Ron Johnson - CEO: Good afternoon, everyone. Thank you for joining us today for our fourth quarter earnings presentation and conference call I'd also like to welcome all of our employees here in Plano who are in our cafeteria and in our town hall gathering space. Ken Hannah and I are here live from Plano and I would like to start today with a few comments about the past year, about what we accomplished, what we learned, and what we will do going forward; then I'll hand it back to Ken for a financial presentation; following Ken's presentation we'll be happy to take your questions.
Let's start with the accomplishments. First, during the past 12 months we launched an entirely new vision for JCPenney. We developed our plans to reposition JCPenney as a specialty department store. We built out a nearly 60,000 square-foot prototype here in Dallas and have shared this vision with our key partners throughout the world. They are excited about where we're headed and eager to participate.
Second, we have built an entirely new senior team, combined the best of JCPenney with key additions from the outside. We have amazing leadership in finance, operations, design, sourcing, information systems, real estate, store design, construction, marketing and human resources. Yet at the same time we have promoted nearly 400 employees at our Plano Headquarters and in our regional centers. Our teams are committed to our transformation and working closely together to deliver on our vision.
Third, we built out eight shops last year and learnt that shops work, and we have more on the way. Our first shops included great plans that we already offered our customer such as Levi, IZOD and Liz Claiborne. You have heard from the leadership team that Levi and IZOD about how thrilled they are with the shop performance and looking at the numbers I can understand their enthusiasm.
Fourth, we dramatically improved the look and feel of all of our stores all 1100. We reduced inventory, we focused our content, we invested heavily in a variety of visual display elements such as manikins and new signage and our customers have noticed, everyone who visits our store say they have never looked better.
Fifth, under the leadership of Mike Kramer, Ken Hannah and others, we simplified our business model and our organizational structure. We have eliminate non-productive work and invested time and things that directly serve our customer. The result was a massive change in our cost structure. This year alone we actualized savings of $800 million and we are well on our way to achieve the $900 million run rate in savings that we identified just a year ago.
Sixth, we began the year with outdated, customized, difficult to maintain information systems and under Kristen Blum leadership we exit the year with a vision to completely overhaul our IT platform, partnering closely with Oracle we’re in the middle of a complete overhaul of our finance, merchandising, planning, allocation and store systems, so that we can compete with the most modern systems in our industry. In fact, we are well on our way.
Systems improvements are already materially helping us understand the business and serve our customers. As an example, we have already rolled out global POS to our stores. Within one month, every employee on the floor of a JCPenney store will carry an iPod and be able to check out customers anytime and anywhere in the store. Last week 25% of all transactions were conducted on a mobile device, and this quarter we will start to see product information, training, and all of our employee support systems directly to employees through our in-store WiFi networks on these iPods.
Seventh, we began the year with bloated inventory levels, and despite a significant sales drop, we reduced our inventory levels throughout the year by nearly $600 million and are beginning 2013 clean. This effort was expensive and it showed up in our gross margins last year, but it was necessary. We began this year clean and ready to chase the items that are selling. It is incredibly comforting to me to be relieved of the massive inventory overhang with which we began last year. Based on these accomplishments, we exit the year positioned to succeed in 2013, and this is the year the new JCP will take form.
In 2.5 short weeks on Friday, March 15, we will launch Joe Fresh, Canada's number one apparel brand to the United States. We are so pleased and honored that Joe Fresh chose us to reach the American consumer. We are currently under construction of Joe Fresh shops in nearly 700 stores and have begun the early lead marketing. You may have seen our commercial on the Oscars and you can go online right now to view the assortment and buy Joe Fresh today.
In fact, let me provide a quick update on our Joe Fresh online performance. Prior to this week, Liz Claiborne has been our number one performing online brand. Since the launch of Joe Fresh on Sunday's Oscars telecast we have had seven times the visitors to Joe Fresh than the Liz Claiborne. Conversion of visitors to the Joe Fresh site is 10% higher than Liz Claiborne. Average retail is nearly 20% higher and a full 61% of the buyers of Joe Fresh are first time JCP.com customers. Interestingly, only 8% of sales are coming out of the New York Metro area where Joe Fresh has stores and only 9% from the State of California.
I am delighted to report that this week Joe Fresh will be the number one selling apparel brand on our online store and we can't wait until March 15th to have it in our physical stores. We've also just launched new Intimate apparel from Casa Bella, junior's fashions from Nanette Lepore and the most exciting lineup of social occasion dresses the industry has seen designed by Georgina Chapman of Marchesa. Her Pearl line will be available in our stores this Friday. But the biggest change of all is coming in May. As you know, we are undertaking a complete makeover of our home department with an average of 19,000 square feet per store under construction as we speak.
Home has been one of the worst-performing categories in our stores for years and in particular this past year and we're going to get the business back. Home formerly ran nearly 20% of JCPenney store sales and over the years has declined to a mere 10%. Sales per square foot in home which formerly ran at a $185 per foot have dropped through the years to under $80 per square foot. It's an incredible opportunity and a great place to launch the new JCP.
