Notes from JCPenney’s 2016 Analyst Meeting: Targeting Growth … 2016... · 2016-09-06 · The...

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DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

The Fung Global Retail & Technology team attended JCPenney’sanalystmeetingtodayinPlano,TX.

1) CEOMarvinEllisoncharacterizedthecompanyashavingturnedthe corner, and as now targeting growth and profitability. ThecompanyaimstoreturntoprofitabilitythisyearandtogenerateEPSof$1.40–$1.55in2019.

2) Managementhassimplifiedandclarifiedthecompany’sstrategyandmadeanefforttogettoknowitsemergingcustomerprofileandgiveherwhatshewantsandneeds.

3) Focusareas includeprovidingherwithvalue (intermsofutilityand ease of shopping), offering a beauty solution, becoming adestination for special (i.e., plus) sizes, and enabling her torefreshherhome.

4) At the same time, JCPenney is working to improve its supplychain,technology,andomni-channelandin-storeentertainmentofferings.

Notes from JCPenney’s 2016 Analyst Meeting: Targeting Growth and Profitability

Source:Dallasnews

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EXECUTIVESUMMARY

The Fung Global Retail & Technology team attended JCPenney’sanalystmeeting today inPlano,TX.CEOMarvinEllisoncommentedthat the company has been saved and stabilized, that itsmanagementteamhasbeenmodernizedandupgraded,andthatitsstrategyhasbeenclarified.Thecompany is readytopursuegrowthandprofitabilityagain,hesaid.

ThemanagementteamistargetingtheemergingJCPenneycustomerprofile, who is a 33-year-old multicultural mom, and the teamprovided its strategy to targetandkeepherasacustomer (womenresembling this demographic profile account for 45% of thecompany’s sales). JCPenney’s medium-term strategy centers onunderstandingthiscustomer,givingherwhatshewants,helpingherfind what she wants quickly, serving her needs both in-store andonline,anddeliveringprofitableresults.

AlthoughJCPenneyhasturnedthecorner,thereismuchworktodoonthefinancialside,andthecompanyistargetingacombinationofrevenuegrowth,grossmarginexpansionandexpensereductionthatshould enable it to return to profitability this year and to generateEPSof$1.40–$1.55in2019.

CEOMARVINELLISON’SREMARKS

MarvinEllisonstatedthegoalsfortoday’sanalystmeeting:

1. Clarifythecompany’sstrategicfocus

2. DefinehowJCPenneywillremainrelevant

3. Outline the company’s financial targets beyond just achieving$1.2billioninEBITDAnextyear

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SavetheCompany

StabilizetheBusiness

BuildTeam&ClarifyStrategy

Growth&Profitability

The current environment appears quite negative for retailers, withheadlines detailing mall closures, claiming that brick-and-mortar isdeadanddiscussinghowthe Internet ishurtingdepartmentstores.JCPenney’sannualrevenuessharplydeclinedinrecentyears,hittingatroughin2013beforebeginningtorecoverin2014.

Figure1.JCPenneyRevenue(Bil.)

Source:Companyreports

Ellisonoutlinedthecompany’stimelineforaturnaround,asshowninthefigurebelow.

Figure2.JCPenneyTurnaroundTimeline

Source:Companypresentation

Nowthat thecompanyhasbeen savedand thebusiness stabilized,theteambuiltandthestrategyclarified,managementcanfocusonreturningtogrowthandimprovingprofitability.Toachievethatgoal,Ellison outlined five “steps to success,” which represent themajortopicscoveredintoday’smeeting:

1. Understandthecustomer

2. Givethecustomerwhatshewants

3. Helpherfindwhatshewantsquickly

4. Serveherneedsbothin-storeandonline

5. Deliverprofitableresults

Phase1 Phase2 Phase3 Phase4

$17.8 $17.3

$13.0$11.9 $12.3 $12.6 $13.0

2010 2011 2012 2013 2014 2015 2016F

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UnderstandtheCustomer—MaryBethWest,EVP,ChiefCustomerandMarketingOfficer

MaryBethWestdividedherremarksintofourparts:

1. Brandplatform

2. Servingourcustomers

3. Marketingstrategies

4. Loyaltyprogram

First,Westdiscussed JCPenney’s typicalcustomers,classifying themintotwogroups:activeknowncustomersandothercustomers.Thegraphbelow shows thebreakdownof three-year known customersanditsmethodofclassifyingone-yearactiveknowncustomers.

Figure3.JCPenneyThree-YearandOne-YearActiveKnownCustomers


JCPenney has a name, address and paymentmethod on file for itsactiveknowncustomers(whichrepresent75%ofsales).

The tablebelowbreaksdown JCPenney’s typical loyalist customers,aswellasitsemergingcustomers(whichthecompanyistargeting).

Figure4.JCPenneyActiveKnownCustomers

Category LoyalistCustomerProfile

EmergingCustomerProfile

PenetrationofRevenue ~55% ~45%

Female 73% 71%

AverageAge 60 33

Multicultural Less More


Acmve(0–12Mos.)

