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THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPTJCP - Q1 2016 J C Penney Company Inc Earnings Call

EVENT DATE/TIME: MAY 13, 2016 / 12:30PM GMT

OVERVIEW:

Co. reported 1Q16 loss per share of $0.22.

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C O R P O R A T E P A R T I C I P A N T S

Trent Kruse J.C. Penney Company, Inc. - IR Manager

Marvin Ellison J.C. Penney Company, Inc. - CEO

Ed Record J.C. Penney Company, Inc. - EVP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

David Glick Buckingham Research - Analyst

Oliver Chen Cowen and Company - Analyst

Neely Tamminga Piper Jaffray - Analyst

Paul Trussell Deutsche Bank - Analyst

Steve Ruggiero R.W. Pressprich - Analyst

Jeff Van Sinderen B., Riley & Co. - Analyst

Randy Konik Jefferies LLC - Analyst

Omar Saad Evercore ISI - Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen, welcome to the J.C. Penney Company first-quarter 2016 earnings conference call. (Operator Instructions). As areminder, this conference call may be recorded. I would now like to turn the conference over to Trent Kruse, you may begin.

Trent Kruse - J.C. Penney Company, Inc. - IR Manager

Thanks, Nicole, appreciate that. Good morning, everybody. As a reminder the presentation this morning includes forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995, which reflects the Company's current view of future events and financialperformance.

The words expect, plan, anticipate, believe and similar expressions identify forward-looking statements. Any such forward-looking statements aresubject to risks and uncertainties and the Company's future results of operations could differ materially from historical results or current expectations.For more details on these risks please refer to the Company's Form 10-K and other SEC filings.

Please note that no portion of this presentation may be rebroadcast in any form without the prior written consent of J.C. Penney. For those listeningafter May 13, 2016 please note that this presentation will not be updated and it is possible that the information discussed will no longer be current.

Also, supplemental reference slides are available on our Investor Relations website. While management will not be speaking directly to the slides,these slides are meant to facilitate your review of the Company's results and to be used as a reference document following the call.

Joining us on today's call our Marvin Ellison, CEO of J.C. Penney, and Ed Record, our CFO. Following our prepared remarks we look forward to takingyour questions. With that, I will now turn the call over to our CEO, Marvin Ellison.

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MAY 13, 2016 / 12:30PM, JCP - Q1 2016 J C Penney Company Inc Earnings Call



Marvin Ellison - J.C. Penney Company, Inc. - CEO

Thank you, Trent, and good morning, everyone. The first quarter was clearly challenging from a top-line perspective and we were disappointed inour results relative to our own expectations.

As you have heard throughout the week from other retailers, top-line sales were negatively impacted by many factors outside of our control. Havingsaid that, at JCPenney I challenged our leadership team to focus on controlling what we control. Therefore when I look back at the first quarter andcompare JCPenney's results to our competitive space, I feel confident that we are still winning in the marketplace.

I am also pleased that the team did an excellent job of appropriately managing our variable expenses and effectively adjusting inventory giventhe trends we're seeing on the top line. This quarter only furthers our confidence that even in a difficult retail environment, where top-line growthis lighter than expected, we will still achieve our EBITDA expectations for 2016 and in the future. This is evidenced by an over 63% increase in EBITDAduring the first quarter.

Now while our comp sales were slightly down for the quarter, we delivered a two-year stack performance of 3%. And as I look back at the monthlycomps for the quarter, we delivered positive comps in the month of February; we experienced negative comps in March and in early April andexperienced positive comps the last two weeks of April heading into the Mother's Day selling season.

These recent trends provide confidence in our ability to grow top line and improve our EBITDA for the remainder of the year, especially as we beginto reap benefits of the new initiatives which I will discuss later during the call.

I'd like to personally thank our over 100,000 associates for their continued dedication to driving great customer service while maintaining fiscaldiscipline.

Although our sales environment in Q1 was challenging, there were areas of strength in our business during the quarter. First, we continue to seestrong performance in our existing Sephora inside JCPenney shops. We're also very pleased with the performance of our 28 new locations thatopened at the end of April bringing our total number of Sephora locations to 546.

The first few weeks of the selling season in these 28 new locations have exceeded our expectations. In fact, this wave of openings is delivering ourbest ever new opening performance from an average of sales per location perspective.

This is incredibly encouraging as we are placing Sephora shops into smaller more rural locations than ever before, but the power of this greatpartnership is clearly resonating with our customers in all locations. We have another 30 openings scheduled for mid June and we have twoopenings planned for later in 2016.

We will continue to gain market share by organically growing sales in existing stores, by adding new locations and by delivering new brands inour Sephora shops. In fact, this quarter we launched Origins, [La Sotaine] plus expanded Kate Somerville, Marc Jacobs, Fresh and Bumble andbumble and in the fall we will be adding [Pharmacie] and other great brands to this compelling beauty assortment.

Second, our footwear and handbag business delivered strong comp sales performance during the quarter. Not only is our expansion of women'sshoes and the relocation of men's shoes continuing to reap benefits, we also continue to see a strong response from the re-launch of a Liz Claiborneassortment of handbags.

Third, our online business continues to generate strong results. On a year-over-year basis for the first quarter our online SKU count increased over50% and our online supply base is up nearly 20%. In addition, our mobile traffic continues to increase dramatically, but even more important ourconversion on mobile improved nearly 50% in the quarter.

And fourth, we are excited about the sales potential of our Center Core initiative and their benefits for the second quarter and the second half of2016. We have rolled out our Center Core concept in approximately 125 stores as of the end of the first quarter with new locations coming onlineeach week.

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We are very pleased with our sales performance of our new Center Core stores and remain excited to roll this new format out to over one-third ofour stores by the end of the second quarter.

Now let me take a moment to discuss the evolution of our merchandising strategy. At JCPenney we know we must continue to pivot our merchandiseassortments toward less weather sensitive categories while providing our customers with more reasons to shop in our stores.

And candidly our overreliance on apparel hurt us in times during the first quarter when weather patterns were not conducive to apparel sales. Andthe consumer was simply spending their hard earned dollars on experiences, entertainment and to beautify their home.

