Money For Lunch – JC Penny CEO Marvin Ellison – Power Lunch

JC Penny CEO Marvin Ellison – Power Lunch

August 17, 2016 4:40 PM0 commentsViews: 34

 

 

 

 

 

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COURTNEY REAGAN: OF COURSE I CAN’T COME ALL THE WAY DOWN HERE FOR JC PENNEY ANALYST DAY AND NOT SIT DOWN WITH CEO MARVIN ELLISON. HE TOOK OVER JUST ABOUT A YEAR AGO AND SO NOW HE’S HERE ANSWERING SOME OF OUR QUESTIONS. CONGRATULATIONS ON THE QUARTER YOU ALL POSTED ON FRIDAY. HERE YOU LAID OUT YOUR THREE-YEAR PLAN. I WILL TELL YOU, YOUR STOCK IS DOWN ABOUT 3.6%. YOU’RE LOOKING AT COMP SALES TO GROW 3% TO 4% BY THE YEAR 2019. I’M NOT SURE THE MARKET BELIEVES THAT, ESPECIALLY WITH MALL TRAFFIC DECLINING MID SINGLE DIGITS. SO WHAT WILL YOU TELL THOSE THAT ARE SKEPTICAL THAT YOU CAN ACTUALLY FOLLOW THROUGH WITH YOUR PLAN?

MARVIN ELLISON: WELL, I THINK FOR US IT’S ALL ABOUT THE RESULTS THAT WE BELIEVE WE CAN DELIVER. WE HAVE A COUPLE HUGE INITIATIVES THAT WE BELIEVE WILL BE NET POSITIVE, NOT ONLY IN THE FALL SEASON BUT FOR THE NEXT THREE YEARS. WE’RE GOING TO EXPAND OUR SEPHORA COSMETICS BUSINESS MORE AGGRESSIVELY. IT’S BEEN A WONDERFUL BUSINESS ATTRACTING A NEW MILLENIAL CUSTOMER. WE’RE ROLLING OUT APPLIANCES IN 500 STORES THIS YEAR AND WE SEE CONTINUED GROWTH OVER THE NEXT COUPLE OF YEARS. WE HAVE A STRONG, AGGRESSIVE PLAN TO FIX OUR WINDOWS BUSINESS. BACK IN 2006, JC PENNEY WAS THE NUMBER ONE IN MARKET SHARE IN WINDOWS, TOUCHING A THIRD OF THE AMERICA’S HOMES. AND WE DESTROYED THAT BUSINESS WITH A LOT OF RESETS THAT REALLY DID NOT DRIVE ANY TYPE OF CUSTOMER AWARENESS. WE BELIEVE THAT BUY ONLINE AND PICK UP IN STORE SAME DAY. WE WERE ONE OF THE FEW LARGE RETAILERS THAT COULD NOT EXECUTE THAT. WE’VE ROLLED IT OUT CHAIN WIDE THIS YEAR, WE’LL GET BENEFIT IN THE SECOND HALF. AND WE THINK THE WHOLE VALUE MESSAGE IS REALLY IMPORTANT TO OUR CUSTOMER. I MEAN, WE STRUGGLED YEARS AGO UNDERSTANDING WHO OUR CUSTOMER WAS, WHAT SHE WANTED AND HOW WE COULD SERVE HER. AND WE THINK THE DATA LEADS US IN A MUCH BETTER CLEAR DIRECTION.  AND AS FAR AS MARKET TODAY, WE DON’T LOOK AT IT DAY-TO-DAY. THERE ARE A LOT OF RETAIL ACTIVITY IN THE MARKET, A COUPLE OF POOR RESULTS FROM A COUPLE OF LARGE RETAILERS. WE HAD GREAT RESULTS LAST WEEK. OUR STOCK IS UP FOR THE YEAR AND WE THINK WE’RE HEADED IN THE RIGHT DIRECTION.

