JC Penney Co Inc JCP
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/16/2013

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2013 JCPenney Company Incorporated Earnings Conference Call. My name is Patrick and will be your operator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Eric Cerny, Vice President of Investor Relations. Please proceed.

Eric Cerny - VP of IR: Thank you, and welcome to the JCPenney 2013 first quarter earnings call. This call is being recorded and the replay may be accessed through the Internet at JCPenney.com under the Company Information-Investors section.

Before we begin I'll remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our release. Forward-looking statements are subject to risks and uncertainties. For more details on those risks, please refer to our most recent Form 10-K and other SEC filings.

I'll turn the call over to Michael.

Mike Ullman - CEO: Good afternoon and thank you for joining us. This is obviously my first quarterly earnings call since returning to JCPenney last month. I know many of you quite well and others I haven't met I'm looking forward to meeting you in the near future.

In a few minutes Ken Hannah, our Chief Financial Officer, will take you through the Company's financial results for the first quarter of 2013, but I want to say a few words at the top of the call about my initial impressions and some of the priorities we are guiding our work as we (set out to) turn this company around. I should point out that we're somewhat constrained about what we're going to say about the future, both because of the limitations placed on us by the financing and bond tender on our way and my instinct and not get ahead of ourselves as we talk about the future.

Since returning to the Company five weeks ago I've spoken with a wide variety of stakeholders to fully assess our situation and to fully determine the next steps to take to improve our performance. These conversations have been enlightening and they'll continue to inform the actions we take.

The good news is our fundamental business processes are still strong and our senior leadership is intact, with especially strong teams in merchandising, planning and allocation and our store leadership.

I can say with confidence we're looking forward not back, developing new strategies and initiatives to take into account the changes in the consumer environment, the competitive landscape and the opportunities we have for a successful future. There are several key priorities we are focusing on as we put together our plan to return to profitable growth.

We've taken steps to stabilize the business and strengthen our financial position. As you all know we have drawn down $850 million on our $1.85 billion committed revolving credit facility and security and commitment for a five-year $1.75 billion senior secured term loan facility.

With the home launch beginning next month our 2013 capital expenditures are nearing completion.

One of our top priorities this year is to restore traffic and drive purchase conversion in our stores, to do this we're taking steps to reconnect with our core customer through more effective marketing and messaging. We need to make a connection with the customer that is meaningful, as well as enduring.

This won't happen overnight, the customers will begin to see important changes in the coming months that are aimed at meeting their needs. We're really listening to the customer and putting efforts in everything we do.

You may have seen our most recent marketing that better reflects how we intend to reconnect with the customer and encourage her to reconsider JCPenney. We would also deploy our marketing spend to better support those occasions and get a better return on our marketing investments. You saw this approach in action in our Mother's Day marketing and expect to see similar advertising pushes around other important occasions.

Next, we obviously needed to get the right merchandise in the right place at the right time. But we find our merchandising strategy to focus on the right mix of private, national and exclusive brands as well as attractions. Speaking of those three categories; private brands, national brands, and attractions, our traditional private brands have been the core of our business. These brands have been underemphasized over the last year or so. We are bringing back a number of the brands the customers value and she has told us loud and clear she intends to return when they are in the store.

From my perspective, the JCPenney has made very good progress over the last 18 months improving how our stores look and how our brand assortments like Joe Fresh and Happy Chic by Jonathan Adler look in our stores. Our plans for these and other new brands to be available at JCPenney alongside several newly restored private brands as I mentioned, particularly the $1 billion St. John's Bay women's sportswear brand and Arizona, as well as the exclusives like Liz Claiborne, each of which has been updated with exciting styles. Our customer will also see significantly expanded range of basics within our core brands. She has told us that's what she wants. These higher margin items will be important focus for us going forward.

Given the proven success of Sephora and the encouraging performance by Levi, IZOD, Liz Claiborne, Arizona in JCP shops, attractions are going to remain a strategic emphasis. We are not going to (assess) specific number of shops, we will test and build out the ones the customers clearly want. We're also focused on making JCP.com a stronger component of our business once again. JCP.com lost significant sales volume in 2012, due in large part to merchandise assortment and in-stock issues, as well as execution challenges.

Over the last year, JCP.com functioned as a completely separate entity inside the Company with little synergy between stores and online. We need to create a seamless omnichannel experience with strong store and digital convergence.

Finally, we are intently focused on our teams. The last year has been tough, but we're focusing on the future and our teams are energized and ready to win. We're getting the right people in the right roles at all levels of the organization. We don't anticipate making a larger number of new hires, nor do we expect any further meaningful workforce reductions.

We'll focus on building the bench strength to make sure that we have succession plans in place for key roles. And we know we must return to being a leader in social engagement. Rest assured, we recognize the magnitude of the challenges that we face. We believe we can put JCPenney back on the pathway to profitable growth.

With that, I'll turn the call over to Ken, who will take you through the Company's first quarter results.

Ken Hannah - EVP and CFO: Thank you, Mike, and good afternoon, everyone. Welcome to our first quarter 2013 financial report. Total sales for the quarter decreased 16.4% to $2.635 billion compared to $3.152 billion in the same quarter last year.