When we unveil our new home department in May, we will have created the most exciting place to buy home products in America, with new partners such as Martha Stewart, Michael Graves, Jonathan Adler, Sir Terence Conran and more and great brands such as BODUM and Calphalon, and OXO and Keurig, we will have the most sought after products for Americans to update their homes. And we will introduce a shopping environment unlike any other. We will roll out nearly 20 new shops, create a (street in that store) filled with activities and some stores will even include a kitchen where people can learn and get help.
When home is complete in May, we will have transformed over 30% of the floor space in over 500 stores and we will move from having a few islands of improved space to critical mass. And we express this to provide synergy between the new JCP and JCPenney, as customers come into shop for home, they will discover Joe Fresh and Sephora and MNG By Mango and more and many will see for the first time the irresistible style and unmatched value we deliver through our great own brands such as Arizona, Liz Claiborne, Worthington, JCP and St. John's Bay. Our timing for the home makeover is perfect as housing is clearly beginning to recover throughout our country.
But as much as we accomplished last year, we also made some big mistakes, and I take personal responsibility for these. Experience is making mistakes and learning from that, and I've learned a lot. I had a personal conviction to deliver everyday value beginning with truth on the price tag; you all know how important that is to me.
We worked really hard and tried many things to help the customer understand that she could shop any time on her terms. But we learned she prefers a sale. At times she loves a coupon, and always she needs a reference price. Whether it is a manufacturer suggested price on a branded item, a comparison on a private label item or a sale, she needs to feel she added value to her family through the savings she got from being a savvy shopper. So we've brought back sales. We've brought back coupons for our rewards members, although we still call them gifts.
We will offer sales each and every week as we move forward, but we will do it differently than we did in the past. We don't need to artificially mark-up prices to create the illusion of savings. We can offer the industry's best everyday prices and deliver even more exciting value through our promotions.
Let me give you an example through our recent experience with jewelry at Valentine's Day. Forever customers have asked the question, what is this piece of jewelry really worth? Well, we wanted to show the customer the value we offer, so we had nearly all of our jewelry appraised by IGI, the world's largest gemological institute, and provided our customers with a true appraisal of our jewelry for insurance purposes. We then priced our jewelry below the appraised value.
During Valentine's Day we offered the customer an additional 20% savings and our reward to customers is a one pound box of box of See's Candy with every purchase over $75, and it worked. While the industry offered hard-to-believe savings of 70% to 80% off their jewelry prices, we offered a shallower discount off of a true value and delivered a box of chocolate to boot. Our jewelry business grew 36% over 2012 on only a 20% discount, and the expensive category such as Modern Bride and diamond stud earrings actually performed 31% better, not than they did last year than they did in 2011 at only 20% savings. The combination of a real appraisal, great everyday value, and a shallow discount works.
Our teams are excited to deliver incredible value to our customer and we will do it very unique ways as we did in this jewelry example for Valentine's Day. And the good news, this is the easiest problem for us to fix. Our promotion will be targeted almost exclusively within our private label brands and with select national brands who chose to run their businesses this way. We've already learned we don't need to promote everything. Sephora has been the highest performing category in our stores for years and this has been an everyday price business. Our Levi's and IZOD shops are running extraordinary increases at everyday prices when combined with an industry leading shopping environment. Our performance in Carter's America's number one selling kids brand is off the charts and growing faster at JCPenney than anywhere else at the full ticketed price. New brands such as Joe Fresh we priced at great value every day just as they do in their stores in Canada and their own stores in Manhattan in the United States.
The purpose of our new renewed promotion strategy is just very simple. It is to reconnect with our core customer, get new customers to try JCP and to drive traffic to our stores. Our new brand partners are actually really excited for us to be taking this step, as they want as much traffic that's possible to visit their shops. As we began our new promotional efforts, we are doing it with two exciting new marketing campaigns. As we all know our marketing didn't connect very well with our customers last year. We failed to communicate our unique value proposition. So three weeks ago, we launched a campaign called compare, which establishes a great value of our everyday prices by comparing our key items with those you would find elsewhere. We saw an immediate jump in traffic and sales the moment these ads began. And just this week we launched our Dear America Yours Truly campaign, which begins a conversation with our customer about all of the new exciting brands they will find at JCPenney and how we are working really hard to bring them irresistible style at unmatched value.
Additionally we are in the third week of new marketing leadership. Finding great leadership to join our team is one of the keys to our transformation, and we are lucky at JCP today to have Sergio Zyman advising our marketing efforts. I reached out to Sergio last fall, based on his experience at Coca-Cola in the 90s based on his having the wisdom of being a board member at the Gap and leading his own marketing consulting firm. Sergio has a unique ability to understand customers and to develop strategies that will succeed based on rapid-fire test and response. I have enjoyed greatly working side-by-side with Sergio in the past few weeks. I'm delighted he believed so strong in our mission that he has joined our efforts.
This is my third transformation. I went through the successful repositioning of Target from a discount store to industry's leading upscale discounter. As you know, I work side-by-side with leadership team at Apple as Apple repositions itself from a cult brand selling Macs to the world's most valuable company. And I'm now leading our effort to transform JCP to create a new platform for growth that will last for years to come. I told you this would be a multiyear effort and it will be. I told you transformations are unpredictable and can be bumpy and this one has been. But our result has never been higher, and we greatly look forward to year two of our transformation.
