SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 13 and 26 week periods Commission file number 1-15274
ended July 27, 2002
J. C. PENNEY COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 26-0037077
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 431-1000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
267,932,276 shares of Common Stock of 50 cents par value, as of August 30, 2002.
-1-
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Consolidated Statements of Operations
($ in millions, except per share data)
13 weeks ended 26 weeks ended
---------------------------- ----------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
---------- ----------- ----------- -----------
Retail sales, net $ 7,198 $ 7,211 $ 14,926 $14,733
Costs and expenses
Cost of goods sold 5,063 5,174 10,438 10,462
Selling, general and administrative
expenses 2,040 1,990 4,136 4,035
Other unallocated 7 11 15 (6)
Net interest expense 92 94 194 192
Acquisition amortization 7 21 17 56
Restructuring and other, net (2) 7 - 12
---------- ---------- ----------- -----------
Total costs and expenses 7,207 7,297 14,800 14,751
---------- ---------- ----------- -----------
(Loss)/income from continuing
operations before income taxes (9) (86) 126 (18)
Income taxes (3) (33) 46 (6)
---------- ---------- ----------- -----------
(Loss)/income from continuing
operations (6) (53) 80 (12)
(Loss) on sale of discontinued
operations, net of income tax - (16) - (16)
---------- ---------- ----------- -----------
Net (loss)/income $ (6) $ (69) $ 80 $ (28)
Less: preferred stock dividends (7) (7) (14) (15)
--------- ----------- ----------- -----------
Net (loss)/income applicable to common
stockholders $ (13) $ (76) $ 66 $ (43)
========== =========== =========== ===========
(Loss)/earnings per share from continuing operations:
Basic $ (0.05) $ (0.23) $ 0.25 $ (0.10)
Diluted $ (0.05) $ (0.23) $ 0.24 $ (0.10)
(Loss)/earnings per share:
Basic $ (0.05) $ (0.29) $ 0.25 $ (0.16)
Diluted $ (0.05) $ (0.29) $ 0.24 $ (0.16)
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
-2-
Consolidated Balance Sheets
($ in millions)
July 27, July 28, Jan. 26,
2002 2001 2002
---------------- ----------------- -----------------
ASSETS
Current assets
Cash and short-term investments
(including restricted balances
of $121, $245 and $115) $ 2,004 $ 1,696 $ 2,840
Receivables (net of bad debt
reserves of $15, $32 and $27) 697 737 698
Merchandise inventory (net of LIFO
reserves of $401, $368 and $377) 5,002 5,413 4,930
Prepaid expenses 252 175 209
---------------- ----------------- -----------------
Total current assets 7,955 8,021 8,677
Property and equipment (net of
accumulated depreciation of $3,575,
$3,137 and $3,328) 4,889 4,964 4,989
Goodwill 2,312 2,358 2,321
Intangible assets (net of accumulated
amortization of $285, $285 and $304) 513 550 527
Other assets 1,540 1,484 1,534
---------------- ----------------- -----------------
Total assets $17,209 $ 17,377 $ 18,048
================ ================= =================
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
-3-
Consolidated Balance Sheets
($ in millions except per share data)
July 27, July 28, Jan. 26,
2002 2001 2002
----------------- ----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,500 $ 3,503 $ 3,465
Short-term debt 17 21 15
Current maturities of long-term debt 14 907 920
Deferred taxes 88 141 99
----------------- ----------------- -----------------
Total current liabilities 3,619 4,572 4,499
Long-term debt 5,172 4,545 5,179
Deferred taxes 1,256 1,127 1,231
Other liabilities 999 1,045 1,010
----------------- ----------------- -----------------
Total liabilities 11,046 11,289 11,919
Stockholders' equity
Capital stock
Preferred stock, no par value
and stated value of $600 per share:
authorized, 25 million shares;
issued and outstanding, 0.6, 0.6,
0.6 million shares of Series B
ESOP convertible preferred 345 380 363
Common stock, par value $0.50:
authorized, 1,250 million shares;
issued and outstanding 268, 263 and
264 million shares 3,400 3,311 3,324
----------------- ----------------- -----------------
Total capital stock 3,745 3,691 3,687
----------------- ----------------- -----------------
Deferred stock compensation 9 - 6
Reinvested earnings at beginning of year 2,573 2,636 2,636
Net income/(loss) 80 (28) 98
Common stock dividends declared (66) (65) (128)
Preferred stock dividends (14) (15) (33)
----------------- ----------------- -----------------
Reinvested earnings at end of period 2,573 2,528 2,573
Accumulated other comprehensive (loss) (164) (131) (137)
----------------- ----------------- -----------------
Total stockholders' equity 6,163 6,088 6,129
----------------- ----------------- -----------------
Total liabilities and stockholders'
equity $ 17,209 $ 17,377 $ 18,048
================= ================= =================
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
-4-
Consolidated Statements of Cash Flows
($ in millions)
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26 weeks ended
-------------------------------------------
July 27, July 28,
2002 2001
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Cash flows from operating activities
Income/(loss) from continuing operations $ 80 $ (12)
Non-cash adjustments to reconcile net income to net cash provided by
operating activities:
Restructuring, asset impairments and other 26 8
Depreciation and amortization 324 362
Real estate (gain) - (26)
Pension expense/(income) 4 (28)
Deferred stock compensation 3 -
Deferred taxes 14 24
Change in cash from:
Receivables 1 (44)
Sale of drugstore receivables - 200
Inventory (72) (144)
Other assets (49) 29
Accounts payable 302 (162)
Current income taxes payable (19) 102
Other liabilities (166) (246)
------------------- ---------------------
448 63
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Cash flows from investing activities
Capital expenditures (286) (316)
Proceeds from sale of discontinued operations - 1,305
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(286) 989
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Cash flows from financing activities
Change in short-term debt 2 21
Proceeds from equipment financing 9 -
Payment of long-term debt, including
capital leases (929) (252)
Common stock issued, net 18 17
Preferred stock redemption (18) (19)
Dividends paid, common (80) (80)
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(998) (313)
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Cash received from discontinued operations - 13
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Net (decrease)/increase in cash and
short-term investments (836) 752
Cash and short-term investments at
beginning of year 2,840 944
------------------- ---------------------
Cash and short-term investments at
end of period $ 2,004 $ 1,696
=================== =====================
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
-5-
Notes to the Unaudited Interim Consolidated Financial Statements
1) Summary of Significant Accounting Policies
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A description of the Company's significant accounting policies is included in
the Company's Annual Report on Form 10-K for the fiscal year ended January 26,
2002 (the "2001 10-K"). The accompanying unaudited interim consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto in the 2001 10-K.
The accompanying interim consolidated financial statements are unaudited but, in
the opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation. Because of the seasonal
nature of the retail business, operating results for the six-month periods are
not necessarily indicative of the results that may be expected for the entire
year.
Certain reclassifications have been made to prior year amounts to conform to the
current period presentation.
As disclosed in the Company's 2001 10-K, effective January 27, 2002, J. C.
