SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the 13 and 26 week periods Commission file number 1-777
ended July 28, 2001
J. C. PENNEY COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-5583779
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 431-1000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No _______.
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
263,521,650 shares of Common Stock of 50 cents par value, as of August 31, 2001.
-1-
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Statements of Operations
(Amounts in millions, except per share data)
13 weeks ended 26 weeks ended
--------------------------------- -------------------------------
July 28, July 29, July 28, July 29,
2001 2000 2001 2000
------------ ---------- ----------- ------------
Retail sales $ 7,211 $ 7,207 $ 14,733 $ 14,735
Costs and expenses
Cost of goods sold 5,174 5,102 10,462 10,406
Selling, general and
administrative expenses 1,990 2,024 4,035 4,111
Other unallocated 11 11 (6) 18
Net interest expense 94 102 192 215
Acquisition amortization 21 22 56 58
Restructuring and other
charges, net 7 (25) 12 207
----------- --------- --------- ---------
Total costs and expenses 7,297 7,236 14,751 15,015
----------- --------- --------- ---------
(Loss)from continuing
operations before income taxes (86) (29) (18) (280)
Income taxes (33) (10) (6) (105)
----------- --------- --------- ---------
(Loss) from continuing operations (53) (19) (12) (175)
Income from discontinued
operations, net of income tax - 42 - 80
(Loss) on sale of discontinued
operations, net of income tax (16) - (16) -
----------- --------- --------- ---------
Net (loss)/income $ (69) $ 23 $ (28) $ (95)
=========== ========= ========= =========
(Loss)/earnings per common share:
(Loss) from continuing operations $ (53) $ (19) $ (12) $ (175)
Less: preferred stock dividends,
net of tax (7) (8) (15) (16)
----------- --------- --------- ---------
(Loss) from continuing operations
for EPS calculation (60) (27) (27) (191)
Income from discontinued operations - 42 - 80
(Loss) on sale of discontinued operations (16) - (16) -
----------- --------- --------- ---------
(Loss)/earnings for EPS calculation $ (76) $ 15 $ (43) $ 111
Shares
Average shares outstanding (used
for basic and diluted EPS) 263 261 263 261
(Loss) per share from
continuing operations:
Basic $ (0.23) $ (0.10) $ (0.10) $ (0.73)
Diluted $ (0.23) $ (0.10) $ (0.10) $ (0.73)
(Loss)/earnings per share:
Basic $ (0.29) $ 0.06 $ (0.16) $ (0.42)
Diluted $ (0.29) $ 0.06 $ (0.16) $ (0.42)
See Notes to the Unaudited Interim Consolidated Financial Statements.
-2-
Balance Sheets
(Amounts in millions)
July 28, July 29, Jan. 27,
2001 2000 2001
--------- ---------- ----------
ASSETS
Current assets
Cash (including short-term investments
of $1,691, $481 and $935) $ 1,696 $ 483 $ 944
Receivables, net 737 915 893
Merchandise inventory 5,413 6,041 5,269
Prepaid expenses 175 165 151
--------- ---------- ----------
Total current assets 8,021 7,604 7,257
Properties, net of accumulated
depreciation of $3,137, $3,069
and $2,948 4,964 5,096 5,114
Goodwill and other intangible assets,
net of accumulated amortization
of $508, $389 and $452 2,807 2,932 2,870
Other assets 1,504 1,396 1,474
Assets of discontinued operations
(including cash and short-term
investments of $0, $158 and $156) - 3,052 3,027
--------- ---------- ----------
Total assets $ 17,296 $ 20,080 $ 19,742
========= ========== ==========
See Notes to the Unaudited Interim Consolidated Financial Statements.
