FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004 Commission file number 1-15274
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transitional period from ______________ to ________________
Commission file number _______________________
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 26-0037077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
(Address of principal executive offices)
(Zip Code)
(972) 431-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
288,190.139 shares of Common Stock of 50 cents par value, as of September 7,
2004.
INDEX
Page
----------
Part I Financial Information
Item 1. Unaudited Financial Statements
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flows 4
Notes to the Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 30
Part II Other Information
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
Signature Page 33
Certifications 34
i
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
J. C. Penney Company, Inc.
Consolidated Statements of Operations
(Unaudited)
($ in millions, except per share data) 13 weeks ended 26 weeks ended
------------------------------ ----------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
-------------- ------------ ------------ --------------
Retail sales, net $ 3,857 $ 3,645 $ 7,890 $7,356
Cost of goods sold 2,414 2,335 4,832 4,590
-------------- ------------ ------------ --------------
Gross margin 1,443 1,310 3,058 2,766
Selling, general and administrative expenses 1,287 1,257 2,673 2,629
Net interest expense 49 70 106 135
Real estate and other (income) (5) (12) (13) (21)
-------------- ------------ ------------ --------------
Income/(loss) from continuing operations
before income taxes 112 (5) 292 23
Income tax expense/(benefit) 40 (2) 102 6
-------------- ------------ ------------ --------------
Income/(loss) from continuing operations $ 72 $ (3) $ 190 $ 17
Discontinued operations, net of income tax
(benefit)/expense of $(88), $2, $(178)
and $27 (71) 3 (148) 44
-------------- ------------ ------------ --------------
Net income $ 1 $ - $ 42 $ 61
Less: preferred stock dividends 6 6 12 13
-------------- ------------ ------------ --------------
Net (loss)/income applicable to common
stockholders $ (5) $ (6) $ 30 $ 48
============== ============ ============ ==============
Basic earnings/(loss) per share:
Continuing operations $ 0.23 $(0.03) $ 0.64 $ 0.02
Discontinued operations
(0.25) 0.01 (0.53) 0.16
-------------- ------------ ------------ --------------
Net (loss)/income $(0.02) $(0.02) $ 0.11 $ 0.18
============== ============ ============ ==============
Diluted earnings/(loss) per share:
Continuing operations $ 0.23 $(0.03) $ 0.62 $ 0.02
Discontinued operations (0.25) 0.01 (0.48) 0.16
-------------- ------------ ------------ --------------
Net (loss)/income $ (0.02) $(0.02) $ 0.14 $ 0.18
============== ============ ============ ==============
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-1-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
($ in millions) July 31, July 26 Jan. 31,
2004 2003 2004
--------------- ------------ --------------
Assets
Current assets
Cash and short-term investments
(including restricted balances of $88,
$87 and $87) $ 7,414 $ 2,617 $ 2,994
Receivables (net of bad debt reserves
of $6, $5 and $5) 227 267 233
Merchandise inventory (net of LIFO
reserves of $43, $49 and $43) 3,430 3,343 3,156
Prepaid expenses 132 130
104
--------------- ------------ --------------
Total current assets 11,203 6,331 6,513
Property and equipment (net of accumulated
depreciation of $2,240, $2,203 and $2,122) 3,464 3,498 3,515
Prepaid pension 1,319 1,111 1,320
Goodwill 39 42 42
Other assets 516 522 556
Assets of discontinued operations (net of fair value
adjustment of $-, $- and $450) - 6,840 6,354
--------------- ------------ --------------
Total Assets $ 16,541 $ 18,344 $ 18,300
=============== ============ ==============
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-2-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
($ in millions, except per share data) July 31, July 26, Jan. 31,
2004 2003 2004
-------------- ------------ -------------
Liabilities and Stockholders' Equity
Current liabilities
Trade payables $ 1,377 $ 1,048 $ 1,167
Accrued expenses and other 1,390 978 1,384
Short-term debt 20 25 18
Current maturities of long-term debt 1,165 626 242
Income taxes payable 806 - -
Deferred taxes 90 21 943
-------------- ------------ -------------
Total current liabilities 4,848 2,698 3,754
Long-term debt 3,960 5,128 5,114
Deferred taxes 1,138 1,207 1,217
Other liabilities 993 778 804
Liabilities of discontinued operations - 2,091 1,986
-------------- ------------ -------------
Total Liabilities 10,939 11,902 12,875
Stockholders' equity
Capital stock
Preferred stock, no par value and stated value
of $600 per share: authorized, 25 million shares;
issued and outstanding, 0.5, 0.5 and 0.5 million
shares of Series B ESOP convertible preferred 291 317 304
Common stock, par value $0.50 per share:
authorized, 1,250 million shares; issued and
outstanding, 284, 272 and 274 million shares 3,774 3,486 3,531
-------------- ------------ -------------
Total capital stock 4,065 3,803 3,835
-------------- ------------ -------------
Reinvested earnings at beginning of year 1,728 2,817 2,817
Net income/(loss) 42 61 (928)
Dividends declared (81) (80) (161)
-------------- ------------ -------------
Reinvested earnings at end of period 1,689 2,798 1,728
Accumulated other comprehensive (loss) (152) (159) (138)
-------------- ------------ -------------
Total Stockholders' Equity 5,602 6,442 5,425
-------------- ------------ -------------
Total Liabilities and Stockholders' Equity $16,541 $ 18,344 $ 18,300
============== ============ =============
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-3-
J. C. Penney Company, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
($ in millions) 26 weeks ended
----------------------------------------
July 31, July 26,
2004 2003
------------------ -----------------
Cash flows from operating activities:
Income from continuing operations $ 190 $ 17
Adjustments to reconcile income from continuing operations
to net cash provided by/(used in) operating activities:
Depreciation and amortization 173 199
Asset impairments, PVOL and other unit closing costs 3 16
Net gains on sale of assets (3) (51)
Benefit plans expense 19 35
Deferred taxes 33 80
Change in cash from:
Receivables - (11)
Inventory (274) (373)
Prepaid expenses and other assets 14 22
Trade payables 210 55
Current income taxes payable 69 (43)
Accrued expenses and other liabilities (213) (240)
------------------ -----------------
Net cash provided by/(used in) operating activities 221 (294)
------------------ -----------------
Cash flows from investing activities:
Capital expenditures (184) (150)
Proceeds from the sale of Eckerd drugstores 4,666 -
Proceeds from sale of assets 28 68
------------------ -----------------
Net cash provided by/(used in) investing activities 4,510 (82)
------------------ -----------------
Cash flows from financing activities:
Change in short-term debt 2 12
Net proceeds from issuance of long-term debt - 595
Payment of long-term debt, including capital leases (238) (33)
Common stock issued, net 182 13
Preferred stock redeemed (13) (16)
Dividends paid, preferred and common (81) (80)
------------------ -----------------
Net cash (used in)/provided by financing activities (148) 491
------------------ -----------------
Cash (paid to)/received from discontinued operations (163) 28
Net increase in cash and short-term investments 4,420 143
Cash and short-term investments at beginning of year 2,994 2,474
------------------ -----------------
Cash and short-term investments at end of period $7,414 $2,617
================== =================
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-4-
Notes to the Unaudited Interim Consolidated Financial Statements
1) Summary of Significant Accounting Policies
-------------------------------------------
A description of significant accounting policies is included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 2004 (the "2003
10-K"). The accompanying unaudited Interim Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and
notes thereto in the 2003 10-K.
The accompanying Interim Consolidated Financial Statements are unaudited but, in
the opinion of management, include all material adjustments necessary for a fair
presentation. Because of the seasonal nature of the retail business, operating
results for interim periods are not necessarily indicative of the results that
may be expected for the full year. The January 31, 2004 financial information
has been derived from the audited Consolidated Financial Statements, with
related footnotes, included in the 2003 10-K.
Certain reclassifications have been made to prior year amounts to conform to the
current period presentation.
Holding Company
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 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 and type
of shares in the 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.
Stock-Based Compensation
The Company has a stock-based compensation plan that provides for grants to
associates of stock awards, stock appreciation rights or options to purchase the
Company's common stock. The Company accounts for stock options under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
No stock-based employee compensation cost is reflected in the consolidated
statements of operations for stock options, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the date of grant. Compensation expense for fixed stock awards with pro
rata vesting is recorded on a straight-line basis over the vesting period, which
typically ranges from one to five years.
-5-
The following table illustrates the effect on net income and (loss)/earnings per
share (EPS) as if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," to stock options.
($ in millions, except EPS) 13 weeks ended 26 weeks ended
---------------------- -------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
------------ -------------- ---------- -----------
Net income, as reported $ 1 $ - $ 42 $ 61
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects 2 1 4 2
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects (6) (6) (12) (12)
------------ -------------- ---------- -----------
Pro forma net (loss)/income $ (3) $ (5) $ 34 $ 51
============ ============== ========== ===========
(Loss)/earnings per share:
Basic--as reported $ (0.02) $ (0.02) $0.11 $0.18
Basic--pro forma $ (0.03) $ (0.04) $0.08 $0.14
Diluted--as reported $ (0.02) $ (0.02) $0.14 $0.18
Diluted--pro forma(1) $ (0.03) $ (0.04) $0.11 $0.14
(1) Diluted EPS is calculated using diluted shares at the continuing
operations level.