While apparel will always be important to JCPenney, we have conducted a detailed review of our customer current and future shopping patternsand will start to strategically shift our merchandising mix to sell more products and services that correlate to where customers are spending thegreater percent of their dollars.

John Tighe, our Chief Merchant, has taken the lead in this effort and he and his merchant team are in the process of exploring category roles andallowing the data to guide our decisions on which categories we will continue to grow, which categories we will add and which categories we willbegin to minimize in our assortment. And we will keep you updated.

And we're also focused on winning market share, but we will intensify our focus and commitment to reducing expense and being a more operationallydisciplined Company. For the second quarter and for the remainder of 2016 we will focus on being an aggressive expense reduction Company andwe will focus on key initiatives to make that a reality.

We owe it to our shareholders to be a more fiscally responsible Company and we will not apologize for our relentless efforts to reduce costs whileprotecting the top line.

As a team we are committed to take additional steps to right size our SG&A, to simplify and improve our store environment, to modernize ourmarketing, to take cost of our supply-chain operations while scrutinizing every single dollar of inventory we add. We remain committed to growthe top line while aggressively reducing our controllable expenses.

We look forward to sharing more details on our plans in the months to come. And with that I will hand the call over to Ed.

Ed Record - J.C. Penney Company, Inc. - EVP & CFO

Thank you, Marvin, and good morning, everyone. As Marvin stated, we were disappointed in our sales results relative to our expectations headinginto the quarter. However, we took actions to effectively manage expenses and inventory and in turn delivered a $68 million increase in EBITDAto $176 million.

As we've previously stated, we have multiple pathways to achieve our profitability target. This quarter clearly demonstrates our ability to driveEBITDA growth even in a tepid retail environment. With that I will now take you through the Company's first-quarter financial results.

Comparable store sales declined 0.4% for the quarter; this was clearly a challenging quarter for retail driven by unseasonable weather and a changingconsumer spending pattern. We experienced a strong start to the quarter in February followed by a significant slowdown in March and early April.Having said that sales improved during the last two weeks of April.

Our strongest performing divisions in the quarter were men's, Sephora and footwear and handbags. Geographically the Northeast and Ohio Valleyregions were our best performing regions. Our Ohio Valley region is comprised of Western New York through Indiana.

For the quarter conversion and units per transaction were up versus last year while transactions and average unit retail were down. As we lookahead we are excited about the impact our initiatives will have on driving sales.

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Our Sephora roll outs, Center Core refresh, rebranded salons, expanded window offerings and the rollout of appliances will drive traffic and shareof wallet. We expect these initiatives to have a positive impact in the second quarter but a more meaningful impact in the back half of the year. Inaddition, these initiatives will allow us to become less weather sensitive.

Now let me turn to gross margin. For the first-quarter gross margin was 36.2% of sales and was impacted by markdowns associated with theunseasonable weather. Heading into the quarter we expected a cooler February to help clear through our remaining fall merchandise. However,temperatures in February were warmer than expected necessitating additional markdowns in March and early April in order to liquidate thesegoods.

As we look forward we know we have continued opportunity for gross margin expansion driven by increased private brand penetration and margin,improved clearance profitability, reduced shortage, the impact of our new pricing analytics team and supply-chain efficiencies.

As we recently announced, we are expanding appliances to over 500 locations. On a square foot basis appliances drive substantially higher salesand gross margin dollars relative to the rest of our home department. However, as we have previously stated, appliances will have a negativeimpact on our gross margin rate.

Because of this rollout and the growth of our online business we are lowering our gross margin guidance for the full year to a 10 to 30 basis pointimprovement.

Now turning to expenses. Given the trends we experienced (technical difficulty) on the top line the teams did an excellent job of appropriatelymanaging our variable expenses. As a result for the first quarter SG&A decreased $93 million to $872 million (technical difficulty) by 280 basis points.

We saw savings in all of the major SG&A categories of stores, marketing (technical difficulty) which was driven predominantly by our decision tono longer sponsor the (technical difficulty) IT and corporate overhead.

In addition, we saw improvement in our private label credit card income. Corporate overhead leveraged the most and benefited from the actionswe took last October to continue (technical difficulty) to right size the corporate office.

As we look ahead we expect continued SG&A dollars savings for the remainder of the year, but not to the magnitude we (technical difficulty)experienced in the (technical difficulty) first quarter.

Our focus on finding efficiencies and reducing expenses across all aspects of the business remains as strong as ever. We remain committed topermanently reducing cost and running a leaner and more efficient organization. And we continue to work to ensure our reductions are notnegatively impacting our customers' in-store or online experiences.

Now let's talk about profitability. EBITDA increased $68 million to $176 million, a 63% improvement from the same period (technical difficulty) lastyear. Adjusted EBITDA improved 80% to $153 million, also a $68 million improvement.

We are pleased with the progress we have made in our EBITDA this quarter given the challenging environment. With the continued opportunitieswe have to improve our operational performance we remain confident in our ability to deliver EBITDA of $1 billion this year.

(Technical difficulty) our first quarter earnings pressure improved (technical difficulty) to a loss of $0.22 versus a loss of $0.49 in the same quarterlast year.

Moving on to our balance sheet and capital structure. We are very pleased with the credit rating agency upgrades we received from Moody's andS&P during the quarter, which demonstrates that these agencies recognize our improving balance sheet and financial condition.

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We ended the first-quarter with liquidity of $2.3 billion, up approximately $80 million over last year's first quarter. Following last year's pay downof more than $500 million of debt we anticipate a further reduction of $400 million to $500 million in 2016. Even as this deleveraging continueswe expect liquidity at year end to exceed last year's liquidity of $2.5 billion.

Having said that, let me provide you with an update on our debt reduction initiatives. During the quarter we purchased and retired $60 million ofour outstanding debt. In addition, we plan to use free cash flow to retire the $78 million in notes maturing this August.

Through a combination of deleveraging and refinancing we will continue to proactively manage our near-term debt maturities which also -- whilealso actively monitoring markets to identify further opportunities. This includes refinancing and extending the maturities of our $2.2 billion termloan and modernization of our home office building as well as select real estate properties.