-3-
Balance Sheets
(Amounts in millions)
July 28, July 29, Jan. 27,
2001 2000 2001
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,422 $ 3,172 $ 3,877
Short-term debt 21 103 -
Current maturities of long-term debt 907 550 250
Deferred taxes 141 149 108
------- ------- -------
Total current liabilities 4,491 3,974 4,235
Long-term debt 4,545 5,411 5,448
Deferred taxes 1,127 1,115 1,136
Other liabilities 1,045 975 978
Liabilities of discontinued operations - 1,652 1,686
------- ------- -------
Total liabilities 11,208 13,127 13,483
Stockholders' equity
Capital stock
Preferred stock, without par value:
Authorized, 25 million shares -
issued and outstanding, 0.6, 0.7
0.6 million shares of Series B
ESOP convertible preferred 380 420 399
Common stock, par value $0.50:
Authorized, 1,250 million shares -
issued, 263, 261 and 263 million
shares 3,311 3,284 3,294
------- ------- -------
Total capital stock 3,691 3,704 3,693
------- ------- -------
Reinvested earnings
at beginning of year 2,636 3,590 3,590
Net (loss) (28) (95) (705)
Common stock dividends declared (65) (151) (216)
Preferred stock dividends (15) (16) (33)
------- ------- -------
Reinvested earnings at end
of period 2,528 3,328 2,636
Accumulated other comprehensive
(loss) (131) (79) (70)
------- ------- -------
Total stockholders' equity 6,088 6,953 6,259
------- ------- -------
Total liabilities and
stockholders' equity $17,296 $20,080 $19,742
======= ======= =======
See Notes to the Unaudited Interim Consolidated Financial Statements.
-4-
Statements of Cash Flows
(Amounts in millions)
26 weeks ended
--------------------------------------
July 28, July 29,
2001 2000
-------------- -----------------
Cash flows from operating activities
(Loss) from continuing operations $ (12) $ (175)
Restructuring and other charges, net 12 207
Depreciation and amortization,
including intangible assets 362 352
Non-cash real estate gain (26) -
Deferred taxes 24 (75)
Change in cash from:
Receivables (44) 6
Sale of receivables-Eckerd 200 -
Merchandise inventory, net of trade payables (306) 263
Current income taxes payable 102 (36)
Other assets and liabilities, net (252) (330)
------ ------
60 212
------ ------
Cash flows from investing activities
Capital expenditures (313) (276)
Proceeds from sale of discontinued operations 1,305 -
Proceeds from sale of assets - 30
Proceeds from the sale of investment
securities - 268
------ ------
992 22
------ ------
Cash flows from financing activities
Change in short-term debt 21 (227)
Payment of long-term debt (252) (510)
Common stock issued, net 17 18
Preferred stock redemption (19) (26)
Dividends paid, preferred and common (80) (170)
------ ------
(313) (915)
------ ------
Cash received from discontinued operations 13 9
Net increase/(decrease) in cash and
short-term investments 752 (672)
Cash and short-term investments at
beginning of year 944 1,155
------ ------
Cash and short-term investments at
end of second quarter $1,696 $ 483
====== ======
Supplemental disclosures
Interest paid $ 213 $ 252
Interest received 21 30
Income taxes (received)/paid (146) 4
See Notes to the Unaudited Interim Consolidated Financial Statements.
-5-
Notes to the Unaudited Interim Consolidated Financial Statements
1) Summary of Significant Accounting Policies
------------------------------------------
A description of the Company's significant accounting policies is included in
the Company's Annual Report on Form 10-K for the fiscal year ended January 27,
2001 (the "2000 10-K"). The accompanying unaudited interim consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto in the 2000 10-K.
The accompanying interim consolidated financial statements are unaudited but, in
the opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation. Because of the seasonal
nature of the retail business, operating results for the 13-week and 26-week
periods are not necessarily indicative of the results that may be expected for
the entire year.
As disclosed in the 2000 10-K, prior year amounts in the accompanying unaudited
consolidated financial statements have been presented to reflect J. C. Penney
Direct Marketing Services, Inc. (DMS) as a discontinued operation, the
reclassification of shipping and handling fees billed to customers from selling,
general and administrative (SG&A) to retail sales and related costs to cost of
goods sold, and rent and occupancy costs from cost of goods sold to SG&A
expenses. Certain other amounts have been reclassified to conform to the current
period presentation.
In the second quarter of 2001, the Company adopted the provisions of Statement
of Financial Accounting Standard (SFAS) No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", a replacement
of SFAS No. 125 with the same title. It revises the standards for
securitizations and other transfers of financial assets and collateral and
requires certain additional disclosures, but otherwise retains most of SFAS No.