REAGAN: SO APPLIANCES IS A BIG PART OF SOME OF YOUR NEW INITIATIVES AS WELL AS PILOTS WITH ASHLEY FURNITURE AND EMPIRE FLOORING. I UNDERSTAND YOUR BEST SELLING REFRIGERATOR IS A $2,700 VERSION.

ELLISON: THAT’S CORRECT.

REAGAN: THAT’S GREAT, BUT HOW MANY REFRIGERATORS DOES A CUSTOMER NEED? ARE THEY GOING TO COME IN AND BUY A REFRIGERATOR AND THEN COME BACK AND BECOME A REPEAT LOYAL CUSTOMER TO BUY OTHER ITEMS THAT YOU SELL? ARE YOU WORRIED YOU’RE JUST GETTING ONE-TIMERS?

ELLISON: NOT AT ALL. LET ME GIVE YOU A COUPLE OF DATA POINTS ON APPLIANCES. IN THE U.S., 100,000 APPLIANCES BREAK EVERY DAY. THAT’S A FACT. SO CUSTOMERS WILL ALWAYS NEED APPLIANCES. THE APPLIANCE MARKET IS PROJECTED TO GROW AT 30% OVER THE NEXT THREE YEARS. THOUGH NOT MANY RETAIL CATEGORIES THAT HAVE THAT TYPE OF GROWTH PROJECTIONS OR TRAJECTORY OVER THE NEXT THREE YEARS. SO WE DON’T BELIEVE THAT. WHAT WE DO KNOW IS THAT A THIRD OF THE CUSTOMERS BUYING APPLIANCES FROM US ARE BRAND NEW CUSTOMERS TO JC PENNEY. WE KNOW THAT 70% OF THOSE APPLIANCE CUSTOMERS ARE BUYING IT ON A JC PENNEY CREDIT CARD. AND OVER A THIRD OF THOSE CUSTOMERS ARE NEW CREDIT CARD CUSTOMERS. WE KNOW THAT THE APPLIANCE CATEGORY IS 10X MORE PROFITABLE THAN OUR EXISTING CATEGORIES FROM A GROSS PROFIT AND FROM A SALES STANDPOINT. SO WE KNOW WE’RE DOING THIS BUSINESS THE RIGHT WAY. WE ARE GROWING AN ACCRETIVE, PROFIT ACCRETIVE, DOLLARS PER SALES FOOT AND WE THINK THAT WE’RE HEADED IN THE RIGHT DIRECTION AND WE THINK THIS IS A CUSTOMER THAT WILL SHOP IN OTHER AREAS. OUR STORES WITH APPLIANCES HAVE A SLIGHT HALO EFFECT WHERE THE OTHER CATEGORIES ARE LIFTING AS WELL, WHICH TELLS ME THAT WHEN SHE COMES IN SHE’S GOING TO HOME, SHE’S GOING TO KIDS, SHE’S GOING TO WOMEN’S APPAREL, SHE’S GOING TO SEPHORA. SO WE THINK THIS CUSTOMER IS MORE THAN JUST A ONE-TIME CUSTOMER.

REAGAN: YOU’VE SAID THAT YOU HOPE TO PICK UP SOME SHOPPERS THAT PERHAPS ARE LEAVING SEARS OR AS SEARS CLOSES STORES. WHAT ABOUT ALL THE MACY’S STORE CLOSURES? IF A MACY’S CLOSES IN A MALL WHERE THERE’S ALSO A JC PENNEY AND/OR SEARS, WHAT DOES THAT MEAN FOR YOU? WHAT HAPPENS WITH THE TRAFFIC FLOWS?

