Q3 2019 Earnings Call
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Thank you, Kevin and good morning, everyone.
As a reminder that 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 a future events and financial performance.
The words expect plan anticipates believes and similar expressions identify forward looking statement.
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 are current expectation.
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For those listening after November 15th 2019. 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, well management will not be speaking directly to all slides presented these lines are meant to facilitate you review of the company's result and to be used as a reference document following the call.
Joining us on today's call our gel Salto, Chief Executive Officer of JC, Penney and Bill Walford, Our Chief Financial Officer. Following our prepared remarks, we look forward to taking your questions with that I'll now turn the call over to Jim.
Thank you Kelly and good morning.
Past quarter wasn't exciting and energizing time, a JC Penney.
As you saw in our release. This morning, we increased our adjusted EBITDA expectations and reaffirmed all other financial guidance metrics for full year 2019.
We delivered meaningful gross margin improvement this quarter driven in large part by increased enterprise selling margins improve shrink results and the exit earlier in the year, a major appliance an in store furniture categories.
Inventory levels were down 9% at the end of the quarter and down 14% when compared to the end of the third quarter 2017, reflecting our continued discipline and commitment to improved inventory management and productivity.
This was our plan and we are pleased with the result.
Bill will cover our financials, but before we do that I want to provide further detail on our strategy to return JC Penney to sustainable profitable growth.
On our call last quarter I referenced our focus on renewing the business.
Well I am pleased with our continued progress on inventory management gross margin improvement and adjusted EBITDA, We're laser focused on our plan for renewal.
Today I'd like to share the five component of that plan.
Coupled with our deep understanding of the customer these components guide everything we do.
These components are drive traffic.
Offer compelling merchandise.
Provide an engaging experience.
Fuel growth.
And build our results minded culture.
Let's get right to it.
Understanding these components will clarify all the work we have done and where we are going.
The five component of our plan for renewal reinforce and drive one another and I want to take some time to share each with you.
I am confident in the strategic choices, we've made and by implement implementing them, we will restore JC penney to profit growth and our rightful place in the retail industry.
Over the past here, we have worked tirelessly to better understand the customer.
So when we think about the best way to deliver the first component of our plan for renewal drive traffic, we know we need to deliver something different.
We view our footprint in malls as a way to engage in new ways with customers.
Using our space to present, our merchandise with a fresh approach and provide experiences and services that customers want and are giving us permission to offer.
We know a lot about our customer focus segment.
We conducted holistic research that was broad and deep speaking to thousand a retail consumers that included those who shop on those who used to and those who don't even consider us.
Our efforts are centered on cycle graphics, and knowing what drives a customer attitudinally and behavior really truly understanding what's important to them.
Our customer focus segment is the all in shopping enthusiast.
Learning what this customer wants and what we're not delivering is shaping our actions across all channels. So we can drive traffic and capture more share.
So all in shopping enthusiast live life to the fourth and seeks the most of everything.
They are the most confident in their style vision, yet most open to input and expertise.
They are both willing to invest the time and money to get it right.
There are the most excited by choice and innovation and our most connected with their family friends and community they pride themselves in making life happen for their loved ones.
This shopper told us they liked them. All these are serious shoppers, who respond to compelling merchandise and engaging experiences.
Our research shows that the all in shopping enthusiast represent over a quarter of all home and apparel retail sales.
And the good news is they are already shopping with us.
We need to deliver on what is imperative to this customer, allowing us to capture more of their wallet.
And by getting it right it will halo onto other valuable customer segment.
We need to connect with them unimportant emotional drivers.
And they told us that no retailer is consistently delivering on these key imperatives.
The all in shopping enthusiast has told us they want a retailer that reflects their lifestyle and makes them feel good about themselves.
Truly understands the important moments in their lied big and small.
He is a place that fund to shop and share with others.
As we think about every element of the shopping experience the exploration the discovery and the purchasing in store online and through our App, we're working to connect with them on these emotional drivers.
We know that nearly 90% of customers begin their path to purchase online.
We continue to work on our e-commerce experience to drive traffic across all channels.
We are building a viewpoint of what needs to be done and customers will continue to see incremental improvement overtime.
Our marketing approach that began this quarter and continues into holiday exemplifies customer centricity and every aspect.
Our brand voice established establishes differentiation for JC Penney this combined with heavy lifting communications support our promotional event.
We do not see brand and driving traffic as separate pursuits.
They complement each other across every media channel to grow confident in and preference for the JC Penney brand.
Which leads us to the next component of our plan for renewal.
Offer compelling merchandise another signify a significant driver of traffic online and in store.
Since she joined JC Penney earlier this year, Michelle was low chief merchandising officer and her team have been hard at work on our merchandising strategy.
They began their journey influencing the fall and winter collections by re energizing, our private and national brands.
