J.C. Penney Company, Inc. (JCP)
Q2 2010 Earnings Call Transcript
August 13, 2010 9:30 a.m. ET

Executives

Kristin Hays – Vice President, Investor Relations
Robert B. Cavanaugh – Executive Vice President and Chief Financial Officer
Myron E. Ullman III – Chairman and Chief Executive Officer

Analysts

Deborah Weinswig – Citigroup
Adrianne Shapira – Goldman Sachs
Dana Telsey – Telsey Advisory Group
Charles Grom – J.P. Morgan
Christopher Cuomo – Morgan Stanley
Robert Drbul – Barclays Capital
Lorraine Hutchinson – Bank of America/Merrill Lynch
Michael Exstein – Credit Suisse
Wayne Hood – BMO Capital Markets
Sean Naughton – Piper Jaffray
Erika Maschmeyer – Robert W. Baird & Company

Presentation

Operator

Greetings and welcome to the JCPenney Second Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If any should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kristin Hays, Vice President, Investor Relations. Thank you. Ms. Hays, you may begin.

Kristin Hays

Thank you, Jacky and thank you all for joining us on the call this morning to review J.C. Penney''s second quarter earnings. 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 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.

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 August 13, 2010, 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 will have two speakers. First, Bob Cavanaugh, our Executive Vice President and Chief Financial Officer, followed by Mike Ullman, J.C. Penney''s Chairman and Chief Executive Officer. Now, I''ll turn the call over to Bob.

Robert B. Cavanaugh

Thanks, Kristin and good morning everyone. I will be speaking with you this morning about our financial results in the second quarter. Mike will then provide additional color around our results and update on our strategic initiatives.

This morning, we reported second quarter earnings of $0.06 per share, compared to breakeven results last year and within our guidance of $0.05 to $0.08 per share. Including the $0.05 impact for bond premiums incurred in connection with the company''s debt tender offer completed in May.

Our second quarter results demonstrate our commitment to operational flexibility and delivering improved profitability. Sales for the quarter were challenged by the company''s performance in July, and in particular were impacted by two non-comparable factors that Mike will discuss in a few minutes.

All other financial and operational metrics exceeded plan for the quarter and first half earnings were $0.31 per share compared with $0.11 per share in last year''s first half. Gross margin exceeded plan and improved 90 basis points to a historic peak for the second quarter of 39.4%, primarily due to our ability to control unit costs through strong sourcing relationships and through more profitable sales of clearance merchandise during the quarter under our Red Zone clearance strategy.

Also contributing to gross margin was exceptional sell-through of wear now merchandise, combined with year-over-year shrinkage improvement attributable to our shrinkage reduction initiatives. Our team continues to exhibit discipline in managing our operating expenses across the entire organization, as SG&A came in much better than guidance, up only 2.5% over last year.

The increase in SG&A dollars is partially attributable to expenses related to new stores and the continued rollout of the Sephora inside JCPenney boutiques. These increases were partially offset by a reduction in the incentive compensation accrual.

Operating income for the quarter was up 41.8% to $95 million, compared with $67 million last year. As noted in the release, if we exclude the impact of the non-cash qualified pension plan expense from both this year''s and last year''s second quarter, adjusted operating income increased 7.1%.