125's provisions. SFAS No. 140 is effective for transfers occurring after March
31, 2001. The Company completed a sale of certain Eckerd drugstores' managed
care receivables in May 2001, which met the criteria of SFAS No. 140 to be
accounted for as a sale of receivables. See Note 10 for a discussion of the
transaction.
The Company has adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133". The Company has reviewed areas impacted by
these rules, principally long-term debt, purchase commitments for goods and
services and real estate leases. There is no material impact on the Company's
consolidated financial position or results of operations as a result of
adoption.
2) Effect of Accounting Standards Not Yet Adopted
----------------------------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". These statements supersede
Accounting Principles Board Opinion Nos. 16 and 17, respectively. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Upon adoption of SFAS No. 142, goodwill and
intangible assets with indefinite useful lives will cease to be amortized and
will instead be subject to at least annual impairment
-6-
reviews using a fair-value based approach, as set forth in the new standard. The
Company is currently evaluating the Statement's impairment provisions and has
not yet determined what effect, if any, they might have on the consolidated
financial position and results of operations of the Company.
SFAS No. 142 will also require that intangible assets with estimable useful
lives be amortized over those lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Under SFAS No. 142, the Eckerd trade name qualifies as an intangible asset with
an indefinite useful life. The Company is reviewing the estimated useful lives
of its other identifiable intangible assets and has not yet determined what
adjustments, if any, will be made. Identifiable tangible assets will continue to
be amortized over their remaining useful lives, as determined.
The Company has approximately $2,685 million of unamortized goodwill, including
the Eckerd trade name, as of July 28, 2001. Under the provisions of SFAS No.
142, goodwill and the Eckerd trade name will cease to be amortized for fiscal
years beginning after December 15, 2001 (fiscal 2002 for the Company). The
Company estimates that the impact on annual earnings of ceasing amortization of
goodwill and the Eckerd trade name will be an increase of approximately $0.25
per share. The Company is required to adopt SFAS No. 142 as of the beginning of
its 2002 fiscal year.
3) Discontinued Operations
-----------------------
On June 18, 2001, the Company closed on the sale of its J.C. Penney Direct
Marketing Services, Inc. (DMS) assets, including its J.C. Penney Life Insurance
subsidiaries and related businesses, to Commonwealth General Corporation
(Commonwealth), a U.S. subsidiary of AEGON, N. V.(AEGON). The Company received
cash at closing of approximately $1.3 billion($1.1 billion after-tax).
DMS was reflected as a discontinued operation in the 2000 10-K. Results of
operations for fiscal 2000 included net income of $159 million for discontinued
operations and a $296 million net loss on the sale of discontinued operations.
The net loss of $296 million was based on estimates as of March 2001. Upon
closing of the sale, the loss was approximately $314 million, net of tax. This
loss was adjusted to $312 million, net of tax, upon completion of the
transaction. The additional net loss of approximately $16 million is reflected
in the second quarter 2001 as a loss on the sale of discontinued operations. The
transaction is subject to additional post closing adjustments, after the
conclusion of a purchaser review period, as defined in the Stock Purchase
Agreement.
4) Restructuring and Other Charges, Net
------------------------------------
During the second quarter of 2001, the Company recorded a net pretax charge of
$7 million related to restructuring programs and adjustments to previously
established restructuring reserves. The $7 million charge was comprised of $13
million related to JCPenney unit closings (additional future lease obligations
of $6 million, asset impairments of $5 million, and severance payments of $2
million), downward adjustments of Eckerd reserves of $7 million, and $1 million
for severance benefits paid to certain members of senior management.
-7-
A charge of $5 million was recorded in the first quarter of 2001 related to
JCPenney unit closings ($2 million), Eckerd asset impairments ($1 million), and
severance benefits for certain members of senior management ($2 million).