With that, I would like to turn to Ken Hannah for a financial update.
Ken Hannah - CFO: Thank you, Ron and good afternoon everyone. Welcome to our fourth quarter 2012 and full year earnings webcast. In addition to the materials provided earlier with our release, I prepared a number of slides to help walk through our financial statements for the quarter and full year. So, let's get started.
Sales for the quarter came in at $3.884 billion compared to $5.425 billion in the same quarter a year ago and $2.927 billion last quarter. That results in a comparable store sales decline of 31.7% excluding the benefit of this year's 53rd week, or down 28.4% if included. Traffic for the quarter was down 17% year-over-year. Q4 has traditionally been our most promotional quarter, one in which customers are shopping for others and seeking value and as Ron said, it's very important for us to compete and connect with our customer. Our store conversion was down 10% to last year and consistent with previous quarters. For the year sales were $12.985 billion with comparable store sales down 25.2%. Traffic was down 13% for the year and conversion down 9%.
Our reported gross margin for the quarter was 23.8%. That's compared to 30.2% in the fourth quarter of 2011. Let me walk you through the cause of change year-over-year. The everyday merchandize selling margin which we will walk through in detail had a positive impact of 80 basis points year-over-year. The clearance mix, it's associated with us having clearance at a higher percentage of our business than we did a year ago had a 430 basis point impact on the quarter, in line with what we had experienced last quarter. A lower selling margin on the clearance goods sold in the quarter versus last year cost us 120 basis points. Vendor cost concessions consistent with prior quarters were down 60 basis points as well and number of other miscellaneous items had a 110 point impact on the quarter.
Let's walk through the merchandize selling margin. Let me remind you this is simply our average unit retail minus our average unit cost including freight. Selling margin was up 100 basis points over last year at 44.7%. Our everyday revenue was 76% of the business in the quarter. That compares to 86% of the revenue in Q4 of 2011 and 77% in Q3 of 2012. Our clearance selling margin was down 830 basis points to negative 0.6% and clearance represented 24% of our business compared to 14% in the same quarter a year ago and 23% of our business in quarter three.
So the merchandising selling margin in total was down 490 basis points in the quarter, including a negative 430 basis point impact associated with a higher mix of clearance compared to the same period last year. I've included this table to provide the quarterly and annual numbers associated with our business mix and selling margin.
For the year, everyday revenue represented 80% and our clearance was 20% of revenue. Our everyday selling margin was 49.5% and our clearance selling margin for the year was negative 6.8%. The mix of clearance in the negative selling margin was primarily driven by our desire to reduce overall inventory levels, particularly in the back half of the year and begin 2013 as clean as possible.
Our SG&A was $1.209 billion in quarter three. That's down $175 million on a gross basis from the same quarter last year. Similar to last quarter, we made some decisions to invest back in the business that netted savings year-over-year of $134 million. For the year, our gross margin savings were $671 million and our net realized savings for the year were over $600 million.
The teams have done a great job reducing waste throughout the business. These savings are real and expected to be over $900 million, below the 2011 levels. You probably saw higher pension expense number this quarter than you had expected. As noted in our release, we incurred a charge of $148 million related to the participants that it separated from the Company and elected a lump sum cash settlements from our pension plan.
We also incurred $29 million in restructuring charges in the quarter, $18 million of which was related to store fixtures in which the Company has accelerating depreciation associated with our upcoming shop schedule. So our reported earnings per share is a loss of $2.51 for the quarter. Adjusted for the charges we took in the quarter for restructuring and adding back the non-cash pension expense, the adjusted EPS is a loss of $1.95.
For the full-year, our reported earnings per share is a loss of $4.49. Again, adding back the restructuring, the non-cash pension expense for the year, and the charges we took early in the year for transition markdowns as we discontinued brands for shops and removing the gains that we received from the sale of the non-core assets, the adjusted earnings per share is a loss of $3.49.
Now let's move to our balance sheet. I'd like to take a moment and walk you through a few of the items on the asset side of our balance sheet. Let's start with cash; our cash balance at the end of the year was $930 million, that's up $405 million from Q3, driven by operating cash generated in the quarter offset with our capital spending. Our merchandise inventory is down 20% or $575 million from last year to $2.341 billion. Despite the declines in traffic and sales, our team made great progress with inventory management and reduced our overall weeks of supply, improved our inventory aging, improved our processes.
Our deferred tax assets are down $139 million year-over-year. This reduction is due to lower deferred tax accounting associated with inventory items and accrued expenses and the reclassification of all of our net operating loss tax benefits to long-term deferred tax liabilities. All other assets are down $422 million for the year. This is primarily driven by the monetization of the non-core assets early in the year for our REIT ownership interest, leverage leases, and regional mall partnerships. We still have several hundred million dollars of opportunity here.
As we move to the liability and equity side of our balance sheet, let's walk through a few of the specific line items. Our supplier payables are up 14% from the last quarter. This is an area where we're getting the benefit of reducing inventory levels and the specific steps taken to improve our overall working capital. In the quarter we received the benefit of aligning our vendor payment schedules to our inventory management strategy. There was also a one-time benefit associated with the deferral of select vendor payments in the fourth quarter of $85 million. Our long-term deferred tax liability is down $500 million due to the increase in future tax benefits from federal and state net operating losses.
