UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2006
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: 1-15274
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)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 234,839,421 shares of Common
Stock of 50 cents par value, as of June 2, 2006.
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 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
Part II Other Information
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 6. Exhibits 31
Signature Page 32
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
--------------------------------------
Apr. 29, Apr. 30,
2006 2005
----------------- -----------------
Retail sales, net $ 4,220 $ 4,118
Cost of goods sold 2,451 2,424
----------------- -----------------
Gross margin 1,769 1,694
Selling, general and administrative expenses 1,400 1,386
Net interest expense 34 49
Bond premiums and unamortized costs - 13
Real estate and other (income) (13) (22)
----------------- -----------------
Income from continuing operations before income taxes 348 268
Income tax expense 135 97
----------------- -----------------
Income from continuing operations $ 213 $ 171
Discontinued operations, net of income tax (benefit)
of $(2) and $- (3) 1
----------------- -----------------
Net income $ 210 $ 172
================= =================
Basic earnings/(loss) per share:
Continuing operations $ 0.91 $ 0.63
Discontinued operations (0.01) -
----------------- -----------------
Net income $ 0.90 $ 0.63
================= =================
Diluted earnings/(loss) per share:
Continuing operations $ 0.90 $ 0.62
Discontinued operations (0.01) 0.01
----------------- -----------------
Net income $ 0.89 $ 0.63
================= =================
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) Apr. 29, Apr. 30, Jan. 28,
2006 2005 2006
--------------- ------------ --------------
Assets
Current assets
Cash and short-term investments
(including restricted balances of $56,
$64 and $65) $ 2,791 $ 4,115 $ 3,016
Receivables 269 274 270
Merchandise inventory (net of LIFO
reserves of $24, $25 and $24) 3,355 3,258 3,210
Prepaid expenses 181 172 206
--------------- ------------ --------------
Total current assets 6,596 7,819 6,702
Property and equipment (net of accumulated
depreciation of $2,163, $2,103 and $2,097) 3,787 3,574 3,748
Prepaid pension 1,465 1,524 1,469
Other assets 530 493 542
Assets of discontinued operations - 289 -
--------------- ------------ --------------
Total Assets $12,378 $13,699 $ 12,461
=============== ============ ==============
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) Apr. 29, Apr. 30, Jan. 28,
2006 2005 2006
-------------- ------------- -------------
Liabilities and Stockholders' Equity
Current liabilities
Trade payables $ 1,219 $ 1,155 $ 1,171
Accrued expenses and other 1,205 1,404 1,562
Short-term debt - 72 -
Current maturities of long-term debt 345 264 21
Income taxes payable - 102 8
-------------- ------------- -------------
Total current liabilities 2,769 2,997 2,762
Long-term debt 3,116 3,461 3,444
Deferred taxes 1,277 1,320 1,287
Other liabilities 967 1,031 961
Liabilities of discontinued operations - 128 -
-------------- ------------- -------------
Total Liabilities 8,129 8,937 8,454
Stockholders' Equity
Common stock and additional paid-in capital(1) 3,559 4,192 3,479
-------------- ------------- -------------
Reinvested earnings at beginning of year 512 812 812
Net income 210 172 1,088
Retirement of common stock - (259) (1,263)
Dividends declared (42) (34) (125)
-------------- ------------- -------------
Reinvested earnings at end of period 680 691 512
Accumulated other comprehensive income/(loss) 10 (121) 16
-------------- ------------- -------------
Total Stockholders' Equity 4,249 4,762 4,007
-------------- ------------- -------------
Total Liabilities and Stockholders' Equity $12,378 $13,699 $12,461
============== ============= =============
(1) Common stock has a par value of $0.50 per share; 1,250 million shares are
authorized. As of April 29, 2006, April 30, 2005 and January 28, 2006, 235
million shares, 267 million shares and 233 million shares were issued and
outstanding, respectively.
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-3-
J. C. Penney Company, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
---------------------------------------
13 weeks ended
---------------------------------------
Apr. 29, Apr. 30,
($ in millions) 2006 2005
------------------ -----------------
(Revised)
Cash flows from operating activities:
Net income $ 210 $ 172
Loss/(income) from discontinued operations 3 (1)
Adjustments to reconcile net income to net cash (used in)/provided by operating
activities:
Asset impairments, PVOL and other unit closing costs - 1
Depreciation and amortization 88 87
Net gains on sale of assets (3) (14)
Benefit plans expense 12 20
Stock-based compensation 7 22
Deferred taxes 28 33
Change in cash from:
Receivables (24) (31)
Inventory (145) (116)
Prepaid expenses and other assets 28 (18)
Trade payables 47 11
Current income taxes payable 3 56
Accrued expenses and other liabilities (373) (188)
------------------ -----------------
Net cash (used in)/provided by operating activities (119) 34
------------------ -----------------
Cash flows from investing activities:
Capital expenditures (126) (97)
Proceeds from sale of assets 5 16
------------------ -----------------
Net cash (used in) investing activities (121) (81)
------------------ -----------------
Cash flows from financing activities:
Payments of long-term debt, including capital leases and bond premiums (3) (138)
Common stock repurchased - (318)
Dividends paid, common and preferred (29) (35)
Proceeds from stock options exercised 54 75
------------------ -----------------
Net cash provided by/(used in) financing activities 22 (416)
------------------ -----------------
Cash flows from discontinued operations:
Operating cash flows (7) (92)
Investing cash flows - 4
Financing cash flows - 17
------------------ -----------------
Total cash (paid for) discontinued operations (7) (71)
------------------ -----------------
Net (decrease) in cash and short-term investments (225) (534)
Cash and short-term investments at beginning of year 3,016 4,649
------------------ -----------------
Cash and short-term investments at end of period $ 2,791 $ 4,115
================== =================
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 28, 2006 (the 2005
10-K). The accompanying unaudited Interim Consolidated Financial Statements
present the results of J. C. Penney Company, Inc. and its subsidiaries (the
Company or JCPenney) and should be read in conjunction with the Consolidated
Financial Statements and notes thereto in the 2005 10-K. All significant
intercompany transactions and balances have been eliminated in consolidation.
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 28, 2006 financial information
was derived from the audited Consolidated Financial Statements, with related
footnotes, included in the 2005 10-K.
Certain reclassifications were made to prior year amounts to conform to the
current period presentation, including the reclassification of the results of
operations and financial position of Lojas Renner S.A. (Renner) to discontinued
operations for all periods presented (see Note 2).
Certain debt securities were issued by J. C. Penney Corporation, Inc. (JCP), the
wholly owned operating subsidiary of the Company. The 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 Company of certain of
JCP's outstanding debt securities is full and unconditional.
Stock-Based Compensation
The Company has a stock-based compensation plan that provides for grants to
associates of restricted and non-restricted stock awards (shares and units),
stock appreciation rights or options to purchase the Company's common stock.
Effective January 30, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised), "Share-Based Payment" (SFAS No. 123R),
which requires the use of the fair value method of accounting for all
stock-based compensation, including stock options. The statement was adopted
using the modified prospective method of application. Under this method, in
addition to reflecting compensation expense for new share-based awards, expense
is also recognized to reflect the remaining vesting period of awards that had
been included in pro-forma disclosures in prior periods. The Company did not
adjust prior year financial statements under the optional modified retrospective
method of application.
Prior to fiscal year 2005, the Company used the Black-Scholes option pricing
model to estimate the grant date fair value of stock option awards. For grants
subsequent to the adoption of SFAS No. 123R, the Company estimates the fair
value of stock option awards on the date of grant using a binomial lattice model
developed by outside consultants who worked with the Company in the
implementation of SFAS No. 123R. The Company believes that the binomial lattice
model is a more accurate model for valuing employee stock options since it
better reflects the impact of stock price changes on option exercise behavior.
See Note 9 for additional discussion of the Company's stock-based compensation.
-5-
Cash Flow Presentation
Beginning with the 2005 10-K, the Company has separately disclosed the
operating, investing and financing portions of the cash flows attributable to
its discontinued operations. In prior periods, these were reported on a combined
basis as a single amount.
Effect of New Accounting Standards
On October 6, 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) FAS 13-1, "Accounting for Rental Costs Incurred during a
Construction Period." FSP FAS 13-1 requires rental costs associated with ground
or building operating leases that are incurred during a construction period to
be treated as rental expense, as opposed to capitalizing them as a part of the
building or leasehold improvement. The provisions of this FSP must be applied to
the first reporting period beginning after December 15, 2005, and therefore,
beginning in the first quarter of fiscal 2006, the Company no longer capitalizes
rental costs incurred during the construction period. FSP FAS 13-1 did not have
a material impact on the Company's consolidated financial statements for the
thirteen weeks ended April 29, 2006, and the Company did not adjust prior year
financial statements under the optional retrospective method of application.