Effect of New Accounting Standards
In December 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
Statement amends the disclosure requirements of SFAS No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The Statement requires interim disclosure that is addressed in Note
12 but did not change the recognition and measurement requirements of the
amended Statements.
On May 19, 2004, the FASB issued FASB Staff Position (FSP) SFAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." The referenced legislation
(the Act) was passed in December 2003, and provides for a federal subsidy to
employers who offer retiree prescription drug benefits that are at least
actuarially equivalent to those offered under the government sponsored Medicare
Part D. The provisions of FSP SFAS 106-2 will be effective in the Company's
third quarter of 2004. Final regulations that would define actuarial equivalency
have not yet been issued. As a result, the expense amounts shown in Note 12 do
not reflect the potential effects of the Act, which, due largely to the cap on
Company contributions, are not expected to have a material effect on the
Company's consolidated financial statements.
The provisions of FASB Interpretation No. 46R (FIN 46R), "Consolidation of
Variable Interest Entities," became effective in the first quarter of 2004. FIN
46R replaced the same titled FIN 46 that was issued in January 2003. FIN 46R
identifies when entities must be consolidated with the financial statements of a
company where the investors in an entity do not have the characteristics of a
controlling financial interest or the entity does not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support. The adoption of FIN 46R did not have a material impact on the
Company's consolidated financial statements.
-6-
2) Discontinued Operations
------------------------
Eckerd Drugstores
On July 31, 2004, the Company closed on the sale of its Eckerd drugstore
operations for a total of approximately $4.7 billion in cash proceeds that
included a working capital adjustment, which is discussed below. After deducting
taxes, fees and other transaction costs, and estimated post-closing adjustments,
the ultimate net cash proceeds from the sale are expected to total approximately
$3.5 billion. As previously reported, The Jean Coutu Group (PJC) Inc. (Coutu)
acquired Eckerd drugstores and support facilities located in 13 Northeast and
Mid-Atlantic states, as well as the Eckerd Home Office located in Florida. CVS
Corporation and CVS Pharmacy, Inc. (collectively, CVS) acquired Eckerd
drugstores and support facilities located in the remaining southern states,
principally Florida and Texas, as well as Eckerd's pharmacy benefits management,
mail order and specialty pharmacy businesses. Proceeds from the sale will be
used for common stock repurchases and debt reduction, as announced on August 2,
2004 and more fully discussed in Note 13.
At closing, the proceeds received by the Company included $209 million for the
estimated increase in Eckerd's working capital from January 31, 2004 to July 31,
2004. The working capital adjustment will change based on the final closing
balance sheet, which is subject to a review period and must be agreed to between
the Company and the purchasers. Additionally, reserves established at closing
for estimated post-closing adjustments may be adjusted in future periods based
on additional information that may indicate that actual costs are more or less
than original estimates. See discussion of the more significant and judgmental
reserves below.
During the second quarter, the Company increased the previously recorded
estimated loss on disposal of Eckerd by $96 million pre-tax, or $31 million
after-tax, including revised estimates of certain post-closing adjustments and
resulting sales proceeds. The loss on the sale was $713 million pre-tax, or
$1,433 million on an after-tax basis. The relatively high tax cost is a result
of the tax basis of Eckerd being lower than its book basis because the Company's
previous drugstore acquisitions were largely tax-free transactions. Through the
first quarter of 2004, the Company had recorded after-tax losses totaling $1,402
million to reflect Eckerd at its estimated fair value less costs to sell. As
reflected on the Consolidated Balance Sheets, income taxes payable related to
the Eckerd sale were reclassified from current deferred taxes to current income
taxes payable on July 31, 2004, the closing date of the sale.
Discontinued operations in the consolidated statements of operations reflect
Eckerd's operating results for all periods presented, including allocated
interest expense. Interest expense was allocated to the discontinued operation
based on Eckerd's outstanding balance on its intercompany loan payable to
JCPenney, which accrued interest at JCPenney's weighted average interest rate on
its net debt (long-term debt net of short-term investments) calculated on a
monthly basis.
Additionally, $3.4 billion of the present value of lease obligations, which was
an off-balance sheet obligation under generally accepted accounting principals
(GAAP), was eliminated with the transfer of these leases to the purchasers of
the Eckerd drugstore operations upon the closing of the sale.
The Company will provide to the purchasers certain information systems,
accounting, banking, vendor contracting, tax and other transition services as
set forth in the Company's Transition Services Agreements (Transition
Agreements) with CVS and Coutu for a period of twelve months, unless terminated
earlier by the purchasers. One Transition Agreement with Pharmacare Management
Services, Inc., a subsidiary of CVS, involves the provision of information and
data management services for a period of up to fifteen months. The Company will
receive monthly service fees, which are designed to recover the costs of
providing such services, as specified in the Transition Agreements.
-7-
At the closing of the sale of Eckerd on July 31, 2004, the Company assumed
sponsorship of the Eckerd Pension Plan, the Eckerd Contingent Separation Pay
Programs and the Genovese Drug Stores, Inc. Stock Option and Stock Appreciation
Rights Plan. The Company also assumed the benefit payment obligations under
various terminated non-qualified retirement plans and programs and the
terminated Fay's Incorporated Non-Employee Director Retirement Plan. The Company
further assumed all severance and health and welfare benefit obligations under
various employment and other specific agreements. Finally, the Company assumed
all retiree health and life insurance obligations under the Eckerd plans and
programs. The Company is evaluating its options with respect to these assumed
liabilities, including, but not limited to, termination of the agreements, plans
or programs and/or settlement of the underlying benefit obligations. As of July
31, 2004, the Company had a liability of approximately $59 million for the
Eckerd Pension Plan and these other post-employment severance and benefit
obligations.
Certain of the estimated reserves the Company established for post-closing
adjustments involved significant judgment and actual costs incurred over time
could vary from these estimates. The more significant estimates relate to
severance payments to former Eckerd associates, the costs to exit the Colorado
and New Mexico markets, environmental indemnifications, and letters of credit
issued as collateral to a third party insurance company for general liability
and workers' compensation insurance. These are discussed in more detail below.
As part of the Asset Purchase Agreement with CVS, it was agreed that, with
respect to the Colorado and New Mexico locations (CN real estate interests), at
closing any of these properties that were not disposed of would be transferred
to CVS. On August 25, 2004, the Company and CVS entered into the CN Rescission
Agreement, whereby the Company received a one-time payment from CVS of $21.4
million, which represents the agreed-upon limit of CVS's liability regarding the
CN real estate interests plus net proceeds from dispositions as of August 25
minus expenses borne and paid by CVS as of August 25 relating to the CN real
estate interests. Effective August 25, CVS transferred to the Company all CN
real estate interests not disposed of, corresponding third party agreements and
liabilities. Based on management's analysis of the length of time expected to
exit these locations, estimates of costs expected to be incurred and fair values
of owned properties, the Company recorded a net reserve of approximately $80
million as of July 31, 2004. Any costs incurred prior to July 31, 2004 were
included in the calculation of the loss on sale. Actual costs to exit these
locations could vary from preliminary estimates and the process may take longer
than anticipated.
As part of the Eckerd sale agreements, the Company retained responsibility to
remediate environmental conditions that existed at the time of the sale. Certain
properties, principally distribution centers, were identified as having such
conditions at the time of sale. Preliminary cost estimates have been established
by management, in consultation with an environmental engineering firm, for
specifically identified properties, as well as a certain percentage of the
remaining properties, considering such factors as age, location and prior use of
the properties. The Company has a liability of $20 million recorded at July 31,
2004 based on management's preliminary analysis of the costs to remediate
environmental conditions that are considered probable. Further studies are
underway to develop remediation plans and refine cost estimates, which could
vary from preliminary estimates.
The Company currently has $64 million in letters of credit pledged as collateral
to an insurance company in support of general liability and workers'
compensation claims that were transferred to Coutu as part of the Eckerd sale.
Based on management's initial assessment of the probable risk, a $5 million
reserve was recorded at July 31, 2004. However, the amount of letter of credit
support that will be provided by the Company to Coutu is currently under
negotiation. Therefore, estimates of loss exposure may change when final terms
are agreed upon.
-8-
Mexico Department Stores
Effective November 30, 2003, the Company closed on the sale of its six Mexico
department stores to Grupo Sanborns S.A. de C.V. of Mexico City. The stock sale
transaction, which included the Mexico holding company and operating companies
comprising JCPenney's Mexico department store operation, resulted in a loss of
$14 million, net of a $27 million tax benefit. The loss was principally related
to currency translation losses of $25 million accumulated since operations began
in 1995 that were previously reflected as reductions to stockholders' equity.
Additional components of the loss included potential liability on certain real
estate leases and merchandise and transaction costs.