Of note, we are providing information to over 80 prospective buyers demonstrating the significant interest we are receiving on the home officesale leaseback.

Now moving on to cash. Cash and cash equivalents at the end of the first quarter were $415 million, $630 million below last year's first quarter. AsI mentioned earlier, in the fourth quarter last year we utilized $500 million in cash on hand to retire the outstanding term loan principal previouslyissued under our ABL facility.

Inventory was $2.925 billion, up 4.1% over the same period last year. On a two-year basis inventory is up 3.2%, in line with our two-year comp stackof 3%.

We continue to make strategic investments in inventory to drive the top line, including expanding our online SKU counts which were up over 50%year over year in the first quarter, and improving our in-stock position both in-store and online.

Our inventory build is heavily weighted towards our key growth initiatives including Center Core, beauty, athletic, footwear and handbags amongother categories. We know these investments will help drive our performance throughout the remainder of the year.

Merchandise Accounts Payable was $995 million, down $68 million over the same period last year, primarily due to the change in timing due tothe receipts associated with last year's port delays.

Now let me walk you through our updated full-year guidance. Comparable store sales are expected to increase 3% to 4%. Gross margin is nowexpected to increase 10 basis points to 30 basis points versus last year.

SG&A dollars are expected to decrease versus last year; EBITDA is expected to be $1 billion; adjusted earnings pressure is expected to be positive;and free cash flow is expected to improve versus last year.

In closing, although we faced pressure on the top line this quarter given the challenging environment, we were still able to deliver our bottom-lineresults. We know we have multiple pathways to achieving our EBITDA goal and we remain focused on delivering it.

And let me add that while we feel very good about the initiatives that we will roll out in the remainder of the year, we believe we can achieve ourEBITDA target of $1 billion with a comparable store sales increase of 1.5% for the full year.

Understanding that our customers' discretionary spending patterns will likely continue in the near-term, we are prudently managing our business.Having said that, the initiatives we have in place today are concentrated on where our customers are spending their dollars and will help positionus to succeed in the challenging environment. With that I will turn the call back over to Marvin.

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Thank you, Ed. And I would now like to take an opportunity to provide an update on our strategic framework for 2016. As a reminder, at JCPenneywe're focused on three strategic priorities, the first is private brands.

We will leverage our tremendous sourcing and private brands infrastructure to become the most efficient retailer at producing a portfolio of privatebrands with style, quality and value. We have sourcing offices around the world and over 200 in-house designers.

We possess a unique ability to grow our private brands penetration and increase profits because of our lack of dependency on third parties as amiddleman. For the first quarter private brands like Arizona, St. John's Bay, Liz Claiborne, Xersion, Stafford and JCP Home played a key role in ourability to deliver great value for our customers.

And as we previously announced, we are very pleased with the expansion of our collection of Michael Strahan to nearly 500 doors by this Father'sDay.

In addition, based on the strength of our relationship with Michael, we are launching an exclusive active lifestyle brand called MSX by MichaelStrahan, which is being developed by our best-in-class sourcing and design team. We will launch these goods in nearly 500 stores just prior toFather's Day.

We also recently began rolling out a new in-store plus size concept called Boutique in nearly 200 stores. This will be a one-stop shopping destinationfor plus size fashion which will include casual sportswear, denim and activewear.

Additionally, our merchant and design teams have conceived and developed our first plus size private brand for millennial women called Boutique+.

We are excited about our new collaboration with Project Runway winner, Ashley Nell Tipton who will serve as a brand ambassador and will alsodesign two upcoming capsule collections for our Boutique assortment.

Plus size apparel represents a $17 billion industry and we will be a destination for millions of fashion conscious plus size women who are not findingwhat they need in terms of style, quality and value.

Second, we are committed to becoming a world-class omni-channel retailer. While there are opportunities to improve our e-commerce capability,I believe we have the talent and resources to catch up quickly.

Our EVP of omni-channel, Mike Amend, and his team have done an outstanding job of quickly closing the technology gap with our competition.This was evident in the first quarter as we delivered another significant increase in our digital business.

In the first quarter we continued to roll out Buy Online Pickup in Store same day and this capability is now available in more than 20% of our stores.And in the first quarter our store attach rate on BOPUS was nearly 40%, which means that 40% of the customers who visit our store to pick up aBOPUS order also purchased additional items. We are pleased with the early results and have plans to roll out BOPUS chain wide prior to theback-to-school selling season.

And our final strategic priority is increasing revenue per customer. As I have said many times, we have approximately the same number of activecustomers today as we did in 2011. However, there is an opportunity to increase their frequency and the amount they spend on every transaction.

And more than ever customers are spending their money to update and beautify their homes and we believe JCPenney is in a unique position tooffer a compelling assortment within major appliances, window treatments, furniture, and flooring. And to address these opportunities let me giveyou an update on our new home initiative that we announced earlier this week.

First we are very excited about the expansion of our major appliance initiatives to over 500 stores this year. As you know, we have been running apilot of major appliances in 22 locations since the beginning of February and we've been very pleased with the results.

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We will be live on jcpenney.com nationwide next week with over 1,200 items available to purchase from our partners from Samsung, LG and GE.The online team is developed a best-in-class online experience that will provide a simple process for customers to purchase an appliance, schedulea delivery, install the new unit and haul away the old appliance in one seamless process.

We are also very excited about adding this business to our omni-channel portfolio. We have an in-store nationwide rollout beginning in July withall appliance departments slated to open later this fall. This will put us at over 500 stores selling major appliances.

During the pilots not only were our sales and customer service scores phenomenal, we learned a lot. So let me quickly share some of the key findingsfrom our pilots.

First, over one-third of our appliance customers were new customers to JCPenney. Approximately 70% of our appliance customers were female.The sales productivity was 10 times higher than the product the new appliance set replaced.

Over 70% of the appliance purchases were on the JCPenney credit card and 30% of those were new credit customers. The average transaction wasover $1,200 and this business added low-single-digit comp sales lift to the entire store in the pilot locations.

Obviously we are very excited about the future of this category and we are even more excited about the new customers it will bring to JCPenney.We will keep you posted on the rollout.

