Q4 2019 Earnings Call
Ladies and gentlemen, todays conference just go to begin shortly please continue to standby and thank you for your patience.
[music].
The Q4, 2019, JC Penney's, earning conference call at this time, a participant lines on a listen only mode. So to speak his presentation. There will be question answer session. That's the question during the session you need to press star one telephone.
Please be advised of today's conference is being recorded if you acquire any further assistance. Please press star Zero I don't like Dan Conference over to your Speaker today Kelly.
<unk> director of Investor Relations. Thank you. Please go ahead.
Thank you Justin and good morning, everyone joining us on the call today is chief Executive Officer, Jill Salto, and Chief Financial Officer, they'll walk right.
Before we begin I want to remind you that are presentation. This morning includes forward looking statements within the meaning of the private Securities Litigation Reform Act of 1990 pot, which reflects the company's current view of future events and financial performance.
The words expect plan anticipate a leap 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 operation could differ materially from these historical results or current expectation.
For more details on these risks please refer to the company's form 10-Q, and other SCC filings.
Please note that no portion of this presentation may be rebroadcast in any form without the prior written consent of JC Penney.
For those listening after February 27, 2020. 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.
Management will not be speaking directly to off like presented.
Slides are meant to facilitate your review of the company's result and to be used as a reference document following the call.
Following our prepared remarks. This morning, we look forward to taking your questions with that I'll now turn the call over to Jim.
Thank you Kelly and good morning, before we get started I want to briefly update you on a couple items.
First the impact of the Corona virus and second our New York stock exchange listing status.
The Corona virus continues to be a fluid situation that we are of course watching closely.
As you know we have a diversified supply chain and we have no stores in China or in other impacted countries.
We do have associates in our international buying offices, including in Shanghai, and Hong Kong and we are in constant contact with them to ensure we are meeting their needs.
For now it remains too early to quantify any financial impact of the virus.
Next the New York Stock Exchange, our 30 day average closing share price fell below $1 as of January thirtyth.
We intend to increase our share price to above one dollar through improvements in our operating performance as we did this past December.
We will go into detail about those improvements and walk you through the three year financial outlook during our upcoming analyst day.
Now, let's move onto our Q4 in fiscal year 2019 performance.
As a reminder, we set our expectations for the year, knowing that it would take time to restore discipline and return growth in a profitable and sustainable manner.
I am pleased to say that we are seeing results.
As I've shared with you for more than a year, we are returning JC penney to sustainable profitable growth by reestablishing the fundamentals of our business.
We are making strategic decisions based on data that is fueling our actions to develop an emotional connection with our customers.
To rebuild the fundamentals of our business, we are making improvement ranging from our core store processes to our integrated digital strategy.
We are now consistently reducing inventory improving shrink reenvisioned in our merchandise and rolling out innovation, including curbside pickup, which I will tell you more about in just a moment.
Our deep research and data informed us as we developed our plan for renewal.
We acted on or inside and stood up experiential physical initiative to test capital light concept that enhanced the shopping experience, while gathering customer feedback to validate our hypotheses.
Overall in my experience there are no quick fixes when you are turning around a major retailer.
We are methodically rebuilding the company's foundation and I continue to be encouraged by the progress we are making.
As you saw in our release earlier. This morning, we met or exceeded all five financial guidance metrics for the year.
We also delivered our third consecutive quarter of meaningful gross margin improvement.
200 basis points versus Q4 of last year.
This is a result of the intensely focused work, we're doing to rebuild the business across the key tenants a strategic purposeful and effective retailing.
Well our plan is beginning to take hold turnarounds take time and significant action.
Let's take a closer look at the key areas, where we acted in 2019 to improve our operations and our connection to the customer.
First we increased inventory productivity, we lowered inventory levels by over 11% compared to the end of last year, reflecting our continued discipline and commitment to inventory management and productivity.
When compared to the end of fiscal 2017 inventory was down nearly 23%.
We expect that inventory levels will continue to be a source of working capital in 2020.
Actually improving our ability to meet customer needs.
We also reallocated inventory to areas, where we are seeing the most growth, including athletic apparel and denim.
Customers are noticing and they are telling us that they like our shoppable racks, and the look and feel of our stores with reduced inventory.
Second we improved gross margin by executing our markdown cadence differently refining our pricing and promotion strategy and improving shrink.
Shrink is being addressed on several fronts, including technology update reconfigured store layout and staffing adjustments.