Let's move to cash flow. Starting with operating cash, we generated $645 million of operating cash in the quarter. We've walked through the details. You can see we reported a GAAP net loss of $552 million. Adding back the non-cash portion of the restructuring charge and depreciation and a decrease in inventory, which generated over $1 billion in cash benefit in the quarter, offset somewhat by a decrease in payables of $246 million. The tax benefit associated with the losses doesn't flow through to cash in the quarter and we have to add back the non-cash charges for asset impairments to get to an overall net cash generation of $645 million for the quarter.
Our overall net cash increased $405 million for the quarter. As we just discussed operating cash generated $645 million, investing cash flow associated with CapEx was a use of $229 million and financing was a use of cash of $11 million associated with capital leases. Despite the impacts of reduced sales and gross margin and restructuring charges associated with the Company's transformation throughout 2012, our full year operating cash flow was a use of $10 million. This schedule calls out the annual impact of the non-cash items like restructuring, depreciation, asset impairments and pension expenses.
The decrease in inventory year-over-year generated $575 million and the increase in payables was a source of cash of $140 million. Again the timing difference between book and cash tax associated with the loss doesn't flow through to cash in the year when you need to remove the gain on sale of our non-core assets. The cash from those transactions shows up as cash in investing, netting an overall net cash use of $10 million for the year.
Our net cash decreased $577 million for the year, a $10 million cash used from operations; investing cash flow was a use of cash of $293 million, primarily driven by $810 million of capital being invested in our stores and infrastructure, offset by $526 million of cash from the sale of our non-core assets. Financing was a use of cash of $274 million driven primarily by the retirement of $250 million of debt and capital leases.
Let me touch on our liquidity for a moment. I will start with providing you a summary of the amendment to our credit facility that was completed a couple of weeks ago to give us additional financial flexibility. We increased the line of credit from $1.5 billion to $1.85 billion and increased the number of lenders. We also increased the accordion feature from $250 million to $400 million. We increased the flexibility for third-party financing and updated the representations and warranty section to acknowledge the business results in the first year of our transformation.
There were no changes to the asset borrowing base, which were the Company's receivables and inventories nor the borrowing rates. There are no new financial covenants associated with this facility. We are very pleased with the support of our banking partners. Now let's put this in the context of our overall liquidity. As we discussed earlier, we had an $85 million deferral of vendor payments into 2013 that I have removed from our cash balances for purposes of looking at our liquidity.
So, using the adjusted cash on hand of $850 million and taking into consideration the amendment to our asset-backed credit facility in which the line was increased to $1.85 billion with a $400 million accordion feature. You can see our access to short-term capital is approximately $3 billion. To-date, we've only used the credit facility for letters of credit and there've not been any cash draws against the facility.
Before Ron and I open up for questions, I wanted to again highlight some of the key financial accomplishments in 2012. As we mentioned, we reduced expenses by $671 million. We are on track to achieve over $900 million in savings. We reduced our inventory by $575 million and significantly improved our aging and our weeks of supply. We monetized $526 million of non-core assets and have several hundred million more in opportunities. We invested $810 million in existing stores and infrastructure. We transformed 10% of the floor space and opened eight new apparel shops and they continue to outperform the rest of the store with the productivity of the shops in Q4 consistent with what we've experienced in Q3.
We also reduced our overall debt by $250 million. So as Ron mentioned, despite disappointing traffic and sales we accomplished a lot in our first year of the transformation of JCPenney to America's favorite store.
With that I will turn it back over to Ron and we will take your questions.
Ron Johnson - CEO: Thank you, Ken. We appreciate all the great work your team has done over the last year and now we are ready for your questions.
Ron Johnson - CEO: Brian Nagel, Oppenheimer.
Brian Nagel - Oppenheimer & Co.: Can you guys hear me?
Ron Johnson - CEO: There we go. Sorry about that everybody. Our apologies. It's our first time doing this live from Plano. So please go ahead Brian, we will come back to Matt right after this.
Brian Nagel - Oppenheimer & Co.: So the first question I had, Ken you commented at the end of your prepared remarks about the performance of the shop-in-shops, but you didn't give a specific number. I think you said something about consistent. So in the Q3 report, the number was 33%. So are the shop-in-shops still performing at north of 30%?
Ken Hannah - CFO: Yeah, I'd go ahead and answer that. Brian, we went through and looking at the shop performance, there's only a couple dollars per square foot difference quarter-over-quarter in the performance. Until we get a full year's worth of sales history to establish the curve for those individual shops, we are not willing to share those, it's kind of like comp store sales, until a store has been opened for a full-year, you don't really have that comparable. So when we look at the shops, they are outperforming the rest of the store. If I look quarter-to-quarter when we had traffic down 17% and also comp sales down 31.7%, we only had a few dollar per square foot difference in terms of the performance of those shops.
Brian Nagel - Oppenheimer & Co.: Then any comment on the sales performance at your chain or in the shop-in-shops since the fourth quarter end?
