J. C. Penney Company, Inc. (JCP)
Q3 2008 Earnings Call Transcript
November 14, 2008 9:30 am ET

Executives

Phil Sanchez – Director of Investor Relations
Kenneth C. Hicks - President
Robert B. Cavanaugh - Chief Financial Officer
Myron E. Ullman III - Chief Executive Officer

Analysts

Charles Grom - J.P. Morgan
Robert Drbul - Barclays Capital
Deborah Weinswig - Citigroup
Michael Exstein - Credit Suisse
Bernard Sosnick - Gilford Securities.
Uta Werner - Bernstein Global Wealth Management
Lizabeth Dunn - Thomas Weisel Partners
David Glick – Buckingham Research
Michelle Clark – Morgan Stanley

Presentation

Operator

Greetings and welcome to the J. C. Penney Company, Inc. third quarter earnings conference call. (Operator Instruction) At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. At that time if you’d like to ask a question please press “*1” on your telephone keypad. If at any time should you require operator assistance during the conference please press “*0” on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Phil Sanchez, Director of Investor Relations. Thank you, Mr. Sanchez, you may begin.

Phil Sanchez – Director Investor Relations

Thank you, Latania (ph) and thank you all for joining us on the call this morning, to review J. C. Penney’s third quarter earnings. We have scheduled this call to last about 45 minutes, which includes time for questions and answers. Before we begin, let me remind everyone that the discussion this morning includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect 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. Also, please note that no portion of this call may be rebroadcast in any form without the prior written consent of J. C. Penney.

Replays of today’s webcast will be available for 90 days. For those listening after November 14, 2008 please note that this recording will not be updated and it is possible that the information discussed will no longer be current. On this morning’s call we have three speakers: Ken Hicks, President and Chief Merchandising Officer, will discuss our third quarter results and provide an update on some of our initiatives; Bob Cavanaugh, Executive Vice President and Chief Financial Officer, will add some more detail on operating results for the quarter and review our financial condition; and Mike Ullman, Chairman and Chief Executive Officer will make some concluding remarks before we take your questions.

Now, I will turn it over to Ken Hicks.

Kenneth C. Hicks -- President

Thanks Phil and good morning. This year’s third quarter marks the fifth consecutive quarter in which our customers have been dealing with the challenges of a deteriorating economic environment. With the benefit of J. C. Penney’s strong financial position, we have been able to continue focusing on the business initiatives that will best position J. C. Penney to gain market share, both in the current environment and when the situation improves in the future. Let me begin with a recap of the third quarter. Consistent with the update we provided in our October sales release this morning, we reported third quarter earnings of continuing operations of $0.55 per share. This reflects a number of factors, including a decline in sales stemming from the lower mall traffic levels and severely restrained consumer spending. On the brighter side, we made further progress in reducing our inventory levels to reflect both current and expected sales demand. We also continue to be successful in controlling our operating expenses in response to lower sales.

Total sales for the period decreased 8.7% and comparable store sales decreased 10.1% compared with the 2.4% comp decrease in last year’s third quarter. As noted in our October sales release, sales during the last week of the quarter were negatively impacted by a promotional shift that moved a significant event into this year’s November period from last year’s October period. From a geographic perspective the Northeast and Central regions had the best sales trends, while the Southeast and Southwest regions were the weakest, where the impact from soft housing markets has been most pronounced. On a positive note, J. C. Penney continues its leadership position in apparel, where our sales trends have been stronger than our competitors. For the third quarter women’s and children’s apparel and family shoes were our best performing divisions. By contrast, and consistent with both our recent results and those of the industry, our fine jewelry and home divisions continue to be our weakest businesses.

J. C. Penney’s industry leading Internet business, one of the largest general merchandise e-commerce sites, has also been impacted by the weakness in home division sales. For the quarter jcp.com sales decreased approximately .3 principal percent versus an 11.8% increase last year, as a result of home merchandise comprising a significantly larger portion of catalog and online sales than it does in our stores.

For the quarter our gross margin rate decreased by 120 basis points to 38.5% as a result of increased clearance activity in response to soft sales and to meet our inventory objectives. Our SG&A was very well controlled during the quarter and Bob will provide you with details on this topic in a moment. With respect to inventory management we continue to take significant action and as of the end of the quarter total inventory is down 5.6% despite the addition of 35 new stores since last year’s third quarter. We are satisfied with our inventory position, which is down approximately 9% on comparable store basis versus last year and in alignment with our expectations for sales trends over the remainder of the year. In the third quarter we opened 12 new stores, 11 of which were in our off-mall format. We have now completed our plan to open 35 new or relocated stores in 2008, which represents a 2.8% increase in gross square footage.

In addition to new stores, we have also completed 21 major renovations, 3 expansions, 90 store refurbishments and updates, and significant fixturing and store environment improvements in over 600 stores across the country. We also added 10 new Sephora inside J. C. Penney locations, which brings us to 91 locations. Sephora brings an industry-leading beauty concept to our customers and continues to be one of the strongest parts of our business. We will further expand this concept with 64 additional Sephora inside J. C. Penney locations planned to open next year. Overall, our third quarter results were not what we planned, but with the successful execution of our bridge plan we were able to take actions to protect earnings and still bring inventory levels to the appropriate level. Let me turn now to the initiatives we have underway to drive our business in the fourth quarter and into 2009.

First, I would like to cover what we are doing from a marketing perspective. We recognize the pressures facing our customers this holiday season and the unprecedented competitive environment for retailers. Customers want great style, they want lasting quality, and they want to give gifts that are memorable, special, and reflect thought and care; and they want it all at a very affordable price. As a result, we know it is especially important to communicate a clear, compelling message to our customers that reinforces all the reasons to shop with us. J. C. Penney has always been known for offering quality at great prices and now, more than ever, we have the style she’s looking for. We know that every day matters to our customers, especially in difficult times. The objective of our marketing is to clearly provide our customers with the answer to the question, “Why J. C. Penney?” To answer this we have planned an aggressive, integrated marketing campaign to explicitly show how we are making the joy of giving come alive in our stores, on jcp.com, and in our catalogues.

Our first holiday ads launched today and you will see them in various forms on television, in cinema, in print and even mobile messaging. They are charming, compelling, and show the great value in shopping with J. C. Penney. In addition to our strong marketing campaign, we also recognize the importance of having newness in our merchandise assortments. For this holiday season we have redoubled our efforts to provide our customers with a better-than-ever Red Box gift collection with distinctive, stylish gifts for every member of the family.