2) Discontinued Operations
-----------------------
Lojas Renner S.A.
On July 5, 2005, the Company's indirect wholly owned subsidiary, J. C. Penney
Brazil, Inc., closed on the sale of its shares of Renner, a Brazilian department
store chain, through a public stock offering registered in Brazil. The Company
generated cash proceeds of $283 million from the sale of its interest in Renner.
After taxes and transaction costs, net proceeds approximated $260 million.
Proceeds from the sale were used for common stock repurchases, which are more
fully discussed in Note 3.
The sale resulted in a cumulative pre-tax gain of $26 million and a loss of $7
million on an after-tax basis. The relatively high tax cost is largely due to
the tax basis of the Company's investment in Renner being lower than its book
basis as a result of accounting for the investment under the cost method for tax
purposes. Included in the pre-tax gain on the sale was $83 million of foreign
currency translation losses that had accumulated since the Company acquired its
controlling interest in Renner.
Eckerd Drugstores
On July 31, 2004, the Company and certain of its subsidiaries closed on the sale
of its Eckerd drugstore operations to the Jean Coutu Group (PJC) Inc. and CVS
Corporation and CVS Pharmacy, Inc. (together, CVS). During the first quarter of
2006, the Company recorded a $3 million after-tax charge relating to the Eckerd
sale, primarily related to taxes payable resulting from a state sales tax audit.
Through the first quarter of 2006, the cumulative loss on the Eckerd sale was
$719 million pre-tax, or $1,333 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.
The net cash proceeds of approximately $3.5 billion from the Eckerd sale, which
closed in the second quarter of 2004, were used for common stock repurchases and
debt reduction, which are more fully discussed in Note 3.
Upon closing on the sale of Eckerd, the Company established reserves for
estimated transaction costs and post-closing adjustments. Certain of these
reserves involved significant judgment and actual costs incurred over time could
vary from these estimates. The more significant remaining estimates relate to
the costs to exit the Colorado and New Mexico markets, assumption of the Eckerd
Pension Plan and various post-employment benefit obligations and environmental
indemnifications. Management continues to review and update the remaining
reserves on a quarterly basis and believes that the overall
-6-
reserves, as adjusted, are adequate at the end of the first quarter of 2006 and
consistent with original estimates. Cash payments for the Eckerd-related
reserves are included in the Company's Consolidated Statements of Cash Flows as
Cash Paid for Discontinued Operations, with tax payments included in operating
cash flows and all other payments, if applicable, included in investing cash
flows.
Based on the terms of an agreement with CVS entered into subsequent to the
Eckerd sale, in August 2004, CVS transferred to the Company all Colorado and New
Mexico real estate interests that had not been disposed of by CVS and made a
one-time payment to the Company of $21.4 million. The Company engaged a
third-party real estate firm to assist it in disposing of the properties. As of
April 29, 2006, most of the properties had been disposed of, and the Company is
working through disposition plans for the remaining properties.
At or immediately prior to the closing of the sale of Eckerd, JCP assumed
sponsorship of the Pension Plan for Former Drugstore Associates and various
other terminated nonqualified retirement plans and programs. JCP further assumed
all severance obligations and post-employment health and welfare benefit
obligations under various Eckerd plans and employment and other specific
agreements. JCP has evaluated its options with respect to these assumed
liabilities and has either settled the obligations in accordance with the
provisions of the applicable plan or program or determined in most other cases
to terminate the agreements, plans or programs and settle the underlying benefit
obligations. On June 20, 2005, the Board of Directors of JCP approved the
termination of JCP's Pension Plan for Former Drugstore Associates; required
notices have been sent to the affected parties. JCP is in the process of seeking
regulatory approval for the termination and selecting an annuity provider to
settle the underlying benefit obligations.
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. Reserves were established by management, after
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's financial statements reflect Renner and Eckerd as discontinued
operations for all periods presented. Results of the discontinued operations are
summarized below:
Discontinued Operations
($ in millions) 13 weeks ended
-------------------------------
Apr. 29, 2006 Apr. 30, 2005
-------------- --------------
(Loss) on sale of Eckerd, net of income tax
(benefit) of $(2) and $- $ (3) $ -
Renner income from operations, net of
income tax expense of $- and $- - 1
-------------- --------------
Total (loss)/income from
discontinued operations $ (3) $ 1
============== ==============
Included in the Renner income from operations amount provided above were net
sales of $74 million for the first quarter of 2005.
-7-
Assets and liabilities of the Renner discontinued operation were reflected on
the Consolidated Balance Sheet as of April 30, 2005 as follows:
($ in millions) Apr. 30,
2005
---------------
Current assets $ 176
Goodwill 42
Other assets 71
---------------
Total assets $ 289
---------------
Current liabilities $ 120
Other liabilities 8
---------------
Total liabilities $ 128
---------------
JCPenney's net investment in Renner $ 161
===============
3) Common Stock Repurchase and Debt Reduction Programs
---------------------------------------------------
In February 2006, the Company's Board of Directors (Board) authorized a new
program of common stock repurchases of up to $750 million, which will be funded
with 2005 free cash flow and cash proceeds from stock option exercises. By the
end of 2005, the Company had completed its 2005 and 2004 equity and debt
reduction programs, which focused on enhancing stockholder value, strengthening
the Company's capital structure and improving its credit rating profile. The
Company used the approximate $3.5 billion in net cash proceeds from the sale of
the Eckerd drugstore operations, $260 million in net cash proceeds from the sale
of its shares of Renner, cash proceeds from the exercise of employee stock
options and existing cash and short-term investment balances, including free
cash flow generated in 2004, to fund the programs, which consisted of common
stock repurchases, debt reduction and redemption, through conversion to common
stock, of all outstanding shares of the Company's Series B ESOP Convertible
Preferred Stock.
Common Stock Repurchases
No common stock was repurchased during the first quarter of 2006 due to the
planned announcements of important strategic initiatives, primarily the Sephora
initiative, accelerated store growth and increased earnings per share growth
targets, which were announced in mid-April. Management continues to expect to
complete the current $750 million program by the end of 2006.
The Company's 2005 and 2004 common stock repurchase programs totaled $4.15
billion and were completed in the fourth quarter of 2005. In total, 94.3 million
shares were repurchased under these programs, which represented nearly 30% of
the common share equivalents outstanding at the time of the Eckerd sale in 2004
when the capital structure repositioning program was initiated, including shares
issuable under convertible debt securities.
Common stock was retired on the same day it was repurchased, with the excess of
the purchase price over the par value being allocated between Reinvested
Earnings and Additional Paid-In Capital.
Debt Reduction
The Company's debt reduction programs, which were completed by the end of the
second quarter of 2005, consisted of approximately $2.14 billion of debt
retirements.
The Company's debt retirements included $250 million of open-market debt
repurchases in the first half of 2005, the payment of $193 million of long-term
debt at the scheduled maturity date in May 2005 and 2004 transactions that
consisted of $650 million of debt converted to common stock, $822 million of
-8-
cash payments and the termination of the $221 million Eckerd securitized
receivables program. The Company incurred pre-tax charges of $18 million in 2005
related to these early debt retirements ($13 million and $5 million
respectively, in the first and second quarters). During 2004, the Company
incurred total pre-tax charges of $47 million related to early debt retirements.
Common Stock Outstanding
During the first quarter of 2006, the number of outstanding shares of common
stock changed as follows:
Outstanding
(in millions) Common Shares
------------------------
Balance as of January 28, 2006 233
Exercise of stock options 2
------------------------
Balance as of April 29, 2006 235
========================
4) Earnings per Share
------------------
Basic earnings per share (EPS) is computed by dividing net income by the
weighted-average number of shares of common stock outstanding for the period.
Except when 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, during the period, could have been issued under outstanding
stock options.
Income from continuing operations and shares used to compute EPS from continuing
operations, basic and diluted, are reconciled below:
(in millions, except EPS) 13 weeks ended
--------------------------
Apr. 29, Apr. 30,
2006 2005
------------ -----------
Earnings:
Income from continuing operations, basic and
diluted $ 213 $ 171
============ ===========
Shares:
Average common shares outstanding (basic shares) 234 271
Adjustment for assumed dilution:
Stock options and restricted stock units 2 3
------------ -----------
Average shares assuming dilution (diluted shares) 236 274
============ ===========
EPS from continuing operations:
Basic $ 0.91 $0.63
Diluted $ 0.90 $0.62
The following potential shares of common stock were excluded from the EPS
calculation because their effect would be anti-dilutive:
(shares in millions) 13 weeks ended
---------------------------
Apr. 29, Apr. 30,
2006 2005
------------- ------------
Stock options 1 2
============= ============
-9-
5) Cash and Short-Term Investments
-------------------------------
($ in millions) Apr. 29, Apr. 30, Jan. 28,
2006 2005 2006
------------------- ----------------- ---------------
Cash $ 123 $ 139 $ 109
Short-term investments 2,668 3,976 2,907
------------------- ----------------- ---------------
Total cash and short-term investments $ 2,791 $4,115 $3,016
=================== ================= ===============
Restricted Short-Term Investment Balances
Short-term investments include restricted balances of $56 million, $64 million
and $65 million as of April 29, 2006, April 30, 2005 and January 28, 2006,
respectively. Restricted balances are pledged as collateral for a portion of
casualty insurance program liabilities.