Results of the discontinued operations as reflected in the consolidated
statements of operations are summarized below:
($ in millions) 13 weeks ended 26 weeks ended
------------------------------- -------------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
------------------------------- -------------------------------
Eckerd
Net sales $3,532 $3,655 $7,254 $ 7,425
------------------------------- -------------------------------
Gross margin 833 833 1,676 1,699
Selling, general and administrative expenses 841 779 1,635 1,527
Interest expense 51 38 97 77
Acquisition amortization 3 8 5 18
Other 1 1 2 3
------------------------------- -------------------------------
(Loss)/income before income taxes (63) 7 (63) 74
Income tax (benefit)/expense (23) 3 (23) 28
------------------------------- -------------------------------
Eckerd (loss)/income from operations (40) 4 (40) 46
(Loss) on sale of Eckerd, net of income tax
(benefit) of $(65), $-, $(155) and $- (31) - (108) -
Mexico (loss) from operations, net of income
tax (benefit) of $-, $(1), $- and $(1) - (1) - (2)
------------------------------- -------------------------------
Total discontinued operations, net $ (71) $ 3 $(148) $ 44
=============================== ===============================
With the closings of the Eckerd sale on July 31, 2004 and the Mexico stores on
November 30, 2003, there were no assets or liabilities of discontinued
operations as of July 31, 2004. Assets and liabilities of discontinued
operations as of July 26, 2003 and January 31, 2004 were as follows:
($ in millions) July 26 Jan. 31,
2003(1) 2004
----------------- -----------------
Current assets $ 2,601 $ 2,467
Other assets 4,239 4,337
----------------- -----------------
Total Assets $ 6,840 $ 6,804
----------------- -----------------
Current liabilities $ 1,669 $ 1,509
Other liabilities 422 477
----------------- -----------------
Total Liabilities $ 2,091 $ 1,986
----------------- -----------------
JCPenney's net investment $ 4,749 $ 4,818
Fair value adjustment - (450)
----------------- -----------------
$ 4,749 $ 4,368
================= =================
(1) Includes $27 million of current assets for Mexico department stores.
-9-
Effective May 20, 2004, the Company terminated Eckerd's managed care receivables
securitization program. Upon termination and final payment of $221 million, the
receivables under the program were conveyed back to Eckerd. This transaction was
considered in the determination of the fair value of the Company's investment in
Eckerd at January 31, 2004.
3) Debt
-----
Eckerd's managed care receivables securitization program was terminated and the
related debt paid off in May 2004 in the amount of $221 million. In June 2004,
the 7.375% Notes in the amount of $208 million matured and were paid, and JCP
retired $25 million of its 9.75% Debentures Due 2021 at par, through the
mandatory sinking fund payment of $12.5 million and an additional $12.5 million
optional sinking fund payment.
Current maturities of long-term debt on the consolidated balance sheets include
debt issues that the Company intends to pay off within the next twelve months,
including open market purchases of long-term debt, as well as debt issues that
are payable at the holders' option. As a result of the capital structure
repositioning program announced on August 2, 2004 and discussed in Note 13, the
following securities have been classified as current maturities of long-term
debt on the consolidated balance sheet as of July 31, 2004:
($ in millions) July 31,
2004
----------------
8.25% Sinking Fund Debentures Due 2022 $ 196
6.00% OID Debentures Due 2006 174
9.75% Sinking Fund Debentures Due 2021 92
7.40% Debentures Due 2037 (Putable April 2005) 400
7.05% Notes Due 2005 193
Open market purchases of long-term debt 100
Capital leases and other 10
-----------------
$ 1,165
================
4) Earnings per Share
------------------
Basic earnings/(loss) per share (EPS) is computed by dividing net income/(loss)
less dividend requirements on the Series B ESOP Convertible Preferred Stock, net
of tax as applicable, by the weighted average number of common shares
outstanding for the period. Except where the effect would be anti-dilutive at
the continuing operations level, the diluted EPS calculation includes the impact
of restricted stock units 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. If the applicable shares
are included in the calculation, 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.
-10-
Income/(loss) from continuing operations and shares used to compute EPS from
continuing operations, basic and diluted, are reconciled below:
(in millions, except per share data) 13 weeks ended 26 weeks ended
--------------------------- --------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
------------ ----------- ----------- ------------
Earnings:
Income/(loss) from continuing operations $ 72 $ (3) $ 190 $ 17
Less: preferred stock dividends, net of tax 6 6 12 13
------------ ----------- ----------- ------------
Income from continuing operations, basic 66 (9) 178 4
Adjustment for assumed dilution:
Interest on 5% convertible debt, net of tax - - 11 -
------------ ----------- ----------- ------------
Income/(loss) from continuing operations,
diluted $ 66 $ (9) $ 189 $ 4
============ =========== =========== ============
Shares:
Average common shares outstanding (basic
shares) 283 271 280 271
Adjustment for assumed dilution:
Stock options and restricted stock units 4 - 5 2
Shares from convertible debt - - 23 -
------------ ----------- ----------- ------------
Average shares assuming dilution (diluted
shares) 287 271 308 273
============ =========== =========== ============
EPS from continuing operations:
Basic $ 0.23 $(0.03) $0.64 $0.02
Diluted $ 0.23 $(0.03) $0.62 $0.02
The following potential shares of common stock were excluded from the EPS
calculation because their effect would be anti-dilutive:
(shares in millions)
13 weeks ended 26 weeks ended
--------------------------- ---------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
------------- ------------ ----------- -------------
Restricted stock units - 2 - -
Stock options (1) 3 26 7 17
$650 million notes convertible at $28.50
per share 23 23 - 23
Preferred stock 10 11 10 11
(1) Exercise prices per share for the excluded
stock options for the respective periods ranged from: $37 to $71 $9 to $71 $36 to $71 $19 to $71
-11-
5) Cash and Short-Term Investments
-------------------------------
($ in millions) July 31, July 26, Jan. 31,
2004 2003 2004
------------------- ----------------- ---------------
Cash $ 4,771 (1) $ 3 $ 8
Short-term investments
2,643 2,614 2,986
------------------- ----------------- ---------------
Total cash and short-term investments $ 7,414 $2,617 $2,994
=================== ================= ===============
(1) Includes gross cash proceeds of $4,666 million from the sale of Eckerd,
which closed on July 31, 2004. See Note 13 for the planned use of cash proceeds.
Restricted Short-term Investment Balances
Short-term investments include restricted balances of $88 million, $87 million
and $87 million as of July 31, 2004, July 26, 2003 and January 31, 2004,
respectively. Restricted balances are pledged as collateral for import letters
of credit not included in the Company's bank credit facility and for a portion
of casualty insurance program liabilities.
6) Supplemental Cash Flow Information
-----------------------------------
($ in millions) 26 weeks ended
-----------------------------
July 31, July 26,
2004 2003
------------ ------------
Total interest paid $ 207 $ 196
Less: interest paid attributable to discontinued operations 95 75
------------ ------------
Interest paid by continuing operations $ 112 $ 121
============ ============
Interest received $ 13 $ 15
Income taxes paid $ 8 $ 34
Non-cash transactions: The Company issued 2.4 million shares of common stock in
the first quarter of 2003 to fund savings plan contributions of $47 million for
2002.
7) Goodwill
--------
The carrying amount of goodwill for Renner Department Stores in Brazil was $39
million, $42 million and $42 million as of July 31, 2004, July 26, 2003 and
January 31, 2004, respectively. The changes in carrying value are related to
foreign currency translation adjustments. There were no impairment losses
related to goodwill recorded during the first half of 2004 or 2003.
8) Credit Agreement
-----------------
The Company's Credit Agreement dated as of May 31, 2002 with JPMorgan Chase Bank
as administrative agent was amended effective as of June 2, 2004. The amendments
permitted the sale of the Eckerd Corporation, and its affiliates and assets,
permit a broader range of cash investments, and permit issuing banks to extend
maturities of certain letters of credit past the expiration of the Credit
Agreement as long as they are collateralized with cash at that time. No
borrowings, other than the issuance of trade andstandby letters of credit, which
totaled $274 million as of the end of the second quarter of 2004, have been, or
are expected to be, made under this facility.
-12-
9) Comprehensive Income and Accumulated Other Comprehensive (Loss)
-----------------------------------------------------------------
Comprehensive Income/(Loss)
($ in millions) 13 weeks ended 26 weeks ended
------------------------------- -------------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
-------------- -------------- --------------- --------------
Net income $ 1 $ - $ 42 $ 61
Other comprehensive (loss)/income:
Foreign currency translation adjustments (9) 17 (10) 25
Net unrealized gains/(losses) in
real estate investment trusts 8 9 (4) 18
Non-qualified retirement plan minimum
liability adjustment (1) - (1) -
Other comprehensive income
from discontinued operations 1 1 1 1
-------------- -------------- --------------- --------------
(1) 27 (14) 44
-------------- -------------- --------------- --------------
Total comprehensive income $ - $ 27 $ 28 $ 105
============== ============== =============== ==============
Accumulated Other Comprehensive (Loss)/Income
($ in millions) July 31, July 26, Jan. 31,
2004 2003 2004
---------------- ------------- ---------------
Foreign currency translation adjustments (1) $ (125) $ (115) $(115)
Net unrealized gains in real estate investment trusts (2) 56 37 60
Non-qualified retirement plan minimum liability adjustment (3) (83) (58) (82)
Other comprehensive (loss) from discontinued operations (4) - (23) (1)
---------------- ------------- ---------------
Accumulated other comprehensive (loss) $ (152) $ (159) $(138)
================ ============= ===============
(1) A deferred tax asset has not been established due to the historical
reinvestment of earnings in the Company's Brazilian subsidiary.