Second, we are excited about the expansion of our window treatment offering. This is a lucrative category that represents a $200 million salesopportunity. And the plan is to increase and enhance the window coverings presentation by an average of 25% in approximately 500 stores byearly fall.

JCPenney has a historically dominant position in the window business covering one-third of the windows in America as recently as 2006. JCPenney'sunique product proposition includes readymade curtains, blinds and shades, rods and hardware as well as custom home products.

As we reset the floor in our stores for appliances we will take this opportunity to restore the original treatment square footage in our stores, givingus the flexibility to focus on trending hard window categories such as ready-made blinds and shades, as well as larger selections of curtains, drapesand valances.

And third, we just recently announced our partnership with Ashley Furniture and we are going to test 21 of their signature collections in selectstores by Memorial Day weekend. Ashley's is the largest furniture supplier in the US and most recognized brand.

This new assortment offers a better value to our customer with a very relevant set of trends and designs. Ashley's logistics infrastructure is highlyefficient with five warehouses nationally and the largest fleet of trucks in the industry allowing shorter customer lead times and flexibility oninventory ownership.

Product will be directly shipped to our customers and JCPenney will own the floor samples but will carry no additional inventory. Ashley's corecustomer is identified as family and value oriented and wants products to make life easier. And these attributes align perfectly with our key customerdemographic of the modern American mom.

In addition, approximately 1,500 SKUs of Ashley furniture will be available on JCP.com in time for Memorial Day weekend growing to over 4,000SKUs later this summer.

And lastly, we are excited about our new partnership with Empire Today flooring. Beginning in early July we will start testing this in-store conceptin two markets within Tampa and the Washington DC metropolitan areas. This is a unique and exciting opportunity for both companies.

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Empire Today inside JCPenney will operate independently and will be responsible for staffing, the environment, marketing and customer service.They will occupy between 750 to 1,000 square feet of location in the Home department and they will display samples of hardwood, tile, laminate,vinyl and carpet competitively priced to fit our customer demographic.

We believe this new category will be significantly accretive to the current profit dollars per square foot we currently generate in this unproductivespace in our Home department. And our data tells us that customers tend to purchase window treatments and flooring in sequential transactions.Therefore our plan is to display the Empire Today flooring adjacent to our updated window presentation.

We are very excited about the renewed focus on Home and believe that our strategic focus on these initiatives will drive increased sales in thesecond half of the year while creating differentiation between JCPenney and traditional mid-tier department stores.

We will also continue to update you on our strategic framework and key initiatives of private brands, omni-channel and increasing revenue percustomer on future calls.

We continue to make progress in our mission to re-emerge as a world-class retailer and our associates are highly committed to this effort. Ourability to improve profitability in a difficult sales quarter only intensifies my excitement in the future of JCPenney.

I believe we have the right leadership team, the correct strategic focus to deliver JCPenney back to profitable earnings this year and achieve ourgoal of $1.2 billion in EBITDA for 2017. And with that, Nicole, we will open the call for questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions). David Glick, Buckingham Research.

David Glick - Buckingham Research - Analyst

Marvin, just curious sort of the internal debate you guys had on maintaining that 3% to 4% comp guidance, obviously tough in the first quarter.How are you guys going to manage inventories along the way?

Obviously Ed said 1.5% comp to hit the $1 billion. But if you're caught with too much inventory with a too aggressive sales plan that could put thatin jeopardy.

If you could just kind of walk us through that decision process, the checks and balances you have in place and how we should expect this improvementover the course of the year. Thanks.


Thanks. It is very basic approach. I mean, we are taking a hard look at the trends. Obviously, as we mentioned, the first part of April was verychallenging, but we had positive comps toward the end of the month and we had a positive selling environment for that whole Mother's Dayselling period.

So we left the month of April and entered the month of May with some confidence. So obviously for our current trend was headed in the wrongdirection we would have updated guidance. So we have confidence in the trend.

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Also as I mentioned and Ed mentioned, these initiatives in the second half of the year are very significant. These initiatives are not something thatwe are hoping that will work, but we have created a very disciplined test and learn environment.

And the reason I felt it was prudent to go through the data on the appliance pilot was because I wanted to articulate why we are aggressivelyrolling it out to 500 stores.

So, we think the combination of recent trends, we think the combination of key initiatives in appliances, Center Core, window expansion, thebenefits from our shoe expansion and some of the categories that remain to be working well like the new Sephora, etc., gives us confidence thatwe can come in at that guidance.

Now having said that, we have a very disciplined process on managing inventory. And on a weekly basis we are looking at sales trend versusreceipts, and John Tighe and our planning and allocation team have done an incredibly good job from working with the merchants making surethat we have our kind of finger on the pulse and we know what we can cancel, we know what we can chase and we are not going to get in troublewith inventory.

It is much too important for us to make sure that we manage our cash position well and that we and that we don't get over our skis. So, our holdingthe sales is based on those things and we are very confident that we will be able to manage the business as well as manage the inventory.


Thank you. One quick follow up on marketing, you said you discontinued the Academy Awards advertising campaign. Just wondered what, if any,lessons you took from Q1. Obviously advertising was down, traffic sounds like it was down.

Were there any learnings from the first quarter that you have used to course correct for the second quarter back-to-school and holiday? Do youfeel like you need to step up the level of marketing or any mixed lessons? Thank you.


Well, just a couple of thoughts. The decision not to sponsor the Academy Awards represented roughly 75% of our savings in marketing for thequarter. So that was a big contributor to the SG&A savings in marketing. For the quarter our impressions are up over 3%. We received incrediblypositive feedback on our new branding campaign.

We will always tweak our marketing strategy, but we have no plans to make any major overhaul in what we are going to do in the second quarter.We feel very comfortable with our strategy. But as always, we will make adjustments along the way.


Okay, thank you very much. Good luck.

Operator

Oliver Chen, Cowen and Company.

Oliver Chen - Cowen and Company - Analyst

Marvin, a lot of your comments were really interesting about the transformation of the shopper and the transformation of the store towardsproducts and services. How -- in your research are there any ages or demographics where this is more relevant?

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And what is your hypothesis about the magnitude and how the store may need to shift? And how will you leverage the existing core competenciesjust to navigate that change as you rethink how the [products merch] should be modernized?

