J.C. Penney (OTC:JCPN.Q) made huge strides in its turnaround effort during 2015, culminating in a big Q4 earnings beat. Following the company's earnings release last week, J.C. Penney CEO Marvin Ellison and CFO Ed Record talked about the company's plans to continue its momentum in 2016. Here are five major points they emphasized.
Catching up on omnichannel initiatives
Second, we're committed to becoming a world-class omnichannel retailer. ... I believe we have the talent and the resources to catch up quickly. Our EVP of Omnichannel, Michael Amend and his team, have done an outstanding job of quickly closing the technology gap to our competition.
-- J.C. Penney CEO Marvin Ellison
While Macy's (NYSE:M) faced declining sales and earnings in 2015, it has been one of the best-performing department stores since the Great Recession. Much of this has to do with its focus on three key strategic pillars, one of which is omnichannel integration.
This entails aligning in-store and online inventory and creating IT systems to enable Macy's (and other retailers) to ship e-commerce orders from stores and offer in-store pickup (ideally same-day) for online orders. The ultimate goal is to allow customers to seamlessly switch between the in-store and e-commerce "channels" based on what's convenient for them.
J.C. Penney has historically been a laggard in the omnichannel field, but it is looking to catch up quickly. It already has hundreds of stores shipping online orders. J.C. Penney is also testing a buy online, pick up in-store option, which it plans to fully roll out before the back-to-school shopping season. These new capabilities should help J.C. Penney keep sales growing steadily.
Localization is coming to J.C. Penney
For us, localization is very basic. It is, 'Do we have the right product assortment for the ethnicity of the demographic, do we have the right product for the climate zone we are in, and are we allocating product to the store that is the right size, based on the profile of the customer demographic?'
Localization is another one of Macy's three key strategic pillars. It's also a second area where J.C. Penney is looking to boost its sales growth by copying moves that have worked for Macy's.
For a national retailer like J.C. Penney or Macy's, it's obvious that tailoring each store's products and sizes to the local customer base would be good for sales. J.C. Penney now has the IT infrastructure it needs to refine its product assortments by store over the next few years.
Gross margin has room to grow
Looking ahead ... we expect continued improvement in our gross margin from increased penetration and improved margin in private brands, continued improvement in our clearance profitability, and as Marvin discussed, benefits associated with systems utilization, supply-chain efficiency, and pricing analytics.
-- J.C. Penney CFO Ed Record
In addition to implementing sales growth initiatives, J.C. Penney hopes to drive further gross margin improvements in the next few years. One key initiative there is an ongoing effort to grow sales of higher-margin private brands. Since it isn't available anywhere else, private brand merchandise is less susceptible to e-commerce competition.
The second big initiative entails boosting clearance margins. A few years ago, J.C. Penney was losing far too much money on clearance merchandise. However, thanks to better inventory management and improved IT tools, the company was able to reach breakeven clearance margins in 2015, with further upside ahead.
Last year, J.C. Penney's gross margin reached 36.0%, up from less than 30% two years earlier. However, as recently as 2010, J.C. Penney's gross margin was about 39%. This demonstrates the significant size of this potential profit growth opportunity.
Becoming more data-driven
... [W]e learned a very valuable lesson in the era of the failed strategy about not testing and learning. ... [I]t is an ongoing learning process, where we will move a product to a different location, or assort it differently and have a test versus control environment, and that has really driven a lot of the things we're going to be executing this year, like center core.
A recent profile of new J.C. Penney CEO Ellison in Fortune highlighted his data-driven approach to decision making. In his relatively brief time at J.C. Penney, Ellison has instituted a much more rigorous process for testing and refining new ideas before making major changes.
This is a huge shift from a few years ago. The main reason why J.C. Penney got into hot water in the first place was a major change to its pricing and merchandising strategy implemented by former CEO Ron Johnson with no advance testing. Ellison's test-and-learn philosophy will probably lead to better results from future changes.
Debt reduction will continue in 2016
... [C]ontingent on the sale of the home office, we expect to further the progress we made in 2015 by paying down another $400 million to $500 million in debt in FY16.
After burning through billions of dollars of cash in 2012 and 2013, J.C. Penney returned to positive free cash flow generation in 2014. Free cash flow more than doubled in 2015 to $131 million. This has allowed J.C. Penney to start reducing its massive debt load.
Last month, the company announced that it would pursue a sale-leaseback transaction for its home office in order to further reduce its debt load. If this effort is successful, the sale would likely close in the early fall.
Between the sale proceeds and its free cash flow production, J.C. Penney expects to have enough cash to pay down another $400 million to $500 million of debt this year. That's about 10% of its current debt burden. This will help it get onto a firmer financial footing as it gears up to face whatever challenge comes next.