6) Supplemental Cash Flow Information
-----------------------------------
($ in millions) 13 weeks ended
----------------------------------------
Apr. 29, 2006 Apr. 30, 2005
----------------- -----------------
Total interest paid $ 70 $ 112
Less: interest paid attributable to discontinued operations - 4
----------------- -----------------
Interest paid by continuing operations $ 70 $ 108(1)
================= =================
Interest received by continuing operations $ 33 $ 21
================= =================
Total income taxes paid $ 105 $ 17
Less: income taxes paid attributable to discontinued
operations 6 3
----------------- -----------------
Income taxes paid by continuing operations $ 99 $ 14
================= =================
(1) Includes cash paid for bond premiums and commissions of $8 million.
7) Credit Agreement
-----------------
On April 7, 2005, the Company, JCP and J. C. Penney Purchasing Corporation
entered into a five-year $1.2 billion unsecured revolving credit facility (2005
Credit Facility) with a syndicate of lenders with JPMorgan Chase Bank, N.A., as
administrative agent.
The 2005 Credit Facility includes a requirement that the Company maintain, as of
the last day of each fiscal quarter, a maximum ratio of Funded Indebtedness to
Consolidated EBITDA (Leverage Ratio, as defined in the 2005 Credit Facility), as
measured on a trailing four-quarters basis, of no more than 3.0 to 1.0.
Additionally, the 2005 Credit Facility requires that the Company maintain, for
each period of four consecutive fiscal quarters, a minimum ratio of Consolidated
EBITDA plus Consolidated Rent Expense to Consolidated Interest Expense plus
Consolidated Rent Expense (Fixed Charge Coverage Ratio, as defined in the 2005
Credit Facility) of at least 3.2 to 1.0. As of April 29, 2006, the Company's
Leverage Ratio was 1.7 to 1.0, and its Fixed Charge Coverage Ratio was 5.9 to
1.0, both in compliance with the requirements.
No borrowings, other than the issuance of standby and import letters of credit,
which totaled $132 million as of the end of the first quarter of 2006, have been
made under the 2005 Credit Facility.
-10-
8) Comprehensive Income and Accumulated Other Comprehensive Income/(Loss)
----------------------------------------------------------------------
Comprehensive Income
($ in millions) 13 weeks ended
-------------------------------
Apr. 29, Apr. 30,
2006 2005
-------------- --------------
Net income $ 210 $ 172
Other comprehensive (loss)/income:
Net unrealized (losses)/gains in
real estate investment trusts (6) 12
Other comprehensive (loss)
from discontinued operations - (1)
-------------- --------------
(6) 11
-------------- --------------
Total comprehensive income $ 204 $ 183
============== ==============
Accumulated Other Comprehensive Income/(Loss)
($ in millions) Apr. 29, Apr. 30, Jan. 28,
2006 2005 2006
----------------- ----------------- ---------------
Net unrealized gains in real estate investment trusts(1) $ 112 $ 86 $ 118
Nonqualified retirement plan minimum liability
adjustment(2) (102) (102) (102)
Other comprehensive (loss) from discontinued operations - (105)(3) -
----------------- ----------------- ---------------
Accumulated other comprehensive income/(loss) $ 10 $ (121) $ 16
================= ================= ===============
(1) Shown net of a deferred tax liability of $60 million, $47 million and $64
million as of April 29, 2006, April 30, 2005 and January 28, 2006, respectively.
(2) Shown net of a deferred tax asset of $65 million, $66 million and $65
million as of April 29, 2006, April 30, 2005 and January 28, 2006, respectively.
(3) Represents foreign currency translation adjustments related to Renner. A
deferred tax asset was not established due to the historical reinvestment of
earnings in the Company's Brazilian subsidiary.
9) Stock-Based Compensation
-------------------------
In May 2005, the Company's stockholders approved the J. C. Penney Company, Inc.
2005 Equity Compensation Plan (2005 Plan), which reserved an aggregate of 17.2
million shares of common stock for issuance to associates and non-employee
directors. The 2005 Plan replaced the Company's 2001 Equity Compensation Plan
(2001 Plan), and since June 1, 2005, all grants are made under the 2005 Plan.
The 2005 Plan provides for grants to associates of options to purchase the
Company's common stock, restricted and non-restricted stock awards (shares and
units) and stock appreciation rights. The 2005 Plan also provides for grants of
restricted and non-restricted stock awards (shares and units) and stock options
to non-employee members of the Board. As of April 29, 2006, 15.1 million shares
of stock were available for future grants.
Options are granted and priced according to a pre-defined calendar for incentive
compensation purposes. Stock options and awards to associates typically vest
over periods ranging from one to three years. The number of option shares is
fixed at the grant date, and the exercise price of stock options is set at the
market value of the Company's common stock on the date of grant. The 2005 Plan
does not permit awarding stock options below grant-date market value. Options
have a maximum term of 10 years. Over
-11-
the past three years, the Company's annual stock option grants have averaged
about 1.1% of total outstanding stock. The Company issues new shares upon the
exercise of stock options.
The cost charged against income for all stock-based compensation was $7 million
and $22 million for the quarters ended April 29, 2006 and April 30, 2005,
respectively. The total income tax benefit recognized in the Consolidated
Statements of Operations for stock-based compensation arrangements was $3
million and $8 million for the first quarters of 2006 and 2005, respectively.
Compensation cost related to stock options for the first quarter of 2006 and
2005 was $5 million and $19 million ($3 million and $12 million after tax),
respectively. Stock option expense for the first quarter 2005 reflected the
early adoption of SFAS No. 123R.
Stock Options
On March 22, 2006, the Company granted approximately 1.5 million stock options
to associates at an option price of $60.50. As of April 29, 2006, options to
purchase 10.3 million shares of common stock were outstanding. If all options
were exercised, common stock outstanding would increase by 4.4%. Additional
information regarding options outstanding as of April 29, 2006 follows:
(Shares in thousands; price is weighted-average exercise price)
Exercisable Unexercisable Total Outstanding
Shares % Price Shares % Price Shares % Price
------------------------------ ----------------------------- ---------------------------
In-the-money 5,078 86% $ 31 4,369 100% $ 48 9,447 92% $ 39
Out-of-the-money(1) 858 14% 71 - 0% - 858 8% 71
------------------- --------------------- ------------------
Total options outstanding 5,936 100% $ 37 4,369 100% $ 48 10,305 100% $ 42
============================== ============================= ===========================
(1) Out of the money options are those with an exercise price equal to or above
the closing price of $65.46 at the end of the first quarter of 2006.
As of April 29, 2006, unrecognized or unearned compensation expense for stock
options, net of estimated forfeitures, was $41 million, which will be recognized
as expense over the remaining vesting period, which has a weighted-average term
of approximately 1.3 years.
Stock Awards
The 2005 Plan also provides for grants of restricted and non-restricted stock
awards (shares and units) to associates and non-employee members of the Board.
Associates
On March 22, 2006, the Company granted approximately 400,000 performance-based
restricted stock unit awards to associates. The performance unit grant is a
target award with a payout matrix ranging from 0% to 200% based on 2006 earnings
per share (defined as per common share income from continuing operations,
excluding any unusual and/or extraordinary items as determined by the Human
Resources and Compensation Committee of the Board). For an associate to receive
100% of the target award, the Company must generate 2006 earnings per share of
$4.26. In addition to the performance requirement, the award includes a
time-based vesting requirement, under which one-third of the award vests on each
of the first three anniversaries of the grant date provided that the associate
remains continuously employed with the Company during that time. Upon vesting,
the performance units are paid out in shares of JCPenney common stock.
As of April 29, 2006, there were 800,000 nonvested shares and units outstanding.
Related to these associate stock awards, there was $36 million of compensation
cost not yet recognized or earned. That cost is expected to be recognized over
the remaining vesting period, which has a weighted-average term of approximately
2.8 years.