ELLISON: OUR HISTORICAL TRENDS TELL US THAT IT IS A NET POSITIVE TO JC PENNEY. WHEN WE SHARE A MALL WITH SEARS AND THEY CLOSE, WE GAIN MARKET SHARE. SO IT’S A NET POSITIVE FROM A SALES GROWTH. WHEN MACY’S CLOSES IN A MALL, HISTORICALLY IT’S BEEN A NET POSITIVE FOR A COUPLE REASONS. NUMBER ONE, BECAUSE IT IS WELL TELEGRAPHED. SO WE KNOW EXACTLY WHEN IT’S GOING TO HAPPEN SO WE CAN TAKE SPECIFIC STEPS TO GET THE TRAFFIC TO FLOW OUR WAY. AND ALSO IF A RETAILER IS CLOSING A STORE, IT’S TYPICALLY AN UNDERPERFORMING STORE. AND AN UNDERPERFORMING STORE ISN’T CREATING A TON OF TRAFFIC IN THE FIRST PLACE. SO MALL OPERATORS CAN REPLACE AN UNDERPERFORMING RETAILER WITH A MORE DYNAMIC BUSINESS MODEL, MAYBE A THEATER, MAYBE A RESTAURANT OR SOME OTHER ATTRACTION. BUT NET POSITIVE, WE THINK THAT IT’S GOING TO BENEFIT US AND ALLOW US TO TAKE MARKET SHARE.

REAGAN: SO WHAT ABOUT YOUR STORE FLEET? YOU’RE GOING TO STICK WITH WHERE YOU ARE?

ELLISON: EVERY YEAR WE TAKE A VERY HARD LOOK AT OUR STORE PORTFOLIO. LAST YEAR WE CLOSED ROUGHLY 40 STORES. WE’RE GOING TO CLOSE ABOUT SEVEN STORES THIS YEAR. BUT WHAT WE UNDERSTAND IS THAT WE DON’T WANT TO RUN ON PROFITABLE STORES. AND WE HAVE VERY FEW STORES THAT ARE FULL ALL CASH FLOW UNPROFITABLE. WHAT WE WANT TO DO IS LEVERAGE OUR 1,000 STORES TO HELP TO DRIVE OUR OMNICHANNEL BUSINESS. WE WANT TO LEVERAGE THESE STORES TO DELIVER FROM STORE TO PICK UP IN STORE. AND WHAT WE’VE LEARNED IS FROM A DIGITAL E-COMMERCE PERSPECTIVE, OVER 50% OF OUR E COMMERCE TRANSACTIONS TOUCH OUR STORES. THAT’S A SIGNIFICANT NUMBER. AND SO WHAT WE UNDERSTAND IS THAT WE CAN LOWER OUR COSTS TO DELIVER FOR US, WE CAN MAKE IT MORE CONVENIENT FOR OUR CUSTOMER, AND WE CAN DRIVE FOOT TRAFFIC IN OUR BRICK AND MORTAR LOCATIONS. HAVING SAID THAT, IF A STORE IS NOT STRATEGICALLY RELEVANT, IT WON’T STAY OPEN. AND IF IT’S NOT PROFITABLE, IT WONT’ STAY OPEN. BUT IF IT IS PROFITABLE AND STRATEGICALLY RELEVANT, WE SEE NO NEED TO CLOSE IT.

REAGAN: MARVIN, I THINK WE HAVE A QUESTION ON THE EAST COAST.

MELISSA LEE: YEAH. THANKS, COURTNEY. IT’S MELISSA LEE HERE IN THE STUDIO IN ENGLEWOOD CLIFFS. MARVIN, THANKS FOR JOINING US. I WANT TO GET TO YOUR COMMITMENT TO THESE PHYSICAL STORES BECAUSE LAST WEEK, YOU SAID, I’M GOING TO PARAPHRASE, IS THAT E-COMMERCE COMPETITORS WHO THINK THEY CAN FULLY COMPETE WITHOUT STORES ARE, AND THESE ARE YOUR WORDS, IN FOR A RUDE AWAKENING. IS THAT A DIG AT THE LIKES OF AN AMAZON.COM?