5) Restructuring Reserves
----------------------
In the past, the Company established reserves for the closing of underperforming
department stores and drugstores, related exit costs and workforce adjustment
programs. The majority of the remaining reserves represent the present value of
future lease obligations for both department stores and drugstores that have
closed or were identified for closing. The table below provides a rollforward of
the reserves that were established for each of these charges and the status of
the reserves at July 28, 2001. Costs are being charged against the reserves as
incurred. Reserves are reviewed for adequacy on a periodic basis and are
adjusted as appropriate based on those reviews. Cash payments related to these
reserves are expected to be approximately $90 million in 2001 and the remaining
cash payments are expected to be made by the end of 2005.
2000 2nd Qtr 2001 YTD
--------------------------------------------------------------
Year End 2001 Cash Other Ending
Reserve Charges Payments Changes Balance
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($ in millions)
1996 and 1997 charges
Department stores and catalog
Future lease obligations $ 4 $ - $ (1) $ (1) $ 2
Eckerd drugstores
Future lease obligations 68 - (3) - 65
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Total 1996 and 1997 72 - (4) (1) 67
2000 charges
Department stores and catalog
Future lease obligations 68 - (14) 6 60
Severance 6 - (5) - 1
Contract cancellations 11 - (2) - 9
Headcount reductions 9 - (8) - 1
Eckerd drugstores
Future lease obligations 63 - (8) (3) 52
Other exit costs 2 - (1) (1) -
Contract cancellations 24 - (13) (4) 7
Headcount reductions 3 - (2) - 1
---------------------------------------------------------------------------------
Total 2000 186 - (53) (2) 131
2001 charges
Department stores and catalog
Future lease obligations - 2 - - 2
Severance - 2 - - 2
---------------------------------------------------------------------------------
Total 2001 - 4 - - 4
=================================================================================
Total $ 258 $ 4 $ (57) $ (3) $ 202
=================================================================================
-8-
Department stores and catalog
-----------------------------
Future lease obligations and severance related to store closings - During the
first and fourth quarters of 2000, the Company approved plans to close a total
of 92 underperforming JCPenney stores. All 45 of the stores approved in the
first quarter 2000 plan had closed by April 2001. By the end of the second
quarter 2001, 40 stores had closed out of the 47 stores identified for closing
in fourth quarter 2000. The remaining stores are scheduled to close by the end
of fiscal 2001. Approximately 5,000 store employees are expected to be impacted
by the scheduled 47 store closings. The $6 million reserve for severance was
established for those employees. From this reserve, termination benefits had
been paid to about 1,600 employees.
In 2001, a $1 million reserve was established for the severance costs of three
units targeted to close in 2001 that were identified in the 2000 restructuring
plan. Also in 2001, the restructuring plan was modified to include two
additional units (a catalog outlet store and a telemarketing center). For these
two new units, a $3 million reserve was established ($2 million for future lease
obligations and $1 million for severance).
Headcount reductions - Out of the 300 JCPenney Home Office and field positions
that were planned to be eliminated, 200 associates were terminated by the end of
the second quarter. The remaining positions are expected to be eliminated by the
third quarter of 2001.
Eckerd drugstores
-----------------
By the end of the second quarter of 2001, Eckerd had closed all 279
underperforming drugstores identified for closing in fiscal 2000.
6) (Loss)/Earnings Per Share (EPS)
-------------------------------
Because the Company had a loss from continuing operations, no potential common
shares were included in the computations of diluted EPS. The following is a
description of the potential common stock that was excluded from the
calculation:
. Preferred stock totaling 633 and 700 thousand shares, convertible into 12.7
million and 14.0 million common shares were issued and outstanding at July
28, 2001 and July 29, 2000, respectively.
. Stock options to purchase 18 million and 11 million shares of stock at
prices ranging from $9 to $71 and $14 to $71 were outstanding at July 28,
2001 and July 29, 2000, respectively. Of these total options outstanding,
certain amounts would have been excluded from the diluted EPS calculation
regardless of income level because their exercise price was higher than the
average stock price. The exercise price of 9 million and 11 million
options, ranging from $25 and $71 and $17 to $71 were higher than the
average share prices for 2001 and 2000, respectively.
. Restricted stock units convertible into 1.3 million shares of common stock
were outstanding at July 28, 2001.