-12-
Non-Employee Members of the Board
Restricted stock awards (shares and units) for non-employee members of the Board
are expensed when granted since they vest upon qualifying termination of service
in accordance with the grant. Shares or units arising from these awards are not
transferable until a director terminates service. No such awards were granted
during the first quarters of 2006 or 2005.
10) Retirement Benefit Plans
-------------------------
Net Periodic Benefit Cost/(Credit)
The components of net periodic benefit cost/(credit) for the qualified and
nonqualified pension plans and the postretirement plans for the 13 weeks ended
April 29, 2006 and April 30, 2005 are as follows:
Pension Plans
-------------------------------------------------------
Supplemental Postretirement
Qualified (Nonqualified) Plans
------------------------ ------------------------ ------------------------
($ in millions) 13 weeks ended 13 weeks ended 13 weeks ended
------------------------ ------------------------ ------------------------
Apr. 29, Apr. 30, Apr. 29, Apr. 30, Apr. 29, Apr. 30,
2006 2005 2006 2005 2006 2005
------------------------ ------------------------ ------------------------
Service cost $ 24 $ 20 $ - $ 1 $ - $ 1
Interest cost 53 45 6 5 1 2
Expected return on plan assets (92) (73) - - - -
Net amortization 19 23 5 3 (7) (5)
------------------------ ------------------------ ------------------------
Net periodic benefit cost/(credit) $ 4 $ 15 $ 11 $ 9 $ (6) $ (2)
======================== ======================== ========================
Employer Contributions
The Company did not make a discretionary contribution to its qualified pension
plan in 2005 due to the plan's well-funded status and Internal Revenue Service
rules limiting tax deductible contributions. In 2006, the Company does not
expect to be required to make a contribution to its qualified pension plan under
the Employee Retirement Income Security Act of 1974. Although no discretionary
contributions have been made to the qualified pension plan during the first
three months of 2006, the Company has factored into its plan a discretionary
contribution later in 2006, which will depend on market conditions, the funded
position of the pension plan and whether any legislative developments allow such
a contribution to be tax deductible.
Postretirement Medical Benefits
Effective June 7, 2005, the Company amended its medical plan to reduce the
Company-provided subsidy to post-age 65 retirees by 45% beginning January 1,
2006, and then fully eliminate the subsidy after December 31, 2006. This change
resulted in an incremental credit of approximately $6.5 million in fiscal 2005
and is expected to result in an additional $8 million incremental credit in
fiscal 2006 to postretirement medical plan expense, which is a component of
selling, general and administrative expenses.
-13-
Retirement Benefit Plan Changes
The Company provides retirement and other postretirement benefits to
substantially all employees (associates). Retirement benefits are an important
part of the Company's total compensation and benefits program designed to
attract and retain qualified and talented associates. The Company's retirement
benefit plans consist of a non-contributory qualified defined benefit pension
plan (pension plan), non-contributory supplemental retirement and deferred
compensation plans for certain management associates, a 1997 voluntary early
retirement program, a contributory medical and dental plan and a 401(k) and
employee stock ownership plan. These plans are discussed in more detail in the
Company's 2005 10-K. Associates hired or rehired on or after January 1, 2002 are
not eligible for retiree medical or dental coverage.
Effective January 1, 2007, the Company is implementing certain changes to its
retirement benefits. With respect to the 401(k) plan, all associates will be
immediately eligible to participate in the plan and all eligible associates who
have completed one year, and at least 1,000 hours, of service will be offered a
fixed Company matching contribution of 50 cents on each dollar contributed up to
6% of pay. The Company may make an additional discretionary matching
contribution each fiscal year end. This fixed plus discretionary match will
replace the current Company contribution of an amount equal to 4.5% of available
profits, plus discretionary contributions. The vesting period for Company
matching contributions under the 401(k) plan will be changed to full vesting
after three years from the current five-year pro rata vesting.
New associates hired on or after January 1, 2007 will not participate in the
Company's pension plan but will be eligible for a new retirement account. This
account will be a component of the defined contribution 401(k) plan that will
receive a Company contribution equal to 2% of participants' annual pay after one
year of service and will be fully vested after five years. Associates hired on
or prior to December 31, 2006 will remain in the Company's pension plan.
11) Real Estate and Other (Income)/Expense
---------------------------------------
($ in millions) 13 weeks ended
-----------------------------
Apr. 29, Apr. 30,
2006 2005
-------------- -------------
Real estate activities $ (8) $ (9)
Net gains from sale of real estate (3) (14)
Asset impairments, PVOL and other unit
closing costs - 1
Other (2) -
-------------- -------------
Total $ (13) $ (22)
============== =============
Real estate activities consist primarily of ongoing income from the Company's
real estate subsidiaries. In addition, net gains were recorded from the sale of
facilities and real estate that are no longer used in Company operations. For
the first quarter of 2005, the gain from the sale of real estate was primarily
from the sale of a vacant merchandise processing facility that was made obsolete
by the centralized network of store distribution centers put in place by
mid-2003.
-14-
12) Guarantees
-----------
As of April 29, 2006, JCP had guarantees totaling $46 million, which are
described in detail in the 2005 10-K. These guarantees consist of: $11 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 $15 million
for certain personal property leases assumed by the purchasers of Eckerd, which
were previously reported as operating leases.
-15-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion, which presents the results of J. C. Penney Company,
Inc. and its subsidiaries (the Company or JCPenney), should be read in
conjunction with the Company's consolidated financial statements as of January
28, 2006, and for the year then ended, and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations, all
contained in the Company's Annual Report on Form 10-K for the year ended January
28, 2006 (the 2005 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. Unless otherwise indicated, all references to earnings per share
(EPS) are on a diluted basis and all references to years relate to fiscal years
rather than to calendar years.
Certain debt securities were issued by J. C. Penney Corporation, Inc. (JCP), the
wholly owned operating subsidiary of the Company. The 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 Company of certain of
JCP's outstanding debt securities is full and unconditional.
Key Items
----------
o Earnings per share from continuing operations increased 45% to $0.90 in the
first quarter of 2006 from $0.62 in last year's first quarter. On a dollar
basis, income from continuing operations increased nearly 25% to $213
million in the first quarter of 2006, compared to $171 million last year.
o Net income per share increased to $0.89 in the first quarter of 2006,
compared to $0.63 in the comparable 2005 period. Net income in the first
quarter of 2006 reflected an after-tax charge of $3 million, or $0.01 on a
per share basis, related to discontinued operations. Discontinued
operations added $1 million, or $0.01 per share, to net income in the first
quarter of 2005.
o Operating profit was $369 million, or 8.7% of sales, compared with $308
million, or 7.5% of sales, last year. This represents an increase of
approximately 20% on a dollar basis, or 120 basis points as a percent of
sales.
13 weeks ended
------------------------------------
($ in millions) Apr. 29, 2006 Apr. 30, 2005
---------------- ---------------
Gross margin $ 1,769 $ 1,694
Selling, general and administrative
(SG&A) expenses 1,400 1,386
---------------- ---------------
Operating profit(1) $ 369 $ 308
================ ===============
As a percent of sales 8.7% 7.5%
(1) Operating profit (gross margin less SG&A expenses), which is a non-GAAP
(generally accepted accounting principles) measure, is the key measurement
on which management evaluates the financial performance of the retail
operations. Operating profit excludes Net Interest Expense, Bond Premiums
and Unamortized Costs and Real Estate and Other. Real estate activities,
gains and losses on the sale of real estate properties, asset impairments,
other charges associated with closing store and catalog facilities and
other corporate charges are evaluated separately from operations and are
recorded in Real Estate and Other in the Consolidated Statements of
Operations.
-16-
o Comparable department store sales increased 1.3% for the first quarter of
2006, on top of a 2.8% increase in last year's first quarter. This
represented the twelfth consecutive quarter of comparable department store
sales gains. Direct (Internet/catalog) sales increased 3.9% for the first
quarter of 2006, with the Internet channel increasing approximately 22%. In
last year's first quarter, Direct sales increased 5.4%, with the Internet
channel increasing approximately 35%.
o In February 2006, the JCPenney Board of Directors (Board) authorized a new
$750 million common stock repurchase program, which will be funded with
2005 free cash flow and cash proceeds from stock option exercises. The
program is expected to be completed by the end of fiscal 2006. In addition,
the Board authorized a plan to increase the annual dividend from $0.50 per
share to $0.72 per share, a 44% increase, beginning with the May 1
quarterly dividend. On March 21, 2006, the Board declared a dividend of
$0.18 per share, which was paid on May 1, 2006.
o During the first quarter of 2006, the Company attained investment grade
credit rating status from both Standard & Poor's Ratings Services and
Moody's Investors Service, Inc., resulting in investment grade ratings from
all three credit rating agencies. On April 6, 2006, Standard & Poor's
raised the Company's credit rating to an investment grade rating of BBB-,
citing the Company's turnaround in the competitive department store sector.