Penney Company, Inc. changed its corporate structure to a holding company
format. As part of this structure, J. C. Penney Company, Inc. changed its name
to J. C. Penney Corporation, Inc. (JCP) and became a wholly owned subsidiary of
a newly formed affiliated holding company (Holding Company). The new holding
company assumed the name J. C. Penney Company, Inc. The Holding Company has no
direct subsidiaries other than JCP, nor does it have any independent assets or
operations. All outstanding shares of common and preferred stock were
automatically converted into the identical number of and type of shares in the
new holding company. Stockholders' ownership interests in the business did not
change as a result of the new structure. Shares of the Company remain publicly
traded under the same symbol (JCP) on the New York Stock Exchange. The Holding
Company is a co-obligor (or guarantor, as appropriate) regarding the payment of
principal and interest on JCP's outstanding debt securities. The guarantee by
the Holding Company of certain of JCP's outstanding debt is full and
unconditional. The Holding Company and its consolidated subsidiaries, including
JCP, are collectively referred to in this quarterly report as "Company" or
"JCPenney," unless indicated otherwise.
Implementation of New Accounting Standards
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Adoption of SFAS No. 142
Effective January 27, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Upon adoption, the Company ceased amortization of goodwill and indefinite-lived
intangible assets, primarily the Eckerd trade name. These assets are now subject
to an impairment test on an annual basis, or when there is reason to believe
that their values have been diminished or impaired. Additionally, a transitional
impairment test is required as of the adoption date. These impairment tests are
performed on each business of the Company where goodwill is recorded. The net
carrying value of goodwill and the Eckerd trade name, as of January 26, 2002 was
$2,643 million. The Company completed the transitional impairment test on the
Eckerd trade name in the first quarter of 2002 and the transitional goodwill
impairment test in the second quarter of 2002 and determined that there is no
evidence of impairment. The fair value of the Company's identified reporting
-6-
units was estimated using the expected present value of corresponding future
cash flows and market values of comparable businesses where available. Other
intangible assets with estimable useful lives will continue to be amortized over
that period.
The following table sets forth the condensed consolidated pro forma results of
operations for the 13-week and 26-week periods ended July 27, 2002 and July 28,
2001 as if Statement 142 had been in effect for all periods presented:
($ in millions except EPS) 13 weeks ended 26 weeks ended
--------------------------- --------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
------------ -------------- ------------ -------------
Reported net (loss)/income $ (6) $ (69) $ 80 $ (28)
Goodwill and trade name amortization - 12 - 33
------------ -------------- ------------ -------------
Adjusted net (loss)/income $ (6) $ (57) $ 80 $ 5
============ ============== ============ =============
Earnings per share (EPS) - basic:
Reported net (loss)/income $(0.05) $ (0.29) $ 0.25 $(0.16)
Goodwill and trade name amortization - 0.05 - 0.12
------------ -------------- ------------ -------------
Adjusted net (loss)/income $(0.05) $ (0.24) $ 0.25 $(0.04)
============ ============== ============ =============
Earnings per share (EPS) - diluted:
Reported net (loss)/income $(0.05) $ (0.29) $ 0.24 $(0.16)
Goodwill and trade name amortization - 0.05 - 0.12
------------ -------------- ------------ -------------
Adjusted net (loss)/income $(0.05) $ (0.24) $ 0.24 $(0.04)
============ ============== ============ =============
Intangible assets consisted of the following:
July 27, July 28, Jan. 26,
($ in millions) 2002 2001 2002
---------------- --------------- ---------------
Amortized intangible assets:
---------------------------
Prescription files $ 271 $ 242 $ 258
Less accumulated amortization 137 104 121
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Prescription files, net 134 138 137
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Favorable lease rights 205 204 204
Less accumulated amortization 148 121 136
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Favorable lease rights, net 57 83 68
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Software - 20 -
Less accumulated amortization - 18 -
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Software, net - 2 -
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Carrying amount of amortized
intangible assets 191 223 205
Unamortized intangible assets
-----------------------------
Eckerd trade name(1) 322 327 322
---------------- --------------- ---------------
Total carrying amount $ 513 $ 550 $ 527
================ =============== ===============
(1) Eckerd trade name is net of accumulated amortization of $42 million and $47
million for the second quarter 2001 and year end 2001.
-7-
The following table provides amortization expense for the periods presented.
Amortization expense related to major business acquisitions is reported as
acquisition amortization on the consolidated statements of operations. The
remaining amount of amortization expense is included in selling, general and
administrative (SG&A) expenses.
($ in millions) 13 weeks ended 26 weeks ended
---------------------- --------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
---------- --------- ---------- ----------
Major business acquisitions(1) $ 7 $ 21 $ 17 $ 56
Other acquisitions 5 5 11 10
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Total for amortized intangible assets $ 12 $ 26 $ 28 $ 66
========== ========== ========== ==========
(1) Includes amortization expense of $13 million and $35 million related to
goodwill and trade name for the second quarter and first half of 2001,
respectively, before the adoption of SFAS No. 142. Major business acquisitions
include Eckerd Corporation acquired in early 1997, Lojas Renner S.A. acquired in
January 1999 and Genovese Drug Stores, Inc. acquired in March 1999.
Amortization expense for the amortized intangible assets reflected above is
expected to be approximately $63 million, $61 million, $29 million, $20 million
and $12 million for fiscal years 2002, 2003, 2004, 2005 and 2006, respectively.
Of these amounts, amortization related to major business acquisitions is
expected to be approximately $42 million, $40 million, $9 million, $6 million
and $1 million for fiscal years 2002, 2003, 2004, 2005 and 2006 respectively.
The carrying amount of goodwill was $2,321 million at the beginning of 2002 and
decreased to $2,312 million at July 27, 2002, due to currency translation
adjustments. At July 27, 2002, the total carrying amount of goodwill consisted
of $43 million for the Department Store and Catalog segment and $2,269 million
for the Eckerd Drugstore segment.
Adoption of SFAS No. 144
In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
establishes a single accounting model to be used for the impairment or disposal
of long-lived assets and broadens the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of", and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30 for the disposal of a segment of a
business, as previously defined. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company's adoption of SFAS No. 144,
effective January 27, 2002, did not have a material impact on its financial
statements.
Adoption of SFAS No. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Statement 145 rescinds Statement 4, "Reporting Gains and Losses from
Extinguishment of Debt - an amendment of APB Opinion No. 30", which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income
-8-
tax effect. As a result, the criteria set forth by APB Opinion 30 will now be
used to classify those gains and losses. Statement 145 also amends Statement 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company adopted SFAS No. 145 in the second
quarter 2002 concurrent with the initial closing of notes tendered in the
Company's debt exchange. Accordingly, the loss on the exchange of approximately
$0.5 million was recorded as net interest expense in income from continuing
operations and is more fully discussed in Note 11.