Ron Johnson - CEO: Yeah, I can take that one, Brian. We really don't want to provide any guidance on current sales, but I will say this, we are thrilled with the traffic to our store on our key holidays. We talked about our Valentine's promotion. We had more traffic than last year on Valentine's Day. For the important Presidents' Day weekend, the Saturday, Sunday and Monday, our traffic was essentially identical to the year before. The key to our volume is getting the customer back in the store, and as I mentioned, we've launched all new marketing and we're really pleased with the traffic, but I don't want to get in the habit of reporting on early quarter sales.
Brian Nagel - Oppenheimer & Co.: And I'll just ask one more. Then I'll let someone else take the floor. The follow-up question, you talked about in your prepared remarks and in the press release about the launch of the Home section, the 20 shop-in-shops and I think you also mentioned Joe Fresh and then Sephora. Are we still on track for the 40 shop-in-shops you had talked about initially for 2013?
Ron Johnson - CEO: We are working really hard to deliver all new shops for this year. We have shop partners lined up for the back half of the year, which include Levi's and Dockers and Disney, and one more that we haven't announced yet. So, we have the capital to continue our shop transformation and look forward to continuing that path after May.
Ron Johnson - CEO: Let's go Matt, and I apologize Matt if we couldn't hear you before.
Matt Boss - JPMorgan: I didn't hear you explicitly state it before, should we still think about 2013 as a return to growth and as we think about the year when should we expect an inflection in same-store sales? Conversely along those lines, if the traffic is not there post the May shops and Martha Stewart and some of the different lines coming in, is there a contingency or a backup plan in place that we should think about?
Ron Johnson - CEO: Matt, let me try to answer that. We expect the ability to return to growth to be much, much greater when the complete the transformation of Joe Fresh and Home. When we get 30% of our store completed, and/or under no construction, we think our chance to return to growth is much higher. And as I mentioned, we are now going to promote each and every week, so every week we'll be competing with all retail to get people in our store and our teams are very excited and I'm very excited about that, but ultimately our return to growth will be dictated by our customer and how we connect with our core customer and how new customers respond to our marketing and our new merchandise initiatives. And, again, I really want to stay out of the guidance business. Obviously, our commitment is to return to growth. The sooner we do that the better, but we're here for the long haul and we believe we're taking the steps needed to return to growth and we'll report that to you as soon as it happens.
Matt Boss - JPMorgan: And then more on the balance sheet. As we think about working capital for next year 2013 and some of the drivers of cash flow, like you said staying away more from the guidance. But what's the general game plan for inventory after cutting it 20% this year? And also Ken mentioned the $85 million deferral of vendor payments in the fourth quarter. Can you provide a little bit of color on this? And finally CapEx, what should we think about for next year with the 30 shops?
Ron Johnson - CEO: Why don’t I take the inventory question and then Ken can add to that and I'll let Ken talk about the $85 million, if I can. It was really important to reduce our inventory. It's just really good working capital management. As I mentioned and Ken mentioned, it was expensive, but we began the year with bloated inventory levels. Today we're lean, we are clean, and we are ready to chase new merchandise as it sells. Because we reduced inventory throughout the year, as we move into like the May, June, July, August period, our inventory levels will be pretty close to last year because we made a lot of progress early in the year and reducing inventory through markdowns and different initiatives. So, the beauty of this year is we will actually be receiving more merchandised most months then we did last year and that’s going to dramatically improve our in stocks, our turnover and our ability to get the merchandise to the right stores. So, long-term we intend to manage our inventory like a specialty store where we run on a goal of about 13 weeks of supply. And as sales return to growth our inventory levels will creep up but we want to stay lean and clean at all time with our inventory levels. Ken would you like to add to that or talk about the $85 million?
Ken Hannah - CFO: Yes, sure I think the working capital management strategy is tied directly to the inventory strategy. The team has done a great job reducing the weeks of supply and in doing so that actually reduces the overall working capital including allowing us to get the benefit of having a higher payables balance when you look at that inventory. So as we turn that inventory faster and faster than the company will continue to get the working capital benefit. Now I think the $85 million we wanted to call that out as we went through the last half of the year, we took a number of steps to work with our partners to align our inventory strategy and our working capital strategy. And as I've mentioned before I felt as though we weren’t on industry-standard terms with a number of our vendors, so we took action to start working with them to try to move an alignment between our purchasing strategy and our inventory strategy. When we got to the end of the year as part of that process there were $85 million in payments for select vendors that were paid the first week of the following quarter. So I wanted to make sure we call that out, Ron and I have continued to be transparent around the line items on the balance sheet. I didn't want anyone to look at our liquidity number and think that we were trying to do something to try to bolster liquidity. This is simply me breaking down our accounts payable process from what was just an automated process. We went to more of a manual process where we were looking at what we thought the industry standard terms would be and then working closely to align that with our communications with our vendor. So, that $85 million was paid out the first week of the quarter and I would fully expect at the end of February, our payables balance to be higher than it was at the end of the year and so I just felt necessary to go ahead and break that out, so that you guys could see that.
Matt Boss - JPMorgan: Is it fair to state that you guys can still self-fund the transformation or do we need to think about additional sources of liquidity?