Spring will mark the first collection her team has managed from start to finish yet what they have done with the current collections is resonating with the customer.
Our fall for you event, which focused on Hughes of Brown, and Spice Latte and featured animal print from brands, including Worthington, M&A and Liz Claiborne exceeded our expectations.
In Levis, we are encouraged by the customer response to our expanded offering.
In addition to great denim, we've added relevant pieces, including T shirt jackets and other layering item. So our customer can complete their look.
We also had a strong start to our recently launched men outdoor shop.
Categories, such as sweaters heavyweight Wovens and shirt jackets performed well from both private and national brands, including St. John's Bay, Hi, Tech American Outdoorsman and American threats.
The all in shopping enthusiast is driven by style and newness and continuing to deliver on this is key.
Furthermore, understanding how this customer lives their life is critical to our success.
Through our extensive consumer research, we identified the five lifestyles, which shaped our approach to merchandising in a way that would resonate with our customers and how they want to shop.
This will enable us to make an emotional connection with the all in shopping enthusiasts.
We are merchandising bodies lifestyles, which one for all product decisions and future experiences.
These lifestyles representing important moments in the customers day week and life are.
Move for everything from low to high impact.
Chill for the stylists five to nine you plus great lounge and sleepwear.
All day for casual workwear and weekend wear.
Onpoint for when you want to be a bit more refined and polished.
Shine for those special occasions.
Our clearly focused lifestyles will provide the framework for our brand architecture, each brand private and national serves a purpose within these lifestyles delivering the looks our customers want.
We started first in womens and we will extend this architecture to men children's and home.
As I mentioned on the second quarter earnings call Stacy Shively recently joined the company as senior Vice President G.M. home.
She is developing a comprehensive strategy, which includes adding and intensifying key national brands that are already resonating with customers.
These include instant pot, correct Ninja Brookstone sharper image and more.
These early efforts are encouraging and we will have more to share in the future as we reestablished our dominant in the home category.
Another element of providing compelling merchandise is our visual merchandising strategy.
Visual merchandising brings the product to life and inspire shopping through storytelling is how the customer connect and find themselves in a retailer it encourages wardrobing and makes putting outfits together easy.
It may seem obvious to have visual merchandising in a department store yet it is something JC Penney had moved away from in the past and that was a mistake.
Through our research, we know that visual merchandising coupled with proper inventory management and of course, the right product creates an emotional connection with the customer which is another step to driving traffic and sales.
With these insights we tested visual merchandising in womens within the five lifestyles.
Given our initial results. We recently implemented this strategy into 92 stores to start.
We are currently measuring the impact and we'll continue to refine and expand this effort in a way that best served the business.
As I referenced earlier, the all in shopping enthusiast likes the mall, but we know we need to be more than a department store, which brings us to our next component provide an engaging experience.
The all in shopping enthusiasm told us that they want a great experience both for themselves and to share with friends and family.
Last quarter, we told you about our test and learn which for for single store concepts, most notably the styling room.
We took our learnings and incorporated three of the test and learn along with the lifestyle merchandising and visual merchandising into a single store.
Our learning and the performance of that store gave us the confidence to move forward [noise].
[noise] nothing in bodies the effort to provide an engaging experience more than the recent grand opening of our brand defining store in Hurst, Texas.
Before I talk more about that I want to be clear that the brand defining store is an investment in our future.
Our brand defining store is not a prototype to roll out across all our stores and it is not a flagship store our brand to finding store is the fullest articulation of our customer strategy.
It is this store, where we can leverage learnings from customer feedback yet also observed customer preferences and shopping behaviors.
It provides an inspiring shared experience and engages customers in new ways.
It's a lab there are over 100 touch point that will inform future actions as part of our broader strategy.
Putting the customer at the heart of everything we do to return JC Penney to sustainable profitable growth.
The store showcases our compelling products and brands, our customers know and love.
Our brand to finding store brings together every touch point and initiative from our research and the test and learn including lifestyle merchandising visual merchandising product the Jason seats and cross merchandising.
In addition customers have consistently told us that they want us to make their shopping experience easier and a fun place to share with others.
We've created differentiating elements that will deliver on these imperative.
Our first ever mens styling room and of course are women styling room, which with dedicated style experts and innovative technology to get new sizes are colors brought to your fitting room.
A destination to complete the look the all use zone showcasing fashion jewelry and accessories, a new open concept so for a inside JC Penney and a re imagined salon by Instyle, which include spots services.
The Barbary pennies first ever Barber shop for fresh cut shave or shoeshine.
Styling substance lifestyle workshop.
The movement studio offering instructor led fitness classes.
We've created a kids destination complete with a clubhouse and interactive digital art with our authoritative Disney shop at the center.
There are a 11 lounges, including a cafe and obese trail powered by a local partner.
And the Shutterfly picture pop selfie studio the first ever of its kind.
And not to forget the many social media moment around the store.
