company opened 15 new stores, 13 in the off-mall format.
Second Quarter Highlights
Net sales increased 4% from $4.2 billion to $4.4 billion, despite a challenging operating environment.
- Operating expenses rose 3% to $1.3 billion due to higher pre-opening expenses.
- Pre-opening expenses totaled $15 million, in support of 15 new stores opened in the second quarter, and 28 new stores opening in the third quarter.
- Interest expense was up $5 million from $32 million in the prior year to $37 million, including $12 million for early debt redemption.
Operating income increased 17.5% from $280 million in 2006 to $329 million due to improvement in all areas i.e. sales, gross margin and SG&A.
- SG&A improved as a result of leveraging salary related expenses and direct operating expenses.
- Net income was $182 million compared to $179 million in the prior year, reflecting continued benefits from improved planning and allocation technology and processes.
- Earnings per share rose from 79 cents in 2006 to 81 cents due to a reduction in shares outstanding.
Long term debt, including current maturities amounted to $3.8 billion up from $3.1 billion indicative of the increasing outlets opened.
- Capital expenditures at $598 million were in tandem with expectations and compared favorably with $323 million incurred in 2006.
- A total of 22 new stores have been opened since the beginning of the year, with 15 during the quarter.
- Share repurchases of 5.1 million common stock concluded the $400 million common stock repurchase authorization.
Department Stores
- Total company sales increased 3.6% and comparable department store sales increased 1.9%.
- Sales patterns were impacted by the fiscal calendar shift with sales from the first week of August, which is a significant back-to-school week, shifting into the July reporting period.
- Sales increased across most areas, with the best performance in the North West and South West regions.
- Private brands continued to out-perform the store average, benefitting from the success of newer brands such as a.n.a and east5th in women’s apparel and Studio in the home division.
- New launches continued to do well, including Ambrielle, and two new brands from Liz Claiborne Company, Liz & Co. and Concepts by Claiborne.
Home areas, i.e. house wares, bath and gifts did well, offsetting softer trends in big ticket home categories.
- The back-to-school selling season started of strong, with encouraging results in areas such as Juniors, Boys & Girls, Young Men’s and Shoes.
- An additional 22 Sephora were opened inside JCPenney shops briging the total to 36 Sephora shops in line with the year end target of nearly 50 shops.
- JCP.com was the fastest growing sales channel, increasing 17.4% though overall direct sales decreased 2.3% as a result of challenges in catalogue which were impacted by soft sales in the spring and summer Big Book.
- Gross margins increased 80 basis points from last year ending at 38.1% of sales, reflecting continued improvement in product flow and better overall inventory management.
Upcoming Highlights
- A total of 28 new or relocated stores will be opened, with 22 new store grand openings on October 5 bringing the total new store count for 2007 to 50, in line with plans.
- The company has 10% of the 10% denim market share and the largest Levis business in the world with an opportunity to build on leadership position with the launch of new products such as C7P a Chip and Pepper Production, in both juniors and young men’s this season.
- In intimate apparel, specifically private brands Ambrielle and Flirtitude continue to do well.
- In children’s, improvements are being made on presentation in active wear making it easier for mothers’ to shop.
- In the Dorm Shop assortments in many categories, especially in bedding have been expanded.
- Every Day Matters brand positioning was introduced to teens with new in-store style graphics and additional promotions targeted for the teen.
- Commercials supporting the Every Day Matters positioning are being flighted, including webisodes for the C7P introduction, and movie trailers based on new commercials.
Third Quarter Outlook
- Sales will vary by month from last year''s sales pattern, with a t benefit expected in the October period due to the timing of reporting of events in the fiscal calendar.
- Total department store sales are expected to increase low- to mid- single digits.
- Comparable department store sales are expected to increase low-single digits.
- Operating income margin is expected to be about flat versus last year.
- Approximately 224 million average shares of common stock, including about 3 million common stock equivalents.
- Third quarter EPS are expected to be $1.28 per share, increasing to $2.41 per share in the fourth quarter with improvements expected in both gross margin and expenses.
Fiscal 2007 Outlook