Ken Hannah - CFO: Well, I think the customer is ultimately going to decide that for us, when we look at that traffic and some of the things that we are doing to drive those customers back into the store, our intentions are to fund this transformation out of our cash from operations. We are committed to this strategy. I think the team here is very excited about the addition of a couple different levers that we can use to try to really connect with our customer and that's our plan.
Ron Johnson - CEO: If I could add to that as we turn to the question. Our intention is remains to self-fund our transformation, but we intend to get through the launch of the home shops and get 30% of our space built out and we are going to learn a lot. As you know, we've already learned a lot from our first aid shops and the performance of those shops was exceptional during the third quarter, continued at the same exceptional rate during the fourth quarter and we are highly encouraged by that, but it is only eight shops. It is only 10% of our space. We want to learn and read that 30% and what Ken said is the customer will dictate the timing of the transformation. We have the merchandize partners. We have the ideas to complete our transformation over the next three years. We still hope to do that, but we want the pace to be governed by the customer response to our strategy, so we can self-fund the transformation.
Deborah Weinswig - Citigroup: Deborah Weinswig, Citigroup. So can you provide some color around the idea of utilizing your credit card as a loyalty and marketing vehicle and also the opportunity for to drive traffic and sales?
Ron Johnson - CEO: Sure. I will take that first Deb, and then you could take it too. We think the credit card is an incredible opportunity. The JCPenney credit card share is substantially below that of Kohl's and Macy's and other retailers and it currently runs about 40% of our revenue. We believe we can use that in a variety ways to build loyalty and to build volume. It will be especially helpful with our mobile POS. So we're working on a variety of ways to increase that credit share. It's hand-in-hand with our loyalty strategy and we will provide more details as we unveil those plans in the period ahead.
Deborah Weinswig - Citigroup: Then can you help me understand what you are doing to drive traffic and sales through the Internet and have there been specific internet performance issues that have driven the decline in sales there since they have been greater than the decline in sales in the stores? In other words, is there more opportunity on the Internet than maybe in the stores?
Ron Johnson - CEO: Sure. Let me – I will take that too and then Ken you can jump in and answer. We have been disappointed with our internet sales. For the fourth quarter they performed pretty much as they have all year, slightly behind our store sales and there's two primary reasons for that. One, the Internet as we all know is the most promotional field in retail today. People compete and go online and compare prices and buy things primarily based on price and delivery and other things. That makes it hard. Secondly for us, our Internet site is dominated by Home. Home has been nearly 50% of the business and so as our Home business suffered, as we move through our transformation, that pulled down our Internet site. But we are not happy about that, we want to get it back and we have put a lot of work into our site into a variety of strategies to improve its performance. That's one of the reasons I went into detail about Joe Fresh because that shows when we get unique product that's available online at the time we are marketing, people will respond and as we move into our Home transformation with the Home business being the highest category that people buy online. Williams-Sonoma, 40% of all revenue comes from their online store as you know. We expect when we launched products with Martha Stewart and Jonathan Adler and Sir Terence Conran and expand our furniture that our percent share in Home and online will start to exceed our store sales. We are highly committed to that. We are also highly committed to our social strategy and as many of you might have followed on the Oscars, we kind of got the Academy award if you will from the industry for our great social media plans and execution. So we've got a lot of work to do here, but we are committed to growing our online stores faster than our (store's sales) in the years ahead.
Deborah Weinswig - Citigroup: Then last one, can you provide some insights on the benefits that you are realizing to date from the Oracle rollout?
Ken Hannah - CFO: Yeah, I will go ahead and I will take Ron. I think when we look at Oracle right now; I've got a team that's looking at implementing Oracle Financials. So, we'll go live here in a couple of months with that system, and so the benefits there are to come. There is a lot of people that are working on the RMS, the planning module. So, we believe there is going to be great benefits from that as well. So, it's been a lot of work. I think Ron called out our IT team here with the Company doing a great job under Christian's leadership and I think you're going to start to see the benefits of that Oracle platform as we start adding all the different modules to it.
Ron Johnson - CEO: To add to that, if I could real quickly. We are so excited about our Oracle strategy. Over the next three years we will complete the overhaul of our information systems and be 100% at state-of-the-art Oracle systems, and with systems from a handful of other partners that will augment that. So, we'll have state-of-the-art systems. But the most important part of the change is that nearly $100 million a year as we go forward will be invested in the next new thing. So, we're going to stay current for years to come because of this transformation we're going through. So, we'll see benefits each and every year as we rollup systems. This year we'll see benefits in our financial systems. Later in the year we'll see benefits in our merchandising, our planning and allocation systems as they roll out. But as we move through this transformation, and we exit, we will be in an unbelievably great place on systems, and I think ready to compete with anybody in our industry on the use of information technology to drive the business. Paul?
Paul Swinand - Morningstar: So, given that you are now promoting, how are you adjusting your starting or everyday points to protect gross margins or are you just willing to maybe take a little bit of a haircut to the selling margin that was 49.5% last year in order to reduce the mix of clearance?