(2) Shown net of a deferred tax liability of $30 million, $20 million and $32
million as of July 31, 2004, July 26, 2003 and January 31, 2004,
respectively.
(3) Shown net of a deferred tax asset of $53 million, $39 million and $52
million as of July 31, 2004, July 26, 2003 and January 31, 2004,
respectively.
(4) Shown net of a deferred tax asset of $- million, $- million and $1 million
as of July 31, 2004, July 26, 2003 and January 31, 2004, respectively.
10) Contractual Obligations and Guarantees
----------------------------------------
Contractual Obligations
In December 2003, JCP notified the third-party service providers of the six
outsourced store support centers (SSCs) of its intent to terminate contracted
services. In accordance with the related service contracts, JCP assumed $61
million of building leases for four of the six SSCs during the first quarter of
2004 and $34 million of building leases for the two remaining SSCs in the second
quarter of 2004. Equipment leases, for which the Company had a potential
obligation of $20 million as of July 31, 2004, were assumed on August 1, 2004 by
JCP. Additional contractual obligations are disclosed in the 2003 10-K.
-13-
Guarantees
As of July 31, 2004, JCP had guarantees totaling $81 million. Guarantees of $48
million are described in detail in the 2003 10-K and include: $18 million
related to investments in a real estate investment trust; $20 million maximum
exposure on insurance reserves established by a former subsidiary included in
the sale of the Company's Direct Marketing Services business; and $10 million
related to certain leases for stores that were sold in 2003, which is recorded
in accounts payable and accrued expenses. In addition, JCP had guarantees of
approximately $33 million for certain personal property leases assumed by the
purchasers of Eckerd, which were previously reported as operating leases.
11) Real Estate and Other (Income)/Expense
---------------------------------------
($ in millions) 13 weeks ended 26 weeks ended
----------------------------- -----------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
-------------- ------------- -------------- ------------
Real estate activities $ (7) $ (6) $ (14) $(10)
Net gains from sale of real estate (1) (30) (3) (51)
Asset impairments, PVOL and other unit
closing costs 3 24 4 39
Other - - - 1
-------------- ------------- -------------- ------------
Total $ (5) $(12) $ (13) $(21)
============== ============= ============== ============
Real estate activities consisted primarily of income from the Company's real
estate subsidiaries.
Net real estate gains were recorded from the sale of facilities that are no
longer used in Company operations.
Asset impairments, the present value of lease obligations (PVOL) and other unit
closing costs of $3 million and $4 million for the second quarter and first half
of 2004 consisted primarily of asset impairments.
For the second quarter of 2003, asset impairments, PVOL and other unit closing
costs totaled $24 million and consisted of $10 million of accelerated
depreciation for catalog facilities closed in the second quarter of 2003, $9
million of asset impairments and $5 million of charges related to the PVOL for
closed stores. For the first half of 2003, these costs totaled $39 million and
consisted of $22 million of accelerated depreciation for closed catalog
facilities, $9 million of asset impairments and $8 million of expenses related
to PVOL and other costs for closed units.
-14-
12) Retirement Benefit Plans
-------------------------
Net Periodic Benefit Cost/(Credit)
The components of net periodic benefit cost/(credit) for the qualified and
non-qualified pension plans and the postretirement plans for the 13 weeks ended
July 31, 2004 and July 26, 2003 follow:
Pension Plans
-------------------------------------------------------
Qualified Supplemental Postretirement
($ in millions) (Non-Qualified) Plans
------------------------------------------------------- -------------------------
13 weeks ended 13 weeks ended 13 weeks ended
------------------------------------------------------- -------------------------
July 31, July 26, July 31, July 26, July 31, July 26,
2004 2003 2004 2003 2004 2003
------------------------------------------------------- -------------------------
Service cost $ 9 $ 7 $ - $ - $ 1 $ -
Interest cost 22 17 2 3 2 3
Expected return on plan assets (34) (22) - - - -
Net amortization 8 10 3 1 (4) (4)
------------------------------------------------------- -------------------------
Net periodic benefit cost/(credit) $ 5 $ 12 $ 5 $ 4 $ (1) $ (1)
======================================================= =========================
The components of net periodic benefit cost/(credit) for the qualified and
non-qualified pension plans and the postretirement plans for the 26 weeks ended
July 31, 2004 and July 26, 2003 follow:
Pension Plans
-------------------------------------------------------
Qualified Supplemental Postretirement
($ in millions) (Non-Qualified) Plans
------------------------------------------------------- -------------------------
26 weeks ended 26 weeks ended 26 weeks ended
------------------------------------------------------- -------------------------
July 31, July 26, July 31, July 26, July 31, July 26,
2004 2003 2004 2003 2004 2003
------------------------------------------------------- -------------------------
Service cost $ 23 $ 22 $ 1 $ 1 $ 2 $ 1
Interest cost 55 56 6 7 5 6
Expected return on plan assets (82) (72) - - - -
Net amortization 26 32 4 2 (11) (9)
------------------------------------------------------- -------------------------
Net periodic benefit cost/(credit) $ 22 $ 38 $ 11 $ 10 $ (4) $ (2)
======================================================= =========================
Employer Contributions
As previously disclosed in the 2003 10-K, the Company does not expect to be
required to make a contribution to its qualified plan in 2004 under the Employee
Retirement Income Security Act of 1974. However, depending on market conditions
and the funded status of the qualified plan, the Company may decide to make a
discretionary contribution up to the maximum amount deductible for tax purposes.
-15-
13) Subsequent Events
-----------------
Capital Structure Repositioning
On August 2, 2004, the Company announced that it intends to use the
approximately $3.5 billion in net cash proceeds from the sale of the Eckerd
drugstore operations and $1.1 billion of existing cash balances to implement a
major repositioning of its capital structure. This repositioning program
includes the following:
Debt Reduction
The Company's debt reduction program consists of the retirement of $2.3 billion
of debt in 2004 and 2005. As detailed in Note 3, approximately $454 million of
on- and off-balance sheet obligations were paid during the second quarter of
2004.
Debt payments for the remainder of 2004 and first half of 2005 are expected to
include the following:
o On August 15, 2004, the Company retired $37.5 million of JCP's 8.25%
Debentures Due 2022 at par, through the mandatory sinking fund payment of
$12.5 million and an optional sinking fund payment for an additional $25
million. On September 1, 2004, the Company redeemed the remaining principal
balance of $158.2 million for this issue, at a redemption price of 103.096%
plus accrued interest.
o In August 2004, the Company purchased $9 million of JCP's long-term debt on
the open market. The Board of Directors has authorized up to $200 million
aggregate principal amount of open market purchases of JCP's long-term
debt. The Company currently expects to purchase approximately $100 million
aggregate principal amount of this debt.
o On September 1, 2004, the Company also redeemed the following debt issues:
o 6.0% Original Issue Discount Debentures Due 2006, with a July 31, 2004
principal amount of $174 million, at a redemption price of 100% plus
accrued interest ($200 million face amount); and
o 9.75% Sinking Fund Debentures Due 2021, with a principal amount of
$92.2 million, at a redemption price of 103.2% plus accrued interest.
o The Company currently anticipates that it will exercise the October 2004
call provision of JCP's $650 million 5.0% Convertible Subordinated Notes
Due 2008, which are convertible into 22.8 million common shares.
o Holders of JCP's 7.4% Debentures Due 2037, with a principal amount of $400
million, have the right to elect to redeem the debentures in April 2005.
o In May 2005, the Company expects to pay the $193 million 7.05% Notes Due
2005, at the scheduled maturity date.
The pre-tax cost to redeem these securities, including call premiums and
unamortized costs, is expected to be approximately $50 million, which will be
recorded as a separate component of interest expense primarily in the third
quarter of 2004.
Series B Convertible Preferred Stock Redemption
On August 26, 2004, the Company redeemed all of its outstanding shares of Series
B ESOP Convertible Preferred Stock (Preferred Stock), all of which were held by
the Company's Savings, Profit-Sharing and Stock Ownership Plan, a 401(k) savings
plan. Each preferred stockholder received twenty equivalent shares of JCPenney
Common Stock for each one share of Preferred Stock in their Savings Plan
account. Preferred Stock shares, which are included in the diluted earnings per
share calculation as appropriate, were converted into approximately 9 million
common stock shares. Annual dividend savings will approximate $11 million after
tax.