Comparable store sales decreased 16.6% for the quarter and were negatively impacted by the disruption resulting from the ongoing transformation of the home department in our stores. Traffic for the quarter was down 6% compared to the same quarter last year, while store conversion was down 1% and our average transaction value was down close to 10% as a result of offering select sales and some promotion on an already low everyday value price and a higher mix of clearance.

Our reported gross margin rate for the quarter was 30.8% compared to 37.6% in the first quarter last year. The 680 basis point reduction year-over-year was driven primarily by higher penetration of clearance merchandise sales. Reported gross margin for the quarter was up 700 basis points sequentially from the fourth quarter 2012 on lower clearance penetration. Clearance merchandise sales were 21% of the business in the first quarter of 2013, 24% in the fourth quarter of 2012, and 15% in the first quarter of 2012. Our SG&A was $1.078 billion in the first quarter. That's down $82 million or 7.1% from the same period a year ago, driven primarily by reductions in noncustomer-facing activities in our stores and home office. The teams have done a great job reducing expenses throughout the business. The actions taken will generate operating leverage as we grow our top line and allow us to reinvest in customer-facing activities.

Primary pension expense was $25 million in the quarter, down from $49 million in the same quarter a year ago, reflecting the actions taken last year, resulting in lower service cost due to the fewer participants in the plan. Our pension plan remains fully funded. Depreciation and amortization expense was $136 million in the quarter, up $11 million from the first quarter a year ago. The increase is primarily the result of the investments we've made in our existing stores in the last year. We incurred $72 million in restructuring charges in the quarter, $28 million of which was related to store fixtures, including increased depreciation for fixtures being replaced in the home department and other fixture write-offs, another $28 million associated with reductions in home office and stores and $68 million in management transition expense in the quarter.

Reported earnings per share is a loss of $1.58 for the quarter. Adjusted earnings per share, adjusted for the charges we took in the quarter for restructuring and management transition and adding back the non-cash pension expense is a loss of $1.31.

The company's cash balance at the end of the quarter was $821 million, a decrease of $18 million from the first quarter last year and down $109 million from the end of fiscal 2012. The balance includes the drawdown of $850 million of our $1.85 billion revolving credit facility in April.

Our merchandise inventory while down 9% from the same quarter last year is up $457 million from the fourth quarter 2012. The increase from year-end reflects investments in home and women's apparel associated with the introduction of our new attractions as well as additional inventory investment in our merchandising assortment.

Property and equipment is $5.690 billion up from $5.126 billion from first quarter year ago. The increase is primarily associated with the capital investments we've been making in our existing stores.

All other assets are down $488 million year-over-year. This is driven by monetization of non-core assets throughout 2012.

Our supplier payables at quarter and were $1.248 billion up $264 million from the same quarter a year ago and up $86 million from year-end.

The increased days outstanding reflect the actions taken throughout 2012, to better manage the working capital.

Our other accounts payable and accrued expenses were up $302 million from the same quarter a year ago, reflecting accrued and unpaid capital expenditures of $335 million primarily associated with our investment at home. Short-term borrowings in the quarter were up $850 million reflecting the draw on our revolving credit facility in April. Our operating cash flow was a use of $752 million in the quarter, compared to a use of $577 million in last year's first quarter. The use of cash was primarily driven by an increase in inventory levels of $457 million since year end and operating losses in the quarter.

We spent $214 million on capital expenditures in the quarter with approximately 11 million square feet of floor space under construction as we introduced Joe Fresh to JCPenney customers, opened 30 Sephora's inside JCPenney and renovated our home department. As mentioned earlier, there was an additional $335 million of accrued and unpaid capital expenditures primarily associated with the home renovation that will be paid when due in the current quarter.

With that operator, we'll open the lines for Q&A.

Transcript Call Date 05/16/2013

Operator: Deborah Weinswig, Citigroup.

Deborah Weinswig - Citigroup: Mike, let me just say it's fantastic to have you back. Can you talk about marketing, what's happened since you've been back, where are we now and where are we going?

Mike Ullman - CEO: I think that marketing is obviously paired with our sales promotion function. We think that we have strengthened our messaging and marketing approach. I think that we're very focused on the key shopping occasions throughout the year, so we can focus our spending on the times the customers expect to be shopping, probably about over 20 times that we've identified the customer really expects to be in the marketplace. We think we have market share opportunities clearly. We don't get all of our spending at this time, nor we ever had all of the spending, so she crossed shops. So, messaging what we're about is very important. We need to know who she is and what she expects. I think the addition of coupling that with strong sales promotion that includes clarity to the offer. I think you will see our sales promotion vehicles will be more impactful, less cluttered, but very clear offers in terms of the price and the integrity of what we're selling. So, we feel very good about marketing and messaging. We've obviously been dark for a long period of time in terms of the way the customer expects to the shop with us. We've had the home store closed for an extended period of time and home is probably the most promotional part of the department store. So, while we're early in this process, we're quite encouraged by the reaction to the Mother's Day marketing, as well as our so-called apology media in the last three or four week. So, marketing and sales promotion is very important part of our recovery of traffic. We measure very carefully the traffic in the stores as well as the purchase conversion.