And, Marvin, was there anything -- as you look back (inaudible) this quarter it really looks like you controlled everything you could. But were thereany factors in which if you had to do over you would have done a little bit differently in this tough environment?


Well, Oliver, the one great thing about retail is every day you can give yourself a scorecard. And we graded ourselves pretty harshly in the firstquarter because we believed that we actually could have delivered better results but the market was incredibly challenging.

As we listen to our peers in the competitive space we actually feel a little better that we really actually outperformed based on the headwinds thatwe are up against. So I would say there are always things that we look back on that we could have done differently as it relates to timing ofpromotions, as it relates to the efficiency of our execution.

But overall I am incredibly pleased with the hard work of the team in order to deliver the profit performance that we were able to present in the[tough] off some very difficult headwinds.

As relates to the customer and the shifts, I mean we spend a lot of time looking at data. And I think one of the great lessons from the challengesthat this Company faced in the past is that the leadership team did not embrace data and didn't really leverage data as a way of having to developstrategy.

And what the data tells us about customers is that we have really two types of customers. We have a current customer and an emerging customer.

Now emerging customer is in her early 30s, she is female, she is multicultural and she has kids. And so when we look at that customer and we lookat our current customer it's a little bit more mature, she is also female, but her kids are out of the home. Those customers have different ways thatthey consume media and they have different desires on what they shop and how they shop.

And so, what we have tried to do and I think we have done successfully is make sure that we are very focused on digital marketing and modernizingour one-to-one marketing to really address that millennial emerging customer while understanding that traditional media still matters to thecustomer that is our current customer.

And when we look at our categories and we look at what customers are spending, you have heard the data all week, it's entertainment, it'sexperiences, it's home beautification and apparel was down because of the share of wallet went other places.

And so, what we are trying to do is just be very transparent about how we view the retail business and that is we have areas that we know we canimprove to get a larger share of our customers' wallets. And that ties directly to appliances, that ties directly to our expansion in the Windows area,that ties directly to looking at Ashley's and Empire for pilots.

So, we are making those adjustments. And also I will close with the value of experiences. We think our Sephora inside JCPenney is a huge experience.It is an experience you can't get online. I mean we are going to be close to 600 stores by the end of the year and we are going to continue to opennew locations next year.

We think our salon environment is an experience you can't get online. Very important to our customer and something that when we do it wellcreates loyalty.

We think special sizes is a category that our customers have said to us that they don't like buying special sizes online because it is too hard to makesure that they get the right fit and style. So it is no accident that we launched our first plus size private brand for women and we are rolling out ourBoutique in 200 locations.

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So we are listening, we are addressing those customer needs and we think it is going to allow us to perform better in the back half and give us astrong future in serving our customers better.

Oliver Chen - Cowen and Company - Analyst

Thank you. Just a follow up, a final one. Do you really feel like you can make your store less weather sensitive? Weather, for better or worse, is alarge ongoing topic and it is just interesting you brought that up in terms of really trying to combat that factor which plagues the volatility of whatwe have been seeing.

So, I am just curious, when will that happen and what are the key factors we should focus on as analysts in terms of understanding the road tobecoming less weather sensitive at the department store?


Well, Oliver, here is what I will say to you. I spent 12 years of my life in a different retail business that had strong correlations to weather. Andspending a lot of time on that and a lot of time on it here at JCPenney, we believe the one category that will help us to minimize our weathersensitivity is appliances.

It doesn't matter if it is snowing outside or the sun is shining, you are going to need a refrigerator, a washer and dryer and you are going to needa stove. And so, the predominant percent of our customers are homeowners, they have said to us that they would buy appliances from us if wesold them.

Our pilot results proved that to be accurate and we think appliances will is one of those categories that we can have a promotional cadence aroundit that can help us to respond in a soft sales environment if we need to. So, that is one example of what we believe will be a weatherproof categoryfor the future of JCPenney.

Operator

Neely Tamminga, Piper Jaffray.

Neely Tamminga - Piper Jaffray - Analyst

Marvin, I wanted to dig a little bit more into the home initiatives here. You said appliances, Ashley, Empire -- all great announcements. Could youjust remind us kind of like are these capital light, capital heavy?

And then maybe some of the actual technical financial arrangements, like will the sales of Empire be floated into comps or are they netted out insome other line item? So, I am just trying to better understand kind of the financial implication in the P&L as that rolls out.

And then just a quick follow-up on the apparel side. Within apparel did you see any differences? We are just kind of curious because we are seeingsome trends there. Have you seen any differences between let's say women's apparel versus teen?

Like are moms basically pulling back on themselves but still spending on kids? Or -- we are just trying to figure that out. Any sort of context youcould give around Mother's Day weekend would be helpful. Thank you.

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What I was saying on the apparel side in the quarter, I mean in women's apparel -- I mean we were really light across the board. The only reallybright spot was active wear was significantly up. And we are pleased with that and we are very pleased with our private brand Xersion as well asour great partnership with Nike, it really helped to drive that.

As it relates to Home, all of our initiatives are in our 2016 capital plan. I mean we strategically allocated capital in case the pilot results were good.And so I wouldn't call it capital light or capital heavy, but I would say the capital is appropriate but, most important, we are not holding inventory.So it is a low risk strategic investment for us.

We are going to roll out appliances and the average store will have between 120 to 230 actual appliances in the store and will have over 1,200online starting next week. But we will own no inventory in any distribution center.

The same with Ashley's, we are going to own only what is in the store, we are going to have the product pulled from their distribution centers andthey have a best-in-class logistics infrastructure. And Empire is the same way, sample product, no inventory.

So on the financial arrangements for appliances it's pretty straightforward, we sell the product, we make the revenue. For the other categories offurniture and flooring it is a pilot. So we are still working through what makes the most sense for us and our supplier partners. So more to comeon that. And windows obviously is a category that we have had great history in, we just want to regain it and we think we can.


Anything on Mother's Day you could add -- weekend?


We were pleased with the Mother's Day selling season. I mean, that is something that actually gave us confidence at least coming out of the firstquarter to hold our sales guidance for the year. We continue to work each day each week, but for that entire selling season, Mother's Day, we feelgood about the progress we made.


