J.C. Penney Company, Inc. (NYSE:JCP) hosted a conference at Bank of America Merrill Lynch today. The CFO, Ken Hannah spoke about the company’s plan and urged investors to have patience with the transformation started by Ron Johnson. The stock has been under pressure lately and a big hedge fund is shorting the debt. Interestingly, the CFO started off the conference stating that neither Johnson nor himself would be resigning. We have a transcript covering all the CFO’s remarks. We excluded the Q&A. Full transcript below:
Ken Hannah – J.C. Penney Company, Inc. (NYSE:JCP) – CFO
Thanks, Lorraine, and good afternoon, everyone. So all kind of rumors in the marketplace. I can tell you that I am not resigning, Ron is not resigning. In fact, I left my family on spring break this week for my children. I have five of them. They have got a number of their friends, there’s about 30 of us in a house in Destin, I left them this morning to come up here. If I was going to resign, I would have done it last week and not inconveniencedmy family.
But, look, I’m happy to be here. It is no surprise we had a tough year last year and I want to make sure that you guys all understand, Ron and I are not going to go hide. We are going to tell you what we are doing, we are going to tell you what we are learning, and we’re going to stand up and we are going to be held accountable. Okay?
So let’s just talk about a few things. I want to remind folks about some of the accomplishments that we have had in the past year. Despite what was a very, very tough environment inside J.C. Penney Company, Inc. (NYSE:JCP) last year, I think the teams were able to accomplish a lot. We set out on this transformation.
No one said it was going to be easy. When I started with the Company in May, my first couple days was here in New York at our first-quarter earnings. And I saw the reaction to roughly a down 20 top-line. And how many people were disappointed that this 110-year-old Company hadn’t transformed in the first quarter of 2012. And so I realized very, very quickly what I was up against. This is something that — it’s a multiyear transformation and something that is going to take a lot better connection with our customers and a lot more patience by our investors. Okay?
So let’s talk just quickly about what we were able to accomplish. As I said, we launched an entirely new strategy in 2012. We changed everything in the Company but the address. And if you read the papers, you will see that we are sitting on 300 acres of the most sought after land in all of Dallas and if someone wants to pay me a pretty penny for it, I will gladly take our team and put them into something that is sized more appropriately for the business that we have today.
So we went after every non-core asset that we had on the balance sheet and said, how do we make sure we fund this transformation internally?
So we had a lot of things we had done for many years for tax purposes and we were able to go in and monetize about $526 million worth of assets. And there are several hundred million more that we are working on today, all of which were sold at a significant gain. So this isn’t a fire sale, we are not looking to sell our core assets to survive; we are looking to take our non-core assets and use them as a source of funding.
So Ron’s vision to a specialty department store is well underway. We transformed 6 million square feet in 2012. Now to give you an idea, his entire time at Apple, they transformed a little over 2 million square feet. So we were joking that noise you hear next door is a jackhammer. We are probably putting a Joe Fresh shop across the hall here.
So we are very excited about what we are seeing in the productivity of the space where we have done that transformation. We have got a major launch in 681 stores on March 15, that is this week. Joe Fresh will be launching across all 681 stores. And we are very excited about what that is going to mean for the Company.
The business model, I think Mike and Ron had stood up in the initial presentation and talked about the opportunity around expenses, talked about the opportunity around inventory. So we’ve taken out in excess of $900 million of expense and that is looking at every single expense that we have in the Company and understanding not just how to make it better, but how to determine whether it needs to be done at all.
We had a town hall several months ago and I stood up in front of everyone in Plano and I said, I learned something back in 1990 walking through a factory, it was on a manufacturer — manufacturing engineer’s black board and it said, there is nothing as wasteful as doing with the greatest efficiency that which doesn’t need to be done at all. And that has been something that, as I grew up through my time at General Electric, my time with the Boeing Co., my time with Home Depot, it has been something that governs the way I operate every single day.
So when someone comes to my office and says, look, I’m going to reduce this by 4% or 5%. My first question is, why do you have to do it at all? And that is a lot of what we’re trying to do. Even today with taking over $450 million of expense out of our stores, 30% of the hours are still non-selling hours. So everything we do, I ask our team, does this have to do with buying or selling our product? And if not, explain to me why we need to do it.
And, yes, there is compliance and there is controls and there is things like that that we have to make sure we maintain, but we are challenging every single aspect of what we’re trying to do on the expense structure. And so I think there is still opportunity as we go forward. And we’re going to continue to identify those things.
Look, I was at The Home Depot when we dialed back the labor model to the point to where there was two people in
the store and you walked in and you needed a fastener — I mean good luck in the fastener aisle. I saw what happened when we dialed the customer-facing piece of this back too far. So we are not looking to do anything with that other than redeploy the 30% of the non-customer-facing hours.
So still lots of opportunity on the expense side. We are spending close to $1 billion in advertising. There is still opportunity to make that much more effective. As we start to resonate and really connect with these customers, there is much more effective ways to bring them aware of what is going on inside our stores. So I think the team made major, major progress in 2012 addressing expense structure and addressing inventory.
My first week on the job, I asked for a report to look at our out-of-stocks. Would you believe that there wasn’t a report that the Company was looking at to understand out-of-stocks. So do you think anyone was looking at inventory? So we took $575 million of inventory out of the system. And I think we ended the year very, very clean. The sell-throughs that we have seen through the first month here, the ability of getting our product into the store and onto the floor and not having to set in a back room to be then delivered. That inventory management is going to have continued benefit as we go forward. And the aging has been reduced in a big, big way.
