Highlights From JCP's Q4 Conference Call: Too Early To Tell on New Pricing Strategy, But Reaffirming Guidance

J.C. Penney Co., Inc. (NYSE: JCP) reported Q4 EPS of $0.74, $0.06 better than the analyst estimate of $0.68. Revenue for the quarter came in at $5.43 billion versus the consensus estimate of $5.5 billion. Shares are trading down 0.39% today to $41.76.

Highlights From JCP's Q4 Conference Call:

• Comps down 1.8%. J.C. Penney Co., Inc. reaffirmed FY2012 guidance.
  
• (Michael P. Dastugue) While it was a challenging quarter from the sales and margins standpoint, the overarching thing in Q4 was the preparation and completion of the groundwork necessary to begin the execution of our new transformational strategy, which we launched on February 1st of 2012.
  
• Comp store sales declined 1.8% in the fourth quarter compared to our guidance for the sales to be flat to down slightly.
  
• Gross margin, however, decreased approximately 740 basis points to 30.2% of sales.
  
• Our gross margin in the fourth quarter was impacted by the softer than expected selling environment, which resulted in higher promotional activity and more markdowns in the quarter.
  
• We recorded approximately 207 million related to the actions we took to convert our new pricing strategy.
  
• SG&A for the quarter came in better than we anticipated, decreased from 122 million year-over-year to 1.34 billion or 24.8% of sales.
  
• We also recorded a $154 million charge related to the management transition, supply chain and other restructuring expenses and initiatives.
  
• A couple of other things to note, our real estate and other line item reflects a $58 million impairment charge related to several of our stores, as you know this is our normal course of business to test for impairments in the fourth quarter.
  
• Additionally, our effective tax rate came in at 33% versus our guidance of 48%, reflecting a loss in the quarter versus our initial expectations.
  
• Overall in 2011, comparable store sales increased 0.2% and total sales decreased 2.8% for the year. As a reminder, the impact of the discontinuation of the catalogue and outlet businesses impacted our sales by over $500 million and accounted for the 300 basis points difference between comps and total sales.
  
• For the full year, the company's gross margin dollars decreased 742 million over last year. As a percent of sales, gross margins decreased 320 basis points to 36% when compared to last year. SG&A was leveraged for the year at approximately 29.6% of sales. This is about 249 million below a year ago and 60 basis points lower as a percent of sales.
  
• We generated 23 million in free cash flow and had 1.5 billion in cash in the balance sheet even after the completion of our $900 million buyback program purchasing Liz Claiborne brands and investing in Martha Stewart.
  
• Capital expenditures for the year were 634 million, slightly lower than the guidance of 650 million. Our inventory at yearend was down approximately 9.2%.
  
• Moving on to our 2012 expectations, on a GAAP reported basis, the company expect full year earnings for fiscal 2012 to meet or exceed $1.59 per share, including approximately 15 million of restructuring charges to complete the realignment of the company's supply chain operations. And approximately 197 million of non-cash qualified pension plan expense.
  
• We are also starting to simplify our business model and in 2012, we expect to incur additional restructuring and management transition charges associated with that. We will update you as we go along.
  
• (Michael Kramer) By simplifying our processes across the entire organization, we will optimize our expense structure, flow more margins through to the bottom line, and ultimately enhance J.C. Penney's profit formula for the long-term. We are committed to this and the teams are already taking action.
  
• In addition, we no longer overstaff our cash reps, this saves salary dollars, but more importantly, this enables our store associates to spend more time on actions that add value, like serving the customer.
  
• In the home office, the leadership teams are working to reorganize their teams to align with a new simplified business model. And certainly, I'm already seeing organizational changes that will eliminate unproductive processes and work, allowing the teams to work smarter, saving time and money.
  
• Finally, 2011 was a year of transition. 2012 is a year of transformation. We will be transforming J. C. Penney month-by-month, quarter-by-quarter and we will update you on the transformation each quarter going forward.
  
• (Ron Johnson) While it was way too early assumption, any conclusions on our new pricing strategy as we are only three weeks into a 52-week transition. I would like to take this opportunity to share with you some of the learning we've experienced thus far.
  
• First, February sales are trending below last year. This is especially true on the days we are up against major promotional marketing from a year ago as to our extra discount and coupon events.
  
• Regardless we are confident that the benefits of our simplified business model will more than offset the sales decline so we can meet or exceed our 2012 earnings guidance.
  
• Second, we are learning that customers have responded well to our fashion apparel pricing highlighted in the monthly book, whether it's offered in everyday price or a month on value in the book, fashion apparel and accessories are performing to quote [ph], representing men, women, children, kids and accessories.
  
• Third, we have struggled during the first few weeks in home and fine jewelry. This is in part due to the lack of [indiscernible] that we deployed last year, but it is also clear we need to more strongly communicate our value strategy in these historically commercial on category. We are working to strengthen our in-store sign and make other adjustments to better communicate the value we offer. We're, obviously, dedicating more advertising to client to review in May, April.
  
• Finally, success strategy is doing exceptionally well, before insight J.C. Penney continues to outperform the rest of the store, growing strong double-digit comparable store sales increases and MNG by Mango has significantly improve over the last year.
  
• As important as the early sales indicators, our - it is in careful evidence about how the customer perceive their changes in pricing, promotion and in-store presentation, and here we have some encouraging news. Within the first couple of weeks of deploying and managing our new strategy, we've seen some meaningful improvements in our customer survey over the same period in the prior year.
  
• Ultimately, our success in part is simplicity, our new corporate strategy requires that we dramatically simplify our operations and realign our organization whether associates are in the right position to do their best work and deliver on our vision.
  
• No Q&A on conference call

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