Thank you. Best wishes out there.

Operator

Paul Trussell, Deutsche Bank.

Paul Trussell - Deutsche Bank - Analyst

Just want to continue the conversation on top-line guidance. Certainly the positive comps heading into Mother's Day is encouraging, frankly oneof the better data points we have had all week. But we also note that JCPenney is a destination during those kind of key shopping events.

And so just overall, I am just kind of wondering, Marvin, is your view in maintaining the comp guidance, is your view that the environment forapparel spending has not overall been altered or changed? But that perhaps mid-March to early April was weather induced or something elsegoing on?

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Just still wondering about the conviction in maintaining the overall 3% to 4% comp guidance, or maybe even add in some color to the extent thatthe appliance rollout is additive versus where your guidance started the year.


Well, Paul, obviously you can imagine we spent a lot of time on this. And it really came down to the simple fact that we didn't believe that onequarter was significant enough to bring the entire year down, especially based on the fact that we were opening 60 Sephoras. We were rolling outcenter core to one-third of our stores, and the early rollouts have been successful, in addition to accelerating the rollout of appliances to 500 stores.

So as we thought about the new initiatives, we really felt good about the second half of the year because we knew that we'd have these initiativeskicking in. And I didn't -- I failed to mention the windows in the 500 stores, which in our pilot location has been very successful. So we had somevery tangible things that we felt great about that we believed would give us incremental sales growth in the back half of the year. So that was partof the equation.

The other part was when we look at apparel and just look at what happened in the first quarter, we do believe a lot of it was driven by weather.And we think some was driven by just a shift in consumer sentiment. We don't believe that is a permanent shift, but we believe that it is somethingthat we'll be able to recover from to get to that 3% to 4%.

We also understand that we are going to be in a much better position heading into back-to-school, which is a critical season for us and otherretailers. And we just felt it would not have been prudent to make a assumption on sales coming out for the entire year based on one quarter.

Having said that, we have enormous discipline around managing inventory. And we are going to look at it on a daily/weekly basis and if we seeour trend not performing to the level that it should, we will make the necessary course corrections. So we are not swinging for the fences here.

We understand what we have to do; we understand what our forecasts our and our receipts will reflect that, and we will make the adjustmentsalong the way. But it is really based on the confidence of our initiatives, it is based on the current trend and how the trend improved coming outof early April, and we are hoping that trend continues.


Great, thanks for that. As we turn to maybe gross margins, Marvin or Ed, if you can just help us with some of the factors that led to the modestdecline here in 1Q and how we should be thinking about private-brand penetration, clearance levels and margins, supply chain, shrink; if you canjust touch on some of those factors for gross margins, both in the first quarter and going forward.


Sure, Paul, this is Ed. I will take that. I think first quarter was predominantly impacted by our over penetration of clearance. Our margin on clearancewas actually substantially better than it was last year; we just sold a lot more clearance. We came into the year with a little more fall than we probablywanted, but we expected it to be a cold February and expected to be able to sell that, and frankly sell it before it got to clearance.

And we did not sell it in February. The customer wanted spring in February. And as we got into March and April, the customer -- the weather gotcooler than seasonal, and the customer didn't want spring anymore -- they didn't want spring and they weren't going to buy a coat in March orApril. So we ended up having to mark that stuff down. Now clearance was up for the quarter, but the over penetration of clearance was whatpredominantly hit our margin.

As we move forward we feel really good about our initiatives to drive additional margin. Obviously we feel good about the content of the inventorygo forward. I would tell you that almost all of our increase in inventory is in basic goods. So we feel good that we don't have an overhang onmarkdowns going into Q2.

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And then when you look at the efficiencies we have as we continue to look at our supply-chain initiative, the pricing analytics team we are justlaunching, we feel good about the margin opportunities we have. And again, the predominant reason for lowering the margin guidance is aroundappliances rolling out and the impact it is going to have particularly in the third and fourth quarter on our margins.


Thank you.

Operator

Steve Ruggiero, R.W. Pressprich.

Steve Ruggiero - R.W. Pressprich - Analyst

Marvin, can you just discuss how you are going taking dollars out of your domestic transportation and logistics infrastructure given you're historicallyscaled to a larger sales base?


Well, I think as a reminder, we have a new supply-chain leader that we brought in in 2015. And really what is happening is more network optimizationand just being more efficient on [cube] utilization.

There are some very specific initiatives that Mike Robbins, our head of supply-chain, and team put in place that is really driving cost down that wethink will be significant for the balance of the year. Just one real example, we were one of the only retailers in the US that were shipping garmentshanging in the physical truck.

And what I learned years ago running a supply chain is that the most expensive thing to ship is air and we were shipping a lot of air. And so fromthat Mike worked with Joe McFarland and the store operations team and the merchants to really come up with a more efficient way to cube outa truck to take those transportation costs down and improve the fill rate and the (inaudible) of goods that is delivered to the store.

We have been extremely pleased with the results of that and it is something that we will continue to benefit on. Mike has also brought in someoutside help and some technology to help us with the optimization of the network, making sure that we have the right DC locations, we are usingthe right over the road lanes and that we are understanding the efficiencies of how we get product from the port.

So, those are just examples but those examples are meaningful. And for every dollar we can take out of our supply-chain expense is accretive togross margin. And that is a big deal to us. And so, I look forward, hopefully in the next call, but definitely later this year, to outlining some veryspecific supply-chain initiatives that we are pleased with that we think will reap big benefits in the future.


Well, thank you for that. And just shifting gears to the Salon by InStyle, just if you could give us an update on that, where you are with the stores.And those that have experienced the changes, have you seen any meaningful differences in customer traffic?

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The short answer is we are very pleased with the change. We are seeing incremental traffic growth, we are actually seeing better revenue. Andsurprisingly what we didn't anticipate is that we are seeing a higher quality of associate.

It is so much easier for us to recruit high-quality stylists with an existing clientele and book of business come and work for that InStyle brand ofsalon than a traditional JCPenney salon. We are still learning.

We are going to roll out a little less than 100 locations this year for sure. We are making tweaks throughout and we are also excited about a newonline scheduling system that we are rolling out companywide that will modernize the way a customer can make an appointment and updatethat appointment.