Deborah Weinswig - Citigroup: My last question. There were two words I picked up from the press release which I thought were very important, which were loyalty and listening. Can you talk about what you are doing in terms of extending loyalty to your customers and how are you listening to you customers?

Mike Ullman - CEO: Let me start with listening. I think we're using new techniques in terms of understanding consumer insights. We benefited from this new approach by being able to test media and print before we actually run the promotion. I think our television spot, particularly the first one was very well received. I think it was the number one social media conversation for several days. We believe part of that was because of the pretesting we did of various messages. We wanted to make sure that customers understood that while we had lots of changes, some she liked, some she didn't like so much, and that we had listened. So listening is a very important part going forward, not only to our customers, but also to our associates. I've spent much of the last 700 hours since I've been awake in the job listening to our associates, particularly those that are leading in the stores and customer-facing associates, and they are eager to tell us what they like and what they don't like, and I think we've tried to aggregate that information to be able to act on things that are quite straightforward to fix. As to the rewards part, we more or less changed our rewards approach with only one level of reward. We (will) go back to a tiered approach that customers clearly told us they appreciate being rewarded for the frequency and size they are purchasing, so you'll see that come back into what we do.

Operator: Paul Lejuez, Wells Fargo.

Paul Lejuez - Wells Fargo: Just a couple questions. One, your payables to inventory ratio Ken I'm just wondering how we should think about that, how that progresses throughout the year and how that looks at the end of the year. Second, Mike and/or Ken, from a CapEx perspective, what should we be thinking about as we look out to next year, what kind of number will we end 2013 at, and just how should we think about the investment at the store level going forward? And then Mike just curious about your thoughts on expenses and whether or not you think that you've cut too much over the past year and if you need to add back some expenses…

Mike Ullman - CEO: Ken will address the first point on payables.

Ken Hannah - EVP and CFO: We'll start with payables. So we'd made a number of improvements in our working capital throughout the course of 2012 and if you recall we actually had a payables level that was about $85 million over-stated. So that’s been corrected in Q1 with some payments that we made in the beginning of the quarter. But what you see today is reflective of the current business and the arrangements that we have. So I would expect it to remain fairly constant with what you are seeing today as we go throughout the year.

Mike Ullman - CEO: Well as to the CapEx as you may realize with the major home store, 505 home store installations almost complete. That the vast majority of our CapEx for this year has been committed so it is probably less than 10% after we account for the major spending on home remodel and the rest of CapEx for the first half of the year, about 10% left for the remaining of the year. We don’t foresee major level of CapEx for attractions anywhere near the level that’s been for the last year or so. It is premature to talk about next year's CapEx at this point. Now on expenses I am pleased to say that having a lower expense structure is a huge advantage as we grow volume coming back out of this abyss. That we'll be able to capitalize on the bottom line leverage we'll get out of that. Specifically to your question there maybe few areas where we went a bit too far but I don’t think it’s a material part of what we took out and we'll make those decisions intelligently based on the productivity that we can gain by putting it back in several places. We may find savings in other places, so I think the level of expense reduction is probably about right.

Operator: Brian Nagel, Oppenheimer.

Brian Nagel - Oppenheimer & Co.: So my question, Mike, you mentioned in your prepared comments your plan to bring back some of the more popular private label products to JCPenney stores. The question I have is, as you have been reviewing the business now, and clearly a lot of work was done to bring new products into your stores over the last few quarter or so and maybe the execution wasn't that great, but are you seeing as traffic is beginning to come back potentially that these new remodel there is actually are resonating with the customers to a point where in the near term they could be center of better sales or profits for you guys?

Mike Ullman - CEO: Well, the way I would characterize the merchandise structure across the store, the core of our business is the private label business, private brand business and we diminished the several of the key brands during this phase and we lost a lot of traffic. So our customer told us loud and clear. St. John's Bay maybe the best example that they would visit again if we have the product that they enjoyed and they could buy it at the price promotion calculus that they were used to, that's how they want to shop. That business is a very profitable business for us when we run it properly. So there's three or four brands that we are bringing back in that customers told us that she misses. I think that the way I would think about is, the biggest bucket we have is that private brand business, which I would call the core brands. The middle bucket would be the national brands where we compete head-to-head with our competitors, and that manufacturer's suggested retail pricing is the name of the game with the most of those brands and we don't expect to be disadvantaged there. If anything we have headquarter assortments that are superior to some of our competition. So that's a – in the first quarter, as a matter of fact, that was the biggest piece of our business was national brand, because we had diminished the private brand. The third category would be what I would call attractions and some could call some of them shops, but frankly the customer really looks at them more as features, things that when they turnaround from shopping the core, they see a Sephora or they see Liz Claiborne or Joe Fresh. These are ideas and aspirational products that make the shopping experience more balanced in terms what she might be looking for, and it stimulates increased business and increased spend. So, I don't think we have a space issue in terms of being able to accommodate throes three categories. I think it's an allocation of how much to the core, how much to the national brand, and we're obviously going to take advantage of the huge investment in the visual excitement and the anchoring of these new products. Frankly, when Sephora first went into stores, as early as 2005 I think it was, it looked very foreign to our customer, and today it's the most successful thing in the store, very high productivity, repeat business, and actually was the most successful single business during 2012. So, we think that these other brands have potential to – as they are accepted by the customer, they are exclusive, and they know that only at JCPenney can they find the brand that these will add to our traffic and our loyalty.