-16-
Common Stock Repurchases
The Company has implemented a common stock repurchase program of up to $3.0
billion (not to exceed 133 million shares), including the repurchase of up to
$650 million of common stock contingent upon the conversion of JCP's outstanding
5.0% Convertible Subordinated Notes Due 2008. Share repurchases will be made
periodically in open-market transactions, subject to market conditions, legal
requirements and other factors. No shares had been repurchased as of July 31,
2004. From August 3, 2004 through September 7, 2004, the Company repurchased
approximately 7.2 million shares of common stock at a cost of approximately $282
million under the common stock repurchase program authorized by the Company's
Board of Directors in July 2004.
Credit Rating
On August 2, 2004, Fitch Ratings upgraded its credit ratings on the Company's
$1.5 billion secured bank facility to BBB- from BB+, its senior unsecured notes
to BB+ from BB, and its convertible subordinated notes to BB from B+. Standard &
Poors revised its outlook to "Stable" from "Negative." Moody's has placed the
Company on a watch list for a potential upgrade with positive implications for
the Company's credit rating. Moody's review should be completed in October 2004.
Store Support Center Leases
In connection with converting the operation of SSCs from third parties to the
Company, on August 1, 2004, JCP assumed approximately $20 million of equipment
leases from the former third-party service provider.
Eckerd
On August 25, 2004, the Company and CVS entered into the CN Rescission Agreement
with respect to the Colorado and New Mexico locations transferred to CVS
pursuant to the Asset Purchase Agreement. Under the CN Rescission Agreement, the
Company received a one-time payment from CVS of $21.4 million, which represents
the agreed-upon limit of CVS's liability regarding the CN real estate interests
plus net proceeds from dispositions as of August 25 minus expenses borne and
paid by CVS as of August 25 relating to the CN real estate interests. On August
25, CVS transferred to the Company all CN real estate interests not disposed of,
corresponding third party agreements and liabilities.
-17-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion relates to J.C. Penney Company, Inc. and its
consolidated subsidiaries and should be read in conjunction with the Company's
consolidated financial statements as of January 31, 2004, and the year then
ended, and Management's Discussion and Analysis of Financial Condition and
Results of Operations, both contained in the Company's Annual Report on Form
10-K for the year ended January 31, 2004 (the "2003 10-K").
This discussion is intended to provide the reader with information that will
assist in understanding the Company's financial statements, the changes in
certain key items in those financial statements from period to period, and the
primary factors that accounted for those changes, how operating results affect
the financial condition and results of operations of the Company as a whole, as
well as how certain accounting principles affect the Company's financial
statements.
Key Items in the Second Quarter
--------------------------------
o Income from continuing operations increased significantly to $72 million,
or $0.23 per share, compared to a loss of $3 million, or $0.03 per share,
for the comparable 2003 period. For the first half of 2004, income from
continuing operations was $190 million, or $0.62 per share, compared to $17
million, or $0.02 per share, for the comparable 2003 period. All references
to earnings per share (EPS) are on a diluted basis.
o On July 31, 2004, the Company closed on the sale of its Eckerd drugstore
operations and received approximately $4.7 billion in cash proceeds that
included a $209 million working capital adjustment. Cash proceeds after
income taxes, fees and transaction costs are expected to be approximately
$3.5 billion.
o Including the results of the discontinued Eckerd operations, the net loss
per share was $0.02 for the second quarter of both 2004 and 2003.
o Comparable department store sales increased by 7.1% and 8.3% for the second
quarter and first half of 2004, respectively, when compared to the same
periods in fiscal 2003. Catalog/Internet sales decreased 1.6% for the
second quarter and increased 2.5% in the first half of 2004.
o The Company ended the second quarter of 2004 with $7.4 billion of cash and
short-term investments, including the proceeds from the sale of Eckerd.
Long-term debt, including current maturities, was $5.1 billion, reflecting
the payment of $233 million of long-term debt that matured during the
second quarter of 2004.
o On August 2, 2004, the Company announced its plan to use the approximately
$3.5 billion of net proceeds from the sale of the Eckerd drugstore
operations and $1.1 billion of existing cash balances to implement a major
repositioning of its capital structure. The overall repositioning program
consists of:
o Up to $3.0 billion of common stock repurchases, including up to
$650 million contingent upon the conversion of the Company's 5.0%
Convertible Subordinated Notes Due 2008 into common shares;
o $2.3 billion reduction of outstanding debt in 2004 and the first
half of 2005;
o $3.4 billion elimination of the present value of Eckerd lease
obligations; and
o The redemption of all of the Company's outstanding shares of
Series B ESOP Convertible Preferred Stock, all of which are held
in its 401(k) savings plan.
-18-
Discontinued Operation
-----------------------
On July 31, 2004, the Company closed on the sale of its Eckerd drugstore
operations for a total of approximately $4.7 billion in cash proceeds that
included a working capital adjustment, which is discussed below. After deducting
taxes, fees and other transaction costs, and estimated post-closing adjustments,
the ultimate net cash proceeds from the sale are expected to total approximately
$3.5 billion. As previously reported, The Jean Coutu Group (PJC) Inc. (Coutu)
acquired Eckerd drugstores and support facilities located in 13 Northeast and
Mid-Atlantic states, as well as the Eckerd Home Office located in Florida. CVS
Corporation and CVS Pharmacy, Inc. (collectively, CVS) acquired Eckerd
drugstores and support facilities located in the remaining southern states,
principally Florida and Texas, as well as Eckerd's pharmacy benefits management,
mail order and specialty pharmacy businesses. Proceeds from the sale will be
used for common stock repurchases and debt reduction, as announced on August 2,
2004 and more fully discussed under Capital Structure Repositioning on pages
26-27.
At closing, the proceeds received by the Company included $209 million for the
estimated increase in Eckerd's working capital from January 31, 2004 to July 31,
2004. The working capital adjustment will change based on the final closing
balance sheet, which is subject to a review period and must be agreed to between
the Company and the purchasers. Additionally, reserves established at closing
for estimated post-closing adjustments may be adjusted in future periods based
on additional information that may indicate that actual costs are more or less
than original estimates. The more significant estimates relate to severance
payments to former Eckerd associates, the costs to exit the Colorado and New
Mexico markets, environmental indemnifications, and letters of credit issued as
collateral to a third party insurance company for general liability and workers'
compensation insurance. Future cash payments for the Eckerd related reserves
will be separately presented in the Company's consolidated statements of cash
flows as cash used in discontinued operations.
During the second quarter, the Company increased the previously recorded
estimated loss on disposal of Eckerd by $96 million pre-tax, or $31 million
after-tax, including revised estimates of certain post-closing adjustments and
resulting sales proceeds. The loss on the sale was $713 million pre-tax, or
$1,433 million on an after-tax basis. The relatively high tax cost is a result
of the tax basis of Eckerd being lower than its book basis because the Company's
previous drugstore acquisitions were largely tax-free transactions. Through the
first quarter of 2004, the Company had recorded after-tax charges totaling
$1,402 million to reflect Eckerd at its estimated fair value less costs to sell.
Additionally, $3.4 billion of the present value of lease obligations, which was
an off-balance sheet obligation under generally accepted accounting principals
(GAAP), was eliminated with the transfer of these leases to Coutu and CVS upon
the closing of the sale.
The Company will provide to the purchasers certain information systems,
accounting, banking, vendor contracting, tax and other transition services as
set forth in the Company's Transition Services Agreements (Transition
Agreements) with CVS and Coutu for a period of twelve months, unless terminated
earlier by the purchasers. One Transition Agreement with Pharmacare Management
Services, Inc., a subsidiary of CVS, involves the provision of information and
data management services for a period of up to fifteen months. The Company will
receive monthly service fees, which are designed to recover the costs of
providing such services as specified in the Transition Agreements.
At the closing of the sale of Eckerd on July 31, 2004, the Company assumed
sponsorship of the Eckerd Pension Plan, the Eckerd Contingent Separation Pay
Programs and the Genovese Drug Stores, Inc. Stock Option and Stock Appreciation
Rights Plan. The Company also assumed the benefit payment obligations under
various terminated non-qualified retirement plans and programs and the
terminated Fay's Incorporated Non-Employee Director Retirement Plan. The Company
further assumed all severance and health and welfare benefit obligations
-19-
under various employment and other specific agreements. Finally, the Company
assumed all retiree health and life insurance obligations under the Eckerd plans
and programs. The Company is evaluating its options with respect to these
assumed liabilities, including, but not limited to, termination of the
agreements, plans or programs and/or settlement of the underlying benefit
obligations. As of July 31, 2004, the Company had a liability of approximately
$59 million for the Eckerd Pension Plan and these other post-employment
severance and benefit obligations.
Discontinued operations in the consolidated financial statements presented for
2003 also included Mexico department stores, which were sold in November 2003.
Results of Operations
-----------------------
The following discussion and analysis, consistent with all other financial data
throughout this report, focuses on the results of operations and financial
condition from the Company's continuing operations.