We have continued to invest in the infrastructure. We have invested in leadership, both internal to the Company and we’ve brought in a number of people from outside the Company, people that are experts in their field, that will give some of the J.C. Penney Company, Inc. (NYSE:JCP) associates that have been doing really good work for a number of years a much broader perspective around what is possible, giving them true benchmarks to what best-in-class really means.
We are investing in our stores. The $810 million of capital that we invested last year went into a number of stores that hadn’t seen investment for a number of years. So, yes, we transformed 6 million square feet of shop space, but we also invested in lighting, in maintenance and things that had been deferred for a number of years.
And as we talked about on our earnings call a couple weeks ago, we invested in technology to go in. We have been looking at our platforms. We are implementing the Oracle retail platform. We will go live here in a couple months with the financial — the Oracle financial piece of that. And we will use that to then transform a number of our business processes. Most of what we have seen to date in the area of expense reduction has not required a lot of change in processes. So there is still a lot of opportunity as we improve our business process to go after additional opportunities.
And then we talked about what we did to monetize our core/non-core assets and I will remind you that we did retire the debt that came due in August. So we have been able to reduce the long-term debt by about $250 million.
Now let’s talk about our learnings. I think, first and foremost, we have to connect with our customer, with all of them. We have done a number of things inside the store that have allowed us to attract a new customer and in some cases, that has been at the expense of our core and we cannot allow that to happen.
Ron talked at the earnings release about adding back some promotions and providing some coupons, some gifts to those customers if that is what is required for us to compete week in and week out. And we’ve got to do that in a way that doesn’t compromise the long-term vision, doesn’t compromise our ability to go bring in brands like Joe Fresh, to go get the best from Levi’s, the best from Nike, those national brands that have entrusted us with their product such that we won’t devalue it.
So you are going to see on a lot of our private label two things — one, us offering that at a sale and you are going to see some assortment that was edited out that the customer has been screaming loud and clear that’s been missing, you are going to see that coming back in April. So that process started several months ago and you will see those goods landing in April.
So the basic denim, khaki, St. John’s Bay for women, huge, huge miss when we edited that out and didn’t offer an alternative for that customer.
And so they voted with their money and they took it somewhere else. And that is something that we need to address.
We have learned that the customer prefers a sale. Despite the fact that our average unit retail today is lower than it was two years ago, our customers need a reference point and the ability to go home and state how much money they saved. And so we recognize that. We are no longer putting the ticket of the everyday price over the top of the MSRP. We put it below so that people can see the reference. The price is the same, but the customer is telling us they need the ability to go home — and I see it in my household. My wife likes to come home and tell me how much money she saved.
And as I go in explaining to her that no one buys it at the full price, she insisted that she is saving me money. And I think we’ve got to take that into consideration, that desire to have an everyday price and the need for people to show that they are saving money is something that we’ve got to bring together and do it in a way that allows us to continue to achieve the long-term vision for this Company.
We must compete every week. We feel really good about what happens in times of need. Our customers come in to J.C. Penney Company, Inc. (NYSE:JCP) and they purchase what they need. It’s those times during the year last year where we didn’t have anything to offer other than an everyday price that we saw the impact on traffic. And granted, 40% of all of our transactions prior to the transformation were happening with a coupon or a promotion. And in a lot of times, it was 80%. And so you may have gotten an e-mail this morning, Wednesday through Sunday, you can go into our store, print your coupon, it is $10 off a $50 investment. Last weekend, Friday, Saturday, Sunday, we had a blast to all of our e-mail partners, $10 off $10, $10 off $25, asking them to bring in a friend.
And so we hear our customers loud and clear. And we’ve got to do this in a way that allows us to attract that core customer that lost confidence in us and then continue to grow with new customers that are
finding our everyday value and our new brands intriguing.
Now transformation takes time; this is a multiyear journey. And we’ve certainly made our mistakes. I think Ron has stood up and taken full responsibility and accountability for our 2012 results. We understand it is unacceptable, it’s unacceptable in the short term and it’s unacceptable in the long term.
But this does take time and we are adapting our day-to-day tactics in a way that allows us to continue to achieve the long-term vision without compromising the present.
So one thing on the financial side that I want to just bring to everyone’s attention, because sometimes it gets lost in looking at quarterly earnings and adding it up. So we lost almost $1 billion in earnings last year. A number of the things that we did were restructuring-related, they were impairment-related, they were things that were non-cash in nature. And so at the operating cash flow line, and this has been adjusted for the $526 million that we received from the disposition of the non-core assets, from an operating cash flow standpoint, we only used $10 million.
And so there is a number of expenses in here that were non-cash-related. In restructuring, we had a term vested reduction in our pension where we allowed people to elect a lump sum payment from our pension plan, a pension plan with $5 billion of assets with $1.2 billion or $1.3 billion of credits, which means we can get into an underfunded situation by over $1 billion and not have to put any more money into our pension plan. So we wrote off a couple hundred million dollars of expense, accelerated pension expense by doing that. And then you guys have seen the restructuring-related charges.
So on the investment side, we did invest $810 million of capital. I mentioned the sale of the non-core assets of that $526 million of cash. It was almost $500 million of gain. So these were very strategic discussions with people that have been trying to buy these assets for a number of years.
We were creating losses and had a way to really protect the tax and so we decided to go ahead and monetize them in 2012 and then we mentioned the paydown of the debt.
Okay, so with that, I’m going to turn it over to Lorraine and she is going to ask a few questions and then we will open it up to the floor and address your questions as well. Okay? Thank you.