Brian Nagel - Oppenheimer & Co.: Then, if I could just follow-up with respect to the price promotions. So, there has been a big significant shift over the past several quarters and the level of promotions. As you look at the business now, do you think you'll take JCPenney back to promotional cadence maybe that's consistent with – in the days before your predecessor ran the Company, or is there going to be something less?

Mike Ullman - CEO: I think I spoke briefly about the fact that – we are now focused on 20 plus occasions putting the investment and marketing in those occasions to make the more important. On the other axis, will be the brands and attractions we have, so the intersection of occasions and the offer are we think the sweet spot for promoting as well as attracting incremental customers. So we're open for all customers. We're not focused on one segment of customers. I think one of the issues over the last year is somehow it became popular wisdom that somehow we didn't want – some customers (wanted) other customers. I think attracting new customers is always part of what we want to do, and we think some of the new ideas will attract new customers as new ideas have over the last several years in Modern Bride or Liz Claiborne or Mango - MNG By Mango. So there's a number of reasons for the customer to visit. We know we are the lowest-price anchor in the mall and we know we compete head-to-head with the best retailers off-mall, and we think as value department store that we have compelling assortments and the reason to rejoin as our partner in their shopping.

Operator: Matthew Boss, JPMorgan.

Matthew Boss - JPMorgan: Mike, as you reengaged over the past couple weeks, I mean do you think there's anything structural which will prevent you from returning to historical sales productivity over time? And also what's the best way to measure your progress ahead from our standpoint?

Mike Ullman - CEO: That's a good question. I really don't see any major structural barriers. I mean one of the great pleasures is walking back in and engaging with my colleagues and to find out that the core of our business processes are in place. Obviously the sales promotion approach had been changed dramatically, so we're rebuilding it not exactly the same way. It's pretty much more strongly driven in a partnership between marketing and how we paginate the offer in terms of promotion. I think that the way to measure our success is based on traffic in the store and how well they accept over selling. We expect since we are in a very competitive marketplace and we are going to compete aggressively. But there is really no reason in my opinion that over time and it may take time that we'll regain the kind of cadence of attracting customers on the key occasions and making sure that she finds what she's looking for at the price she can afford to pay. And we have probably some aspiration that other stores don’t have where she may have been shopping while she was gone.

Matthew Boss - JPMorgan: Could you also speak to some of the top line trends as the quarter progressed particularly as you move back to promotion, maybe some metrics over the past few weeks after you move back to newspaper print and doorbusters. And also – if you could breakout the headwinds that you believe from the home construction I think that would be really helpful?

Mike Ullman - CEO: As I said ahead of the call we're kind of constrained at what we can say in terms of the quantitative aspects of things because we are in the middle of bond tender. So I will say we are quite encouraged by the reaction to last several weekends when we started getting back on our game in terms of messaging the way that we know how to do. And I would say obviously home store is being closed in 500 places had material impact on the home business. But those are going to start to come on stream here and they are gradually opening day-by-day now and we expect to have a launch around June 6 for the new home concept. So, as I said this is going to take time but we expect to have back-to-school being probably one of the most important times for our business since we are so strong in the kids, young men's and juniors business, we believe we'll be in sufficient inventory position to vigorously compete. So we've been spending a lot of our time with our heads down making sure we get the merchandise in the stores, in size and in basics and getting the Internet realigned with the store inventories. I mean, there's a lot of moving parts, identified 30 or 40 specific things that I thought we could improve on and we are busy getting after those initiatives.

Matthew Boss - JPMorgan: Last thing, what do you think a normalized rate of gross margin longer term is in your view?

Mike Ullman - CEO: Well, I wouldn't see why we couldn't achieve as an intermediate goal kind of the margins we saw in the first three quarters of 2011. The fourth quarter of 2011 was preparing for a drastic change in pricing. So, I would say that that would be a fair beginning point. Obviously the better job we do of buying and selling merchandise and the better job we do aligned on an omnichannel basis with the Internet, the better our margins will be.

Operator: Bob Drbul, Barclays.

Robert Drbul - Barclays Capital: I guess a couple of questions. As you realigned the merchandising strategy, how complicated or how long do you think it will take you to have the inventory match the merchandising strategy, exiting some of the other initiatives and sort of bring back some of the St. John's Bay product, et cetera?

Mike Ullman - CEO: Well, obviously different merchandising categories have different lead times. So, a woven shirt takes longer than a knit shirt, just to make it simplistic. As I said, the back-to-school period is probably the best target, because it's a seven-week span and I would expect us to be ready to compete across the board with a very few exceptions. So, we really don't have a – I think fortunately the teams got started before I came back to getting back in business in some of the key areas. Interestingly, Sephora has been in great inventory position all along and it's doing extremely well. The national brands have been in good inventory position, pretty much all along and we're 20 to 30 basis points, I'm sorry 20 to 30 percentage points better trend private brands the spring season. So, we think we have an opportunity to improve in the area where the highest gross margins exist.