-9-
7) Accumulated Other Comprehensive(Loss)and Comprehensive(Loss)
------------------------------------------------------------
Accumulated Other Comprehensive (Loss)
(Amounts in millions) July 28, July 29, January 27,
2001 2000 2001
------------ ---------- -----------
Foreign currency translation $ (102) $ (61) $ (73)
adjustments
Minimum SRP liability (41) - -
Net unrealized changes in
investment securities 12 4 3
Other comprehensive (loss) from
discontinued operations - (22) -
---------- -------- --------
Accumulated other comprehensive (loss) $ (131) $ (79) (70)
========== ======== ========
Net unrealized changes in investment securities are shown net of deferred taxes
of ($7), ($2), and ($2) million as of July 28, 2001, July 29, 2000 and January
27, 2001, respectively. Minimum pension liability is shown net of deferred tax
of $27 million as of July 28, 2001. A deferred tax asset has not been
established for currency translation adjustments.
Total comprehensive (loss)/income was ($82) and $12 million for the 13 weeks
ended July 28, 2001, and July 29, 2000, respectively. Total comprehensive (loss)
was ($89) and ($100) million for the 26 weeks ended July 28, 2001, and July 29,
2000, respectively. The loss reported for the 26 weeks ended July 28, 2001,
included a ($41) million adjustment to recognize additional minimum liability of
the Company's non-qualified supplemental retirement plan (SRP).
8) Segment Reporting
-----------------
The Company operates in two business segments: Department Stores and Catalog
(including the Company's internet web site, jcpenney.com), and Eckerd
Drugstores. The results of Department Stores and Catalog are combined because
they generally serve the same customer and have virtually the same mix of
merchandise. Other items are shown in the following table for purposes of
reconciling to total Company amounts.
-10-
Segment Reporting
(Amounts in millions)
Dept.
Stores & Eckerd Other Total
Catalog Drugstores Unallocated Company
----------------------------------------------------------------------------------------------------------------------
2nd Quarter - 2001
Retail sales, net $ 3,855 $ 3,356 $ - $ 7,211
Segment operating profit 11 36 - 47
Net interest expense (94) (94)
Other unallocated (11) (11)
Acquisition amortization (21) (21)
Restructuring and other
charges, net (7) (7)
--------------
Pretax loss from
continuing operations (86)
--------------
Depreciation and
amortization expense 95 54 21 170
First Half - 2001
Retail sales, net 7,917 6,816 - 14,733
Segment operating profit 144 92 - 236
Net interest expense (192) (192)
Other unallocated 6 6
Acquisition amortization (56) (56)
Restructuring and other
charges, net (12) (12)
--------------
Pretax loss from
continuing operations (18)
--------------
Depreciation and
amortization expense 196 110 56 362
Total assets $ 10,434 $ 6,735 $ 127 $ 17,296
----------------------------------------------------------------------------------------------------------------------
2nd Quarter - 2000
Retail sales, net $ 4,073 $ 3,134 $ - $ 7,207
Segment operating profit 74 7 - 81
Net interest expense (102) (102)
Other unallocated (11) (11)
Acquisition amortization (22) (22)
Restructuring and other
charges, net 25 25
--------------
Pretax loss from
continuing operations (29)
--------------
Depreciation and
amortization expense 95 50 22 167
First Half - 2000
Retail sales, net 8,269 6,466 - 14,735
Segment operating profit 241 (23) - 218
Net interest expense (215) (215)
Other unallocated (18) (18)
Acquisition amortization (58) (58)
Restructuring and other
charges, net (207) (207)
--------------
Pretax loss from
continuing operations (280)
--------------
Depreciation and
amortization expense 190 103 58 351
Total assets $ 9,932 $ 7,006 $ 3,142 $ 20,080
-11-
9) 2001 Equity Compensation Plan
-----------------------------
On May 18, 2001, the Company's stockholders approved a new 2001 Equity
Compensation Plan (2001 Plan) which will initially reserve 16 million shares of
common stock for issuance, plus shares reserved but not subject to awards under
the Company's 1993, 1997 and 2000 equity plans. The 2001 Plan also authorizes
the granting of performance-based cash incentive awards. Additionally, the 2001
Plan provides for grants of stock options and stock awards to members of the
Board of Directors not otherwise employed by the Company. No future grants will
be made under the existing 1993, 1997 and 2000 plans.