Lapsed(13–24Mos.)

AlmostLost(25–36Mos.)

New

Reacmvated

Retained

0%

25%

50%

75%

100%

3-YearAcmveKnownCustomers

1-YearAcmveKnownCustomers

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The average JCPenney customer is female, so managementconsistently referred to the typical customer as a “she” during themeeting. The company has profiled this emerging customer as the“Modern American Mom” (MAM); customers fitting this profileaccount for45%of sales,and their share isgrowing.TheMAMhasthefollowingadditionalcharacteristics(boldingiscompany’sown):

1. Sheisamodernwoman…withmoderntastes,behaviorsandexpectations

2. Sheisrepresentativeoftoday’smulticulturalAmerica

3. Sheisamom

Thiscustomerdemographichasanaverageoftwochildren,andtheMAMdefinesvalueasgettingwhatshewantsinanefficientmanner.Thecompanysummarizesthisas“it’snotabout‘shopping’;it’sabout‘finding’”and“valuegoesbeyondprice,styleandqualityandincludestimeandeffort.”

Toaddressthiscustomer,thecompany’smarketingstrategycentersondeliveringvalueby:

• Creatingdisruption

• Providingutility

• Attachingtoculture

• Deliveringexperiences

• Reinventingtheloyaltyprogram

The company’s marketing efforts include the “Power PenneyPromotion”(cleverlyphrasedas“buyone,getoneforapenny”);the#SOWORTHIT hashtag on social media; retailtainment offerings(many JCPenney stores contain beauty salons); and a reconfiguredloyalty program that offers points that do not expire, unlimitedrewardsanddifferentiatedbenefitsdependingonstatuslevel.

West summarized her presentation by stating that the company isfocusingon:

• Understandingitscustomer

• Capitalizingongrowingconsumertrends

• Balancingretentionandacquisition

• Rewardingherloyalty

GivetheCustomerWhatSheWants—JohnTighe,ChiefMerchant

JohnTigheoutlinedJCPenney’smerchandisingstrategy:

• Winwithvalue

• Beherbeautysolution

• Becomeadestinationforspecialsizes

• Refreshherhome

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WinwithValue

JCPenney offers a combination of private-label brands, nationalbrandsandexclusivebrands.

Figure5.JCPenney’sBrandCategories

Private-LabelBrands NationalBrands ExclusiveBrands

Arizona

OkieDokie

Xersion

Carter’s

Levi’s

Nike

Disney

MSXbyMichaelStrahan

Sephora

TheSalonbyInStyle


Indeed, the penetration of private labels is expected to grow from52%in2015,to55%–60%in2016,to60%–65%in2017,to65%–70%in 2017. Tighe showed several examples of private-label productsthat are comparable to national-brand products, but are priced aslow as half as much. The company’s private-brand portfolio alsoincludes household appliances such as its Cooks brand ofcoffeemakers.

BeHerBeautySolution

TigheoutlinedJCPenney’sexclusiveagreementwithSephora,underwhich Sephora stores-within-stores are contained within JCPenneystores.

BecomeaDestinationforSpecialSizes

“Special sizes” is JCPenney’s term for plus sizes, and the companyoffersthefollowingspecial-sizesbrands:

• BoyHusky

• Juniors’Plus

• Boutique+(forwomen)

• TheFoundrySupplyCo.(formen;#3intermsofmarketshare)

ThecompanyhasenlistedcelebrityAshleyNellTiptontopromoteitswomen’sclothing.

RefreshHerHome

JCPenneyisincreasingitsfocusonhomecategories,including:

• Appliances

• AshleyFurniture

• EmpireTodayflooring

• Softhome

• Windowcoverings

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HelpHerFindWhatSheWantsQuickly—JoeMcFarland,EVP,Stores

Joe McFarland outlined four ways in which JCPenney can help itscustomershopmoreefficiently:

• Simplification

• Customerservice

• Technology

• In-storeexperiences

Simplification—Management has reduced the number of weeklytasksassignedtostoremanagersinordertofreethemtofocusmoreoncustomerservice.Inaddition,generalmanagersareinstructedtoleaveastorewiththeirownto-dolistratherthanleavingoneforthestore,and thereare restrictionson thenumberofe-mailmessagesthatcanbesenttostoremanagers.Storemanagershavealsobeengiven a portable, mobile device—which replaces the spreadsheetpreviouslyused—tosimplifytheiractivitiesand,again, freethemtofocusoncustomerservice.

Customer service—The company has devised an acronym—WORTH—to summarize its customer-service goals: it stands for(W)elcome, (O)ffer her assistance to find what she is looking for,(R)especthertime,(T)hankherand(H)elpheralwaysgetherpenny’sworth (helping customers get their penny’s worth is a longtimecorporatemotto).

Technology refers toomni-channel, and in-store experiences are acommonthemeinretailtoday.