($ in millions, except EPS) 13 weeks ended 26 weeks ended
------------------------------- ------------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
-------------- --------------- --------------- --------------
Retail sales, net $ 3,857 $ 3,645 $ 7,890 $ 7,356
-------------- --------------- --------------- --------------
Gross margin 1,443 1,310 3,058 2,766
SG&A expenses 1,287 1,257 2,673 2,629
-------------- --------------- --------------- --------------
Operating profit 156 53 385 137
Net interest expense 49 70 106 135
Real estate and other (income) (5) (12) (13) (21)
-------------- --------------- --------------- --------------
Income/(loss) from continuing operations
before income taxes 112 (5) 292 23
Income tax expense/(benefit) 40 (2) 102 6
-------------- --------------- --------------- --------------
Income/(loss) from continuing operations $ 72 $ (3) $ 190 $ 17
============== =============== =============== ==============
Diluted EPS from continuing operations $ 0.23 $ (0.03) $ 0.62 $ 0.02
Ratios as a percent of sales:
Gross margin 37.4% 35.9% 38.8% 37.6%
SG&A expenses 33.4% 34.5% 33.9% 35.7%
Operating profit 4.0% 1.4% 4.9% 1.9%
Depreciation and amortization included
in operating profit $ 86 $ 88 $ 173 $ 177
The Company continued its trend of improved profitability during the second
quarter of 2004 as reflected in income from continuing operations of $72
million, or $0.23 per share, compared to a loss of $3 million, or $0.03 per
share, for the comparable 2003 period. For the first half of 2004, income from
continuing operations was $190 million, or $0.62 per share, compared to $17
million, or $0.02 per share for the comparable 2003 period. The significant
increase over 2003 reflects improved operating profit, resulting from strong
sales growth, continued gross margin improvement and leveraging of selling,
general and administrative (SG&A) expenses. The Company expects third quarter
earnings per share from continuing operations to range from $0.35 to $0.40,
taking into account the approximately $0.11 per share charges related to planned
early debt retirements.
-20-
Operating Profit
----------------
Operating profit for the second quarter of 2004 nearly tripled to $156 million,
or 4.0% of sales, compared to $53 million, or 1.4% of sales, for the comparable
period last year. For the first half of 2004, operating profit increased to $385
million, or 4.9% of sales, compared to $137 million, or 1.9% of sales, for the
comparable 2003 period.
Operating profit and its components (sales, gross margin and SG&A) are the key
measurements on which management evaluates the financial performance of the
retail operations. Real estate activities, gains and losses on the sale of real
estate properties, asset impairments and other charges associated with closing
store and catalog facilities are evaluated separately from operations, and
recorded in real estate and other in the consolidated statements of operations.
Retail Sales, Net
($ in millions)
13 weeks ended 26 weeks ended
------------------------------------ ---------------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
------------------- -------------- ---------------------------------
Retail sales, net $ 3,857 $ 3,645 $ 7,890 $ 7,356
------------------- -------------- ---------------------------------
Sales percent increase/(decrease):
Comparable stores (1) 7.1% 2.3% 8.3% (1.5)%
Total department stores 7.1% 0.6% 8.1% (2.9)%
Catalog/Internet (1.6)% 3.9% 2.5% (4.3)%
(1) Comparable store sales include sales from stores that have been open for 12
consecutive months. A store's sales become comparable on the first day of the
13th fiscal month.
Department store sales were strong for the second quarter of 2004, with
particular strength in May and July. Both comparable department store sales and
total department store sales increased 7.1% for the quarter. Sales continued to
be strong across the country and in all merchandise divisions, reflecting good
customer response to both fashion and basic merchandise, planned marketing
events, improved store environment, particularly visual presentation, and added
convenience. The fashionable merchandise and focus on maintaining fresh seasonal
assortments contributed to the improvement in sales. These factors also drove
increases for the first half of 2004, where comparable department store sales
increased 8.3% and total department store sales increased 8.1%. The second
quarter of 2004 was also positively impacted by early back-to-school sales and
sales tax holidays in certain states that shifted sales to July from August last
year.
Catalog/Internet sales decreased 1.6% for the second quarter of 2004 compared to
last year, and were impacted by strong sell through of certain key categories in
the first quarter. For the first half of 2004, Catalog/Internet sales increased
2.5%. Sales reflect a focus on targeted specialty media and the expanded
assortments and convenience of the Internet, with less reliance on Big Books.
Total Internet sales, which are an integral part of the Company's three-channel
retailing strategy, increased more than 30% in the second quarter and
approximately 40% on a year-to-date basis.
-21-
In May, the Company launched the Chris Madden home furnishings collection,
reflecting the Company's continuing strategy to deliver affordable, trend-right
fashion with remarkable quality to its customers. Chris Madden's "Turning Home
Into Haven" collection is JCPenney's largest home furnishings launch ever and
was introduced with a comprehensive national advertising campaign. Initial sales
results from the collection have been strong, particularly in bedding and
furniture. In addition, the Company is partnering with Colin Cowie, a nationally
recognized wedding planner, to launch a new innovative technology-based wedding
registry and a new line of tableware and giftware in the third quarter of 2004.
Gross Margin
Gross margin improved 150 basis points as a percent of sales in this year's
second quarter to $1,443 million compared to $1,310 million in the comparable
2003 period. For the first half of 2004, gross margin improved 120 basis points
as a percent of sales, to $3,058 million from $2,766 million in the comparable
2003 period. The improvement reflects better inventory management, good
sell-through of seasonal merchandise, less clearance, more consistent execution,
and continuing benefits from the centralized merchandising model. Benefits of
the centralized model have included enhanced merchandise offerings, an
integrated marketing plan, leverage in the buying and merchandising process, and
more efficient selection and allocation of merchandise to individual department
stores.
SG&A Expenses
SG&A expenses in this year's second quarter were $1,287 million compared to
$1,257 million in last year's second quarter. Expenses continued to be well
leveraged, improving by 110 basis points as a percent of sales. For the first
half of 2004, SG&A expenses were $2,673 million compared to $2,629 in the
comparable period of 2003, which represented a 180 basis point improvement as a
percent of sales. Both the quarter and year-to-date improvements reflect savings
in labor costs, centralized store expense management, a decline in non-cash
pension costs and early savings from the Company's previously announced cost
savings initiatives.
With the sale of Eckerd completed, management can focus on its Department Store
and Catalog/Internet business as well as the execution of its capital
repositioning program, which was announced August 2, 2004. The performance
target for Department Stores and Catalog/Internet continues to be to generate an
operating profit of 6% to 8% of sales in 2005. The successful execution of the
turnaround, growth of the business and progress toward improving profitability
is impacted by customers' response to the Company's merchandise offerings,
competitive conditions, the effects of current economic conditions, continued
improvement in gross margin and the reduction of the expense structure. The
Company's strategic plan, financing strategy and risk management are detailed in
the 2003 10-K.
Net Interest Expense
---------------------
Net interest expense was $49 million and $70 million for the second quarters of
2004 and 2003. On a year-to-date basis, net interest expense was $106 million in
2004 compared to $135 million in the first half of 2003. The decrease is
primarily related to lower average borrowing levels for continuing operations.
For the second quarter of 2004, net interest expense allocated to Eckerd
discontinued operations was $51 million compared to $37 million for the same
period last year. For the first half of 2004, this amounted to $95 million
compared to $75 million for the first half of 2003. The higher interest expense
is the result of increases in both the Company's weighted average interest rate
and the intercompany loan balance between Eckerd and a subsidiary of the
Company. With the completion of the Eckerd sale, the debt and related interest
that had been attributed to Eckerd will remain an obligation of the Company. See
pages 26-27 for a discussion of the use of estimated proceeds from the Eckerd
sale transaction.
-22-
Real Estate and Other (Income)/Expenses
----------------------------------------
Real estate and other consists of real estate activities, gains and losses on
the sale of real estate properties, asset impairments, and other charges
associated with closing store and catalog facilities. Real estate and other for
the second quarter of 2004 was a net credit of $5 million, which consisted of a
$7 million credit for real estate operations, $1 million of gains on the sale of
closed units and $3 million of costs related to asset impairments, present value
of operating leases (PVOL) and other costs of closed stores. For the first half
of 2004, real estate and other was a net credit of $13 million, which consisted
of a $14 million credit for real estate operations, $3 million of net gains on
the sale of closed units and $4 million of expenses related to asset
impairments, PVOL and other costs of closed stores.
For the second quarter of 2003, real estate and other was a net credit of $12
million, which consisted of a $6 million credit for real estate operations, $30
million of gains on the sale of closed units, $10 million of accelerated
depreciation of catalog facilities scheduled to close, $9 million of asset
impairments and $5 million of expenses related to future rent for closed units.
For the first half of 2003, real estate and other was a net credit of $21
million, which consisted of a $10 million credit for real estate operations, $51
million of gains on the sale of closed units, $22 million of accelerated
depreciation of catalog facilities scheduled to close, $9 million of asset
impairments and $9 million of expenses related to future rent for closed units
and other expenses.