Over the previous year reductions in shrink contributed 20 basis points to our gross margin result.
Next we eliminated inefficient spending in certain areas and corrected overspending and others positioning the company to invest in driving growth in sales and earnings.
We also expect to see positive results from zero based budgeting implemented for 2020.
Additionally, we define our customer focus segment through our extensive quantitative and qualitative research the all in shopping enthusiast serious shoppers, who want a retailer that understate the occasions in their lives.
We took the deep insight about our customers and our improving our offering.
<unk> Wilbur we're building clear brand architectures within every division to make our customer shopping experience easier.
That wishing differentiation for JC Penney.
And finally, we designed and engaging inspiring customer experience.
We introduced Okasan merchandising to better connect with how customers live every day.
Chill, all day Onpoint and shine.
In addition, we re implemented visual merchandising to bring our products to life and inspire our customer.
These efforts required no capital.
Our experience Hill, physical initiatives, which I will tell you more about in a few minutes and our occasion merchandising and visual merchandising improvement are generating favorable response from customers.
They are telling us that this is how they want to shop.
Now, let's summarize 2019.
Overall, we delivered on our business objective and on our financial guidance, including both comparable sales metrics reported an adjusted Com gross margin rate adjusted EBITDA and free cash flow exceeding guidance on gross margin and adjusted EBITDA.
During the second half the year six of our eight merchandise divisions showed an improvement in comparable store sales over the first half of the year.
The biggest improvement we're in women's apparel women's accessories footwear and home within continuing categories.
We still have work to do on our topline.
As I have said before we're not just running a business were rebuilding a business.
We strongly believe that growing sales in an unprofitable way, it's simply not an option.
Instead, we are guided by our plan for renewal and we'll continue to be measured and methodical in our approach.
Before I walk you through our Q4 progress with our plan for renewal I want to remind you of the five component.
Offer compelling merchandise.
Deliver and engaging experience.
Drive traffic.
Fuel growth.
And build our results minded culture.
Let's start with an update on offering compelling merchandise.
Improving our apparel business is critical to our success.
Chief merchant Michel was well first focus on women's apparel and we're beginning to see result.
Women's apparel had a sequential improvement from the third to fourth quarter, continuing the trend we saw in Q3.
This was driven by positive comps in dresses and our broad assortment in sportswear.
We also saw positive gains that our denim business, including our private brand any as well as our national brand partner Levis.
Other private label brands that performed well include Liz Claiborne and Saint John Fay.
Performance at the businesses drove double digit comp in womens mens and kids apparel.
We saw positive comp overall athletic apparel in both our private and National brand.
All of our National brand of letting partner had strong sales results, including our newest brand champion.
In men's apparel, our dominant big and tall business continued its strong performance gaining market share as we offered more choices in key areas such as active and core essential.
Many brands are comping positively and our customers are responding favorably to our inclusivity initiative.
Our kids business had dramatic sequential improvement from Q3 to Q4.
Our toddler business delivered a positive comp this quarter as we aggressively went after growth in elevated separate.
Our boys and girls Dressy category, and our new stretch denim, which landed in Q3 also continued to fuel improvements.
Overall, all three of our major apparel categories Womens mens and kids have shown considerable sequential comp sales improvement since Q2.
Now, let's turn to home, where we have made significant enhancements and receiving great customer response.
For the holidays, we expanded key brands, including correct and instant pot, which helped drive national brand market share gains in kitchen electrics.
Because of our strong results, we continue to add national brands, including Greenspan, which we launched in January.
Textile saw positive comps in decorative batting cozy, Plano and Intels, where we launched our new Liz Claiborne Egyptian cotton told program in Q4.
Another enhancement we made this quarter was our improved brand balance between Sealy insert a helping to drive positive comps in our mattress category.
And although small home decor also comes up led by expansion in candle Diffusers and new decor, demonstrating our commitment to returning fashion to our home store.
Most recently, we were excited to relaunch our women's private brand any just three weeks ago, establishing ourselves as a destination for casual women's apparel and an authority in denim.
Our expanded collection is just not designed for inclusivity with 15 fids in more than 80 washes sizes to do 24.
And is available in stored and on the JC Penney flagship store JCP dotcom.
The full online assortment hearing sizes to 230 and tall sizing is available March 1st.
Any is are eager brand for all day and it is showing strong preliminary results.