And so much more.
We know the all in shopping enthusiast is not loyal to one store or brand.
By offering both compelling merchandise and engaging experiences we will engage differently to drive traffic and capture more share.
To deliver on that commitment we must fuel growth our fourth component through gross margin improvement asked DNA efficiency and an optimized capital structure.
In a few moments bill will go into more detail on our progress on this important component of our strategy.
Which leads me to the final component of our plan for renewal build a result minded culture.
As I've stated before the only way I know how to rebuild a business is through a holistic approach across all the key tenets of strategic purposeful and effective retailing and having the right team is critical to achieving this.
We are developing our results minded culture focused on accountability urgency an innovative problem solving at all levels of the organization.
This includes senior leadership that we continue to build with a blend of talented JC Penney veterans and new talent.
We have attracted top talent in the industry some of the best and brightest who have been through good times and bad they understand the fundamentals of retail and they also know what it means to innovate and transform.
As you May have seen Lori Wilson recently joined US as senior Vice president of pricing planning and allocation.
She brings over 20 years of executive leadership from Macy's.
Lorries extensive experience in planning and allocation merchandising pricing Omnichannel and operations will play a significant role as we focus on our immediate actions, including restoring disciplines required to enhance inventory management and lower our cost of goods sold.
All these leaders are in place to support our team and we have made progress in how we operate at every level of the company.
We are building a culture that connect each associate to achievement larger than the individual.
It's imperative that all our associates understand where we're going as a company and how their role contributes to our success in our innately connected to our plan for renewal.
There is renewed energy in a sense of clarity at pennies by maintaining the momentum I am confident we will reach and exceed our potential.
Now I will turn the call over to Bill who will provide an in depth financial update on the quarter.
I will return to close out the call and take any questions you may have bill.
Thank you Joe and good morning, everyone. It's a pleasure to join you on the call today.
As Joe mentioned.
Component in our plan prune Newell is fueled growth.
We are confident we can fuel the profitability of our operating performance by taking unnecessary or unproductive SGN expense.
Improving shrink effectively managing our inventory and improving our cost of goods sold.
As part of this plan, we've identified implementing cost reduction and efficiency initiatives across the organization that include reducing demand achieving benchmark level performance across categories and being more disciplined in our approach to results mantra.
Furthermore, we will improve the health of our balance sheet and capital structure.
Additionally.
An important component of fueling growth and doping results minded culture includes a strong team of financial leaders, who understand or overall retail environment.
During the third quarter, we hired a key member of the.
Calling Gordon as senior Vice President of finance to lead in the areas of financial planning and analysis.
Colin brings with him 25 years of experience in both retail and finance with companies, including Us Bank target and Hudson It.
As we move through our plan for renewal he will be an integral part of this team.
Now let me take you through the results of our third quarter.
As reported earlier this morning, we delivered a significant improvement in gross margin rate.
An increase in adjusted EBITDA dollars.
And a further reduction in them important.
Additionally, we ended the quarter with approximately $1.7 billion and liquidity.
Total net sales decreased 10.1% for the quarter.
Parable sales decreased 9.3%.
The exit of the major clients and indoor furniture categories had a negative impact to comp sales this quarter of 270 basis points.
As such when you exclude this impact adjusted comp sales decreased 6.6%.
The Caulfield decline was primarily driven by decreasing transactions, partially offset by an increase in average transaction value.
As expected topline sales pace headwind pressures from aggressive promotions in the third quarter last year to drive the liquidation of slow moving and aged inventory.
These internal headwinds will continue to affect sales in Q4.
In terms of specific results, our top performing merchandise categories in the quarter included fine jewelry.
Footwear mens and womens apparel.
Denim with strong throughout all apparel divisions, this quarter, especially in kids.
We updated our denim assortment for the back to back to school season, and drove more dominant positioning of our denim national brands.
Overall back to school shoppers came out later this year with customers buying closer to seasonal need.
Our fine jewelry business once again delivered solid sales results with positive comps and categories, such as modern bride diamonds gems in silver.
Men's apparel sales outperformed all other categories for the quarter, we delivered double digit call in branded athletic apparel as well as mid single digit comps in both license team apparel and big and tall.
Some of our top performing brands, including collection by Michael Spring Huh.
He'll O'neill Ekso GT.
Champion Puma and Adidas.
Women's apparel outperformed our go forward business call with casual sportswear career separate ingress is performing better overall.
Private labels and eight and Liz Claiborne, both delivered positive comps during the period.
Credit income for the third quarter was $116 million compared to $80 million that third quarter last year.
The improvement over last year is primarily due to higher gainshare, resulting from improved performance of the credit portfolio.
As a reminder, our new credit agreement with enhanced economics went into effect during the fourth quarter last year and as a result, we do not expect such significant improvement in year over year credits to continue.