Ron Johnson - CEO: That's an excellent question, Paul, and something that we're working with very carefully. Let me try to address it. We believe the first price is the right price and so we're going to price our merchandise so that it sells every day, and we fully expect over half the business we do to be at our everyday price. There is really not a change here in the vision about the pricing tools. It's a little bit about how we draw the customer in the store. We launched, for example, our key value items, which have been all over our Compare commercial where we have men's T-shirts and women's T-shirts for $5 and silk shirts for $30, and that has performed exceptionally well. In fact, we're out of stock on many of those and chasing them and we've actually had to reduce our marketing until we catch up on our inventory. So those items we sold at the everyday price. Our national brands will primarily be sold at an everyday price but using a MSRP. There is no change in their margin structure. Where we will make a small change to our pricing is in our own brands, because we're going to promote them more aggressively to get customers in the store. But as we learned with jewelry we don't have to go back to making our prices to create the illusion of savings. We think a savings of 20% or 25% are hitting a great price point will drive traffic to our store and give that savvy shopper the savings that she wants to help her family. So we'll be tweaking our own label pricing as we move through the year to make sure we can still deliver on our promise to deliver 40 point gross margins in the long run and that's a number we believe strongly we will be able to achieve and it's coming from faster turns and lower permanent markdowns. It's coming from new merchandise that sells at a better everyday rate and the design of the promotion is simply to make sure we have traffic in our stores. We learn that with our holiday test, as you know we tested a gift coupon in late October and that brought customers in. We competed on Black Friday as we said we would and we had great traffic Black Friday weekend. We ran a last minute jewelry event through the Internet and a postcard and that brought traffic in our stores. Valentine's Day as we mentioned we won. We did great on President's Day weekend. In this competitive world we are in and listening closely with our customer there's no doubt we need to deliver value each and every week but you don't have to go back to where we were, and we don't have to be like many of our industry competitors. We just need to have something each and every week that allows the customer who cares deeply value to feel like we helped her feel better and help her help her family with the value we offered. And so we will make subtle tweaks to some of our own label pricing overtime as we receive new merchandise in order to make sure that this doesn't impact adversely our gross margin target's.
Paul Swinand - Morningstar: And just to that point, did you see a similar reaction then from some of the other categories such as underwear which I believe was off 25% earlier this month, Worthington was off 20%, denim was off $5 to $10, did you get a similar reaction in those items in those categories as you did in jewelry?
Ron Johnson - CEO: Yes, and we did Paul. As you know many of our – and Jockey is an example, Jockey is one of our great national brand partners they frequently or couple of times a year have a Jockey event. Last year, we set those out and our customers said, why cannot I, get Jockey as lower price at JCPenney as I can at Kohl's or at Macy's. This year, (we are playing) and we saw a great response on the Jockey event. We've had similar reaction to all of our sale items and we haven't had many, but they've been at a shallow discount. So, we are highly confident that as we return to some level of promotion, we'll get the customer back in the store, but we've got to prove it to our execution. So as we move into next quarter at our May call, we'll be able to give you great feedback on how it's going, but we will continue on this path going forward. Next, Liz Dunn.
Liz Dunn - Macquarie: I guess can you talk about some of your efforts to improve conversion because I know traffic has been the key, but conversion has also been a little bit weaker. So, is that just about product, is it just about the promotion or what's really the key there and any learnings that you've seen that have been encouraging?
Ron Johnson - CEO: Sure. I can take one too and Ken you can ask if you like as well. We are delighted with our conversion, the first nearly three weeks of this quarter. The key to conversion and there is a lot of things that impact it, but it starts with having great product and I don't think our merchandize has ever have been better. Second is having clear value that the customer understands and we are expressing value in our stores today better than we ever have. If you walk in our store right now, you'll see a price point sign on every rack. On nearly half the racks, you'll see a comparison price to a price they buy elsewhere or to a manufacturer suggested retail price for a national brand. We've studied and we find that when we ever compare our sell-throughs are higher across the board on both manufacturer suggested retail prices and on compare. Those strategies are really important to us. Our inventory levels will also help our conversion and the fact that our conversion is running so well early in this year, when our inventories are substantially below last year, is very encouraging. We believe as we move our inventories tighter as the quarter goes on, as we have more of the store on sale, as we have customers coming into the store with intent to buy based on the promotion, we believe that conversion will improve. That's the key here. You have got it exactly right, Liz. It's the combination of increases in traffic, increases in conversion and if we can get a little higher average retail that will help us well. That's why new partners such as Joe Fresh are so important. As I mentioned we are selling at a 20% higher average retail, at a faster conversion rate online, it's only three days than we are in our most popular brand Liz Claiborne. So we think we are working on the right things to improve that conversion. We are delighted with the first three weeks but it is only three weeks.
Liz Dunn - Macquarie: Can you also talk about the recent headquarters reduction, just what are the gross savings and the net savings and do you feel like you are getting close to being done with those sorts of cuts? Also as you think about adding back promotion, how should we think about the incremental cost that may come along – may go along with that?