MikeAmend—EVP,Omnichannel

Mike Amend noted that JCPenney’s omni-channel/technologyenhancements in2016 includeprovidingcustomerswith theoptionto:

• Buyonline,pickupinstore

• Makesalonappointmentsandreceivecouponsonasmartphone

With regard to the competitive threat frompure-play e-tailers thatlack physical stores, Amend commented that an omni-channelofferingisclearlysuperior.

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Figure6.Omni-ChannelBeatsPurePlay


Serve Her Needs Both In-Store and Online—Mike Robbins, EVP,SupplyChain

As of 2015, JCPenney’s supply chain was siloed; planning andallocation was separate from sourcing and from logistics andfulfillment.For2016–2019,however,focusareasinclude:

• Shiptostore:improvingshipmenttimesfromthecurrentfour–sevendaystoone–twodays

• Savethesale:ifaparticularfulfillmentcenterisoutofstock,anitemcanbeshippedfromanotherstoretothecustomer

Thecompanycancurrentlyreach95%ofcustomerswithintwodaysusing primary and secondary stores and 99% of customers withinthreedays.

JCPenneyisalsodevelopinglocalizationcapabilitiesthatwillenableittovaryinventoryandmarkdowndatesbystore,dependingonlocaldemand. Simple enhancements include improving truck loading formaximumefficiency.

Insummary,improvementscurrentlyintheworksinclude:

• Organizationalalignment

• Omni-channelgrowthandprofitability

• Globalinitiativestodrivein-stocks,speedandgrossmargin

• Technologyenhancements

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DeliverProfitableResults—EdRecord,ChiefFinancialOfficer

2016FinancialReview

EdRecordofferedsomehighlightsfromthesecondquarter:

Figure7.2Q16Highlights

Metric Results

Comparable-storesales +2.2%

Grossmargin +10bps

SG&Adollars -$48million

AdjustedEBITDA +$95million


JCPenney’s2.2%comps in the secondquarterwere superior to thecompetitoraverageof(2.7)%.

Recordalsoreiteratedthecompany’s2016guidance:

Figure8.2016Guidance

Metric Results

Comparable-storesales 3%–4%

Grossmargin +10–30bpsvs.2015

SG&Adollars Reductionvs.2015

EBITDA $1billion

AdjustedEPS Positive(i.e.,profitable)

Freecashflow Improvementvs.2015


Record also highlighted that JCPenney’s EBITDA has exceeded theforecastprovidedatthecompany’sanalystmeetingtwoyearsago.

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BusinessDrivers

Recordoutlinedseveralrevenueopportunitiesthatcouldcontribute$1.2–$1.7billionofrevenueduring2016–2019:

Figure9.SalesOpportunitiesfor$1.2–$1.7BillionDuring2016–2019

Value Beauty SpecialSizes HomeRefresh

PrivateBrands

ExclusivePartnerships

LoyaltyProgram

MarketingEfficiencies

Women’sApparel

Sephora

SalonbyInStyle

CenterCore

TheFoundry

Boutique+

Juniors’Plus

BoysHuskyandGirlsPlus

Intimates

Footwear

Appliances

WindowCoverings

SoftHome

AshleyFurniture

EmpireTodayFlooring


At the same time,managementenvisionsopportunities to improvegrossmargins,whichmaybeoffsetbycertainheadwinds:

Figure10.GrossMarginOpportunitiesandHeadwindsfor+75–100bpsvs.2016

Opportunities Headwinds

PrivateBrands

MerchandisingSystems/ModernizingReplenishment

SizeOptimization/Localization

SupplyChainOptimization

Shortage

PricingOptimization

.comGrowth

MajorAppliances

ReinvestinPrice/Value


Moreover, there are several opportunities to reduce expenses(which,again,maybeoffsetbyheadwinds):

Figure11.Expense-ReductionOpportunitiesandHeadwindsfor+215–240bpsofLeveragevs.2016

Opportunities Headwinds

Stores

CorporateOverhead

ProcurementInitiatives

IT

Advertising

JCPCreditCardPenetration

MinimumWage

MedicalCosts

Digital


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Atthesametime,JCPenneyplanstostepupcapitalspendingtofuelgrowth.

Figure12.CapitalSpendingForecast(USDMil.)


Finally,Recordprovidedthecompany’sforecastfor2019:

Figure13.FY19Outlook

Metric Results

Comparable-storesales 3%CAGR

Grossmargin +75–100bps

SG&A 215–240bpsleverage

Netincome $450–$500million

EPS $1.40–$1.55


$303$375

$450

2015 2016F 2017F–2019FAvg.

Stores Omni-channel/IT SupplyChain

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:[email protected]

JohnHarmon,CFASeniorAnalystHONGKONG:10thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223002470LONDON:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017FBICGROUP.COM

Notes from JCPenney’s 2016 Analyst Meeting: Targeting Growth … 2016... · 2016-09-06 · The...

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