Cost of goods sold for the third quarter was 64.6% of net sales a decrease of 350 basis points compared to the same period last year.
The decrease was primarily related to an increase in both store and online selling margin.
And improvement in our shrink results and the exit of major appliances in store furniture categories.
For the quarter, both non clearance and clearance selling margins were once again up year over year.
We delivered a significant improvement in both stores and online clearance selling margins, which on an enterprise level were positive in the high mid single digit way.
Additionally, total selling margins improved in nearly every division in Q3, we didn't forcing our expectations for improved underlying gross margin performance for full year 2019.
Now moving to expenses.
As gene a expenses were $854 million down $29 million when compared to the same period last year.
The decrease in SGN $8 was primarily due to lower advertising in store controllable expenses, which were offset by slightly higher incentive compensation.
As a reminder, X gene a expenses last year included a 26 million dollar benefit resulting from the sale of the leasehold interest in our Laguna Hills, California store.
With the adoption of the new lease accounting standard starting this fiscal year, we recorded approximately $5 million in ethylene expense related to the home office lease in Q3 this year.
In addition last year the home office lease was recorded a depreciation and amortization and interest expense.
Net interest expense this quarter was $73 million.
Our adjusted net loss was $97 million or 30 cents per share for the third quarter. This year in improvement when compared to last years, adjusted net loss of $164 million or 52 cents per share.
Next our capital structure liquidity and balance sheet.
As part of fueling growth, we've been engaged in reviewing our overall capital structure.
We have outlined three main objectives.
First we will continue to maintain more than adequate liquidity to fund the operations of our business.
As expected we utilized our ABL facility during the third quarter to fund a portion of our seasonal working capital needs and ended the quarter with approximately 420 mine $29 million an outstanding borrowings.
Compared to $437 million in 2018.
As such our liquidity position at the end of the third quarter was approximately $1.7 billion.
Second we will proactively managing manage our existing debt maturities.
During the third quarter. This year, we paid $50 million of unsecured notes at maturity, bringing our year to date debt repayment to a total of $86 million.
We have very manageable near term debt maturities with $105 million of unsecured debt maturing of 2020.
And third we are maintaining flexibility in how we fund the business to ensure sustainable and profitable growth with that we're taking positive and proactive measures to enhance our capital structure and to improve the long term health of our balance sheet.
Cash and cash equivalents at the end of the third quarter were $157 million.
Capital expenditures were $226 million for the first nine months of 29.
For the first nine months of your free cash flow was the use of $518 million, which is a decrease in cash flow $18 million when compared to last year.
We continue to expect free cash flow to be positive for full year 2090.
Inventory at the ended the quarter was $2.93 billion, a decrease of $289 million or nine 9% when compared to the into the third quarter last year.
The decline was primarily due to lower basic inventory levels. This year compared to the same period last year.
Additionally, the full liquidation of our appliance and furniture floor model inventory accounted for $86 million or approximately 2.5% of our third quarter inventory reduction.
When compared to 2017 inventory was down $470 million or 13.8%.
We remain committed to restoring the discipline required to enhance inventory productivity and as a result, we believe our inventory levels will continue to be a source of working capital. Thank you.
Merchandise accounts payable were $1.1 billion down $129 million or 10.5% versus the end of the third quarter last year.
The reduction was primarily due to our reduced inventory position and is inline with the seasonal increases we expect in the month leading into the holiday season.
Turning now to guidance.
We are reaffirming our financial guidance for the full year 2019 as follows.
Comparable sales are expected to be in that in a range of down 7% to down 8%.
Adjusted comparable sales, which excludes the impact of our exit from major appliance and for furniture category is expected to be in a range of down 5% to down 6%.
Cost of goods sold as a rate of net sales is expected to decreased 150 to 200 basis points compared to last year, resulting in an increase in gross margin of the same amount.
And free cash flow is expected to be positive for full year 2019.
Additionally, we have increased our adjusted EBITDA guidance to the upper end of our prior range as we now expect adjusted EBITDA to exceed $475 million.
As a reminder, our 2018 adjusted EBITDA included a $70 million benefit primarily related to the buyout three leasehold interest in two stores last year.
In addition, we recorded approximately $20 million in home office lease expense in SGN, a this year, which last year was recorded as depreciation and amortization and interest expense.
When combined these items account for an approximate $90 million headwind to last years adjusted EBITDA.
With that I'll now turn the call back over to John .
Thank you Bill.
Re energizing the JC Penney brand is about knowing what is in the hearts and on the mines of our customers. We are staying true to our DNA, yet innovating and differentiating based on the customer insights, we've captured and what they are giving us permission to be for them.
We had to find our strategy our plan for renewal we continue to take a do then say approach and I will provide updates as we make meaningful progress.
As I've said, we're not simply running a business we are rebuilding a business and it will take time.