Ron Johnson - CEO: Ken, why don't I, take a shot at that if I could. Let me try just on the promotion. We had already planned this year to increase our frequency of preprint marque and of being in the customer's Sunday newspaper, their Friday paper, being online and using our email strategy. So as we go forward, there are going to be a handful of extra media things. So there won't be a big increase in the cost to reach our customer. What will change is what we print and put on those pages. So instead of giving a preprint which just has beautiful merchandise and everyday price, the customer will receive a call to action through a promotion. So we aren't worried or nervous about an increased cost in marketing and with (Sergio) here with our testing, we think we will spend our money much more efficiently. So the real cost we have to manage is the impact of the additional markdowns on our overall regular price selling margin. That's what we are paying attention to. On reductions, I just want to comment on that. There is a rumor a day about JCPenney and some incredible layoff that's coming. Two weeks ago, it was 300 people; it was a Valentine's Day, this or that. I think that's really hard on our teams. It's hard on our transformation to have to live in this fishbowl of rumors and like I mentioned the truth is, we promoted 400 people here in Plano and at our existing regional centers in the past year that nobody writes about. Now we've told our teams, Ken and I and Liz Sweeney sat down with the teams last week here in Plano and had a very detailed Town Hall, and we answered every question that they had. We made it very clear that we are always going to be in transformation. We are always going to be looking for ways to do things better and more effectively. When work that doesn't need to be done anymore goes away, we don't want someone to pretend they're working when we don't have work for them. We will try to get them into another job, but we've got to constantly invest in the next new thing so we stay current. So we're going to be always in transformation. But the goal is to build great careers for our teams here. But this idea that we've got massive headcounts reduction on the way is just really rumored and we will tactically make changes, but this has been much more rumor than it is facts. Ken if you want to add to that please go ahead.
Ken Hannah - CFO: I would just add that when you look at the expense reductions that we made last year, we were very, very pleased with the savings. One of the reasons that we've been breaking up the gross and the net is to show you the gross impact of the dollars that we've taken out of this business we are making select decisions quarter-after-quarter to invest back-in for specific reasons. But that doesn't in any way impact the fact that we've reduced the overall cost structure; those investments aren't things that we think are going to be needed from a recurring standpoint, so we'll ultimately receive those benefits. I agree with Ron, with what he said. We made it very clear to our teams that we're going to continue to look at ways to run more efficiently, that's just the way good companies operate. So what we want to get away from is the need to have events that have an impact on everyone in the building. That's not good for our people; it's not good for our results. I think that's why we've been very clear. We're going to look at these things on a one-off basis, but we'd really like to move forward without having to have large events where there's large numbers of people that are impacted, but every day we're looking for ways to get better. I think that goes with everything that we're doing. Ron has made a big emphasis on -- this year about execution, and so every day we got to make sure that we do the things we need to do to make this business as efficient as possible.
Ron Johnson - CEO: Lorraine at Bank of America Merrill Lynch.
Lorraine Hutchinson - Bank of America/Merrill Lynch: I just wanted to follow up on Liz's question first. I think one of the factors in your SG&A reduction plan was not meeting as many people on the floor to execute those promotions and sales. So how does your thinking around the SG&A and the overall cost-cutting opportunity change when you're adding back a weekly event?
Ron Johnson - CEO: Yeah, I can answer that Lorraine. It really doesn’t change. Remember we formerly ran 593 events. We would change signs three times a day. And we used to have every rack in the store on sale. What we're talking about is who knows the exact number, but one-sixth of a number of events, if you do one a week. We're talking about targeted signs for a period of time. This work can be done by our teams in the store, so we do not have any plans to add back assigning teams to handle the promotions. We can do this and we'll do it really well within our existing store cost structure. And my goal is to start to add more employees on the floor to mobile POS, so you can untether their employee from the (cash wrap) and let them meet the customer while they shop and check out anywhere and anytime. Ultimately our employees on the floor are the heartbeat of the transformation. They are JCPenney; that's where the connection happens between a customer and JCPenney, and we've got to create more hours, better work for them to do, and build those teams so they can serve our customers. And as we do that, we will get better and better.
Lorraine Hutchinson - Bank of America/Merrill Lynch: What has the feedback been from some of your new and potentially new brands on the move back toward a more promotional store environment?
Ron Johnson - CEO: Well, I'll answer that, they're thrilled. The big number one question I get from our branded partners, I've taken thousands of people through our Valley View prototype and everyone says, wow, how can you do it quicker? But when they talk about their business say, Ron, what are you going to do to get more traffic in the store? All of our vendors have been hurt by the decline in traffic over the past year. They want traffic, but they also want their brand protected. So, I said with a brand like Joe Fresh, we won't promote it, but they'll benefit as people come in to look for products from Liz Claiborne or JCP. A brand like Sephora, which has performed exceptionally well even through the transformation loves the fact that we are going to bring more traffic in the store to buy Sephora, so our branded partners care deeply about protecting their brand and there is no change in that. Our branded shops will be the greatest place to shop in America for every brand we choose to do. Disney knows that, Levi's knows that, Dockers knows that, Haggar knows that, Michael Graves knows that, Jonathan Adler knows that, but they just want the chance to suit up. So we're going to target promotion to get customers in the store. It will be good for our brands and good for J.C. Penney. All right. Well, with that, we are going to close our first earnings call live from Plano. I hope this has worked out well for you. We intend to do it again in May. As you know, we've been coming to New York for the last three times, but every time, we came we found fewer people attending in person and people want to sit at their desk, at their computer, it like update their reports and their models while we spoke, and so we chose to greet you face-to-face here, and we'll get feedback and try to improve for next time. But thank you very much for tuning in and we will talk to you soon.