On February 16, 2006, Moody's raised its corporate family debt rating, as
well as its credit rating on the Company's senior unsecured notes and
debentures and its $1.2 billion revolving credit facility, to an investment
grade rating of Baa3, citing the Company's continued strong liquidity,
healthy free cash flow generation and solid leverage and coverage metrics.
o In April 2006, the Company announced a joint initiative with Sephora
U.S.A., Inc. (Sephora), under which JCPenney will sell Sephora products in
its stores and through the Internet. Sephora products will be the exclusive
beauty offering at JCPenney, beginning in a limited number of stores in
fall 2006. The Sephora departments in JCPenney stores will feature top
brands from makeup, skincare, fragrance and accessory products carried in
Sephora's stores across the United States. In addition, Sephora will
exclusively service JCPenney customers' online beauty needs through a link
to www.sephora.com from www.jcp.com.
--------------- ------------
o Also in April 2006, the Company announced plans to accelerate its new store
growth. Beginning in 2007, the Company plans to open 50 new stores
annually, representing annual square footage growth of approximately 3%.
New stores will be primarily in the off-mall format. Combined with planned
new store openings for 2006, this would result in over 175 new stores by
2009.
Discontinued Operations
-------------------------
Discontinued operations reflected a charge of $0.01 per share in the first
quarter of 2006 related to management's ongoing review and true-up of Eckerd
reserves. For the first three months of 2005, discontinued operations added
$0.01 per share to net income related to operating income for Lojas Renner S.A.
(Renner), the Company's former Brazilian department store chain. The 2005 sale
of its shares of Renner is discussed below.
Lojas Renner S.A.
In July 2005, the Company's indirect wholly owned subsidiary, J. C. Penney
Brazil, Inc., closed on the sale of its shares of Renner, a Brazilian department
store chain, through a public stock offering registered in Brazil. The Company
received net cash proceeds of approximately $260 million from the sale of its
interest in Renner. Proceeds from the sale were used for common stock
repurchases, which are more fully discussed under Common Stock Repurchase and
Debt Reduction Programs on page 26. The sale resulted in a cumulative pre-tax
gain of $26 million and a loss of $7 million on an after-tax basis. For all
periods
-17-
presented, Renner's results of operations and financial position have been
reclassified and reflected as a discontinued operation.
Eckerd Drugstores
During the first quarter of 2006, the Company recorded a $3 million after-tax
charge relating to the sale of its Eckerd drugstore operations, primarily
related to taxes payable resulting from a state sales tax audit. Through the
first quarter of 2006, the cumulative loss on the Eckerd sale was $719 million
pre-tax, or $1,333 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.
The net cash proceeds of approximately $3.5 billion from the Eckerd sale, which
closed in the second quarter of 2004, were used for common stock repurchases and
debt reduction, which are more fully discussed under Common Stock Repurchase and
Debt Reduction Programs on page 26.
Upon closing on the sale of Eckerd on July 31, 2004, the Company established
reserves for estimated transaction costs and post-closing adjustments. Certain
of these reserves involved significant judgment and actual costs incurred over
time could vary from these estimates. The more significant remaining estimates
relate to the costs to exit the Colorado and New Mexico markets, assumption of
the Eckerd Pension Plan and various post-employment benefit obligations and
environmental indemnifications. Management continues to review and update the
remaining reserves on a quarterly basis and believes that the overall reserves,
as adjusted, are adequate at the end of the first quarter of 2006 and consistent
with original estimates. Cash payments for the Eckerd-related reserves are
included in the Company's Consolidated Statements of Cash Flows as Cash Paid for
Discontinued Operations, with tax payments included in operating cash flows and
all other payments, if applicable, included in investing cash flows.
-18-
Results of Operations
---------------------
The following discussion and analysis, consistent with all other financial data
throughout this report, focuses on the results of operations and financial
condition from the Company's continuing operations.
($ in millions, except EPS) 13 weeks ended
-------------------------------
Apr. 29, Apr. 30,
2006 2005
-------------- ---------------
Retail sales, net $ 4,220 $ 4,118
-------------- ---------------
Gross margin 1,769 1,694
SG&A expenses 1,400 1,386
-------------- ---------------
Operating profit(1) 369 308
Net interest expense 34 49
Bond premiums and unamortized costs - 13
Real estate and other (income) (13) (22)
-------------- ---------------
Income from continuing operations
before income taxes 348 268
Income tax expense 135 97
-------------- ---------------
Income from continuing operations $ 213 $ 171
============== ===============
Diluted EPS from continuing operations $ 0.90 $ 0.62
Ratios as a percent of sales:
Gross margin 41.9% 41.1%
SG&A expenses 33.2% 33.6%
Operating profit(1) 8.7% 7.5%
Depreciation and amortization included
in operating profit $ 88 $ 87
(1) See definition of operating profit on page 16.
The Company continued to improve its profitability during the first quarter of
2006 as reflected in income from continuing operations of $213 million, or $0.90
per share, compared to $171 million, or $0.62 per share, for the comparable 2005
period. The increase over 2005 reflects improved operating profit, resulting
from continued improvement in sales productivity, growth in gross margin and
leveraging of selling, general and administrative (SG&A) expenses, combined with
lower interest expense and bond premiums. Earnings per share for the first
quarter of 2006 also benefited from the reduction in average shares outstanding
compared to the prior year first quarter due to the Company's 2005 and 2004
common stock repurchase programs, which were completed in the fourth quarter of
2005. The Company currently expects 2006 second quarter and full year earnings
per share from continuing operations to be approximately $0.62 and $4.24 to
$4.34, respectively.
-19-
Retail Sales, Net
($ in millions)
13 weeks ended
------------------------------------
Apr. 29, Apr. 30,
2006 2005
------------------- --------------
Retail sales, net $ 4,220 $ 4,118
------------------- --------------
Sales percent increase:
Comparable department stores(1) 1.3% 2.8%
Total department stores 2.2% 3.4%
Direct (Internet/catalog) 3.9% 5.4%
(1) Comparable department store sales include sales of stores after having been
open for 12 full consecutive fiscal months. For the first quarter of 2006, the
five stores that were closed for an extended period from the effects of
Hurricanes Katrina and Rita are not included in the comparable store sales
calculation. As of April 29, 2006, all but one of these stores had reopened. New
and relocated stores, and the reopened stores impacted by the hurricanes, become
comparable on the first day of the 13th full fiscal month of operation.
Comparable department store sales increased 1.3% for the first quarter of 2006,
and total department store sales increased 2.2%. These first quarter increases
were on top of increases of 2.8% for comparable department store sales and 3.4%
for total department store sales for the first quarter of 2005. First quarter
2006 sales reflect good customer response to both fashion and basic merchandise
and the Company's key private brands continue to perform well. First quarter
sales reflect improvements in nearly all merchandise divisions, led by
children's apparel, family footwear and fine jewelry, but the Company
experienced some softness in women's apparel sales. Management has taken action
to keep women's apparel inventory fresh and remains focused on building key
brands and adding new brands, such as a.n.a(TM), a modern casual women's apparel
line, to provide customers with a meaningful assortment. In Fall 2006, the
Company plans to introduce East 5th, a line of traditional women's career wear.
From a regional perspective, for the first quarter of 2006, the strongest
performance was in the southeastern and western regions of the country.
Department store sales have continued to benefit from positive customer response
to the style, quality, selection and value offered in the Company's merchandise
assortments, compelling marketing programs and continued improvement in the
store shopping experience.
Direct sales, which offer customers multi-channel convenience and a broader
merchandise selection complementing that carried in the Company's department
stores, increased 3.9% in the first quarter of 2006, on top of a 5.4% increase
in last year's first quarter. Direct sales continue to reflect a focus on
targeted specialty media and the expanded assortments and convenience of the
Internet. The Direct channel represented approximately 16% of total net retail
sales in both the first quarters of 2006 and 2005. Consistent with customer
shopping patterns, the Company continually reviews its catalog page counts and
circulation to ensure that print catalogs remain productive, while planning for
a gradual shift toward a higher level of shopping via the Internet. The Internet
channel continues to experience strong sales growth, increasing approximately
22% in the current quarter, on top of an approximately 35% increase in last
year's first quarter. Internet sales represented approximately 40% of total
Direct sales for the first quarter of 2006, up from approximately 34% in last
year's first quarter.