I would like to thank our shareholders and vendor partners for their support I would also like to think are over 90000 dedicated and passionate associates, each and everyone across our entire company for their hard work dedication and commitment to our customer.
They are the centerpiece of our brand.
JC Penney is a 117 year young American retail icon that is very important to our customers and hundreds of communities throughout the country.
This company has a rich history and I am confident it hasn't even brighter future.
With that we will be happy to take your questions operator, we're ready to open the lines.
Ladies and gentlemen assume question or comment at this time. Please press the star than the one key on you touched on telephone.
Question has been introduced to move yourself from the Q. Please press the pound <unk>.
First question comes from Oliver Chen with Cowen and company.
Hi, Thank you Phil regarding women.
Thinking in your framework around a move chilling all day, what are your thoughts on on the biggest priority.
Needs and also your thoughts on in store navigation, and managing inventory levels and store, so that the customer experiences curated that being yet.
And Bill we were also curious about free cash flow that printing a little bit lower what gives you confidence that.
Reach for guidance. Thank you.
Thanks Oliver.
Well the way in which we determined was the best way to merchandise for our customer was based on what the customer told us is important to them and how they live their lives and I'm a strong proponent of not being a retailer that tells customers how to live their lives, but to understand how they live their lives and really embodied this idea of making shopping.
Easier the whole reason I took this job at JC Penney is because I understand how hard it is to shop and how hard. It is a find your style customers really want to connect emotionally with a retailer they want to go into the store on on the site and just feel like a retailer gets them that they can find themselves.
And so as we think about what needs to be done we are developing holistic brand architectures that encompass the five lifestyles and each brand both private and national will play a specific role within this brand architecture to make it easy for the customer under understand what we.
Dan for for them easy for them to find their style and easy for them to put looks together and as we think about how to merchandise says on the floor that that's what we've been testing and bringing to life first with some of our early test and learned and then in our.
The 92 stores that we.
Expanded the test in and then there's a full embodiment of this in the brand defining store.
Over in to answer your question on free cash flow on a year to date basis. The Delta on you anything about 518 versus 500 is a cash proceeds from the sale of assets on a year to date basis in Q4, obviously weve annualize that at this point and take our operating performance in Q4 is going to allow us to we're comfortable in the range of having positive free cash flow for the full year.
Okay, and lastly, I'm the holiday season.
Worried about it being highly promotional especially for women's apparel and other weather behaving in a mixed way as well as the calendar being on favorable. So what are your thoughts on the promotional environment. How your prepared the key differences this year versus last year.
And.
And what you think the consumer environment will be and as well as your strategy.
We're excited for the holiday season, and as I mentioned on the on the last call JC Penney will show up differently. Our our marketing campaign is already in market and it really is the first step of us connecting differently with our our customers. We know the holidays can be a frantic type.
And and we don't want to contribute to that we want to do just the opposite and and.
Helping our customers to remember the great things about the holidays. Our campaign is remember the little things and we're setting that up through our merchandise and also our website.
And our physical stores in our marketing communication.
So that the customers can really start to develop that emotional connection we have.
A exclusive partnership with the Hallmark channel that we just shared out recently.
We have Santa photo opportunities within.
Many of our our portrait studios, we are encouraging customers to remember the little things through our social media engagement hashtag memory made and this is all coupled with the incredible product that we have in our stores as well as.
Easier shopping experience to the reduction of inventory that we've been able to achieve and as it relates to the customer feeling.
You know we share the industry view that the consumer continues to be in a good place right now low unemployment better wages and we'll just continue to monitor consumer confidence.
Thank you best regards.
Thanks, all thanks Oliver.
Our next question comes from Matthew Boss with Jpmorgan.
Great. Thanks, So maybe to start with same store sales near term could you just walk through the drivers of the two to 300 basis points of sequential improvement.
Excluding the appliances in furniture, that's implied in the fourth quarter guide.
Maybe just versus the sequential deceleration the last two quarters that we've seen an NGL beyond maybe the third or the fourth quarter could you just elaborate on the phasing and timeline for implementation of the in store initiatives for us to monitor going forward.
Yes.
Now I'll take the first part and yoga the second and when you look to sequentially on our comp store sales and even if you're to look at on a two year stack basis have been relatively consistent when you think of kind of what we've guided for in Q for full year end the implications of that on Q4, I think again, you're going to see tenant consistency and what weve.
Kind of laid out in terms of our expectations. In addition, we did move away from some unprofitable promotions that we were running especially in Q3 of last year as we look to just drive more profitable sales and non run things that are obviously inefficient for the customer and for our business. So.
Our full year guidance kind of implies that changing trend and we don't expect anything different.
So Matt I'll jump in here in terms of the phasing and timeline of the in store initiatives as I mentioned, we've been testing all year first started to stand things up in March that I shared last call in order to get early reads on our hypotheses and get customer.