10) Sale of Certain Eckerd Managed Care Receivables
-----------------------------------------------
On May 11, 2001, Eckerd and its drugstore affiliates entered into a three-year
revolving receivables sales facility with a third party. Eckerd formed a special
purpose entity to facilitate the transaction. The Company received $200 million
on May 14, 2001 from the sale of eligible managed care pharmacy receivables, as
defined, under such agreement, and recorded an immaterial loss on the sale in
the second quarter.
11) Benefit Plan Changes
--------------------
In the second quarter of 2001, the Company approved changes to its retiree
benefit plans that will reduce and cap Company contributions. In accordance with
FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions", these changes will be accounted for as a negative plan
amendment. Accordingly, the effects of reducing the benefit obligation will be
amortized over the remaining years of service to eligibility of the active plan
participants. While the Company expects an overall reduction in ongoing
expenses, the Company is in the process of determining the final effects and
will be begin recognizing the costs under the amended plans in the third quarter
of 2001.
Also in the second quarter of 2001, the Company adopted an amendment to its
pension plan to freeze benefits for all drugstore associates effective July 31,
2001. In its place, Eckerd will adopt a new 401(k) plan for all eligible
drugstore associates effective January 1, 2002. It is currently projected that
this new plan will cost the Company approximately the same as the current
retirement program. The change in the pension plan has been accounted for as a
curtailment gain in accordance with SFAS No.88,"Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits". The reduction in the projected benefit obligation of
approximately $11 million has been recognized in the Eckerd segment results as a
reduction of SG&A expenses.
-12-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Discontinued Operations
-----------------------
On June 18, 2001, the Company completed the sale of its J. C. Penney Direct
Marketing Services, Inc. (DMS) assets, including its insurance subsidiaries and
related business, to a U.S. subsidiary of AEGON N.V. (AEGON). The Company
received cash proceeds at closing of approximately $1.3 billion. DMS was
reflected as a discontinued operation in the Company's 2000 10-K, and an
estimated $296 million net loss on the sale of DMS assets was included in the
results of operations for the year. An additional loss of $16 million has been
reflected in the second quarter of 2001 as a result of the closing of the
transaction. The transaction is subject to additional post-closing adjustments
during a final review period, as set forth in the Stock Purchase Agreement in
connection with the sale.
The Company's financial statements, footnotes and other information provided in
this Form 10-Q accordingly reflect DMS as a discontinued operation for all
periods presented.
Results of Operations
---------------------
Consolidated operating results
13 weeks ended 26 weeks ended
------------------------ -----------------------
July 28, July 29, July 28, July 29,
2001 2000 2001 2000
--------- --------- --------- ---------
$ in millions
Segment operating profit/(loss)
Department stores and catalog $ 11 $ 74 $ 144 $ 241
Eckerd drugstores 36 7 92 (23)
--------- --------- --------- --------
Total segments 47 81 236 218
Other unallocated (11) (11) 6 (18)
Net interest expense (94) (102) (192) (215)
Acquisition amortization (21) (22) (56) (58)
Restructuring and other charges, net (7) 25 (12) (207)
--------- --------- --------- --------
(Loss) from continuing
operations before income taxes (86) (29) (18) (280)
Income taxes (33) (10) (6) (105)
--------- --------- --------- --------
(Loss) from continuing operations $ (53) $ (19) $ (12) $ (175)
========= ========= ========= ========
For the second quarter ended July 28, 2001, the Company had a loss from
continuing operations of $53 million, or $0.23 per share, as compared to a loss
of $19 million, or $0.10 per share, for the comparable 2000 period. For the 26
weeks ended July 28,2001, the loss from continuing operations was $12 million,
or $0.10 per share, as compared to a loss of $175 million, or $0.73 per
share,for the comparable 2000 period. Results for these periods were affected
by non-comparable items, including net restructuring and other charges
consisting mainly of store closing activities. The effects on operations of the
non-comparable items are summarized in the following table.