As part of its 2005-2009 Long Range Plan, the Company has implemented lifestyle
merchandising that reflects its customers' style preferences - conservative,
traditional, modern and trendy - making JCPenney more relevant to an expanded
customer base. The Company will continue to enhance its strong private,
exclusive and national brands that develop customer loyalty by focusing its
merchandise more closely on each of the customer lifestyles. Additional
resources are being focused on the Company's branding efforts to ensure
consistency in product design, packaging, in-store presentation,
-20-
lifestyle marketing and point-of-sale support. The brands launched in early 2006
and in 2005 are the result of these merchandising initiatives.
In early 2006, the Company launched a number of new merchandise lines, including
Solitude(R) by Shaun Tomson, a California lifestyle-inspired men's apparel
brand, and Rule by Steve Madden(TM) in family footwear. The Company has also
introduced the Miss Bisou(R) clothing collection for juniors, an extension of
the Bisou Bisou(R) women's sportswear line, and Studio by the JCPenney Home
Collection(TM), a modern furniture collection. Also in 2006, the Company added
the Chris Madden(R) Hotel Collection, which features silk-blend comforters and
600 thread count sheets.
Management is pleased with customer response and sales results for the Company's
new merchandise launches as well as the performance of the expanded Chris Madden
offerings.
For the second quarter, both comparable store sales and Direct sales are
expected to increase low single digits.
Gross Margin
Gross margin improved 80 basis points as a percent of sales in this year's first
quarter to $1,769 million, compared to $1,694 million in the comparable 2005
period, reflecting continued strength in the performance of the Company's
private brands, better management of inventory flow and seasonal transition and
leverage in the centralized buying and merchandising process. The continued
development of the Company's planning and allocation systems has also supported
the margin improvements.
SG&A Expenses
SG&A expenses in this year's first quarter were $1,400 million, compared to
$1,386 million in last year's first quarter. Expenses continued to be well
leveraged, improving by 40 basis points as a percent of sales. First quarter
2006 SG&A reflected leveraging of salary costs and efficiencies in the Direct
channel, which were partially offset by higher marketing costs, including costs
related to the launch of the Company's new branding campaign in March.
Operating Profit
Operating profit for the first quarter of 2006 increased approximately 20% to
$369 million, or 8.7% of sales, compared to $308 million, or 7.5% of sales, for
the comparable period last year. Operating profit (gross margin less SG&A
expenses) is the key measurement on which management evaluates the financial
performance of the retail operations.
Net Interest Expense
Net interest expense was $34 million and $49 million for the first quarters of
2006 and 2005, respectively. Net interest expense consists primarily of interest
expense on long-term debt, net of interest income earned on cash and short-term
investments. Net interest expense in the first quarter of 2006 benefited from
higher short-term interest rates on cash and short-term investment balances, as
well as the reduction in long-term debt. This year's average long-term
borrowings for the first quarter were $447 million lower than last year's due to
progress made under the Company's debt reduction program. Total debt was reduced
by $2.14 billion under this program, which was initiated in 2004 and completed
by the end of the second quarter of 2005.
Bond Premiums and Unamortized Costs
No bond premiums, commissions or unamortized costs were incurred during the
first quarter of 2006. During the first quarter of 2005, the Company incurred
$13 million of bond premiums, commissions and unamortized costs related to the
purchase of debt in the open market under its debt reduction program, which is
discussed on page 26.
-21-
Real Estate and Other (Income)
Real Estate and Other (Income) consists of ongoing real estate activities, gains
and losses on the sale of real estate properties, asset impairments, other
charges associated with closing store and catalog facilities and other
non-operating items. Real Estate and Other for the first quarter of 2006
resulted in a credit of $13 million, which consisted of an $8 million credit for
ongoing real estate operations, $3 million of gains on the sale of closed units
and a $2 million credit related to other corporate items. Real Estate and Other
for the first quarter of 2005 resulted in a credit of $22 million, which
consisted of a $9 million credit for real estate operations, $14 million of
gains on the sale of closed units, primarily a vacant merchandise processing
facility, and $1 million of costs related to asset impairments, the present
value of operating lease obligations (PVOL) and other costs of closed stores.
Income Taxes
The Company's effective income tax rate for continuing operations was 38.8% for
the first quarter of 2006, compared with 36.2% for the first quarter of 2005.
The rate increase is primarily due to a higher state income tax rate from the
reversal of the state tax net operating loss valuation allowance in the fourth
quarter of 2005, which accelerated recognition of state tax benefits into 2005.
In addition, the rate increase reflects the December 31, 2005 expiration of the
Work Opportunity Tax Credit, a federal tax credit that may be extended by
Congress later in 2006. Management expects a lower tax rate in the second
quarter, including the impact of expected tax credits, resulting in a planned
effective tax rate for the full year 2006 of approximately 37%.
Merchandise Inventory
----------------------
Merchandise inventory was $3,355 million at April 29, 2006, compared to $3,258
million at April 30, 2005 and $3,210 million at January 28, 2006. With an
increase of 3.0% compared to last year, inventory at the end of the first
quarter of 2006 was in line with plan, reflecting increases associated with new
stores and the growth of private brands, was well managed and reflected current
seasonal merchandise with a good balance between fashion and basics. With new
systems and its network of store distribution centers, the Company has continued
to enhance its ability to allocate and flow merchandise to stores in-season by
recognizing sales trends earlier and adjusting receipts, replenishing individual
stores based on rates of sale and consistently providing high in-stock levels in
basics and advertised items. This continued improvement of inventory management
has helped to drive more profitable sales. With the elimination of global trade
quotas on apparel and textiles, the Company expects to concentrate production of
private brand merchandise in fewer countries and with fewer manufacturers. On an
ongoing basis, the Company develops contingency plans to provide for alternate
sources for product in order to ensure uninterrupted access to merchandise. Cost
reductions will allow the Company to invest in higher quality merchandise and
thereby improve the value proposition to the Company's target customer.
Financial Goals
----------------
The Company's financial strategy will continue to focus on opportunities to
deliver value to stockholders, strengthen the Company's financial position and
improve its credit profile. In order for the Company to achieve its objective of
becoming a leader in performance and execution, long-range planning targets have
been established related to operating financial goals, key financial metrics,
cash flow, credit ratings, dividends and earnings per share growth. As announced
at the Company's April 2006 Analyst Meeting, the Company's long range plan
includes certain financial targets, strategic store growth and private brand
initiatives, and programs such as the $750 million common stock repurchase
program for 2006 and a competitive dividend, including the recently announced
44% increase in annual dividends from $0.50 per share to $0.72 per share.
Financial targets include comparable department store sales increases in the low
single digits, Direct sales increases in the low to mid single digits, gross
-22-
margin approximating 40% of sales, SG&A expenses under 30% of sales, an
operating profit margin of 10% to 10.5% of sales by 2009 and annual earnings per
share growth of approximately 16% over the 2006 to 2009 period. The Company's
progress toward achieving its operating financial goals could be impacted by
various risks, which are discussed in the Company's 2005 10-K and in Part II,
Item 1A, Risk Factors, on page 30.
Liquidity and Capital Resources
--------------------------------
The Company ended the first quarter with approximately $2.8 billion in cash and
short-term investments, which represented approximately 80% of the $3.5 billion
of outstanding long-term debt, including current maturities. Cash and short-term
investments included restricted short-term investment balances of $56 million as
of April 29, 2006, which are pledged as collateral for a portion of casualty
insurance program liabilities. During the remainder of 2006, the Company plans
to use $750 million of the balance of cash and short-term investments to
complete the new common stock repurchase program that was approved by the Board
in February 2006. The Company's next scheduled long-term debt maturities are in
2007 and approximate $425 million.
The Company, JCP and J. C. Penney Purchasing Corporation are parties to a
five-year $1.2 billion unsecured revolving credit facility (2005 Credit
Facility) with a syndicate of lenders with JPMorgan Chase Bank, N.A., as
administrative agent. The 2005 Credit Facility includes a requirement that the
Company maintain, as of the last day of each fiscal quarter, a maximum ratio of
Funded Indebtedness to Consolidated EBITDA (Leverage Ratio, as defined in the
2005 Credit Facility), as measured on a trailing four-quarters basis, of no more
than 3.0 to 1.0. Additionally, the 2005 Credit Facility requires that the
Company maintain, for each period of four consecutive fiscal quarters, a minimum
ratio of Consolidated EBITDA plus Consolidated Rent Expense to Consolidated
Interest Expense plus Consolidated Rent Expense (Fixed Charge Coverage Ratio, as
defined in the 2005 Credit Facility) of at least 3.2 to 1.0. As of April 29,
2006, the Company's Leverage Ratio was 1.7 to 1.0, and its Fixed Charge Coverage
Ratio was 5.9 to 1.0, both in compliance with the requirements.