ELLISON: NOT AT ALL. WE HAVE BRILLIANT COMPETITORS THAT ARE PURE PLAY E-COMMERCE COMPANIES. AND THEY HAVE A VERY SPECIFIC STRATEGY. BUT IF YOU’RE A BRICK AND MORTAL RETAILER, IN MY OPINION, YOU HAVE TO LEVERAGE YOUR ASSETS. AND YOUR ASSETS ARE PRIMARILY YOUR EMPLOYEES AND YOUR PHYSICAL STRUCTURE. WE CAN TAKE 1,000 STORES AND WE CAN USE THOSE STORES TO DELIVER FROM STORE TO CREATE WHAT WE CALL ENTERPRISE INVENTORY, LEVERAGING INVENTORY FROM THE DOT COM DCs AND IN OUR PHYSICAL STORE DCs AND IN OUR PHYSICAL STORES. SO IF YOU HAVE 1,000 STORES GEOGRAPHICALLY LOCATED AROUND THE U.S., WE THINK IT’S PRUDENT TO USE THOSE PHYSICAL LOCATIONS TO REDUCE THE DELIVERY TIME, CREATE CONVENIENCE FOR THE CUSTOMER AND LEVERAGE THE ASSET IN A MORE EFFECTIVE WAY.

REAGAN: AND YOU SAID THAT YOU’LL DO THAT AND BE ABLE TO DELIVER TO 90% OF THE COUNTRY WITHIN TWO DAYS WITHOUT A MEMBERSHIP FEE.

ELLISON: ABSOLUTELY.

REAGAN: IS THAT A DIG AT AMAZON?

ELLISON: NOT AT ALL. IT’S REALLY A VALUE PROPOSITION. I MEAN, WE THINK NEXT YEAR, 95% OF OUR IN-STORE DELIVERIES WILL BE TWO DAY OR LESS BECAUSE OF THE GEOGRAPHIC FOOTPRINT AND BECAUSE OF THE TECHNOLOGY WE’RE LAYERING ON TOP OF OUR DIGITAL AND PHYSICAL ENVIRONMENT. AND WE THINK THAT IT’S ALL ABOUT LEVERAGING WHAT WE ARE GOOD AT VERSUS TRYING TO DO WHAT OUR COMPETITORS ARE BETTER AT.

REAGAN: WELL, YOU’VE LAID OUT A BIG PLAN HERE TODAY. YOU KNOW THAT WE’LL BE FOLLOWING ALONG. BRIAN, DO YOU HAVE A QUESTION?

BRIAN SULLIVAN: JUST A QUICK ONE, COURTNEY. I’M SORRY, AWESOME INTERVIEW. MR. ELLISON, IT’S BRIAN SULLIVAN. LISTEN, NOT ONLY ARE YOU A RETAILER, YOU ARE BASED IN TEXAS. I’VE GOT TO ASK YOU, DO YOU GUYS HAVE ANY METRIC AS TO WHERE GAS PRICES IMPACT YOU, IF THEY GO UP A QUARTER, DOES IT DO X AMOUNT OF DAMAGE TO YOUR BUSINESS? DOES IT MATTER TO YOUR CUSTOMER? HOW DOES OIL AND GAS, WHAT DOES IT MEAN TO JC PENNEY?

ELLISON: WELL, IT REALLY HAS HAD A REALLY KIND OF A MARGINAL IMPACT. ONE OF OUR STRONGEST PERFORMING AREAS LAST YEAR WAS TEXAS AND THE SOUTHWEST. AND WHILE THE MARKET WAS GOING THROUGH REDUCING OIL PRICES AND FRACKING AND ALTERNATIVE ENERGY WAS REALLY GOING THROUGH A TRANSITION, WE SAW NO MATERIAL IMPACT TO OUR BUSINESS NEGATIVE OR POSITIVE. SO WE SEE IT AS A NET NEUTRAL. OBVIOUSLY ENERGY IS A HUGE ECONOMIC DRIVER IN TEXAS. AND TEXAS REMAINS ONE OF OUR STRONGEST MARKETS. AND WE THINK THAT’S GOING TO CONTINUE.

REAGAN: THANK YOU VERY MUCH FOR BEING HERE WITH US TODAY, MARVIN ELLISON, CEO OF JC PENNEY. I THINK YOU’VE GOT SOME WORK TO DO.

ELLISON: I DO.

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