Effect of New Accounting Standard Not Yet Adopted
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement requires that costs associated
with exit or disposal activities be recorded at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. This Statement is effective for exit or
disposal activities initiated after December 31, 2002, with earlier application
encouraged. Implementation of SFAS No. 146 will result in a change in the timing
of recording costs associated with exit or disposal activities. Such costs will
be recorded in later periods than under the current rules.
2) Earnings per Share
-------------------
Basic earnings per share (EPS) is computed by dividing income applicable to
common stockholders by the average number of common shares outstanding for the
period. Except when the effect would be anti-dilutive, the diluted EPS
calculation includes the impact of restricted stock awards and shares that could
be issued under outstanding stock options as well as common shares that would
result from the conversion of convertible debentures and convertible preferred
stock. In addition, the related interest on convertible debentures (net of tax)
and preferred stock dividends (net of tax) are added back to income, since these
would not be paid if the debentures or preferred stock were converted to common
stock. The computation of basic and diluted earnings per share follows:
-9-
(In millions, except per share data) 13 weeks ended 26 weeks ended
---------------------------- -----------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
-------------- ------------- ------------- ---------------
(Loss)/earnings applicable to common
------------------------------------
stockholders:
-------------
(Loss)/income from continuing
operations $ (6) $ (53) $ 80 $ (12)
Less: preferred stock dividends,
net of tax (7) (7) (14) (15)
-------------- ------------- ------------- ---------------
(Loss)/income from continuing
operations applicable to common
stockholders(1) (13) (60) 66 (27)
(Loss) on sale of discontinued
operations - (16) - (16)
-------------- ------------- ------------- ---------------
Net (loss)/income applicable to common
stockholders(2) $ (13) $ (76) $ 66 $ (43)
============== ============= ============= ===============
Shares:
--------
Average shares outstanding (basic
shares) 268 263 267 263
Dilutive effect of stock options and
restricted stock - - 3 -
-------------- ------------- ------------- ---------------
Average shares used for diluted EPS 268 263 270 263
============== ============= ============= ===============
(Loss)/earnings per share from continuing operations:
Basic $(0.05) $(0.23) $ 0.25 $(0.10)
Diluted $(0.05) $(0.23) $ 0.24 $(0.10)
(Loss)/earnings per share:
Basic $(0.05) $(0.29) $ 0.25 $(0.16)
Diluted $(0.05) $(0.29) $ 0.24 $(0.16)
(1) (Loss)/income from continuing operations applicable to common stockholders
is the same for purposes of calculating basic and diluted EPS.
(2) Net(loss)/income applicable to common stockholders is the same for purposes
of calculating basic and diluted EPS.
Certain potential common stock was excluded from the above calculations because
the effect would be anti-dilutive. Because of the loss from continuing
operations for the second quarters of both years, as well as the first half of
2001, all stock options and restricted stock units were excluded from the
calculations in those periods. Options to purchase 23 million and 18 million
shares of common stock were outstanding at July 27, 2002 and July 28, 2001,
respectively, at prices ranging from $9 to $71. Restricted stock units
convertible into 1.5 and 1.3 million shares of common stock were outstanding at
July 27, 2002 and July 28, 2001, respectively. For the first half of 2002,
options to purchase 9 million shares of common stock at prices ranging from $22
to $71 were excluded from the EPS calculation because their exercise prices were
higher than the average stock price. Preferred stock convertible into 11.5 and
12.7 million common shares at July 27, 2002 and July 28, 2001, respectively, was
excluded from the calculation of EPS for the 13 and 26 weeks ended the same
dates. The 2002 second quarter and first half EPS calculations also exclude $650
million notes convertible into 22.8 million common shares. These notes were
issued in October 2001.
-10-
3) Cash and Restricted Short-Term Investment Balances
--------------------------------------------------
Restricted short-term investment balances of $121 million, $245 million and $115
million as of July 27, 2002, July 28, 2001 and January 26, 2002, respectively,
were included in the total short-term investment balances of $2,004 million,
$1,696 million and $2,840 million for the same periods. Restricted balances are
pledged as collateral for import letters of credit not included in the bank
credit facility and for a portion of casualty insurance program liabilities.
Cash and short-term investments on the consolidated balance sheet include $5
million, $5 million and $6 million of cash as of July 27, 2002, July 28, 2001
and January 26, 2002, respectively.
4) Supplemental Cash Flow Information
-----------------------------------
26 weeks ended
---------------------------
($ in millions) July 27, 2002 July 28, 2001
---------------- --------------
Interest paid $ 230 $ 213
Interest received 23 21
Income taxes paid/(received) 43 (146)
Non-cash transactions:
---------------------
o During the second quarter 2002, the Company exchanged certain notes and
debentures with a net carrying amount of $206 million for new notes
recorded at a fair value of $205 million.
o The Company issued 2.9 million shares of Company common stock in March 2002
to fund its fiscal 2001 contribution to the savings plan.
5) Eckerd Managed Care Receivable Securitization
---------------------------------------------
As disclosed in the Company's 2001 10-K, Eckerd sells, on a continuous basis,
substantially all of its managed care receivables to ECR Receivables, Inc., a
subsidiary of Eckerd, which then sells to a third party an undivided interest in
all eligible receivables while retaining a subordinated interest in a portion of
the receivables. A three-year revolving receivables purchase facility agreement
was entered into in May 2001. As of July 27, 2002, securitized managed care
receivables totaled $319 million, of which the subordinated retained interest
was $119 million. Losses and expenses related to receivables sold under this
agreement were approximately $1 million and $2 million in the second quarter and
first half of 2002, respectively.
6) Restructuring and Other, Net
----------------------------
During the second quarter of 2002, the Company recorded a $2 million net credit
comprised of $1 million of imputed interest expense associated with discounting
lease obligations, $1 million of downward adjustments to restructuring reserves
and a $2 million gain on the disposal of assets. During the first quarter of
2002, the Company recorded a $2 million charge for interest on lease
obligations.
-11-
During the second quarter of 2001, the Company recorded a $7 million charge
related to JCPenney unit closings ($13 million), severance benefits paid to
certain members of management ($1 million) and downward adjustments to Eckerd
reserves ($7 million). In the first quarter of 2001, the Company recorded a $5
million charge related to JCPenney unit closings ($2 million), severance
benefits for certain members of senior management ($2 million) and Eckerd asset
impairments ($1 million).
7) Restructuring Reserves
----------------------
At July 27, 2002, the consolidated balance sheet included $148 million of
reserves related to restructuring activities compared to $174 million at January
26, 2002. These reserves were initially established in 1996, 1997, 2000 and the
first half of 2001 in connection with store closing programs and other
restructuring activities. The remaining reserves are related primarily to future
lease obligations for both department stores and drugstores that have closed.
Costs are being charged against the reserves as incurred.
Reserves are periodically reviewed for adequacy and are adjusted as appropriate.