Robert Drbul - Barclays Capital: Are you prepared like to give us any national brands that you exited that you'd like to bring it back or are in the process of bringing it back in the back half of the year?

Mike Ullman - CEO: I wouldn't say specifically, we're focused on that at the moment. I mean our work at the moment is to get the primary drivers of the core and obviously execute the attractions that are in work. So, between those two things, that time we have great partnership with national brands. I think they treat us well during all this time frame and we're treating them well as well, right now. So, I met with most of the top 10 national brands in the last couple of weeks and we're doing great business for them.

Robert Drbul - Barclays Capital: The last set of question, essentially, when you look at the profitability levels for the business and the comp levels, are there any – is there a timeline that you have set for yourself before the team on either goals that you might return to profitability or goals that when you might be able to sort of revisit the positive comp trends?

Mike Ullman - CEO: Well, I think the best thing to say at this point is we're still in the middle of analyzing what the fall season should like. And as an executive board, that's our work and we want the plan to be realistic and bottoms up and tops down, feel very good about ability to execute against it, because that will be the true test of our ability to get on a path of profitable growth.

Operator: Liz Dunn, Macquarie.

Liz Dunn - Macquarie: I guess my first question relates to just a follow-up to the previous question. It sounds like you need to add inventory in some areas. Do you have a sense of how much inventory you need to add back? It looks like your inventory is down about 18% from two years ago in the first quarter.

Mike Ullman - CEO: It's not a question of prospectively, we've made the commitment statement to put the inventory back, so it's in work. So I would say it's – I think our goal is to get back to last year's inventory levels in the back half, and I don’t see any reason why we can’t do that.

Liz Dunn - Macquarie: Okay. Have you done any work on where your customer was shopping when she wasn't shopping your stores and do you see any barriers to getting the business back? I mean have you thought about quantifying how much of it you could get back or are there not barriers and you could get feasibly all of it back?

Mike Ullman - CEO: Well, it's a little difficult. I've read a lot of studies, I've read a lot of opinions about where people went. Clearly the customer in our segment isn't necessarily loyal to one retailer, and I think they probably doubled down on one that they had not spent as much time when we were the first choice, but clearly they just got channel benefited somewhat. We're a value mall anchor, so other people in the mall probably benefited somewhat. The off-price marketplace probably did well. Clearly we gave up a lot of Internet business, which we're happy to take back. So we're optimistic that we can earn it back, but it's going to take time and they have to trust us that we're not going to disappoint them. It's our job to make it exciting place to shop. I would remind you that one of the things we're most committed to three or four years ago and year-after-year was having an outstanding customer experience with our sales associates and being involved with the American Express Poland and leading three years in that endeavor, I mean that’s important to us, that and higher social engagements. So having opportunity to come back and work with our associates to get back in touch with the customers and make sure that they are there to assist them that gives us a lot of confidence. But there is lot of work to do.

Liz Dunn - Macquarie: Just finally, I appreciate that you are sort of constrained as to what you can say, but your commercial thanked people for coming back. So is it fair to assume traffic is back in positive territory now?

Mike Ullman - CEO: I don’t know how to answer that without quantifying something I would say we were encouraged by what we saw.

Operator: Lorraine Hutchinson, Bank of America Merrill Lynch.

Lorraine Hutchinson - Bank of America/Merrill Lynch: Mike, you talked about bringing JCP.com back is there an investment cycle that we need to think about as you do some of these updates to get the store inventory aligned with the e-commerce channel?

Mike Ullman - CEO: I don’t think that’s a major issue, it was an organizational mistake frankly. So it's getting the team back together on one page, getting the assortments on line, so that when sales associates need an extended size on something that’s in the store, that the same merchandise exist on dotcom. So when you put two teams in place to do, once buying a different assortment is hard to have the confidence at the store level. They can use dotcom to extend the sale or to help the customer solve size issue. So it's not going to be in 10 minutes but I think there's reasonable confidence that we can get the inventories aligned, what I would say within fall season.

Lorraine Hutchinson - Bank of America/Merrill Lynch: Then Ken, what's the – what is the vendor reaction then to the increase in payables and do you think these are sustainable levels going forward?

Ken Hannah - EVP and CFO: Most of that happened back in the second quarter of last year, so there's really nothing new here. Those vendors have been right along beside us through the last 12 months and been working very closely with us. I think as Mike had said we've been very encouraged by some of the changes that they are seeing. So, we're very proud of the partnerships we have there and the relationships are in very good shape.

Lorraine Hutchinson - Bank of America/Merrill Lynch: Then on the promotional strategy, will this differ between your private label, national brands and then your attraction or shops that you've added, will they remain at everyday low price while the rest of the stores on sale?

Mike Ullman - CEO: What's interesting, the three components of our merchandising offer have somewhat different characteristics. So our core private brands which some of our customers think are national brands, they tend to be the most promotional, but they're also the most profitable and we have the highest sales productivity in those areas. The national brands tend to be more MSRP, and while they are promotional at times, they are more or less comparable to what our key competitors are doing. And the attraction is very – somewhat even greater variety. Sephora is not promotional concept, it's essentially regular price every day and it's the most successful thing we have in the stores. So it's not that customers' not willing to pay regular price when they find exactly what they want, the way they expect to buy it. And there are other brands in the attractions will be in the similar category. And there's obviously clearance in every category, but I'm talking about the day-to-day offer. So we think we have a nice variety of pricing architecture that gives the customer choices and some customers shop very specifically in only one section of the store or one lifestyle, others are happy to shop the whole store. But I think we've made it difficult in the last year with the home store closed in one respect and the lifestyle changes in some of the other areas and brands disappearing. So, I think we've got some work to do turn back the trust that we have what she want, the way she wants to buy it.