Our feedback and then and we went on to broaden out a little bit in July and then obviously the recent addition of of adding some of our.
Lifestyle merchandising visual merchandising into 92 stores, where we're continuing to read and monitor that and determine the best course, Ford, which you know.
Led to our Grand opening just two weeks ago of our brand defining store here in her so we're very early on this journey and.
The brand of fighting store has over 100 components 100 touch points within the store that we are actively measuring and monitoring and reading and will determine the best course forward based on what the customer says certainly we all are working with a healthy sense of urgency.
Here at JC Penney, but at the same time, we are going to ensure that we.
We are making the right decisions for the customer and the right decisions for the business and you have my commitment that I will keep you on this journey with us.
That's great and then maybe just a follow up on the gross margin, what's driving the implied moderation in the fourth quarter gross margin expansion relative to the performance that you just delivered in the third quarter and just any way to size up the gross margin opportunity in terms of ranking the biggest opportunity as we move past this year.
Yeah, Matt I'll take the second part of that first on cutting and we're not going to give guidance on 2020 in terms of how do we think about any level of margin expansion. If you look at we've guided 150 to 200 basis points on the full year this year and that the the year to date is on the upper end to that I think the reason not so much moderation and near the big pickup soon enough.
Last quarter, two quarters, but it's really because when you look at our most promotional time of year from a margin rate perspective. It comes in Q4, right and so you're going to see a little bit of a balance associated with that and that was implied in our guidance.
Great Best of luck.
Thanks.
Next question comes from short run with Gordon Haskett.
Hey, guys good morning.
Questions from me first quarter revenue, obviously has been real strong.
Talking about directionally being slower, but maybe if you could just help us on the fourth quarter God. Although its first question second on the top people impact the 270 basis point drag from appliances furniture, just wondering if you could potentially quantify what the promotional drag was from last year as you go cycle that.
And then third would just be when you look at the core business the underlying business in the third quarter can you just talked maybe the cadence of sales.
I would hope progress throughout the quarter and than anything.
Over the past couple of weeks now but weather.
Clearly broken broker country.
Okay and Chuck.
You squeeze like four in their ma'am.
[laughter].
Hello, Let me take first once a credit income I guess, when we got a few ortho until I got them all in Oregon.
Okay.
So so credit income.
When you on a year over year basis, we really had to big pickup in Q4 last year.
So when you look at it so thats a four straight quarters, where we've had a really big pickup you are going to see a moderation on year over year, you know, we're not going to pick an exact number on it but what you're definitely not going to see is it similar level of pick up as you saw in Q2 in Q3, okay.
That's the first on so again on how did you think about the comp drag.
Related to promotions, if we were going to size the prize and we ran promotions such as things like additional per se additional percent off and things like that that become a little bit of a drug in terms of how you are trying to drive sales you'd size that kind of roughly 100 basis points a drag when you think about the quarter. Okay and those are some of the things we walked away from that allow us to dry.
More profitability and healthier healthier sales that we did drunk driving the quarter.
From a sequential period and how do we think about the quarter, we did and our strongest month of the quarter was the last month was the third month or quarter, So and we're not going to break down with the individuals were but that was a strong. So we did see a pickup as far as that goes and which we were pleased with in terms and you're going to answer. This one already in terms of the last two weeks you can give you.
How we're doing in quarter.
Okay. Okay, Great and then just kind of follow up on last question with regards to.
The new store and then the prototype I guess why not start to accelerate some of those initiatives a little bit quicker.
Where to do that like it seems like visual merchandising you're pretty excited about makes a lot of sense, what what's holding you back in terms of rolling it out more aggressively through the rest of the true.
Well as it relates to visual merchandising, we have put that into an additional.
90, 90, plus stores just recently, so we have moved on that that effort.
The it's just really critical for us to do what's right for the business. We're in this for the long term, we are reestablishing and rebuilding JC penney to be around for the next 117 years and.
You know I, just take more of a prudent effort to ensure that.
When we do it we do it right.
So that we can continue to appeal to customers and capture more share of the all in shopping enthusiasts.
Part and wallet.
Okay. Thanks, very much color. Thank you. Thanks.
Our next question comes from Paul Trussell, which Brian .
Good morning, and congrats on the progress.
Wanted to maybe start with online business, how did you before.
From a ecommerce standpoint, and what are some of the enhancements and capabilities, you're working on with with Dot com App and fulfillment strategies.
Yes, yes, Paul I mean, obviously, we don't break out kind of E com performance versus in store performance.
The one thing that we did have last year as we were liquidating our the appliance business net flow through our E Commerce channel right and so obviously that we don't annualize that on a year over year basis.
There's a lot of 14 Agilent take you through a couple of things that we've got underway, but weren't but we're not specifically carving out what are your comments relative in store.
And we are.