We are also thrilled about the news before partnership with Selena Gomez, who is bringing her beauty line rare beauty to support inside JC Penney.
We will see this authentic beauty brand in our stores beginning this summer.
These are just two examples of how we're leveraging our new brand architecture and it's the start of additional brand introductions and re launches to come.
Next deliver and engaging experience.
Our customers want a great experience, both for themselves and to share with family and friends.
To create that experience, we put our customer insights to work.
As a reminder, we tested four distinct concept all bold low capital and quickly implemented.
Next we took our learnings and implemented them in a single store, where we featured our new occasion merchandising improved visual merchandising and a redesign shopping experience.
From there, we tested customer receptivity and gather feedback.
Taking our scalable learning and quickly rolling them out to more than 90 stores.
Then in November we opened our brand to finding store. It is the fullest articulation of our customer commitment and the manifestation of the research planning and hard work that characterized 2019.
We're measuring over 100 touch points in this labs door to inform our future actions as we put the customer at the heart of everything we do.
One of those touch points that is making our stores even more convenient is JC Penney style long ago curbside pickup.
We tested it at our brand to finding store and our customers responded so positively that we're quickly expanding the service.
JC Penney style long ago will be available in 50 additional stores starting next week as we help customers live life their way through this convenient service.
Now onto drive traffic.
We think about our physical stores and our flagship store JCP dotcom holistically in terms of how customer shop us.
Our goal is to connect with any mostly at every touch point of the customer shopping experience.
From exploration to discovery to purchase whether it's in store online or through our App.
We strengthened our execution on fulfillment, including ship from store and buy online and pick up in store, where we saw accelerated demand over the holidays.
Through the hard work of our associates, we met our increasing fulfillment demands.
More than 80% of our sales are generated in our physical stores, yet nearly 90% of our customers actually start their path to purchase online.
As part of our transformative journey, we have three distinct workstream.
Personalization, our affinity program and improvements to our E Commerce site, which we consider our flagship store.
Supporting this work is Carl walls, our new Chief Digital officer, who is leading the strategic advancements.
Carl was most recently with Pandora jewelry, where he grew the global ecommerce business.
And he brings 18 years of digital expertise to JC Penney.
We are working with speed to enhance our in house capabilities to adjust how we go to market and adapt to customer needs. So that they can shop, when and where they want.
We are energized by the work underway to drive traffic across all channels.
Net.
Fuel growth.
Fueling growth, it's about developing a more efficient operating model reinvesting in value, creating activities and establishing a capital structure that supports the long term needs of the company.
We must work differently and we are bill will go into more detail yet simply put overall in Q4 gross margin rate was up and asked <unk> expenses were down.
The entire organization is focused on process improvement and eliminating inefficient spend.
Through these efforts, we delivered $100 million inexpensive savings in controllable costs in 2019.
And finally build our results minded culture.
To reestablish the fundamentals of retail we are ensuring that our associates are well supported with a deliberate structured and consistent go to market philosophy and clear guidelines.
We developed a comprehensive framework and we are training all of our business driving associates on it.
Putting an end to end process for delivering merchandise to our customer from concept to show insight.
In addition, our strong leadership team remains focused on the customer and is consistently mobilizing all associates around our plan for renewal.
Together, we're building a result monoculture that is based on accountability urgency and innovative problem solving at all levels of the organization.
That includes ensuring every associate understand where we're going as a company how their role contributes to our success and how their work next to our plan for renewal.
In November we hosted our private and National brand partners and our partner summit sharing our plan for renewal.
It was a great dialogue and we're continuing with consistent growth meetings and robust robust conversations.
The journey to restore company to help isn't ongoing process and it takes time.
I'm pleased with our progress and confident that we are on the right track.
We still have a lot of work to do and are energized by the effort.
Now I'll turn it over to Bill who will take you through our financial results.
Thank you Jill and good morning, everyone.
As we reported this morning, and as Joe discussed we delivered on each of our annual guidance metrics in 2019.
We knew the most effective way to fuel growth as we work through our plan for renewal was quite simply do improve operating efficiencies and reduce our cost structure.
As a result, our efforts drove gross improved gross margin and minimize or eliminate unnecessary expenses over the course of the year translated into growth in full year, adjusted EBITDA and free cash flow.
Both of which far exceeded our financial guidance.
Well, we are pleased with these results we know there's more work to be done.
This morning, I will first go through detailed results of our fourth quarter, followed by our full year results.