Cash Flows
The following is a summary of the Company's cash flows from operating, investing
and financing activities:
($ in millions)
13 weeks ended
-----------------------------
Apr. 29, Apr. 30,
2006 2005
------------ ------------
Net cash (used in)/provided by:
Operating activities $ (119) $ 34
Investing activities (121) (81)
Financing activities 22 (416)
Cash (paid) for discontinued operations(1) (7) (71)
------------ ------------
Net (decrease) in cash and short-term investments $ (225) $(534)
============ ============
(1) See the Company's Consolidated Statements of Cash Flows on page 4 for a
breakdown of cash (paid) for discontinued operations among operating, investing
and financing activities.
-23-
Cash Flow from Operating Activities
While improved operating performance in the first quarter of 2006 positively
impacted cash flows from operating activities, operating cash flows were also
impacted by higher payments related to income taxes, as well as higher cash
contributions to the Company's 401(k) savings plan.
Cash Flow from Investing Activities
Capital expenditures were $126 million for the first quarter of 2006, compared
with $97 million for the first quarter of 2005. Capital spending was principally
for new stores, store renewals and modernizations and new point-of-sale
technology. During the first quarter of 2006, the Company opened two new stores
and relocated one store. The majority of new store openings for 2006 are planned
for the third quarter. To date, the Company has implemented the new
point-of-sale technology in approximately 70% of its stores and expects this
technology to be in all stores by the end of the second quarter of 2006.
Management continues to expect total capital expenditures for the full year to
be in the area of $800 million.
Proceeds from the sale of closed units were $5 million for the first three
months of 2006, compared with $16 million for the first three months of 2005.
Cash Flow from Financing Activities
For the first quarter of 2006, cash payments for long-term debt, including
capital leases, totaled $3 million. During the first quarter of 2005, such
payments totaled $138 million and also included premiums and commissions paid by
the Company related to its debt reduction program, which is discussed on page
26.
No common stock repurchases were made during the first quarter of 2006. During
the first quarter of 2005, the Company repurchased 7.7 million shares of common
stock for $360 million, $93 million of which was settled after the end of the
quarter. In addition, $51 million of cash was paid during the first quarter of
2005 for settlement of 2004 share repurchases. Common stock is retired on the
same day it is repurchased, and the related cash settlements are completed on
the third business day following the repurchase.
Net proceeds from the exercise of stock options were $54 million and $75 million
for the first quarters of 2006 and 2005, respectively.
A quarterly dividend of $0.125 per share, or $29 million in total, was paid on
the Company's outstanding common stock on February 1, 2006 to stockholders of
record on January 10, 2006. In February 2006, the Board authorized a plan to
increase the quarterly common stock dividend to $0.18 per share ($0.72 per share
on an annual basis), beginning with the May 1, 2006 dividend. On March 21, 2006,
the Board declared a quarterly dividend of $0.18 per share, which was paid on
May 1, 2006 to stockholders of record on April 10, 2006. Dividends are paid
when, as and if declared by the Board.
For the remainder of 2006, management believes that cash flow generated from
operations, combined with existing cash and short-term investments, will be
adequate to execute the $750 million common stock repurchase program 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 2006. 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. The Company's cash flows may be impacted by many factors, including the
competitive conditions in the retail industry and the effects of the current
economic environment and consumer confidence. Based on the nature of the
Company's business, management considers the above factors to be normal business
risks.
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Based on improvements in the capital structure and in the Company's related
liquidity and coverage metrics, as well as the Company's improved operating
performance and generation of free cash flow, both Standard & Poor's Ratings
Services and Moody's Investors Service, Inc. raised the Company's credit ratings
to investment grade during the first quarter of 2006. In April 2006, Standard &
Poor's raised its credit rating on the Company's long-term corporate credit and
senior unsecured debt from BB+ to an investment grade rating of BBB-, and in
February 2006, Moody's raised its corporate family debt rating, as well as its
senior unsecured credit rating for the Company, from Ba1 to an investment grade
rating of Baa3. In October 2005, Fitch Ratings raised its credit rating on the
Company's senior unsecured notes and debentures and its $1.2 billion 2005 Credit
Facility from BB+ to BBB-, an investment grade credit rating. As of the end of
the first quarter of 2006, all three credit rating agencies have an outlook of
"Stable" on the Company's credit ratings.
Additional liquidity strengths include the 2005 Credit Facility discussed
previously. No borrowings, other than the issuance of trade and standby letters
of credit, which totaled $132 million as of the end of the first quarter of
2006, have been, or are expected to be, made under this facility.
Free Cash Flow from Continuing Operations
($ in millions) 13 weeks ended
------------------------------------
Apr. 29, Apr. 30,
2006 2005
---------------- ----------------
Net cash (used in)/provided by operating activities (GAAP) $ (119) $ 34
Less:
Capital expenditures (126) (97)
Dividends paid (29) (35)
Plus:
Proceeds from sale of assets 5 16
---------------- ----------------
Free cash flow from continuing operations (non-GAAP measure) $ (269) $ (82)
================ ================
In addition to cash flow from operating activities, management evaluates free
cash flow from continuing operations, an important financial measure that is
widely used by investors, the rating agencies and banks. Free cash flow from
continuing operations is defined as cash (used in)/provided by operating
activities less dividends and capital expenditures, net of proceeds from the
sale of assets. The Company's calculation of free cash flow may differ from that
used by other companies and therefore, comparability may be limited. While free
cash flow is a non-GAAP financial measure, it is derived from components of the
Company's consolidated GAAP cash flow statement.
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. Positive free
cash flow generated by a company indicates the amount of cash available for
reinvestment in the business, or cash that can be returned to investors through
increased dividends, stock repurchase programs, debt retirements or a
combination of these. Conversely, negative free cash flow indicates the amount
of cash that must be raised from investors through new debt or equity issues,
reduction in available cash balances or a combination of these. Based on the
seasonality of the Company's business, cumulative free cash flow is generally
negative the first three quarters of the year and becomes positive in the fourth
quarter.
For the first quarter of 2006, free cash flow from continuing operations was in
line with management's expectations, reflecting a deficit of $269 million,
compared to a deficit of $82 million for the comparable 2005 period. The
decrease in free cash flow was due to higher payments related to income taxes,
as well as higher cash contributions to the Company's 401(k) savings plan,
combined with the planned increase in
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capital expenditures. The Company continues to expect to generate approximately
$200 million of positive free cash flow for the full year of 2006.
Common Stock Repurchase and Debt Reduction Programs
----------------------------------------------------
In February 2006, the Board authorized a new program of common stock repurchases
of $750 million, which will be funded with 2005 free cash flow and cash proceeds
from stock option exercises. By the end of 2005, the Company had completed its
2005 and 2004 equity and debt reduction programs, which focused on enhancing
stockholder value, strengthening the Company's capital structure and improving
its credit rating profile. The Company used the $3.5 billion in net cash
proceeds from the sale of the Eckerd drugstore operations, $260 million in net
cash proceeds from the sale of its shares of Renner, cash proceeds and tax
benefits from the exercise of employee stock options and existing cash and
short-term investment balances to fund the programs, which consisted of common
stock repurchases, debt reduction and redemption, through conversion to common
stock, of all outstanding shares of the Company's Series B ESOP Convertible
Preferred Stock.
Common Stock Repurchases
No common stock was repurchased during the first quarter of 2006 due to the
planned announcements of important strategic initiatives, primarily the Sephora
initiative, accelerated store growth and increased EPS growth targets, which
were announced in mid-April. Management continues to expect to complete the
current $750 million program by the end of 2006.
Under the Company's 2005 and 2004 common stock repurchase programs, which were
completed in the fourth quarter of 2005, a total of 94.3 million shares were
repurchased at a cost of $4.15 billion.
Debt Reduction
The Company's debt reduction programs, which were completed by the end of the
second quarter of 2005, consisted of approximately $2.14 billion of debt
reductions. The Company incurred pre-tax charges of $13 million in the first
quarter of 2005 related to these early debt retirements.
Common Stock Outstanding
During the first quarter of 2006, the number of outstanding shares of common
stock changed as follows:
Outstanding
(in millions) Common Shares
------------------------
Balance as of January 28, 2006 233
Exercise of stock options 2
------------------------
Balance as of April 29, 2006 235
========================
Accounting for Stock-Based Compensation
----------------------------------------
The Company has a stock-based compensation plan that provides for grants to
associates of stock awards (restricted or unrestricted stock or units), stock
appreciation rights or options to purchase the Company's common stock. Options
are granted and priced according to a pre-defined calendar for incentive
compensation purposes. Effective January 30, 2005, the Company adopted Statement
of Financial Accounting Standards No. 123 (revised), "Share-Based Payment" (SFAS
No. 123R), which requires the use of the fair value method of accounting for all
stock-based compensation, including stock options. The statement was adopted
using the modified prospective method of application. Under this method, in
addition to reflecting compensation expense for new share-based awards, expense
is also recognized to
-26-
reflect the remaining vesting period of awards that had been included in
pro-forma disclosures in prior periods. The Company did not adjust prior year
financial statements under the optional modified retrospective method of
application.