During the first half of 2002, cash payments related to the reserves were $28
million ($24 million related to lease payments, $3 million for contract
cancellations and $1 million for severance benefits paid to employees of units
included in the 2001 store closing program). Reserves were increased $3 million
in the first half of 2002 for interest on future lease obligations and adjusted
downward $1 million based on favorable experience. Cash payments related to
these reserves are expected to approximate $53 million in 2002 with most of the
remainder to be paid out by the end of 2005.
8) Comprehensive (Loss)/Income and Accumulated Other Comprehensive (Loss)
----------------------------------------------------------------------
Comprehensive (Loss)/Income
($ in millions)
13 weeks ended 26 weeks ended
------------------------------- ------------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
--------------- --------------- --------------- --------------
Net (loss)/income $ (6) $ (69) $ 80 $ (28)
Other comprehensive (loss)/income
Foreign currency translation
adjustments (29) (20) (31) (29)
Non-qualified plan minimum liability
adjustment - - - (41)
Net unrealized changes in
investment securities (3) 7 4 9
--------------- --------------- --------------- --------------
(32) (13) (27) (61)
--------------- --------------- --------------- --------------
Total comprehensive (loss)/income $(38) $ (82) $ 53 $ (89)
=============== =============== =============== ==============
-12-
Accumulated Other Comprehensive (Loss)
($ in millions)
July 27, July 28, Jan. 26,
2002 2001 2002
---------------- --------------- ---------------
Foreign currency translation
adjustments $ (131) $(102) $(100)
Non-qualified plan minimum liability
adjustment (51) (41) (51)
Net unrealized changes in
investment securities 18 12 14
---------------- --------------- ---------------
Accumulated other comprehensive (loss) $ (164) $(131) $(137)
================ =============== ===============
Net unrealized changes in investment securities are shown net of deferred taxes
of $10 million, $7 million and $8 million as of July 27, 2002, July 28, 2001 and
January 26, 2002, respectively. The non-qualified plan minimum liability is
shown net of deferred tax asset of $33 million, $27 million, and $33 million as
of July 27, 2002, July 28, 2001 and January 26, 2002, respectively. A deferred
tax asset has not been established for foreign currency translation adjustments.
9) New Bank Credit Agreement
-------------------------
On May 31, 2002, JCP and J. C. Penney Company, Inc. entered into a three-year,
$1.5 billion revolving bank line of credit (new credit facility) with a
syndicate of banks with JPMorgan Chase Bank as administrative agent. The new
credit facility replaces a $1.5 billion facility that was scheduled to expire on
November 21, 2002 and a $630 million letter of credit facility. The new credit
facility may be used for general corporate purposes, including the issuance of
letters of credit. No cash borrowings, other than the issuance of trade and
stand-by letters of credit, which totaled $323 million as of the end of the
second quarter of 2002, have been made under either the new or previous credit
facilities.
The new credit facility contains the following terms:
o Indebtedness incurred by JCP under the new credit facility is
collateralized by all eligible domestic department store and catalog
inventory, as defined in the new credit facility agreement, which can be
released as performance improvements are achieved and ratings by the rating
agencies improve.
o Pricing is tiered based on the corporate credit ratings for JCP by Moody's
and Standard and Poor's.
o Obligations under the new credit facility are guaranteed by the Holding
Company and JCP Real Estate Holdings, Inc., which is a wholly owned
subsidiary of JCP.
o A financial performance covenant, which consists of a maximum ratio of
total debt to consolidated EBITDA (as defined in the new credit agreement)
as measured on a trailing four quarters basis. In addition, the amount of
outstanding indebtedness under the agreement will be subject to a
limitation based on the value of collateral to total indebtedness, as
defined in the new credit facility agreement.
At July 27, 2002, the Company was in compliance with all financial covenants of
the new credit agreement.
-13-
10) Equipment Financing
-------------------
Effective May 31, 2002, JCP entered into a loan agreement with Lombard US
Equipment Finance Corporation to finance the purchase of equipment for certain
of the store support centers (SSC's). Under the agreement, JCP may borrow up to
a total of $36 million in increments of at least $3 million. Loans made under
the agreement are secured by the equipment being purchased. On June 27, 2002,
JCP borrowed approximately $9 million under this agreement. This note, which
matures July 1, 2007, bears interest at 7.33% per year and is payable in monthly
installments. JCP has the right to prepay the principal balance on the loan
during the loan term, subject to a prepayment penalty of 1% to 5% of the prepaid
amount.
On August 28, 2002, JCP borrowed an additional $9 million under the agreement.
This note, which has similar terms to the first note, matures September 1, 2007
and bears interest at 6.55% per year.
11) Debt Exchange
-------------
On June 26, 2002, JCP offered to exchange in a private placement:
o For each $1,000 principal amount of outstanding 6.125% Notes Due 2003,
$1,015.15 principal amount of new 9.0% Notes Due 2012 (New Notes);
o For each $1,000 principal amount of 7.375% Notes Due 2004, $1,010.10
principal amount of New Notes; and
o For each $1,000 principal amount of 6.9% Debentures Due 2026, $1,015.15
principal amount of New Notes (collectively, the old notes).
Concurrent with the exchange offer, JCP solicited consents to amend the
indentures governing the old notes from holders of old notes to whom JCP made
the offer. JCP offered consent payments of $10 per $1,000 principal amount
tendered to holders who validly tendered their notes and delivered their
consents within the established timeframe.
On July 25, 2002, JCP announced the extension of the exchange offer to August 7,
2002 and the acceptance for settlement of notes tendered through July 24, 2002.
On July 26, 2002, JCP issued New Notes with an aggregate principal amount of
approximately $209 million and a fair value of approximately $205 million in
connection with the approximately $206 million of old notes tendered through
July 24, 2002. The Company paid total consent fees of approximately $2 million
for such tendered notes. In accordance with SFAS No. 145, which the Company
adopted in the second quarter of 2002, the loss of approximately $0.5 million on
the July 26, 2002 exchange was recorded in interest expense and was included in
income from continuing operations.
On August 9, 2002, the Company completed the debt exchange offer, resulting in a
total amount of new bonds issued in the exchange of $230.2 million.
Approximately $79.4 million principal amount of 6.125% Notes Due 2003,
approximately $67.0 million of 7.375% Notes Due 2004 and approximately $80.8
million of 6.9% Debentures Due 2026 were tendered in response to the exchange
offer. The Company paid consent fees of $0.2 million in connection with the old
notes tendered in connection with the August 9, 2002 issuance. A gain of
approximately $0.1 million will be recorded in interest expense in the third
quarter of 2002. No amendments were made to the indentures governing the old
notes.
-14-
12) Segment Reporting
-----------------
The Company operates in two business segments: Department Stores and Catalog
(including internet) and Eckerd Drugstores. Other items are shown in the
following table for purposes of reconciling to total Company amounts.
Business Segment Information
($ in millions)
Dept.