As well as our balance sheet, concluding with a review the financial guidance for fiscal 2020, there was reported earlier this morning.
For the fourth quarter total net sales decreased 7.7% and comparable sales decreased 70%.
The exit of major appliance and instead of putting things work furniture categories had a negative impact to comp sales this quarter of 230 basis points.
As such when you exclude this impact adjusted comp sales decreased 4.7%.
The incremental improvement in comp sales declined from last quarter reflects increases we saw an average transaction value along with the deceleration of traffic declines.
As expected our topline sales this quarter were affected by the pressure from aggressive promotions in the fourth quarter last year to drive the liquidation of slow moving and aged inventory.
As Joe just shared we saw several areas a meaningful sales growth in our merchandise divisions.
Those that outperformed our adjusted sales comp this quarter included women's apparel women's accessories men's apparel and footwear.
The efforts of our teams are beginning to show improved financial results.
Credit income for the fourth quarter was $109 million this year compared to $121 million in the fourth quarter last year.
Decline was inline with our expectations as we discussed on our last earnings call.
Cost of goods sold for the fourth quarter was 66.7% of net sales and improvement of approximately 200 basis points compared to the same period last year.
This improvement was primarily related to increased enterprise clearance selling margins from lower permanent markdowns.
Improved shrink results.
And the exit of major clients, an indoor furniture categories earlier this year.
[noise] moving to expenses.
<unk> expenses were $1.005 billion in the fourth quarter this year.
And were slightly below last years level.
We achieved meaningful savings in control expenses, which helped offset higher incentive compensation and the home office lease expense, which is now recorded last June.
Net interest expense this quarter was $73 million.
Adjusted net income was 43 million million dollars or 13 cents per share for the fourth quarter. This year compared to adjusted net income of $57 million or 18 cents per share last year.
We were pleased with our progress in the fourth quarter.
Now, let me summarize our full year financial results.
For the year total net sales were $10.7 billion, a decrease of 8.1% compared to last year.
Comparable store sales decreased 7.7%, an adjusted comparable sales decreased 5.6%, both well in line with our guided expectation.
Credit income this year was $451 million compared to $355 million last year. The nearly 100 million dollar increase this year is primarily due to higher gainshare, resulting from the improved loss performance or the underlying credit portfolio and reserve changes.
The improved loss performance and favorable reserve adjustments, peaking this year are not expected to repeat and as such we anticipate credit income for fiscal 2020 to be more in line with fiscal 2018.
Cost of goods sold for the year was 65.4% of net sales a 210 basis point improvement compared to 67.5% of net sales last year.
As we've discussed throughout the year. The improvement was primarily driven by an increase in both store and online selling margins improved shrink results and the exit of major appliance and in store furniture category.
For the full year, non Cleveland and clearance selling margins were up year over year, both in store and online.
Additionally, total enterprise selling margins improved in the majority of our division in fiscal 2019.
Before I move to expenses I want to remind you that at the start of fiscal 2019, we had an approximate $90 million headwind terrestrial <unk> expenses.
Last year X gene a expenses included an approximate $70 million benefit which is primarily related to the biodiesel leasehold interest in two stores. Additionally, we adopted a new lease accounting standard and starting in fiscal 2019, our home office lease expense of approximately $20 million to $20 million was recorded in last year an expense.
Last year, the home office lease was recorded in depreciation and amortization and it's interesting.
With that full year SGN expenses were $3.59 billion, a decrease of $11 million compared to last year.
The decrease in SGN $8 was primarily due to lower controllable expenses, they were partially offset by both higher incentive compensation and the headwinds just mentioned.
When you take last year's headwinds into account, we delivered total west you know expense savings of approximately $100 million in 2090.
Interest expense was $293 million down $20 million compared to last year.
Adjusted EBITDA was $583 million this year compared to $568 million last year. We're pleased that will mean that we meaningfully exceeded our adjusted EBITDA guidance, which was primarily driven by improvements in gross margin rate.
Lowering expenses and higher credit income.
For the year, our adjusted net loss was $257 million or 80 cents per share.
An improvement of $39 million or 14 cents per share versus last year.
Next let's move to the balance sheet.
As expected, we fully repaid the outstanding balance under our ABL credit facility during the quarter and ended the year with no outstanding borrowings under this facility.
At the end of fiscal 2019, our liquidity position remains strong at approximately $1.8 billion.