Prior to fiscal year 2005, the Company used the Black-Scholes option pricing
model to estimate the grant date fair value of stock option awards. For grants
subsequent to the adoption of SFAS No. 123R, the Company estimates the fair
value of stock option awards on the date of grant using a binomial lattice model
developed by outside consultants who worked with the Company in the
implementation of SFAS No. 123R. The Company believes that the binomial lattice
model is a more accurate model for valuing employee stock options since it
better reflects the impact of stock price changes on option exercise behavior.
The cost charged against income for all stock-based compensation was $7 million
and $22 million for the first quarters of 2006 and 2005, respectively, or $4
million and $14 million after tax. Of these amounts, compensation expense
attributable to stock options was $5 million and $19 million, respectively ($3
million and $12 million after tax) for the first quarters of 2006 and 2005.
As of April 29, 2006, there was $41 million and $36 million of compensation cost
not yet recognized or earned related to stock options and associate restricted
stock (share and unit) awards, respectively. These expenses are expected to be
recognized as earned over weighted-average periods of 1.3 years and 2.8 years,
respectively.
Retirement Benefit Plans
------------------------
As part of the Company's long range plan, a project was initiated to review the
Company's employee benefit programs, including the pension and savings plans.
The overarching goal was to provide competitive benefits that are cost effective
for both the Company and its associates, while achieving one of the key
strategies of making JCPenney a great place to work. As a result of this review,
in April 2006, the Company's Board of Directors approved several benefit plan
changes. These changes include a fixed Company matching contribution to the
Company's 401(k) defined contribution plan replacing the current profit-sharing
based matching contribution. In addition, the Company will establish a new
retirement account, within the savings plan, for new associates in lieu of
participation in the Company's existing defined benefit pension plan (pension
plan), which will remain in place for associates hired on or prior to December
31, 2006. As reported in the Company's 2005 10-K, the Company's existing pension
plan remains well funded with the fair value of assets exceeding the projected
benefit obligation by $518 million as of year-end 2005. While well funded, the
Company's pension plan is subject to the impact of market and interest rate
volatility. These benefit plan changes were communicated to associates in May
2006, and will be effective beginning in 2007. See further discussion in Note
10.
These benefit plan changes are not expected to have an impact on fiscal year
2006 retirement benefit plan expense. Going forward, they are also not expected
to have a material impact on the Company's financial condition, liquidity, cash
flow or results of operations.
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.
-27-
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 assets; 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. For a further discussion of the judgments management
makes in applying its accounting policies, see Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, in the 2005 10-K.
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 2006, the Audit Committee of the Board approved
estimated fees for the remainder of 2006 related to the performance of both
audit, including Sarbanes-Oxley Section 404 attestation work, as well as
allowable non-audit services by the Company's external auditors, KPMG LLP.
Seasonality
------------
The results of operations and cash flows for the 13 weeks ended April 29, 2006
are not necessarily indicative of the results for the entire year. The Company's
annual earnings depend to a great extent on the results of operations for the
last quarter of its fiscal year when a significant portion of the Company's
sales and profits are recorded.
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. The Company's market risks related to interest rates
at April 29, 2006 are similar to those disclosed in the 2005 10-K.
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 were
no changes in the Company's internal control over financial reporting during the
Company's first quarter ended April 29, 2006, 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, which reflect the Company's
current view of future events and financial performance.
-28-
The words expect, plan, anticipate, believe, intent, should, will and similar
expressions identify forward-looking statements. Any such forward-looking
statements are subject to 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, including the price and
availability of oil and natural gas, impact of changes in consumer credit
payment terms, changes in management, retail industry consolidations, acts of
terrorism or war and government activity. Please refer to the Company's 2005
Annual Report on Form 10-K and subsequent filings for a further discussion of
risks and uncertainties. The Company intends the forward-looking statements in
this Quarterly Report on Form 10-Q to speak only at the time of its release and
does not undertake to update or revise these forward-looking statements as more
information becomes available.
-29-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Gayle G. Pitts, et al v. J. C. Penney Direct Marketing Services, Inc., AEGON
--------------------------------------------------------------------------------
Direct Marketing Services, Inc., and J. C. Penney Life Insurance Company n/k/a
--------------------------------------------------------------------------------
Stonebridge Insurance Company, No. 01-03395-F, in the 214th Judicial District
--------------------------------------------------------------------------------
Court of Nueces County, Texas; and Appellant(s): Stonebridge Life Insurance
--------------------------------------------------------------------------------
Company f/k/a J. C. Penney Life Insurance Company, J. C. Penney Direct Marketing
--------------------------------------------------------------------------------
Services, Inc., and AEGON Direct Marketing Services, Inc. v. Gayle G. Pitts, et
--------------------------------------------------------------------------------
al, No. 13-05-131-CV, in the Court of Appeals for the Thirteenth District of
--------------------------------------------------------------------------------
Texas.
-------
This matter, which was previously reported in the 2005 Form 10-K for the fiscal
year ended January 28, 2006, is a class action lawsuit involving the sale of J.
C. Penney Life Insurance accidental death and dismemberment insurance over the
telephone.
In September 2002, the trial court certified the lawsuit as a national class
action. On July 15, 2004, the Court of Appeals for the Thirteenth District of
Texas reversed the certification order and remanded the case to the trial court.
Plaintiffs filed a second supplemental motion for Class Certification, this time
seeking a Texas class only. On January 31, 2005, the trial court granted the
motion, certifying a Texas class. Following appeal of the trial court order by
the defendants, on May 18, 2006, the Court of Appeals for the Thirteenth
District of Texas upheld the trial court's certification of a class of Texas
consumers who purchased the accidental death and dismemberment insurance
products between 1996 and the certification date. The defendants plan to appeal
the decision of the Court of Appeals to the Supreme Court of Texas.
Although it is too early to predict the outcome of this lawsuit, management is
of the opinion that it should not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Item 1A. Risk Factors.
In addition to the risk factors previously disclosed in Part I, Item 1A of the
Form 10-K for the fiscal year ended January 28, 2006, the Company has identified
the following new risk factor:
The failure to successfully execute the Company's new store growth strategy
could adversely impact the Company's future growth and profitability.
The Company's plans to accelerate the growth of new stores, primarily in the
off-mall format, depend in part on the availability of existing retail stores or
store sites on acceptable terms. The Company competes with other retailers and
businesses for suitable locations for its stores. Local land use and other
regulations may impact the Company's ability to find suitable locations. In
addition, increases in real estate, construction and development costs could
limit the Company's growth opportunities and adversely impact its return on
investment. The inability to execute the Company's new store growth strategy in
a manner that generates appropriate returns on investment could have an adverse
impact on the Company's future growth and profitability.
Except as otherwise specified herein, there have been no material changes to the
risk factors set forth under Part I, Item 1A of the 2005 Form 10-K.
-30-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Issuer Purchases of Securities
The Company did not repurchase any shares of its common stock during the
quarter ended April 29, 2006. In February 2006, the Board of Directors
approved a new common stock repurchase program of up to $750 million. This
program, which the Company announced on February 16, 2006, has no
expiration date but is expected to be completed by the end of fiscal year
2006.
Item 6. Exhibits.
Exhibit Nos.
------------
3.1 Restated Certificate of Incorporation of the Company as amended
May 19, 2006
3.2 Bylaws of the Company, as amended to May 19, 2006
10.1 J. C. Penney Corporation, Inc. Change in Control Plan
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated March 27, 2006)
10.2 Form of Termination Pay Agreement (incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K dated
March 27, 2006)
10.3 2006 Base Salary, 2006 Target Incentive Opportunity, and 2005
Incentive Compensation Table (incorporated by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-K dated
March 27, 2006)
10.4 Form of Notice of Grant of Stock Options under the J. C. Penney
Company, Inc. 2005 Equity Compensation Plan (incorporated by
reference to Exhibit 10.4 of the Company's Current Report on Form
8-K dated March 27, 2006)
10.5 Form of Notice of Performance Unit Grant (incorporated by
reference to Exhibit 10.5 of the Company's Current Report on Form
8-K dated March 27, 2006)
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
-31-
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/ W. J. Alcorn
--------------------
W. J. Alcorn
Senior Vice President and Controller
(Principal Accounting Officer)
Date: June 7, 2006
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