So all those things are on the way. But so far we are very pleased and we think this will be a game changer for us as we figure out what their perfectmodel is.


Great, thanks for that.

Operator

Jeff Van Sinderen, B. Riley.

Jeff Van Sinderen - B., Riley & Co. - Analyst

I wonder if you could just give us a little bit more color on e-com, what you saw in the quarter, whether that accelerated or decelerated versus Q4.

And then just relevant to the discussion on inventory, to clarify on the warmer weather seasonal inventory, are you where you want to be or,because that was a slower category, do you have some I guess an extra [day] that maybe you need to take some harder markdowns on?


Okay, I will take the e-commerce question and I will let Ed take the inventory question. I mean we are very pleased with our e-commerce growthand, as we mentioned in the call, part of that is just aggressive SKU expansion.

When I arrived at JCPenney during the turnaround efforts e-commerce was dramatically impact and really we had a philosophy that e-commerceshould just reflect what we had in the store, just extended sizes and colors. And as I mentioned, we brought Mike Amend on board and he hasrecruited some great talent and really inherited some talented leaders and they've really accelerated e-commerce in a big way.

We are pleased with the mobile strategy; we are going to be launching a new mobile app here in the next couple of weeks that we think will be agame changer for us, it is in beta and it is performing exceptionally well.

We are going to be rolling out Buy Online Pickup in Store same day within the next couple months. And as I mentioned, the pilot results have beenexceptional. Anytime you get a 40% attach rate with customers coming in that is exceptional.

We are very pleased with the navigation, we are pleased with the fact that we have increased our suppliers by 20% and our SKUs by 50%. Soe-commerce is really working well for us. We are still behind and we know that.

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But I will ask everyone to go online next week and look at our new appliance site that will give you a view of the talent and the skill level of oure-commerce team because they built that site from scratch. And we're going to be nationwide selling appliances online starting next week.

And so I think that gives you a glimpse into our confidence in that team and how we believe that will be a continued integral part of our future.

In addition, we are excited about creating true fulfillment locations from our stores. Today our stores are basically in the save to sell mode, meaningif we are out of stock in a dot.com DC the order reverses to a store to pick it and ship it.

And we are in the process of identifying stores and they will be the primary fulfillment location, which we think will allow us to save delivery costsand also give us the ability to ship same day and next day and some examples. And that is how we want to leverage 1,000 stores to really be a moreefficient retailer.

So, we are very pleased. The growth has been an incredibly strong and is maintaining and we see it only getting better. So, I will hand it over to Edto answer your question regarding inventory.


Yes, with regards to spring seasonal, we feel like we are in really good shape. Our inventory growth, as I said earlier, is predominately in basics andin the initiatives like active, Center Core and shoes. So when you adjust for that our spring go-forward inventory in the non-initiative area is reallyflat to down. So we feel like we are in really good shape as we head into Q2.


Okay, good. And then as a follow-up, anything else you could tell us about further expense cuts you might be able to make obviously withoutnegatively impacting the business? And then any update on the debt reply? Thanks.


So, on the expense cuts, I think it is all about being operationally disciplined. Joe McFarland came in to run store operations and really the storyteam. And one of the first things he wanted to do was create efficiency in how we used our store payroll. Meaning what percent of our payroll arewe using for service and selling and what percent are we using to do things that don't impact the customer.

And within the first quarter he and his team identified over 0.5 million hours that we were spending that had nothing to do with customer service,just totally inefficient. And with the implementation of improved systems and processes we are able to reduce 0.5 million hours, over 0.5 millionhours in Q1 just based on efficiency.

And it made no impact to the top line, it made no impact to degradating sales, it was simply back office activity that we modernized and puttechnology in place to supplement.

Now as Ed mentioned, we are not expecting to replicate our Q1 SG&A savings throughout the year, but I think what we proved in Q1 is that wehave a lot of efficiencies remaining that we can go and we can capture and that is just one example of an area that we think is opportunity rich.

And as we look around the entire Company and we implement technology we know what technology will allow us to reduce expense becausewe'll gain efficiency.

So a lot more to come. And again, I am not going to apologize that we are going to be relentless on taking our cost because we owe it to theshareholders. And for our revenue base we can be a more efficient and having a lower expense base and we can do that without putting any ofour top-line sales at risk. So I will let Ed take the second part of your question.

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Sure, regarding debt, refi -- as we have said, we continue to keep an eye on the market. In the last I don't know, six weeks, eight weeks marketshave continued to improve. So, we feel they are pretty constructive right now, so we'll continue to take a really hard look at that. And hopefullywe will have more to say about that at the end of Q2.


Okay, thanks. And best of luck.

Operator

Randy Konik, Jefferies.

Randy Konik - Jefferies LLC - Analyst

I really appreciate the obsession with the data. I guess a couple questions around that. If you think about grouping the stores around the 524 --excuse me, the 546 with Sephora, the 125 with the Center Core and then the balance with but say nothing, how do the UPTs look from a differentialperspective across those three groups?

I am just curious on -- you're obviously pricing a lift in UPT from the Sephora for the Center Core. I am just trying to get some perspective of howdifferent it really is. Thanks.


It is really a great question. I don't have the data in front of me, but I can just give you at a high level. We know for a fact that when we put a newSephora into a store we will get an overall sales lift, we will see the customer shop in more places than a Sephora location.

And as I mentioned in my prepared remarks, what we are most pleased with is that early on in our Sephora relationship we had a belief that wecould not put that environment in a rural market or a smaller footprint store. And we decided to test that theory and we have been incrediblypleased that that brand works wherever we put it.

And as I mentioned, our best performance in the history of our relationship from early sales per location is occurring this year in the face of a verydifficult top-line environment.

And so, I don't have the data in front of me, but our pilot results and our early results will tell us that the Center Core locations are working becausewe do a test versus control. And we know in those stores that received that new environment sales are up relative to their peer group.

And we believe we are going to see the exact same thing to happen with appliances and we believe we are going to see the exact same thinghappen with our update for windows. So, no data in front of me, but anecdotally and at a high level we know that these environment changes aremaking a difference.