For fiscal 2019, our debt repayments totaled $97 million, which included $50 million of unsecured notes paid at maturity and then third quarter earlier in India.
We have very manageable near term debt maturities with $105 million of unsecured notes maturing in June of 2020.
Cash and cash equivalents at the end of the here were $386 million.
Capital expenditures were $309 million for the year, which consisted primarily of investments in technology store environment supply chain and logistics and general maintenance.
For the year free cash flow was $145 million, an increase of $34 million when compared to last year.
As you know reported free cash flow includes proceeds from the sale of operating assets. When you exclude these proceeds from both years. The improvement we delivered in fiscal 2019 was greater than $150 million when compared to fiscal 2000.
Inventory at the end of year was $2.17 billion decrease of $271 million or 11.1% compared to the end of last year.
The decline was primarily the <unk> the decline primarily resulted from our commitment to inventory.
Additionally, the full liquidation of our clients and furniture for model inventory accounted for $73 million or approximately 3% or four years inventory reduction.
When compared to the end of fiscal 2017 inventory was down $637 million or 23%.
[noise], we remain focused on increasing inventory productivity as a result, we expect our inventory improvements will continue to be a source of working capital in 2020.
Merchandise accounts payable was $786 million down $61 million or 7.2% compared to last year.
The decrease was primarily due to our reduced inventory position.
Before moving to our financial guidance, let me touch on our store closures for 2020.
We ended fiscal 2019 with 846 stores in our fleet.
Of these approximately 72% or mall based and the remaining 28% or off mall locations.
For the full year 2019, the vast majority of our stores delivered positive operating profit results.
As we reported this morning, we expect to close at least six stores in 2020.
Including these stores, we will have closed 173 stores since the start of 27.
We continuously review and assess our real estate portfolio and we look forward to sharing more details of our future real estate plans with you and our analyst day in a few weeks.
Now our financial guidance for full year 2020.
I want to know that our financial guidance does include the impact from any currently imposed trying to interconnect.
Yes. It does not include any potential impact from the current Corona virus situation.
Comparable sales are expected to be in a range of down 3.5% to down 4%.
Cost of goods sold as a percent of net sales is expected to improved 102 130 basis points compared to last year, resulting in an increase in gross margin rate of the same amount.
Adjusted EBITDA dollars are expected to be 5% to 10% higher than fiscal 20 Nike.
Additionally, free cash flow is expected to be.
To support this guidance, let me provide you some additional key direction.
As a reminder, we fully exited our appliance and in store furniture categories by the end of the first quarter last year, and we liquidated our floor model inventory in these categories, which together generated approximately $70 million in net sales in Q1 last year.
Additionally, we closed 18 full line stores in 2019, three of which were closed in the first quarter last year.
As I mentioned earlier, we anticipate credit income for fiscal 2000.
Three more in line with fiscal 2018, as the improved loss performance and favorable reserve adjustments taken in 2019 are not expected received 20 twond.
With that we do expect to achieve the 5% to 10% increase in our adjusted EBITDA guidance, given its approximately 800 million dollar headwind and credit income.
Depreciation and amortization is expected to be approximately $515 million for the full year.
Other components and net periodic pension for the full year is expected to be a benefit of approximately $80 million.
Net interest expense is expected to be approximately $290 million for the full year and finally capital expenditures for the full year expected to be across approximately 300 million.
And now I'll turn the call back over to John.
Thank you Bill as we conclude I want to remind you that we take a do then say approach providing updates as we made meaningful progress.
As I mentioned, we are on the right track and we are encouraged yet we still have more work to do.
We look forward to providing more updates on our plan for renewal during our analyst day on Tuesday April 7th in New York.
I'd like to close by thanking our shareholders and vendor partners for their support.
I'd also like to thank our nearly 90000 associates for their hard purposeful work over the last year and the millions of customers who shop us annually.
Their feedback is helping transform JC Penney and they are rooting for us on our journey a fundamental change.
With that we'll be happy to take your questions.
Operator, we're ready to open the lines. Thank you.
As a reminder, ask the question you need a press star one on your telephone. So would you all your question press the pound <unk>. Please standby we've compiled the kuni roster and again, if you'd like to ask a question that star one.
My first question comes from Oliver Chen from Cowen and company. Your line is now open.
Hi, Thank you you've made some nice progress with your product assortment looking ahead, and where do you see the most opportunity for improvement and the product and also as we think about merchandise margins and your guidance.