Income Taxes
--------------
The Company's effective income tax rate for continuing operations was 35.5% for
the second quarter of 2004 compared with a tax benefit of 46.6% for the same
period last year. For the first half of 2004, the Company's effective income tax
rate for continuing operations was 34.9% compared to 24.7% for the comparable
period of 2003. The rate increase for the second quarter and first half of 2004
is primarily due to improved earnings, which decreased the favorable impact of
permanent adjustments, principally the deduction for dividends paid to the
employee stock ownership plan. For the second half of 2004, the Company
anticipates an effective income tax rate for continuing operations of 35.0%.
Merchandise Inventory
----------------------
Merchandise inventory was $3,430 million at July 31, 2004 compared to $3,343
million at July 26, 2003 and $3,156 million at January 31, 2004. With an
increase of 2.6% compared to last year, inventory at the end of the second
quarter of 2004 was in line with sales expectations, was well managed, and
reflected a good balance of seasonal and basic merchandise with less clearance.
The Company has enhanced its ability to allocate and flow merchandise to stores
in-season by recognizing sales trends earlier and accelerating receipts,
replenishing individual stores based on rates of sale, and consistently
providing high in-stock levels in basics and advertised items.
-23-
Liquidity and Capital Resources
--------------------------------
The Company ended the second quarter with approximately $7.4 billion in cash and
short-term investments, which included $4.7 billion of gross proceeds received
from the closing of the Eckerd sale on July 31, 2004. Net cash proceeds of
approximately $3.5 billion from the sale of Eckerd are expected to be used to
repurchase common stock and reduce debt as part of a major repositioning of the
Company's capital structure. See Capital Structure Repositioning on pages 26-27
for details.
Cash and short-term investments included restricted short-term investment
balances of $88 million and $87 million as of July 31, 2004 and July 26, 2003,
respectively, which are pledged as collateral for import letters of credit not
included in the bank credit facility and for a portion of casualty program
liabilities.
The following is a summary of the Company's cash flows from operating, financing
and investing activities:
($ in millions) 26 weeks ended
------------------------------
July 31, July 26,
2004 2003
------------- -------------
Net cash provided by/(used in):
Operating activities $ 221 $ (294)
Investing activities 4,510 (82)
Financing activities (148) 491
Cash (paid to)/received from
discontinued operations (163) 28
------------- -------------
Net increase in cash and cash
equivalents $ 4,420 $ 143
============= =============
Cash Flow from Operating Activities
The increase in net cash provided by operating activities in the first half of
2004 compared with the same period in 2003 was primarily attributable to
improved operating performance.
Operating cash flows may be impacted by many factors, including the competitive
conditions in the retail industry, and the effects of the current economic and
geopolitical conditions and consumer confidence. Based on the nature of the
Company's business, management considers the above factors to be normal business
risks.
Cash Flow from Investing Activities
Gross cash proceeds of $4,666 million were received from the sale of Eckerd,
which closed on July 31, 2004. After deducting taxes, fees and other transaction
costs, and estimated post-closing adjustments, the ultimate net cash proceeds
from the sale of Eckerd are expected to total approximately $3.5 billion.
Capital expenditures were $184 million for the first half of 2004 compared with
$150 million for the comparable 2003 period. Capital spending was for new
stores, store renewals and modernizations, and technology, including gift
registry. Management continues to expect total capital expenditures for the full
year to be in the area of $500 million.
Proceeds from the sale of closed units were $28 million for the first half of
2004 compared with $68 million for the comparable 2003 period.
-24-
Cash Flow from Financing Activities
Approximately $454 million of on- and off-balance sheet obligations were paid
off in the second quarter of 2004. As reflected in cash paid to discontinued
operations on the consolidated statement of cash flows, Eckerd's managed care
receivables securitization program was paid off in May 2004 for a total of $221
million and the program was terminated. In June 2004, the 7.375% Notes in the
amount of $208 million matured and were paid. Also in June 2004, $25 million of
JCP's 9.75% Debentures Due 2021 were retired at par, through the mandatory
sinking fund payment of $12.5 million and an optional sinking fund payment of an
additional $12.5 million. These payments were part of the planned $2.3 billion
debt reduction program.
Net proceeds from the exercise of stock options were approximately $170 million
for the first half of 2004 and were immaterial for 2003.
Quarterly dividends of $0.125 per share on the Company's outstanding common
stock were paid on February 1, 2004 to stockholders of record on January 10,
2004 and on May 1, 2004 to stockholders of record on April 10, 2004. The payment
of dividends is subject to approval by the Company's Board of Directors on a
quarterly basis.
For the remainder of 2004, management believes that cash flow generated from
operations, combined with the proceeds from the Eckerd sale and the balance of
remaining short-term investments, will be adequate to execute the common stock
repurchase and debt reduction programs and fund capital expenditures, working
capital and dividend payments and, therefore, no external funding will be
required. At the present time, management does not expect to access the capital
markets for any external financing for the remainder of 2004. However, the
Company may access the capital markets on an opportunistic basis. Management
believes that the Company's financial position will continue to provide the
financial flexibility to support its strategic plan.
On August 2, 2004, Fitch Ratings upgraded its credit ratings on the Company's
$1.5 billion secured bank facility to BBB- from BB+, its senior unsecured notes
to BB+ from BB, and its convertible subordinated notes to BB from B+. Standard &
Poors revised its outlook to "Stable" from "Negative." Moody's has placed the
Company on a watch list for a potential upgrade with positive implications for
the Company's credit rating. Moody's review should be completed in October 2004.
Additional liquidity strengths include the available $1.5 billion credit
facility discussed in the 2003 10-K and in Note 8. This revolving credit
facility was amended effective June 2, 2004 to permit the sale of the Eckerd
drugstore operations and its affiliates and assets, allow a broader range of
cash investments, and permit issuing banks to extend maturities of certain
letters of credit past the expiration of the Credit Agreement as long as they
are collateralized with cash at that time. No borrowings, other than the
issuance of trade and standby letters of credit, which totaled $274 million as
of the end of the second quarter of 2004, have been, or are expected to be, made
under this facility. The Company was in compliance with all financial covenants
of the credit facility as of July 31, 2004.
-25-
Free Cash Flow
In addition to cash flow from operating activities, management also evaluates
free cash flow from continuing operations, which is a non-GAAP financial
measure. Management believes free cash flow from continuing operations is
important in evaluating the Company's financial performance and measuring the
ability to generate cash without incurring additional external financing.
Through the first half of 2004, free cash flow from continuing operations was a
deficit of $16 million, a significant improvement compared to a deficit of $456
million for the comparable 2003 period. Better earnings and inventory leverage
contributed to the improvement, offset slightly by an increase in capital
expenditures. The Company anticipates free cash flow for the full year 2004 to
be positive. The following table reconciles net cash provided by/(used in)
operating activities (GAAP) to free cash flow from continuing operations (a
non-GAAP measure) for the 26 weeks ended July 31, 2004 and July 26, 2003:
($ in millions) 26 weeks ended
------------------------------------
July 31, 2004 July 26, 2003
---------------- ----------------
Net cash provided by/(used in) operating activities - (GAAP) $ 221 $ (294)
Less:
Capital expenditures (184) (150)
Dividends paid (81) (80)
Plus:
Proceeds from sale of assets 28 68
---------------- ----------------
Free cash flow from continuing operations $ (16) $ (456)
================ ================
Capital Structure Repositioning
-------------------------------
On August 2, 2004, the Company announced that it intends to use the
approximately $3.5 billion in net cash proceeds from the sale of the Eckerd
drugstore operations and $1.1 billion of existing cash balances to implement a
major repositioning of its capital structure. This repositioning program was
approved by the Company's Board of Directors in July 2004 and includes the
following:
Debt Reduction
The Company's debt reduction program consists of the retirement of $2.3 billion
of debt in 2004 and the first half of 2005. Management expects the debt
reduction program to include the following debt issues:
o As previously indicated, $454 million of on- and off-balance sheet
obligations were paid off in the second quarter of 2004. Eckerd's managed
care receivables securitization program was terminated and the related debt
paid off in May 2004 for a total of $221 million. In June 2004, the 7.375%
Notes in the amount of $208 million matured and were paid. Also in June
2004, the Company retired $25 million of JCP's 9.75% Debentures Due 2021 at
par, through the mandatory sinking fund payment of $12.5 million and an
optional sinking fund payment of an additional $12.5 million.
o On August 15, 2004, the Company retired $37.5 million of JCP's 8.25%
Debentures Due 2022 at par, through the mandatory sinking fund payment of
$12.5 million and an optional sinking fund payment for an additional $25
million. On September 1, 2004, the Company redeemed the remaining principal
balance of $158.2 million for this issue, at a redemption price of 103.096%
plus accrued interest.