Operator: David Glick, The Buckingham Research Group.

David Glick - The Buckingham Research Group: Welcome back mike. A question for you and Ken on gross margins, I mean, clearly, you spent a lot of time in the stores. We've seen a lot of reticketing and you're clearly transitioning from a lower mark-up structure to a higher mark-up structure from which you can be competitive and promote and offer extra savings for the coupons or whatever incentives. Could you give us a sense for kind of what sort of markets actually you are heading back to? Are you kind of – is your goal to get back to where you were? If you can kind of give us a sense for how that's going to proceed and whether you think your gross margins kind of going to move along with your mark-up and therefore your ability to manage mark-downs?

Mike Ullman - CEO: I'll start out by saying we didn't see anything inherently wrong with it. We were running the private brand business year and half ago, so I think, you can pretty much assume that we're – on bringing those price back – we're going to price and promote them the way that they were successful. St. John's Bay did become a billion dollar plus brand by not doing it the way she wanted it. So, and we're getting a lot of her positive comments in stores and letters and emails and everything else to return to that product, and there's three or four of the private brands in the same category. So, I wouldn't read anything too serious into the markup/markdown arithmetic at this point. I think it's a bit more strategic by getting the right merchandise and the right category and the right quantity at the right place at the right time sounds easy, but obviously it takes time and (indiscernible) probably in 15 businesses, so it'll take some time.

David Glick - The Buckingham Research Group: I'll follow-up on e-commerce. Are you doing anything else – I mean, obviously, not being in the home business will hurt the e-commerce business given the high penetration, but is there anything else you're doing from the standpoint of improving the sites and the ability to navigate and to shorten the number of clicks to actually making a purchase? Do you think that that maybe has also been an inhibitor in terms of the site and are there any other investments or strategies you have to improve conversion on your e-commerce site?

Mike Ullman - CEO: I think it's fair to say we had some IT opportunities during that period as well. We installed a new engine and the functionality was impaired at sometimes. So I think it's fair to say while the merchandising alignment is the number one opportunity, (it seems) a significant portion of the volume we lost was because of not being able to satisfy store issues. But we want to compete aggressively. Everybody else is running double-digit increases and we're running double-digit declines, but it's self-inflicted. It's not the customer voting. We basically made it hard to use, so.

Operator: Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group: As you think of the business and obviously sales is always a great unknown, margin versus SG&A, if you think of the buckets of what goes in each one in each of the components where is there more near term opportunity and where do you see the long term opportunity build? Thank you.

Mike Ullman - CEO: It's pretty easy to answer I mean expense structure SG&A has been reengineered favorably. And now we just need to get the margin back so that the gap between the two allows us to make the money that we think we owed based on all the hard work. So there is no reason why, there is nothing we've done frankly that impairs our ability to run the business properly with respectable margins. It's that we just have to get the business processes back in place and not that its easy it will take time but there is nothing we have to invent to make the margin work.

Dana Telsey - Telsey Advisory Group: Is the private label more important than the branded or just the structure of the brands versus national brands and exclusives that you have?

Mike Ullman - CEO: At the moment the national brands really didn’t lose much because frankly we amped up some of the most important national brands as part of our attractions. So they put inventory in, they were running margins that were respectable and comparable to our competition. It’s the core private brands that were the poor sisters, and as a result that’s where the biggest opportunity going the other way is. The attractions vary dramatically, by what – which attraction you are talking about. So Sephora obviously is a partnership with (indiscernible), it’s a partnership where we both are incentivized to build the business, we are already in 50 stores now with 30 more yet this year, and we'll open good number over the next several years and its exceeding our expectations in terms of store penetration, average ticket, loyalty, insider, but every metric you can measure which says we have the customer in the store. I mean we've had an increase in Sephora last year despite 17% less traffic and all the other metrics you know that were not good. So we're quite encouraged that the customer when she finds that we have what she wants she's willing to come back.

Operator: Paul Swinand, Morningstar.

Paul Swinand - Morningstar: It's Paul Swinand with Morningstar Investment Research. I just wanted to know, you've been talking a lot on the call about how sort of the sales drop was due to what was edited out, and I think the last comment was there were 15 different products. Is there any way to quantify over the last 12 months or even the last quarter what the portion of the sales decline was due to edited out product?

Mike Ullman - CEO: I can't necessarily reconcile the number 15 or anything I can relate to, but I think it's fair to say we had three or four private brands that we know there's demand for, that we weren’t in business in those brands. So they are coming back and the customers are already experiencing that. I think St. John's Bay and women's is about 50% or 60% back in the levels we expect to have. Ambrielle and Intimate is being brought back for certain portion of the business et cetera. So I don't know exactly how to answer the question the way you are ask it.