What are your thoughts on clearance levels going forward and the ability to to reduce markdowns.
Thanks, Oliver in terms of product assortment, we are very focused on our women's apparel, which I shared some of the areas that we've made improvements to date on that corresponding without of course is a accessories and footwear to enable our fees.
Mail all in shopping into just to complete.
Her look.
And then the home store as I've talked about consistently.
We see a additional opportunity in.
Reestablishing, our national brand dominant as well as re introducing and strengthening key categories and key classifications.
Yeah, I mean on the gross margin piece and you talking about clearance markdowns.
We see that getting back to a more traditional level for us when you look at we're talking about 100 130 basis point improvement in gross margin rate this year and there's a little bit of that it comes from the Annualization of the remaining discontinued merchandise, but also a big element of that is as we get back to a more rightsized inventory level getting to a consistent cadence on clearance we.
Are you thinking really in fiscal 2020 will be a bit of a tailwind for us on a gross margin rate.
Okay. Thank you a follow up is I'm speaking to your digital priorities, what would you say or the top ones that are important to you and your head and balancing capital needs. There and also as you look at your consumer research.
I would love your thoughts on making sure that you embrace and engage the younger customer as well and what the younger customers looking for in terms of the store experience as well as assortment.
In terms of digital priorities, we are focused on the three pass up personalization and our affinity programs as well as.
The ecommerce and they're all interrelated.
We have foundation, there, but our complete focus is to connect more mostly what the customer and be providing to them what they most want from us in the way in which they want it.
As it relates to our product offerings in our consumer research and keeping our all in shopping enthusiast at the heart of everything we do.
I have believed all my career that fashion is an attitude, it's not an age and we are very focused on the all in shopping and whose yes. These are customers who loves to shop. They live life to the full us they are the most interested in.
They're a personal style, we like to think that they have a growth mindset, there very confident yet they are.
Our interested in input and to be inspired they're the most connected with their family and friends. They see part of their job as an all in shopping theres his enthusiasm to bring a life and excitement into the lives of their friends and family.
So all of our efforts are around the all in shopping enthusiasts and and getting it right for those customers will halo onto other psycho graphic segments.
Again that cross all ages and demographics.
And the thing I would add to that as I think when you look at kind of our progression and our fulfillment capabilities and being more convenient for customers, we think thats going to extend the halo, yes to all customer segments, not just you know younger customers as you referenced.
Thank you best regards very helpful.
Thank you and our next question comes from Chuck Grom.
Gordon Haskett your line is an open.
Thanks, Good morning, I'm, just wondering if you guys could on task force the decline in the comp in the fourth quarter, the down 7% through traffic and ticket and I guess, Joe If you could just amplify on your comments that.
Traffic improved relative to the fourth quarter, I guess, where you saw that by category.
Yeah check and we don't give the you know that going Asian between traffic and ticket in terms of the fourth quarter. The thing I will tell you is when you look and we released our you know kind of holiday sales results and where we were at the midpoint of the quarter, we were down 7.5% and ended up down seven right. So you can see the progression in the quarter and how it took through and as I.
Kind of stated earlier in the remarks, it was basically an improvement in our average transaction value in a bit of a deceleration in the traffic decline that we've seen coming into the quarter.
Okay, Great and then a I guess for more of your Bill just just I missed it exactly why you guys are expecting credit revenue and 20 or 20 to be more like 2018 as opposed to 29 can they gotta could you just just go through that again over time point, Yeah. No problem. Chuck I think when you look at where we weren't 2018, the then to get too.
Last four to 2020.
Sales decline what are kind of receivable balance it that now which is at a steady state level, you see kind of lower pull through on for Phil on the fulfillment there that.
And then gainshare associated with the percent of the revolving balances. In addition, we saw an improvement in a loss reserves associated with our credit portfolio and so there was a reserve release of those reserves, we anticipate kind of loss rates, which we're not meaningfully different but did to normalize at a more consistent level of what we've seen historically and so we've got a little bit of you, calling it almost a one time going up.
Good and 29 team that we just don't expect that to annualize on a go forward basis.
Okay, Great and then just one more lots, but for me on the other gross margin it looks like you're projecting I'm not getting back close to say roughly 36% do you feel like that's a good run rate for the business going forward. Once you recapture some of these a onetime items as you guys I'm improved as clearance margins are got shrink back up or do you think overtime you can get closer back to the third.