-26-
o In August 2004, the Company purchased $9 million of JCP's long-term debt on
the open market. The Board of Directors has authorized up to $200 million
aggregate principal amount of open market purchases of JCP's long-term
debt. The Company currently expects to purchase approximately $100 million
aggregate principal amount of this debt.
o On September 1, 2004, the Company also redeemed the following debt issues:
o 6.0% Original Issue Discount Debentures Due 2006, with a July 31,
2004 principal amount of $174 million, at a redemption price of
100% plus accrued interest ($200 million face amount); and
o 9.75% Sinking Fund Debentures Due 2021, with a principal amount
of $92.2 million, at a redemption price of 103.2% plus accrued
interest.
o The Company anticipates that it will exercise the October 2004 call
provision of JCP's $650 million 5.0% Convertible Subordinated Notes Due
2008, which are convertible into 22.8 million common shares.
o Holders of JCP's 7.4% Debentures Due 2037, with a principal amount of $400
million, have the right to elect to redeem the debentures in April 2005.
o In May 2005, the Company expects to pay the $193 million 7.05% Notes Due
2005, at the scheduled maturity date.
The pre-tax cost to redeem these securities, including call premiums and
unamortized costs, is expected to be approximately $50 million, which will be
recorded as a separate component of interest expense primarily in the third
quarter of 2004.
Series B Convertible Preferred Stock Redemption
On August 26, 2004, the Company redeemed all of its outstanding shares of Series
B ESOP Convertible Preferred Stock (Preferred Stock), all of which were held by
the Company's Savings, Profit-Sharing and Stock Ownership Plan, a 401(k) savings
plan. Each preferred stockholder received twenty equivalent shares of JCPenney
Common Stock for each one share of Preferred Stock in their Savings Plan
account. Shares of Preferred Stock, which are included in the diluted earnings
per share calculation as appropriate, were converted into approximately 9
million common stock shares. Annual dividend savings will approximate $11
million after tax.
Common Stock Repurchases
The Company has implemented a common stock repurchase program of up to $3.0
billion (not to exceed 133 million shares), including the repurchase of up to
$650 million of common stock contingent upon the conversion of JCP's outstanding
5.0% Convertible Subordinated Notes Due 2008. Share repurchases will be made
periodically in open-market transactions, subject to market conditions, legal
requirements and other factors. No shares had been repurchased as of July 31,
2004. From August 3, 2004 through September 7, 2004, the Company repurchased
approximately 7.2 million shares of common stock at a cost of approximately $282
million under the common stock repurchase program authorized by the Company's
Board of Directors in July 2004. The program is expected to be completed within
the next nine to twelve months.
-27-
Holding Company
-------------------
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 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 and type
of shares in the 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.
Critical Accounting Policies
-----------------------------
Management's discussion and analysis of its financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. Management bases its estimates on
historical experience and on other assumptions that are believed to be
reasonable under the circumstances. On an ongoing basis, management evaluates
estimates used, including those related to inventory valuation under the retail
method; valuation of long-lived and intangible assets, including goodwill;
estimation of reserves and valuation allowances specifically related to closed
stores, insurance, income taxes, litigation and environmental contingencies; and
pension accounting. Actual results may differ from these estimates under
different assumptions or conditions. Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, in the 2003 10-K
includes detailed descriptions of certain judgments that management makes in
applying its accounting policies in these areas.
Stock Option Accounting
--------------------------
As discussed in the 2003 10-K, the Company follows Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," which does not
require expense recognition for stock options when the exercise price of an
option equals, or exceeds, the fair market value of the common stock on the date
of grant. The Financial Accounting Standards Board (FASB) proposed a new rule
that would require expense recognition of stock options in the statement of
operations beginning in 2005. The Company will adopt any new rules required by
the FASB when they are effective. As required by Statement of Financial
Accounting Standards (SFAS) No. 123 for companies retaining APB 25 accounting,
the Company discloses the estimated impact of fair value accounting for stock
options granted. See Note 1 to the Unaudited Interim Consolidated Financial
Statements for the pro forma impact on the second quarters and first six months
of 2004 and 2003.
-28-
Recently Issued Accounting Pronouncements
--------------------------------------------
Recently issued accounting pronouncements are discussed in Note 1 to the
unaudited Interim Consolidated Financial Statements.
Pre-Approval of Auditor Services
----------------------------------
During the first quarter of 2004, the Audit Committee of the Company's Board of
Directors approved estimated fees for the remainder of 2004 related to the
performance of both audit and allowable non-audit services by the Company's
external auditors, KPMG LLP.
Seasonality
--------------
The results of operations and cash flows for the 13 and 26 weeks ended July 31,
2004 are not necessarily indicative of the results for the entire year. The
Company's business depends to a great extent on the last quarter of the year.
Historically for that period, Department Stores and Catalog/Internet sales have
averaged approximately one-third of annual sales and income from continuing
operations has averaged about 60% of the full year total.
-29-
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks in the normal course of business due to
changes in interest rates and currency exchange rates. The Company's market
risks related to interest rates at July 31, 2004 are similar to those disclosed
in the Company's 2003 10-K. For the 26 weeks ended July 31, 2004, the other
comprehensive loss on foreign currency translation was $10 million. Due to the
limited nature 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.
Item 4 - Controls and Procedures
Based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934) as of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company's principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective
for the purpose of ensuring that material information required to be in this
Quarterly Report is made known to them by others on a timely basis. There have
not been changes in the Company's internal control over financial reporting that
occurred during the Company's last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
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.
-30-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company has no material legal proceedings pending against it.
Item 2 - Changes in Securities and Use of Proceeds
In July 2004, the Company's Board of Directors approved a common stock
repurchase program of up to $3.0 billion for common stock repurchases, including
up to $650 million contingent upon the conversion of the Company's 5.0%
Convertible Subordinated Notes Due 2008.
Also in July 2004, the Company's Board of Directors approved the redemption of
all of the Company's outstanding shares of Series B ESOP Convertible Preferred
Stock, all of which are held by the Company's Savings, Profit-Sharing and Stock
Ownership Plan, a 401(k) savings plan.
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 15, 2004, at
which the two matters described below were submitted to a vote of stockholders,
with the voting results as indicated.
(1) Election of directors for a three-year term expiring at the Company's 2007
Annual Meeting of stockholders:
AUTHORITY
NOMINEE FOR WITHHELD
------- --- --------
C. C. Barrett 238,269,990 15,835,928
M. A. Burns 190,388,694 63,717,224
M. K. Clark 240,258,098 13,847,820
A. I. Questrom 192,998,480 61,107,438
(2) The Board of Directors' proposal regarding employment of KPMG LLP as
auditors for the fiscal year ending January 29, 2005:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
244,105,689 7,657,516 2,342,714 -0-
-31-
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Nos.
-----------
10.1 Amendment and Waiver No. 1 to Asset Purchase Agreement dated as of
July 30, 2004, among CVS Pharmacy, Inc., CVS Corporation, J. C. Penney
Company, Inc., Eckerd Corporation, Thrift Drug, Inc., Genovese Drug
Stores, Inc., and Eckerd Fleet, Inc.
10.2 First Amendment to Stock Purchase Agreement dated as of July 30, 2004,
among The Jean Coutu Group (PJC) Inc., J. C. Penney Company, Inc., and
TDI Consolidated Corporation.
10.3 CN Rescission Agreement dated as of August 25, 2004 among CVS
Corporation, CVS Pharmacy, Inc., certain CVS affiliates, and J. C.
Penney Company, Inc.
10.4 Second Amendment to Employment Agreement effective July 15, 2004
10.5 Employment Agreement dated as of May 1, 2005
10.6 Employment Agreement dated as of May 1, 2005
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(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 18, 2004 (Item 12 - Results
of Operations and Financial Condition)
o Current Report on Form 8-K/A dated May 18, 2004 (Item 12 -
Results of Operations and Financial Condition)
o Current Report on Form 8-K dated July 31, 2004 (Item 2 -
Acquisition and Disposition of Assets; Item 5 - Other Events and
Regulation FD Disclosure)
-32-
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/ William J. Alcorn
------------------------
W. J. Alcorn
Senior Vice President and Controller
(Principal Accounting Officer)
Date: September 8, 2004
-33-
Exhibit 31.1
CERTIFICATION
-------------
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) [Intentionally omitted]
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: September 8, 2004.
/s/ Allen Questrom
---------------------------
Allen Questrom
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.
-34-
Exhibit 31.2
CERTIFICATION
--------------
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) [intentionally omitted]
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 8, 2004.
/s/ Robert B. Cavanaugh
---------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
J. C. Penney Company, Inc.
-35-
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of J. C. Penney Company, Inc. (the
"Company") on Form 10-Q for the period ending July 31, 2004 (the "Report"), I,
Allen Questrom, Chairman and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
DATED this 8th day of September 2004.
/s/ Allen Questrom
-----------------------------
Allen Questrom
Chairman and Chief Executive Officer
-36-
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of J. C. Penney Company, Inc. (the
"Company") on Form 10-Q for the period ending July 31, 2004 (the "Report"), I,
Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
DATED this 8th day of September 2004.
/s/ Robert B. Cavanaugh
-----------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
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