J.C. Penney Company, Inc. (JCP)
Q4 2009 Earnings Call Transcript
February 19, 2010 9:30 a.m. ET

Executives

Phil Sanchez – Vice President of Investor Relations
Myron E. Ullman III – Chairman and Chief Executive Officer
Robert B. Cavanaugh – Executive Vice President and Chief Financial Officer

Analysts

Deborah Weinswig – Citigroup
Charles Grom – J.P. Morgan Chase
Michael Exstein – Credit Suisse
Robert Drbul – Barclays Capital
Lorraine Hutchinson – Bank of America/Merrill Lynch
Dana Telsey – Telsey Advisory Group
Liz Dunn – Thomas Weisel Partners
Adrianne Shapira – Goldman Sachs
Wayne Hood – BMO Capital Markets
Michelle Clark – Morgan Stanley
Jeff Klinefelter – Piper Jaffray
Erika Maschmeyer – Robert W. Baird

Presentation

Operator

Greetings and welcome to the J.C. Penney Incorporated Fourth Quarter 2009 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 one 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, Phil Sanchez, Vice President of Investor Relations for JC Penney Company, Inc. Thank you, Mr. Sanchez, you may begin.

Phil Sanchez

Thank you, Bob and thank you all for joining us on the call this morning to review JC Penney’s fourth quarter and full year 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, belief 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 JC Penney. Replays of today’s webcast will be available for 90 days. For those listening after February 19, 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’ll have two speakers, Mike Ullman, Chairman and Chief Executive Officer and Bob Cavanaugh, Executive Vice President and Chief Financial Officer. Now, I will turn it over to Mike Ullman.

Myron E. Ullman III

Good morning. Thank you for joining us. In reflecting back on our approach to last year, I would say that 2009 was certainly a year of great discipline and planning for growth that delivered better than expected results for our company. We accomplished what we set out to do in 2009. In fact, we beat every planned metric across the board in spite of the most difficult economic climate that most of us can remember.

While we planned our business for a tough retail environment, understanding how difficult it would be for America’s families, we also saw 2009 as an opportunity for us to strengthen our business by stepping up our styles that we offer and significantly improving many aspects of our operations in order to put in place a strong foundation for growth. This time last year we planned for a comparable store sales decline of 10% for the year but in fact, delivered 370 basis points better than that with a decline of 6.3% for the year.

We planned for our EPS to be $0.20 for the year and actually delivered $1.07 per share even with the impact of our non-cash pension expense, having successfully executed our strategy to generate profitable sales during the year. We planned gross margins to modestly improve but delivered gross margins that were 200 basis points higher than 2008. At 39.4% of sales, our margins beat our historic peak.

We expected free cash flow to be $100 million, but we delivered $806 million and ended the year with $3 billion of cash on our balance sheet. In short, our balance operating strategy worked. We made it our mission to protect our profitability by tightly controlling our inventories and planned our business around the lower sales levels for the year which including not choosing to anniversary several promotions during the year which would have not been productive to our bottom line.

For example, the impact of our total sales for the year from lower clearance merchandise was about 350 basis points in sales for the year. This was the essence of our bridge plan which we put in place when the economy began to turn down two years ago and it has proven to be the right approach. In a moment, Bob will walk you through the details of the fourth quarter but from a full year operational perspective 2009 marked a year of refinement for our business in two key areas.

First, refinement in our merchandising structure and execution and, second, refinement in our customer experience. In terms of our merchandising structure, rather than appoint a single chief merchandising officer, we chose to align our merchandising organization with three seasoned merchandising executives, two who focus on the apparel offerings and one who focuses on our big ticket businesses.

These three senior GMMs are supported by a depth of talent within our company including five general merchandise managers, 22 divisional merchandise managers and 96 merchandise action teams. A MAT team is focused on a key business and we have a fully integrated process to offer up-to-date stylish merchandise in order to ensure that we deliver the right assortment and correct quantity for each community we serve.