738% range, where you were the beginning of Portola stuck it. Thanks.
Well I think everybody's going to probably getting back to where they were 10 years ago on a gross margin rate. When you think about fulfillment capabilities right. So I do think we've got to your point the limited a tailwind as we normalize on our clearance margins in kind our level of clients in the organization balancing out or pricing and promotion overtime do we see potential headwind pressure as fulfillment.
Potentially skews to more direct fulfillment and things like that yeah, there's probably a potential headwind there, but that's our work to try to offset that overtime. We're working I mean hundred 30 basis points a lot of work to get to on a one year basis. This year and we feel comfortable within that range right now.
Okay excellent.
Thank you and our next question is from Matthew Boss from JP Morgan. Your line is now open.
Hey, guys. This is elliot on for Matt I'm. Thanks for all the color could you just talk on S. You now for a second the guidance implies further expense reductions. This year Bill could you just help bucket efficiencies you see in 2020 and the magnitude of expense opportunity multiyear.
Yeah, I mean Elliott its you know we like I said, we've got an analyst day coming up in April. So I think we can get into a little more detail for you on kind of forward looking with that.
But you're right. If you look at kind of the sales declined forecasted the gross margin rate expansion, but in steel and I'm also lose a little bit on credit income there. The where you are squeezing the bucket out there becomes SGN a right. We feel like we've got the opportunity not only on the controllable expense side that fairly variable, but it just underlying cost structure to improve the efficiency.
Transition to get to a lower operating model rate. It takes time, you don't flip the switch in one year on that so we can kind of walk you through that in April, but we do feel like there is ample opportunity there to get meaningful improvements on a multi year basis.
Great. Thanks, and then a quick follow up I'm just for.
You'll probably addresses at the analyst day, as well, but risk recently visited the store and Hearst, Texas, which looks great.
What have been you're kind of primary takeaways from this concept than any opportunities to to rollout format across the chain.
Yeah, well things for visiting branded finding store in Hurst is our.
Full articulation of our customer commitment and it is a lab store for us.
And as mentioned, we are monitoring and measuring over 100 touch points in that store based on customer read a feedback and response and we've been learning since the first day that it opened back on November 1st.
I shared today that one of the first things that popped out very strong right away was the curbside pickup so JC Penney style and the go is expanding to 50 stores.
Starting next week and yeah, we want to ensure that where methodical and that as we scale that were also implementing and operating with excellence.
We have had great response to our okasan merchandising through our occasion.
Or the occasions that our customer lives every day of moved Chill, all day Onpoint and shine.
The customers have responded that this is how they live their life. This is how they want to shop visual merchandising continues to inspire a customer that's been something that Dave commented on that they really feel connected they find themselves.
Then the store and within our merchandise.
As you know we have styling room, there we've talked a lot about our women styling room, which was one of our test and learns that Weve first.
Stood up last March to improve the fitting room experience and.
And understand how customer felt about that and that continues to do very well and in Hearst. We introduced our first ever men's styling room and it has had very favorable favorable response as well and those are just some of the key takeaways, but we're very excited as we continue to.
Monitor and react and take action against what we're learning there.
Great. Thanks, guys best of luck.
Thank you.
Thank you.
Next question comes from Paul Trussell from Deutsche Bank. Your line is an open.
Hey, good morning, and congratulations on meeting.
Or exceeding your fiscal 19 goals just looking at the 2020 guidance you know you've outlined free cash flow to be positive just any additional color.
I want to what extent are you thinking as much as 19 or not necessarily just given all the inventory and working capital improvement already made this year and maybe bigger picture.
Liquidity is certainly sufficient currently just any comments on how you're thinking about the capital structure and debt levels longer term.
Yes, sure Paul I mean, I give you the forward looking to the extent they can when you think about free cash flow. This year you know we came in.
Our guidance was positive as which was the same guidance we had last year.
We don't anticipate as much as been improvement from inventory pickup as we've had over the last couple of years right as we get to more efficient inventory levels, but obviously the balance there as you see we were growing earnings at the 5% to 10% clip right. So we've got a little bit of an offset there which makes us feel comfortable were not get more not putting a targeted number on it we do.
If we feel comfortable being positive free cash flow range, but I don't anticipate huge swings relative to where we delivered this year.
On the forward looking in capital structure basis I mean.