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Got it, that's helpful. And then as I think about Home Depot and the way they -- you have category management or SKU proliferation based onturns in a particular category like let's say nails versus paint versus power tools. That company (inaudible) had a certain number of brands or SKUsbecause of the way the category was.

How do you think about that category, the depth of the SKU or the depth of the category in the JCPenney area? Like what needs to be -- do SKUsneed to come down, would SKUs need to go up? I am just curious on how you think about that and how you compare that experience at HomeDepot and that category management philosophy and apply it to JCPenney?


Well, I don't know that the comparison exists other than the fact that Home Depot is a world-class retailer and we are striving every day to becomea world-class retailer. But what I can say, I have been incredibly impressed with the merchant team and incredibly impressed with their depth ofknowledge of our assortments and how it connects to the customer.

As I mentioned, John Tighe, who has been our Chief Merchant since the fall of last year, has taken the lead in really going through our own versionof category management and just asking a very simple question, what is the role and intent of every single category we have in our store. And youcan't do that unless you truly understand your customer.

And so Mary Beth West, our Head of Marketing and Chief Customer Officer, and her team have done a really nice job of working with John and themerchant team to bringing clarity to who is our customer.

One of the key reasons why we changed our branding platform was because we felt that our old brand platform was not addressing the true needsof our customer because we didn't know who the customer was. Now we have a very clear understanding.

So John and his team are taking the necessary steps of looking at the data, by looking at our existing categories, looking at consumers' current andfuture spending and buying patterns and asking the simple question, what do we grow, what do we add and what do we eliminate?

And so, that work is underway and we are excited about the possibilities, but we are very confident that John and his team will help us to understandwhat works for JCPenney. So more to come; we will keep you all updated on the progress.


That is helpful. I guess my last question is I guess again I'm thinking about Home Depot versus Lowe's. And I think about Home Depot as that guy'sguy choice to go to, it is has cement floors and it is almost the preferred choice of the contractor or the Pro.

They did a good job of really kind of highlighting that differential from a Lowe's where you get the chatter about more for the mom or what haveyou.

What do you want -- when you look at JCPenney and you want to make it continue to stand out with Sephora, with the salon, with the appliancesnow, what do you really want -- when you look across the spectrum of competition what do you want that statement or that differential to be thatyour customer goes here because?


Well, I think for us it all starts with the experience in the store. We rolled out a new service training program led by Joe McFarland and his team andwe have retrained every single associate in the store and that training is driven by the general manager. And we just completed that.

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And the good news is we have seen service scores go up on a weekly basis in the store based on the training and based on how it is resonating.So the experience in the store matters.

For us it really comes down to a couple fundamental things. We want to be the number one choice for customers looking for style, quality andvalue. And we think that we can do that by increasing our private brand penetration.

We think we can do that by continuing to expand Sephora inside JCPenney, create an experience with salon and, more importantly, allow thecustomer to come in and beautify her home with our new vision of our Home department. And so style, quality, value is our goal for our customersand we want to be the preferred choice when they want to come in to buy anything.


Great, that is very helpful. Thank you.

Operator

Omar Saad, Evercore ISI.

Omar Saad - Evercore ISI - Analyst

Marvin, I wanted to dig in a little bit further on some of your comments around the private-label credit card. It sounds like that is accelerating alittle bit especially with the expansion into the appliances.

I also think there is -- correct me if I am wrong, there has been a slight change in the loyalty reward program and how the consumer gets theirrewards in that program. Maybe you could elaborate on that if you are seeing any kind of early results on that side as well.

And with the acceleration of appliances, does it change your timeframe of when you think you could get to the more industry average private-labelcredit card penetration?


Well, great question. On credit, because the quarter was down, I mean we still are very pleased with the progress that we are making on the numberof applications, new accounts, all were up and penetration was up. So again we are excited about that.

We are also pleased with the approval rates and everything. So we are all headed in the right direction. So penetration up roughly 240 basis pointsin a tough top-line quarter, we are very pleased with that.

Regarding loyalty, we launched a new program in the first quarter, it's still early days, but we hope to have a more detailed view of the data. Butearly reads is that it's resonating and it is a much more receptive program for customers than the previous program.

But again, it's still early and I look forward to updating you more in the future.

And regarding appliances, one of the key learnings from the appliance pilot is the number of customers that made a purchase with their JCPenneycard and the number of new customers that joined us to acquire credit to make an appliance purchase.

It is one of the reasons why we did accelerate it because, look, without question our penetration still remains significantly lower than our competitors.So we have a huge opportunity to get our penetration up.

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That being said, we think appliances will play a key role in not only driving up the penetration but also getting our average ticket up dramaticallyand driving gross profit dollars per square foot in an area that desperately needs it.

So more to come, but we are committed to credit and we know that credit will be a significant benefit not only from an SG&A standpoint but froma customer loyalty and from a top-line revenue.


And then, Marvin, could you maybe elaborate just a little bit more on the changes in the loyalty program from the consumer's perspective, how itis different than it was before and then why you made those changes?


Well, I think one of the key changes is the expiration of points. In the past our program was very confusing, we didn't leverage the data real well,our points expired and the customers didn't really embrace it. So it was an expensive program to operate, it was a confusing program to articulateand that is a bad equation for any retailer to have with a consumer base.

The other part that we changed was we wanted to gain more benefit to our credit customers. So if you are a credit customer we wanted you tohave a greater portfolio of benefits which is also very important. And candidly, we are piloting different programs around the country just tocontinue to get a read on it.

That is one of the reasons why I am hesitant to get into a ton of detail because we are still trying to understand which component works and whichdoes not work. But overall the biggest change is points not expiring and dramatically more benefits for our credit customers so we can incent themto use credit.

But more to come and, again, we are pleased with the early results, but we want to make sure that we design a program that will really resonatewell with our consumer.


Thank you, good luck.

Operator

Thank you. And that is all of the time we have for questions. I would now like to hand the call back over to CEO, Marvin Ellison. You may begin.


Thank you. Again, thank you for the questions. We look forward to updating you on the continued performance of our business on our next earningscall. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Have a greatday, everyone.

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comment ii. the state of computer animation in litigation 340

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