Really addressing many of the areas no different than what I've been consistent in the year that I've been in the role that this organization has a lot of a lot of problems to fix and we've been very overt on that and it both in our our physical and digital space. So as it relates to our digital space, we are in enhancing our customer.
Yes, the user experience, we are making it easier to navigate we are building out storytelling.
You drive that emotional engagement with the customer make it easier to find what they're looking for as well find their style.
We've also been working on.
Just the friction listen and seamless effort to to shop, a cross functionally between our digital and our physical space.
And as I mentioned, our customers will continue to feel the impact of our efforts overtime. As you know we can we can do this a little bit more quickly and real time and faster and we have a full organization focus on improving our our mobile web are.
Website as well as our App.
Thank you and then just big picture.
Do you feel about the store base any kind of updated views on store count long term or.
Central pace of Remodels.
And then lastly from me Bill is just.
Maybe just touch on.
What's some of the drivers are.
Youre reduction in expenses on a year over year basis. Thank you.
In terms of our stores, we're staying very close to every store, we know exactly how each one is performing.
We're doing future projections on on what they'll continue to contribute to the to the organization, we have nothing to share today, except that.
We are we're very close to our physical fleet.
And on the store expense or roaming since piece right.
Paul I mean, it's going to be a combination of leverage in maintaining leverage in terms of how do we balance on a regular sales.
But it but then also is as I touched on is part of fueling growth. We've already started to go through and look at kind of benchmark level performance in our SGN expenses event and been really working hard across every function and category in the business to start to make sure that we're rationalizing those to the level that we feel as if the right size for our level of organization.
Thanks Best of luck.
Thank you.
Our next question comes from Michael Binetti with Credit Suisse.
Hey, guys. Thanks for taking my questions here could you help us I guess was a little more.
Numerical help on unpacking, the gross margin drivers a little bit in the quarter I guess between the the call outs that you did have the improvement in selling margins.
Strength versus appliances, and then within the improved selling margins.
Got it was interesting that you mentioned that both clear I think you mentioned, the both clearance and non clearance.
Margins increase maybe you could help us think through.
Just directionally.
How much each of those improved in the quarter.
And Michael I mean, we're not going to get down to the basis point impact of my my margin breakdown I can tell you, though like if you look at the exit to exit of appliances right on a year over year basis. There was approximately 50 basis point.
Pick up is that we moved out of that business not only associated with the markdowns.
But also through the fact that that's a lower selling lower margin selling the item. So there's there's a large chunk of the Mark in addition to that just getting our pricing and promotion around we've started to make really good strides in that area and you're starting to see a pickup that flowing through that's why you're seeing prove selling margins on both sides of the equation from Clarence and on clearance basis.
Okay and then.
I should ask you on the another question the store portfolio I guess I understand you want to just aggregate.
e-commerce versus physical stores, but I think your answer was it last year were liquidating some appliances I'm assuming ecommerce trends.
Quite strong relative to the overall comps in the quarter.
It leaves us to backing out some fairly negative numbers in stores Joel I think you've done some media recently, saying you don't see the need to close.
Significant amounts of stores, we turn or 2020, but I do wonder if you were to break down the.
The store fleet into cortiles or something like that and.
Profitability.
How do you look at the level of traffic you haven't stores today.
Versus this.
Improving trajectory on the full price selling in the and.
And the clearance margins as to.
How how you see.
Confidence in.
Some of the lower core Tyler However, you define it stores.
Go forward sustainable on four wall basis.
Hard for us to think through when we when we try to imagine with traffic in some of the bottom tier stores might look like.
Thanks, Michael and just to be clear I have not given any direction on what we're doing with our fleet clothing or keeping open. All I've said is that we are very close to our our physical fleet and understanding what each store is contributing to the total business.
As it relates to driving traffic and then I'll pass it to.
Bill to answer some of your more technical questions.
Retail the dynamic business as you know and.
This our approach at JC Penney is a very holistic effort there, it's not going to be one single action that changes the trajectory of this organization and I have been very clear on that for the past year and as we think about driving traffic, whether it's to our physical footprint or two hour our digital.
Basis, it will be through differentiated products and services and experiences we need to engage with customers in new ways and develop that emotional connection that they're saying other retailers don't do we need to deliver on the imperative defined by the all in shopping to just be the retailer that reflects their lifestyles.
Really understands them and make some feel good about themselves truly understands the important moments in their life, both big and small and as a place that is fun to shop and share with others doing this in store online and in our App. In addition to our physical stores is how we will.
Return.
Improved traffic levels to JC Penney and we'll be communicating this through our our marketing through all the touch points and as I've committed will keep everyone in the loop on how our progresses.
Michael do you think about you wanting to kind of put the stores in the courthouse I think the you know the thing you're probably looking for which is logical lets say do we have this perrigo stores on profitability with kind of until the falls off in I don't think Thats. The way you guys should think about our store portfolio were 846 stores now.