Everything we're doing now we feel incredibly comfortable with where capital structure sets. The relationship we have with our creditors, which has been very strong and very supportive and how we think about kind of maintaining liquidity position and capital structure for many years to come so I mean, not much more than I can share with you on that but but we feel really comfortable unlimited.
When we're out right now.
Thank you and you know certainly from the virus is obviously pretty.
Fluid situation.
To think about quantifying right now to impact but just.
What can you tell us today in terms of what you see as it relates to the supply chain impacts.
Any potential disruption on deliveries are manufacturing of private label goods.
That you can gauge currently.
As you mentioned Paul It is a very fluid situation and it really is too early to quantify we are watching it.
Every hour of everyday to understand more about this very unfortunate situation.
As you know we have a diversified supply chain.
And.
As we worked through the tariffs situation, we found ourselves in a pretty good place there because our sourcing organization has worked over the last decade to diversify away from China. So yeah, that's Ben.
Little bit of comfort that we as we've just watch the news unfold like everyone else has but we are very connected to our suppliers were very connected to our associates in our international buying offices and we are watching it as closely as we can but I don't have any forecast to share with you.
Today.
Understood and lastly from me and I know you will give more color on this in April is just you know as you talk to your customer <unk>.
What did they telling you in terms of how they utilize J.C. Penney and what they like in terms of what they see in the stores today what.
Advice, they're giving you on what to what could be better.
Well, we serve millions and millions of customers every single year and they're very loyal to the brand and we are so appreciative of them and the fact that they are champing us as we.
Move through this turnaround and implement our plan for renewal.
As you know we did extensive extensive qualitative and quantitative reset research to understand what on their mind and every action that we've taken has been based on what they told us.
I believe that the most direct feedback it comes through our results and I am pleased with the progress that we're making I am pleased with the improvements that we've already seen in our women's apparel and women's accessories footwear businesses as well as our home.
They are responding to our improved shopping experiences both in store and online certainly our in store a with the almost 23% reduction in inventory since 2017.
They are.
Responding and letting us know that they feel the difference and we're creating a much easier shopping experience for them.
And we're getting some additional comments some of the same nature as we are.
Beginning to make improvements to our flagship store as well.
Great. Thank you invested.
Thank you.
Thank you and our next question comes from Paul Edge way from Citigroup. Your line is now open.
Hey, Thanks, its Tracy Kogan filling in for Paul I'm I was wondering if you could comment a little more I on the women's apparel category and and how you see the mix of private versus national brands trending as you look to the future I'm not sure what the mix ended at our this past year, but I was just wondering on how what.
Your view is on that in the future. Thanks.
Thanks Tracy.
Well as I mentioned women's apparel had sequential improvement from third to fourth quarter, which was continuing the trend we saw in Q3.
We saw positive comps in dresses as well as our broad assortment in sportswear and sportswear as obviously the biggest part of of women's apparel everything.
Pants blouses sweaters.
Skirts.
The whole gamut and.
In addition, we were really pleased with the gains that we had in our denim businesses and as I mentioned just in as an example in done both our M&A, our private brand any as well as our national brand partner Levis.
Both performed very well.
And I'm a strong believer in the complimentary relationship between private brands and national brands that.
Our customer wants both they eat serve a purpose and as we have been working diligently on our assortment we are developing and have developed.
Very detailed in specific brand architectures.
For each category that we sell so as we make a very clear an understandable presentation to the customer through our our assortment.
And so.
You will continue to see that complimentary relationship between our beloved.
Private brands as well as or very distinguished National brands.
Great. Thank you.
Thank you.
And final question comes from Lorraine Hutchinson from Bank of America. Your line is now open.
Hi. Thank you. This is Heather balsky on for Lorraine, just a follow up on the krona virus impact on your supply chain just.
Without having to qualify X. I realize it's it's early but just how are you starting to see signs of delays and can you can you put that into just some timeframe like are you know where their worries right now about back to school and you talked about your diversified sourcing Oh are you see any signs that sourcing outside.
Out of China is being impacted just Gina challenges getting materials from China. Thanks.
Oh, Thanks Heather.
You know it it's changing you as we've all been talking it's very fluid and it's so early to try and quantify because it's changing daily.
Forecast to share with you.
Today, we're just really focus on understanding what our associates need in our international buying offices as well as we're very close to our vendors and supporting them through this and you know what kind of all that together in and we're just staying on top of it.
Hey, thanks.
Thank you.
And ladies and gentleman. This concludes today's conference call. Thank you participating you may now disconnect.
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