Stores & Eckerd Other Total
Catalog Drugstores Unallocated Company
------------------------------------------------------------------------------------------------------------------------------------
2nd Quarter - 2002
Retail sales, net $ 3,623 $ 3,575 $ - $ 7,198
Segment operating profit 22 73 - 95
Net interest expense (92) (92)
Other unallocated (7) (7)
Acquisition amortization (7) (7)
Restructuring and other, net 2 2
---------
Pre-tax loss from continuing operations (9)
---------
Depreciation and amortization expense 94 60 7 161
---------------------------------------------------------------------
First Half - 2002
Retail sales, net 7,629 7,297 - 14,926
Segment operating profit 179 173 - 352
Net interest expense (194) (194)
Other unallocated (15) (15)
Acquisition amortization (17) (17)
Restructuring and other, net - -
--------
Pre-tax income from continuing operations 126
--------
Depreciation and amortization expense 186 121 17 324
Total assets $ 10,465 $ 6,628 $ 116 $ 17,209
------------------------------------------------------------------------------------------------------------------------------------
2nd Quarter - 2001
Retail sales, net $ 3,855 $ 3,356 $ - $ 7,211
Segment operating profit 11 36 - 47
Net interest expense (94) (94)
Other unallocated (11) (11)
Acquisition amortization (21) (21)
Restructuring and other, net (7) (7)
--------
Pre-tax loss from continuing operations (86)
--------
Depreciation and amortization expense 95 54 21 170
---------------------------------------------------------------------
First Half - 2001
Retail sales, net 7,917 6,816 - 14,733
Segment operating profit 144 92 - 236
Net interest expense (192) (192)
Other unallocated 6 6
Acquisition amortization (56) (56)
Restructuring and other, net (12) (12)
------
Pre-tax loss from continuing operations (18)
------
Depreciation and amortization expense 196 110 56 362
Total assets $ 10,515 $ 6,735 $ 127 $ 17,377
------------------------------------------------------------------------------------------------------------------------------------
-15-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
As disclosed in the Company's 2001 10-K, effective January 27, 2002, J. C.
Penney Company, Inc. changed its corporate structure to a holding company
format. As part of this structure, J. C. Penney Company, Inc. changed its name
to J. C. Penney Corporation, Inc. (JCP) and became a wholly owned subsidiary of
a newly formed affiliated holding company (Holding Company). The new holding
company assumed the name J. C. Penney Company, Inc. The Holding Company has no
direct subsidiaries other than JCP, nor does it have any independent assets or
operations. All outstanding shares of common and preferred stock were
automatically converted into the identical number of and type of shares in the
new holding company. Stockholders' ownership interests in the business did not
change as a result of the new structure. Shares of the Company remain publicly
traded under the same symbol (JCP) on the New York Stock Exchange. The Holding
Company is a co-obligor (or guarantor, as appropriate) regarding the payment of
principal and interest on JCP's outstanding debt securities. The guarantee by
the Holding Company of certain of JCP's outstanding debt is full and
unconditional. The Holding Company and its consolidated subsidiaries, including
JCP, are collectively referred to in this report as "Company" or "JCPenney,"
unless indicated otherwise.
Consolidated Results of Operations
($ in millions)
13 weeks ended 26 weeks ended
--------------------------- ---------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Segment operating profit
Department Stores and Catalog $ 22 $ 11 $ 179 $ 144
Eckerd Drugstores 73 36 173 92
------------- ------------- ------------- -------------
Total segments 95 47 352 236
Other unallocated (7) (11) (15) 6
Net interest expense (92) (94) (194) (192)
Acquisition amortization (7) (21) (17) (56)
Restructuring and other, net 2 (7) - (12)
------------- ------------- ------------- -------------
(Loss)/income from continuing
operations before income taxes (9) (86) 126 (18)
Income taxes (3) (33) 46 (6)
------------- ------------- ------------- -------------
(Loss)/income from continuing
operations $ (6) $ (53) $ 80 $ (12)
============= ============= ============= =============
For the second quarter ended July 27, 2002, the Company reported a loss from
continuing operations of $6 million, or $0.05 per share, compared to a loss of
$53 million, or $0.23 per share for the comparable 2001 period. For the 26 weeks
ended July 27, 2002, income from continuing operations was $80 million, or $0.24
per share, compared to a loss of $12 million, or $0.10 per share, for the
comparable 2001 period. Certain non-comparable items affected results for these
periods. These items are defined and discussed on the following pages.
-16-
The following table reconciles pre-tax (loss)/income from continuing operations
before the effects of non-comparable items to pre-tax (loss)/income from
continuing operations as reported in accordance with generally accepted
accounting principles (GAAP). All references to earnings per share (EPS) are on
a diluted basis.
($ in millions, except EPS) 13 weeks ended 26 weeks ended
----------------------------- ---------------------------
July 27, 2002 July 27, 2002
Pre-tax $ EPS Pre-tax $ EPS
----------------------------- ---------------------------
(Loss)/income from continuing
operations before the effects of
non-comparable items $ (11) $(0.05) $ 126 $0.24
Restructuring and other, net 2 -
--------------- ------------- ---------------- -----------
GAAP (loss)/income from
continuing operations $ (9) $(0.05) $ 126 $0.24
=============== ============= ================ ===========
13 weeks ended 26 weeks ended
----------------------------- ----------------------------
($ in millions, except EPS) July 28, 2001 July 28, 2001
Pre-tax $ EPS Pre-tax $ EPS
----------------------------- ----------------------------
(Loss) from continuing operations
before the effects of
non-comparable items $ (74) $ (0.20) $ (15) $(0.09)
Restructuring and other, net (7) (12)
Other non-comparable items:
Eckerd pension curtailment gain(1) 11 11
Information technology transition
costs(1) (5) (5)
Centralized merchandising
process costs (ACT)(2) (13) (25)
Real estate gains(2) 2 28
--------------- ------------- ---------------- -----------
Total restructuring and other
non-comparable items (12) (0.03) (3) (0.01)
--------------- ------------- ---------------- -----------
GAAP (loss) from continuing
operations $ (86) $ (0.23) $ (18) $(0.10)
=============== ============= ================ ===========
(1) Reported as a component of Eckerd Drugstore SG&A expenses.
(2) Reported as a component of other unallocated.
The Company considers non-comparable items to be significant charges or credits
that occur infrequently and are not reflective of normal operating performance,
including any subsequent adjustments. Examples of non-comparable items would
include significant real estate transactions that are not part of the Company's
core business, costs related to centralizing merchandising and other processes
and costs related to significant acquisitions. The financial impacts of these
transactions complicate comparisons of ongoing operating results and therefore
require discussion to clarify results and trends in the Company's operations for
multiple years.
Second quarter 2002 included a non-comparable $2 million credit recorded as
restructuring and other, net, composed of $1 million of imputed interest expense
associated with discounting lease obligations offset by a $2 million gain on the
disposal of assets and $1 million of downward adjustments to reserves for future
lease obligations. The non-comparable net charge of $12 million, or $0.03 per
share, in the second quarter of 2001 included a $7 million charge recorded as
restructuring and other, net, an $11 million curtailment gain for the Eckerd
pension plan, $5 million of information technology transition costs, $13 million
of Accelerating Change Together (ACT) initiative expenses and $2 million of real
estate gains.