Paul Swinand - Morningstar: St. John's Bay was the biggest at $1 billion, the others half of that or…?

Mike Ullman - CEO: I'm not going to quantify what they are competitively, but it's fair to say they are not $1 billion.

Paul Swinand - Morningstar: Okay. But is it also fair to say – in your discussion you said it was effecting traffic conversion and ticket probably?

Mike Ullman - CEO: Well, the core customer (indiscernible). His traffic was down 17%. The business was down more than that. So, we had traffic in the stores. She just didn't buy as much, because she didn't find as much of what she wanted. So, we took some of the things away she bought from us. Obviously she liked Ambrielle and Intimate apparel and we didn't have what she wants, she had to buy the intimate apparel someplace else. So, we'd like to think when we're back to a respectable level of the offer that we start to earn more of her wallet. But there is nothing that we can see that impairs us from competing for it. We don't have to invent something. We just have to do it well.

Paul Swinand - Morningstar: From the prior discussion, you think you can be back in stock in the fall for these lines, these four major lines?

Mike Ullman - CEO: Having sat through merchandise meetings much of today, I can tell you our teams feel optimistic about being back in business in basics and sizes at sufficient levels of inventory, do the business for all season. That's what we're committed to. Customers will decide how quickly she adopts our new offer, but department store (we think is) a very competitive field. There is merchandise everywhere. So, we have to compete.

Operator: Paul Trussell, Deutsche Bank.

Paul Trussell - Deutsche Bank: One of the impacts to gross margins was the higher level of clearance merchandise. Should we assume that, that will remain at an elevated level over the next quarter or two as you continue to replace current merchandise with the product that is more aligned with your forward looking thoughts on merchandise?

Mike Ullman - CEO: I think it's fair to assume that it's going to converge back to a normal level of markdowns. I mean I think we had a pretty drastic shift in the way we're merchandising the store, and we'd like to think we don’t repeat the same mistakes. So I can't quantify it for you right now, Paul, but you should expect us to see us buy and sell merchandise more effectively.

Paul Trussell - Deutsche Bank: Okay, and then just looking at the balance sheet, you certainly have improved the balance sheet but in adding back inventory. Are you now comfortable with your cash and liquidity levels?

Mike Ullman - CEO: I think we're comfortable that we have sufficient liquidity available to us to return to profitable growth. As I said, we've made the commitments in inventory and it's in the system, so there's not another surprise on the inventory levels at this point. We'll respond to the selling and run the business based on the inventory necessary to meet demand. There are other components of cash, which obviously relate to the success of our top line, and we now have moderated rather dramatically the amount of CapEx because most of our CapEx commitments have been made for the first half. So we obviously are focused on running the business profitably, that's our focus.

Operator: Michael Binetti, UBS.

Michael Binetti - UBS: So just one question on the inventory in the home section, that seems to be a standout area that has a real – if we look ahead to what's coming there's a real push towards price points that are perhaps higher than what your traditional customer was used to seeing. Is there any reason you think you might have to rethink some of the merchandise that was being planned there before you stepped back into the role?

Mike Ullman - CEO: I think when you see the home story relatively, I've been quite impressed with the quality of presentation, the quality of the home store we built. I think there is a variety of price points within home. We are not going to walk away from classifications or particularly what people expect to find in home so we'll have a broader assortment of hardgoods than we've had in the past. We've been more of a softgoods home orientation. Now it's more balanced hardgoods tend to be at lower prices in most cases. So I think there won't be any disappoint, there'll be some aspirational merchandise in the area, but as I said with Sephora, actually Sephora could be the highest price actual purchase in the store by the customer, but they don’t see it that way, they see it as very attractive category that they appreciate. The way we will react to the customers reaction to what we built.

Michael Binetti - UBS: I don’t know if Ken you want to take this one, but so if I think little bit out longer term on the working capital and just look at the levels you guys are operating at versus some of the peer group. Maybe if I think about the payables, you think the payable days can stay at these levels going forward and I guess I would add on to that from the lender presentations that we saw this week it pointed to about $470 million in letters of credit outstanding I was wondering if maybe you could speak to that a little bit and if that will impact payable or if there is a date that, that has to be we should be thinking about that as we model our cash flows over the next few quarters?

Ken Hannah - EVP and CFO: Most of those letters of credit are associated to where we self-funded our worker's comp liability. So they are not associated with trade payables for the most part there is a couple of agreements that we had put in place when we were setting up some of these shops with people that were having to along to buy goods, but that’s predominantly not associated with trade payables. So as I said earlier we are very pleased with where we are in our relationships and as this business grows and our vendors and partners start to see their businesses pick up, we've seen they are very happy. So I think we're in good shape from that standpoint.

Operator: Bernard Sosnick, Gilford Securities.

Bernard Sosnick - Gilford Securities: Mike, glad to see you back. I'm sure you know all the right levers to pull. I have a question with regard to sales during the quarter. The home department for the full year accounted for about 12% of your sales. And since the home was pretty much out of business for the first quarter, a good portion of it, I'm wondering how big the impact on the comp store sales number the closing of the home department had and how did apparel look in terms of comp store sales versus the number that you reported overall?