If you look at or occupancy costs as a percentage sales is actually relatively low and do you feel comfortable about the level of profitability of our store portfolio.
Course, we're always looking at making sure that we've got.
Efficiencies and if there are some things that we can optimize of course, we're going to work through that bill what we don't have as this long tail of if you're trying to say I can theres something to separate from the organization enhanced profitability in a significant way. That's just not the case, we really feel like that we've got some an asset to work with here.
Right.
I would ask Joe about.
As mentioned threat up last time, we talked I'm curious, how you're looking at the early stages or some other ecommerce work that you guys are done since I don't think we talked about thanks.
Yeah. Good point, Michael we were still very early in our partnership with threat up you know, which is currently in 30 stores.
Don't have any additional information or announcements to make today about how that's going or any expansions. We are excited about creating a new in store experience that that makes it possible for our customers to get and expanded offering of brand some brands that are.
Our considered more high end for our current customer base and as you know our partnership with threat up caters to offer eco minded consumers that lot more sustainable options and their wardrobe. So we were you know in the middle of the test things are good and we're just going to keep moving forward with it.
That's great. Thanks, guys. Thank you Michael.
Our next question comes from Paul that's really with Citigroup.
Hey, Thanks, guys.
Curious.
What's the five pillars of the plan for renewal do you think kind of our offer the lowest hanging fruit my guess some kind of curious about LNG I should think about all of them what sort of required cap that might be necessary SG nine investment.
We have cuts that you can make to offset whatever investments might be necessary and I guess just to go back to the store Scully again.
Definitely I'm curious if you're looking at the store fleet in terms of are there any stores that you might be looking to sell to to raise some some cash. Thanks.
Thanks, Paul well you know the interesting thing about retail is that you just can't get one thing right.
And as you know we took a ample time to define our strategy to determine what choices, we would make in order to return this great company to sustainable profitable growth, which has.
Let us to sharing our plan for renewal.
And and honestly I can't tell you one has the most low hanging fruit.
It they all have to work together in order to.
Reestablishing and rebuild this organization.
From the from the ground up restoring the health to the business, while we innovate and transform.
As it relates to.
Capex investments.
A lot of what we're doing and build chime in here too, but a lot of what we're doing.
In the early test and learned in the brand of finding store are.
Low capital investments and no capital investment in fact, a much of some of what's in the brand defining store our components that are in all of our stores are great merchandise.
That our customers responding to our marketing campaign is is the same for the chain and all of our great associates over 90000 of them, who have an infectious passion and.
About JC Penney that they are excited to share with our customers everyday and we are supporting them so that.
They can help us a.
Really propelled this company forward.
Following your question on.
Are we looking to monetize part of the fleet to fund other growth and what we havent defined any plans as far as how do we think about the fleet from that perspective, obviously, you know what our historic levels of Capex have been in for an organization. Our size you know where that comes in at.
And yes, theres a lot of things to invest in when you think about you know kind of our plan for renewal, but to Joe's point here very low capital part of the reason we are fueling growth has been able to fund those internally, but we're not doing is defining some store monetization plan or anything like that and we've stated internally or publicly.
Thank you good luck.
Paul.
Last question comes from Lorraine Hutchinson with Bank of America.
Hi, This is Heather balsky on for Lorraine.
In terms of your merchandising strategy do you think you have the right national brand portfolio and and are you looking to add new brands, especially in apparel or edit out any of your brands and I said a follow up.
Thank you had her Oh, we really believe in the complimentary relationship of private and National brands working together and we have incredible private brands and we have incredible national brands.
And the National brands that we do have are very important to us and we're really pleased with the partnership.
And the work that we're doing together.
We will continue to make them important and stand for them and as I mentioned in home store, we've recently added or intensified some of our national brands.
And each brand private and national will have and serve a specific role within our brand architectures across the five lifestyles that we are now merchandising within.
Hey, Thanks, and just a follow up in terms of the floor state that used to hold appliances can you just update us on on what you're doing with the space or work you're doing too I guess.
Phil fill that station your stores. Thanks.
Sure the the floor space.
Was dispersed on a by store basis based on the changes that were made originally in each store to.
Implement.
Those merchandise categories.
And then as we pulled it out we looked again at each store to determine where there were opportunities to expand categories.
Re energize categories and.
You know, we just didn't have a case by case basis by store. So I can't tell you. There was this one thing that we did in all stores, it's not yet or something like we had a standard prototype to this was the model we were yeah, we have right.
Different.
Our plan.
So at this point is a stay filled and for the majority of your fleet.
Oh, absolutely yep.
The store experience was quickly.
Addressed so that the customers wouldn't feel that there was this huge gap on on the floor.
Great. Thanks.
Thank you.
Ladies and gentlemen, this concludes todays presentation you want to thanks for joining and your participation you may all disconnect and have a wonderful day.
Yes.