-17-
In the first quarter of 2002, a non-comparable $2 million charge was recorded
for interest on lease obligations. Non-comparable items in the first quarter of
2001 included a $5 million charge related to restructuring, as well as $26
million of real estate gains and $12 million of ACT initiative expenses.
The pre-tax loss from continuing operations before the effects of non-comparable
items for second quarter 2002 was $11 million, or $0.05 per share, compared to a
pre-tax loss of $74 million, or $0.20 per share for the comparable 2001 period.
Pre-tax income from continuing operations before the effects of non-comparable
items for the 26 weeks ending July 27, 2002 was $126 million, or $0.24 per
share, compared to a loss of $15 million, or $0.09 per share, for the comparable
2001 period. Both operating segments contributed to the improved second quarter
results through higher gross margins and expense management initiatives. EPS
also includes an increase of $0.05 and $0.12 per share for the 13 weeks and 26
weeks ended July 27, 2002, respectively, from the elimination of amortization of
goodwill and the Eckerd trade name in compliance with the new accounting
standard as discussed in Note 1. This increase to EPS was partially offset by a
decrease of $0.03 and $0.06 per share for the 13 weeks and 26 weeks ended July
27, 2002, respectively, from lower non-cash pension income as previously
disclosed in the 2001 10-K.
Segment Operating Results
Department Stores and Catalog
-----------------------------
($ in millions)
13 weeks ended 26 weeks ended
------------------------------- -------------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
-------------- --------------- -------------- --------------
Retail sales $ 3,623 $ 3,855 $ 7,629 $ 7,917
FIFO/LIFO gross margin 1,307 1,279 2,821 2,740
SG&A expenses (1,285) (1,268) (2,642) (2,596)
-------------- --------------- -------------- --------------
Segment operating profit $ 22 $ 11 $ 179 $ 144
============== =============== ============== ==============
Sales percent (decrease)/increase:
Comparable stores(1) -2.4% 2.3% 2.5% 1.7%
Total department stores -2.7% -0.3% 1.2% -0.4%
Catalog -21.4% -23.3% -23.3% -17.3%
Ratios as a percent of sales:
FIFO/LIFO gross margin 36.1% 33.2% 37.0% 34.6%
SG&A expenses 35.5% 32.9% 34.6% 32.8%
Segment operating profit 0.6% 0.3% 2.4% 1.8%
(1) Comparable store sales include the sales of stores after having been opened
for 12 consecutive months. Stores become comparable on the first day of the
13th month.
Segment operating profit doubled to $22 million in the second quarter this year
from last year's $11 million. Improved gross margin, benefiting from the
centralized merchandising process and Catalog inventory management, contributed
to the increase.
Comparable department store sales declined 2.4%. Total department store sales
decreased 2.7% for the quarter. Sales declined primarily as a result of lower
than planned inventory levels, particularly in key merchandise categories. This
resulted from stronger than anticipated sales in the first quarter, especially
during the 100th year anniversary promotion. Inventories going into the third
quarter are generally on plan. Sales for the second quarter increased
-18-
in home and fine jewelry compared to last year. Sales gains in the home division
continue to be led by our expanded housewares department, bed and bath and
window coverings. Apparel sales in general declined, but gains were recorded in
certain categories, including men's sportswear and tailored clothing, misses
career sportswear and boys' apparel. Catalog sales decreased 21.4% compared to
last year primarily as a result of softer demand and the Company's change to
require payment at the time of order placement. In addition, both the
circulation quantities and number of sale/value and specialty catalogs were
reduced from last year. Total internet sales, which are reported as a component
of catalog sales, increased to $62 million from $57 million last year.
Gross margin for the quarter increased 290 basis points as a percentage of
sales. Margin improvement was the result of better merchandise offerings and
continued benefits from the centralized merchandising model. Benefits include
more timely selection of merchandise, better supplier support from planning
stages through sale of the merchandise and more efficient delivery of
merchandise to individual stores. Also contributing to the improvement in
margins was substantially lower levels of catalog liquidation merchandise.
Selling, general and administrative (SG&A) expenses were well managed, and
increased only 1.3% from last year's second quarter despite planned increases in
advertising, pension expense and transition costs for the new store support
center (SSC) distribution network. The new SSC network for department stores is
an integral part of the Company's centralization efforts. By the end of the
second quarter, five centers were in operation, providing coverage for over 400
stores. The efficiencies of the new SSC network will not be fully realized until
the implementation of all 13 SSCs. Expenses for the quarter benefited from
salary savings in stores, principally from the transition to centralized
checkouts and store receiving, centralized management of store general expenses
and lower catalog expenses.
Segment operating profit for the six months ended July 27, 2002 improved 24.3%
to $179 million from $144 million last year. Sales for comparable department
stores increased 2.5% while catalog sales declined 23.3% compared with last
year's levels. Gross margin for the 26 weeks increased 240 basis points as a
percent of sales, primarily as a result of the benefits from the centralized
buying process and changes in catalog payment policies and improved inventory
management leading to lower liquidation costs. SG&A expenses increased only 1.8%
from last year despite planned increases in advertising, pension expense and
transition costs for the new distribution network.
The Company is now in the second year of a five-year turnaround program for
department stores. Management has taken steps to ensure financial flexibility as
plans are executed to centralize the merchandising and logistics networks,
improve merchandise offerings and enhance systems to provide better inventory
data and more visibility into merchandise selling patterns. The profitability of
department stores is impacted by the customers' response to the merchandise
offerings as well as competitive conditions in the retail industry, the effects
of the current economic climate and consumer confidence.
-19-
Eckerd Drugstores
-----------------
($ in millions)
13 weeks ended 26 weeks ended
-------------------------------- ------------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
--------------- -------------- -------------- --------------
Retail sales $3,575 $3,356 $7,297 $6,816
FIFO gross margin 837 772 1,691 1,560
LIFO charge (9) (14) (24) (29)
--------------- -------------- -------------- --------------
LIFO gross margin 828 758 1,667 1,531
SG&A expenses (755) (722) (1,494) (1,439)
--------------- -------------- -------------- --------------
Segment operating profit $ 73 $ 36 $ 173 $ 92
=============== ============== ============== ==============
Sales percent increase:
Comparable stores(1) 6.1% 8.2% 6.9% 8.7%
Total sales 6.5% 7.1% 7.1% 5.4%
Ratios as a percent of sales:
FIFO gross margin 23.4% 23.0% 23.2% 22.9%
LIFO gross margin 23.2% 22.6% 22.9% 22.5%
SG&A expenses 21.1% 21.5% 20.5% 21.1%
Segment operating profit 2.1% 1.1% 2.4% 1.4%
Ratios as a percent of sales,
before the effects of non-
comparable items:
FIFO gross margin 23.4% 23.0% 23.2% 22.9%
LIFO gross margin 23.2% 22.6% 22.9% 22.5%
SG&A expenses 21.1% 21.7% 20.5% 21.2%
Segment operating profit 2.1% .9% 2.4% 1.3%
(1) Comparable store sales include the sales of stores after having been opened for at least one full year.