Ken Hannah - EVP and CFO: This is Ken. I'll address that. So, first of all, the home stores that were impacted was about 505, so about half of the stores. It did have an impact – it's hard to measure the impact on the total store. We do know that's likely to be something in excess of 300 basis points on our sales for the quarter, but that doesn't take into consideration the impact that having home shutdown would've had on all the areas around it. So clearly we are anxious to get that piece of the store back in business. We're very excited about the merchandising assortment and the presentation and feel really good about the positive contribution this is going to make going forward

Bernard Sosnick - Gilford Securities: So, I mean roughly speaking, I don't want to tie you do down to a number. You are saying that for the 16 down, it might have been down 13 or 12. If you ex-ed out the home as an indication of what happened to the rest of the store?

Ken Hannah - EVP and CFO: Just the impact of the home as from a mix standpoint, so it's performance as a percentage of the total, that does not take into consideration the fact that in a number of stores, home is a traffic driver, and if they weren't coming in for home, they weren't buying women's apparel, they weren't buying things for their children. So, we're sure that that had addition impact, but the number that I quantified is just the mix impact of home on the quarter.

Bernard Sosnick - Gilford Securities: Mike, with regard to the shop concept that Ron Johnson laid out. He was looking at it over a period of years extending into the future. What are your thoughts with regard to shops? It doesn't seem that it would fit within your view – given the fact that you prefer to build up private label again?

Mike Ullman - CEO: Let me first say, I probably – it was three or four years ahead of the topic in terms of attractions.

Bernard Sosnick - Gilford Securities: Indeed you are

Mike Ullman - CEO: I didn't call them shops, but frankly the customer only cares what interest they have to them. So, whether they have hard walls or soft walls or I mean the nail lacquer which is our new brand that was brought in the last year is terrific. We don't call it a shop. It's a presentation, but, so we really are migrating to calling them attractions. If the customers value the fact that they are there as an aspirational idea or something they wouldn't expect to see there or something exclusive at JCPenney, that's good enough for us, and there will be some that come and go, but the majority, if we make the right decisions, like the MNG By Mango is a fast fashion brand. It's the only fast fashion brand in the department store, okay. Sephora is, I would argue, the best beauty concept in any store. Liz Claiborne is the number one women's apparel brand in the United States. So these are attractions, whether they (have hard walls, soft walls), how they are represented is dependent on kind of the best way to show the customer when they're in the store. So I'm not as caught up in kind of the number. I'm very focused on kind of what the balance is between the three categories. So let's say that we did 20% of our business in the first quarter in those attractions. The other 80% of the business is split between national brands and core private brands. I would say a year from now there will be a bigger portion in the private brands chains than would be in the other two buckets, so I think it's a balance. And if you get too skewed toward one or the other you lose something. I think we've proven with Sephora now five or six years in the making that it can do extremely well, married next to accessories, women apparel, fine jewelry, etc. So it's a symphony, not a solo. So I think the ability to be able to do it in a way that we get recognized by the customer as their favorite format, then we win.

Bernard Sosnick - Gilford Securities: Finally you've done a wonderful job and I thank you for reassuring us that you have found the organization in sufficient condition to go forward and to make corrective measures. But you do face a challenge which is on the P&L. You said that getting back to the 2011 gross margin would be a goal. And looking at the first quarter, the gross margin in 2011 was 40.5%, which is below what your SG&A ratio was this last quarter. The challenge then is how do you become more promotional, aggressive on price, without currently having the gross margin in hand?

Mike Ullman - CEO: Well, I don't exactly know how to answer that, Brian. I think I look at it maybe more simplistically. I think about an ongoing business that has margins at those 2011 levels not being a difficult goal to aspire to. As I said at the beginning of the call that the SG&A expense rates are much lower; that's a huge advantage for us. So I think that our business challenge at the moment is how to get back on track, how to get the flow of goods into the store, to get the customers into the store, the increased traffic, increased purchase conversion, all the things that you know will make it a successful business. I don't think there's any barriers aside from our ability to execute. And obviously it's a team sport and I feel very comfortable with the team. There's been lot of changes over the last year or so as we say in the ad. Some of them you liked, some of them not so much. We've listened. We ask our executives to unanimously tell us what they like, what they didn't like, what worried them, what they thought competitor threats were, and very robust messaging back, and I went through every single comment, and I think I learnt a lot in the process and now the opportunity obviously is to work with the team to move ahead. Everybody is very motivated to make everybody proud once again for Penney's performance. And we appreciate those of you that worked so hard to cover us as one of your companies, give us a bit time, give us some patience to get back to a point where we can be easier to deal with. In terms of our ability to talk about our results.

Bernard Sosnick - Gilford Securities: I'm looking positively on what you can accomplish, but I would say you really always won, I know your hands are tied by what you can say, but your advertisement this week said that you were speechless, when can you tell us, when can you regain your voice and give us a little inclination of what you were speechless about?

Mike Ullman - CEO: You hear the end of the ad, the end was thank you. Thanks to all the rest of you. We appreciate your willingness to bear with us while enduring somewhat quite period and we look forward over the next several months to getting together with you and being able to talk more openly about our business prospects and I can assure you we are all hard at work to bring us back to profitable growth. So thanks again for being on the call.

Operator: Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great evening.