Comparable store sales include the sales for relocated stores.
The following discussion compares this year's results to 2001 results before the
effects of the non-comparable $6 million net credit that reduced SG&A expenses
in the second quarter of 2001.
Eckerd's segment operating profit more than doubled to $73 million in this
year's second quarter compared to $30 million in the same period last year, an
increase of 120 basis points to 2.1% of sales. Sales growth, gross margin
improvement and the leveraging of SG&A expenses all contributed to the increase
in operating profit.
Comparable store sales increased by 6.1% for the quarter, with pharmacy sales
increasing 8.6% and general merchandise sales increasing 1.4%. Pharmacy sales,
as a percent of total drugstore sales, for the second quarter were 68.5%, versus
67.1% for the second quarter of 2001. Pharmacy sales growth continued to benefit
from Eckerd's ability to attract and retain managed care customers and favorable
industry trends. These trends include an aging American population and the
increased use of pharmaceuticals as the first line of defense for healthcare.
Sales to customers covered by third party programs have continued to increase as
a percent of total pharmacy sales. Third party pharmacy sales for the second
quarter of 2002 were 92.6% of total pharmacy sales, versus 91.3% in the second
quarter of 2001. Total pharmacy sales were negatively impacted by approximately
180 basis points due to recent generic drug introductions, which are being
substituted for higher priced brand named drugs. Generic drug introductions,
while they have a negative effect on sales, have a positive impact on margins.
General merchandise sales reflect continued increases as a result of lower, more
competitive pricing, improved promotional marketing and the new store format,
-20-
which has been rolled out to approximately 1,200 drugstores, or approximately
45% of the total drugstore base. General merchandise sales gains were strongest
in household products, beverages, baby and hygiene products, cosmetics and
fragrances and vitamins.
Gross margin for the quarter increased 60 basis points as a percent of sales
compared to last year, and includes LIFO charges of $9 million in 2002 and $14
million 2001. The increase in gross margin was primarily from a shift to more
generic drug sales. Slightly offsetting this increase was a higher proportion of
lower-margin third party pharmacy sales. Gross margin also benefited due to
better shrinkage rates and improved buying practices.
As a percent of sales, SG&A expenses for the quarter improved 60 basis points
over last year. SG&A expenses continued to be well controlled and reflect the
benefit of cost savings initiatives.
Segment operating profit for the first half of 2002 more than doubled to $173
million compared to $86 million for the first half of 2001. Comparable store
sales increased 6.9%, with pharmacy sales increasing 9.2% and general
merchandise sales increasing 2.5% compared to the same period last year. Gross
margin in the first half of 2002 improved 40 basis points as a percent of sales
compared to the same period last year, principally from expanded generic drug
sales. SG&A expenses improved 70 basis points as a percent of sales, reflecting
the results of cost saving initiatives such as the in-sourcing of data
processing, salary savings from streamlining back office and distribution
operations, efficiencies obtained from the reconfigured drugstore formats and
the leverage generated from higher sales.
The Company is in the second year of a three-year turnaround program for the
Eckerd drugstore business. The second quarter 2002 performance confirms
management's belief that Eckerd is on track to meet such financial objectives.
The successful continuation of the Eckerd turnaround is dependent on Eckerd's
ability to successfully attract customers through various marketing and
merchandising programs, secure suitable new drugstore locations at favorable
lease terms, attract and retain qualified pharmacists and maintain favorable
reimbursement rates from managed care organizations, governmental and other
third party payors.
Other Unallocated
-----------------
Other unallocated consists of real estate activities, investment transactions,
and other items that are related to corporate initiatives or activities, which
are not allocated to an operating segment. Other unallocated expenses for the
second quarter of 2002 consist primarily of $7 million of asset impairments on
certain underperforming department stores, $3 million of real estate gains and a
$2 million loss from third party fulfillment activities. Second quarter 2001
results included $13 million of ACT initiative expenses, a $6 million gain on
the sale of real estate and a $3 million loss from third party fulfillment
activities.
-21-
Net Interest Expense
--------------------
Interest charges for the second quarter declined by $2 million compared to
second quarter 2001, primarily as a result of the decrease in average long-term
debt outstanding, resulting from payments of long-term debt.
Acquisition Amortization
------------------------
Acquisition amortization decreased $14 million and $39 million in the second
quarter and first half of 2002, respectively, compared to last year. The
decrease was primarily the result of the Company's adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets", which eliminated the amortization
relating to goodwill and the Eckerd trade name.
Income Taxes
------------
The Company's overall effective income tax rate was 36.5% for the second quarter
of 2002 compared with 38.9% for the same period last year. The decrease is due
to recent changes to the tax law related to the deductibility of dividends paid
to the Company's savings plan. Additionally, the tax rate was higher in the
second quarter of 2001 due to a higher percentage of non-deductible permanent
book/tax differences, principally goodwill, relative to income. The overall
effective income tax rates for six months ended July 27, 2002 and July 28, 2001
were 36.5% and 34.0%, respectively.
-22-
Financial Condition
-------------------
As of July 27, 2002, consolidated merchandise inventories on the first-in,
first-out (FIFO) basis were $5,403 million compared to $5,781 million at July
28, 2001 and $5,307 million at January 26, 2002. The 6.5% decline compared to
last year's second quarter reflects lower inventories in Department Stores and
Catalog. Inventory turns continued to show improvement for the Department Store
and Catalog segment. Inventories for Department Stores and Catalog totaled
$3,100 million and $3,430 million at July 27, 2002 and July 28, 2001,
respectively. On a comparable store basis, department store inventories are
approximately 2.5% lower than last year's levels. The current inventory levels
are back on plan with certain key "Back-to-School" categories, specifically
juniors', young men's, girls' and boys' apparel, at higher levels than last
year. Eckerd Drugstore inventories on a FIFO basis totaled $2,303 million
compared with $2,351 million last year. On a comparable store basis, drugstore
inventories were approximately 4.7% lower than last year's levels. Inventory
turns continued to show improvement for Eckerd Drugstores. Inventory levels of
slow-moving merchandise have been reduced, and levels of high-velocity
merchandise are sufficient to maintain an in-stock position.
The current cost of consolidated inventories exceeded the LIFO basis amount
carried on the balance sheet by approximately $401 million at July 27, 2002,
$377 million at January 26, 2002, and $368 million at July 28, 2001.
Liquidity and Capital Resources
-------------------------------
After paying $920 million of maturing debt in the first half of the year, which
represents all of the maturities of long-term debt for the year, the Company's
liquidity remains strong with approximately $2.0 billion in cash and short-term
investments as of July 27, 2002. Of the total $2 billion in cash and short-term
investments, approximately $121 million of short-term investments were pledged
as collateral for import letters of credit not included in the bank credit
facility and for a portion of casualty program liabilities. Cash flow from
operating activities for the first half of 2002 was $448 million compared to $63
million in the comparable period of 2001. This increase is due to improved
earnings and lower inventory levels net of accounts payable.
The Company has completed two transactions that were part of its long-term
financing strategy, and which should enhance the Company's overall liquidity and
financial flexibility. First, in May 2002, JCP and J.C. Penney Company, Inc.
executed a $1.5 billion revolving credit agreement, which replaced the expiring
$1.5 billion bank revolving credit facility and $630 million letter of credit
facility. Indebtedness incurred under the new credit facility is collateralized
by all eligible domestic department store and catalog inventory, as defined in
the new credit facility agreement. This new credit facility will provide JCP
with an additional source of liquidity for working capital needs and letter of
credit support. No borrowings, other than the issuance of trade and stand-by
letters of credit, which totaled $323 million as of the end of the second
quarter 2002, have been made under either the new or previous credit facilities.
The Company was in compliance with all financial covenants of the new credit
agreement at July 27, 2002.
-23-
Second, in August 2002, the Company completed a debt exchange in which
approximately $230.2 million of new 9.0% Notes Due 2012 were issued to certain
bondholders in exchange for $227.2 million of three existing debt issues.
Bondholders exchanged $79.4 million of JCP's 6.125% Notes Due 2003, $67.0
million of its 7.375% Notes Due 2004 and $80.8 million of its 6.9% Debentures
Due 2026. This transaction effectively extends the maturity on amounts
represented by the exchanged notes, which will strengthen the Company's
liquidity as the turnaround of the Department Store and Catalog and Eckerd
drugstore businesses continues to be executed. The debt exchange is discussed
further in Note 11.
For the remainder of 2002, management believes that cash flow generated from
operations, combined with the short-term investment position, will be adequate
to fund cash requirements for capital expenditures, working capital and dividend
payments and therefore, no external funding will be required.
Operating cash flows may be impacted by many factors, including the competitive
conditions in the retail industry, and the effects of the current economic
conditions and consumer confidence. Based on the nature of the Company's
businesses, management considers the above factors to be normal business risks.
The Company has not identified any circumstances that would likely impair the
Company's ability to maintain its planned level of operations, capital
expenditures and dividends in the foreseeable future.
Capital expenditures were $286 million through the first half of 2002 compared
with $316 million for the comparable 2001 period. These were primarily for new
and relocated Eckerd drugstores and the continued remodeling and reconfiguration
of existing Eckerd drugstores, as well as the rollout of centralized checkouts
in JCPenney department stores, department store support centers and investments
in technology to support the new centralized merchandising model. Planned
capital expenditures for the year remain at between $800 and $900 million, split
evenly between the Department Stores and Catalog and Eckerd business segments.
A quarterly dividend of $0.125 per share on the Company's outstanding common
stock was paid on August 1, 2002 to stockholders of record on July 10, 2002. A
semi-annual preferred dividend of $23.70 per share on the Company's outstanding
preferred stock was paid on July 1, 2002 to the savings plan, which holds the
preferred stock.
Seasonality
-----------
The Company's business depends to a great extent on the last quarter of the
year. Historically, sales for that period have averaged approximately one-third
of annual sales and comprise a significant portion of the Company's annual
profits. Accordingly, the results of operations for the 13 and 26 weeks ended
July 27, 2002 are not necessarily indicative of the results for the entire year.
-24-
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks in the normal course of business due to
changes in interest rates and changes in currency exchange rates. The Company's
market risks related to interest rates at July 27, 2002 are similar to those
disclosed in the Company's Form 10-K for the year ended January 26, 2002, and
Form 10-Q for the 13 weeks ended April 27, 2002. For the 13 and 26 weeks ended
July 27, 2002 the other comprehensive loss on foreign currency translation was
$29 and $31 million. Due to the relatively small size of foreign operations,
management believes that its exposure to market risk associated with foreign
currencies would not have a material impact on its financial condition or
results of operations.
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties that
may cause the Company's actual results to be materially different from planned
or expected results. Those risks and uncertainties include, but are not limited
to, competition, consumer demand, seasonality, economic conditions, and
government activity. Investors should take such risks into account when making
investment decisions.
-25-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
The Company has no material legal proceedings pending against it.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
The following documents are filed as exhibits to this report:
4 Second Supplemental Indenture dated as of July 26, 2002, among
the Company, JCP and U. S. Bank National Association, Trustee
(formerly Bank of America National Trust and Savings Association)
to Indenture dated as of April 1, 1994.
10(a)June 1, 2002 Amendment to Supplemental Retirement Program For
Management Profit-Sharing Associates of JCP.
10(b)June 1, 2002 Amendment to JCP Separation Allowance Program For
Profit-Sharing Management Associates.
10(c)May 31, 2002 Amendment to JCP Supplemental Term Life Insurance
Plan For Management Profit-Sharing Associates.
10(d) June 1, 2002 Amendment to JCP Benefit Restoration Plan.
10(e)June 1, 2002 Amendment to JCP Management Incentive Compensation
Plan.
10(f)June 1, 2002 Amendments to JCP Mirror Savings Plans I, II and
III.
10(g)Employment Agreement dated as of June 1, 2002 between JCP and
R.B. Cavanaugh.
10(h)Employment Agreement dated as of June 1, 2002 between JCP and
S.F. Raish.
10(i)Eckerd Corporation Key Management Bonus Program dated February
1, 1999, as amended and restated through February 1, 2002.
10(j)May 31, 2002 Amendment to Eckerd Corporation Executive
Supplemental Plan.
10(k)July 15, 2002 Amendment to Eckerd Corporation Supplemental
Retirement Program.
-26-
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the period
covered in this report:
o Current Report on Form 8-K dated May 31, 2002 (Item 5 - Other Events
and Regulation FD Disclosure; Item 7 - Exhibits)
o Current Report on Form 8-K dated June 26, 2002 (Item 5 - Other Events
and Regulation FD Disclosure)
o Current Report on Form 8-K dated June 26, 2002 (Item 5 - Other Events
and Regulation FD Disclosure; Item 7 - Financial Statements and
Exhibits)
o Current Report on Form 8-K dated July 10, 2002 (Item 5 - Other Events
and Regulation FD Disclosure)
o Current Report on Form 8-K dated July 11, 2002 (Item 5 - Other Events
and Regulation FD Disclosure; Item 7 - Financial Statements and
Exhibits)
o Current Report on Form 8-K dated July 25, 2002 (Item 5 - Other Events
and Regulation FD Disclosure; Item 7- Financial Statements and
Exhibits)
-27-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J. C. PENNEY COMPANY, INC.
By /S/ Robert B. Cavanaugh
-------------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
Date: September 6, 2002
CERTIFICATIONS
---------------
I, Allen Questrom, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 6, 2002.
/s/ Allen Questrom
---------------------------
Allen Questrom
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.
CERTIFICATIONS
I, Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 6, 2002.
/s/ Robert B. Cavanaugh
---------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
J. C. Penney Company, Inc.