-13-
2001
13 weeks ended 26 weeks ended
-------------------------- ---------------------------
$ in millions, except EPS July 28, 2001 July 28, 2001
Pre-tax $ EPS Pre-tax $ EPS
-------------------------- ---------------------------
(Loss) from continuing operations
before the effects of
non-comparable items $ (74) $ (0.20) $ (15) $ (0.09)
Restructuring and other charges, net (7) (12)
Other non-comparable items:
Eckerd pension curtailment gain 11 11
Information technology transition
costs included in Eckerd
segment results (5) (5)
Centralized merchandising
process costs (ACT) (13) (25)
Real estate gains 2 28
----------- ----------- ------------ -----------
Total restructuring and other
non-comparable items (12) (0.03) (3) (0.01)
----------- ----------- ------------ -----------
(Loss) from continuing operations $ (86) $ (0.23) $ (18) $ (0.10)
=========== =========== ============ ===========
2000
13 weeks ended 26 weeks ended
-------------------------- ---------------------------
$ in millions, except EPS July 29, 2000 July 29, 2000
Pre-tax $ EPS Pre-tax $ EPS
-------------------------- ---------------------------
(Loss)/income from continuing
operations before the effects
of non-comparable items $ (48) $ (0.15) $ 25 $ (0.02)
Restructuring and other charges, net 25 (207)
Other non-comparable items:
Store closing activities in
Eckerd segment results 5 (73)
Centralized merchandising
process costs (ACT) (11) (25)
----------- ----------- ------------ -----------
Total restructuring and other
non-comparable items 19 0.05 (305) (0.71)
----------- ----------- ------------ -----------
(Loss) from continuing operations $ (29) $ (0.10) $ (280) $ (0.73)
=========== =========== ============ ===========
The loss from continuing operations for the second quarter ending July 28, 2001
includes a net charge of $12 million, or $0.03 per share, for total
restructuring and other non-comparable items versus a net credit of $19 million,
or $0.05 per share, for the comparable 2000 period. Loss from continuing
operations for the six months ended July 28, 2001 includes a net charge of $3
million, or $0.01 per share, of total restructuring and other non-comparable
items as compared to a net charge of $305 million, or $ 0.71 per share, for the
comparable 2000 period.
Non-comparable items in second quarter 2001 include $7 million of restructuring
and other charges, net (see Note 4 to the Unaudited Interim Consolidated
Financial Statements for additional discussion), an $11 million credit for the
Eckerd pension curtailment gain (see Note 11 to the Unaudited Interim
Consolidated Financial Statements for additional discussion), and $5 million of
information technology transition costs, both of which are included in Eckerd
operating profit as a component of SG&A, and $13 million of ACT initiative
expenses and $2 million of real estate gains reported as other unallocated.
Non-comparable items in second quarter 2000 include a $25 million restructuring
credit from the reversal of certain prior period reserves related to drugstore
closing activities, a $5 million credit included in Eckerd gross margin related
to the reversal of reserves established for closed store liquidation markdowns,
and $11 million of ACT initiative expenses.
-14-
The loss from continuing operations before the effects of all non-comparable
items for the second quarter of 2001 was $74 million, or $0.20 per share,
compared to a loss of $48 million, or $0.15 per share, for the comparable 2000
period. The loss from continuing operations before the effects of all non-
comparable items for the 26 weeks ending July 28, 2001, was $15 million, or
$0.09 per share, compared to income of $25 million, or $0.02 loss per share, for
the comparable 2000 period. The decreases from prior year results continue to be
due primarily to declines in catalog sales and lower margins in stores as a
result of planned promotional marketing programs designed to increase store
traffic. Declines were partially offset by improved performance at Eckerd due to
sales increases and leveraging of SG&A expenses.
Segment Operating Results
Department Stores and Catalog
13 weeks ended 26 weeks ended
------------------------ -----------------------
July 28, July 29, July 28, July 29,
2001 2000 2001 2000
--------- --------- --------- ---------
$ in millions
Retail sales $ 3,855 $ 4,073 $ 7,917 $ 8,269
Cost of goods sold (2,576) (2,684) (5,177) (5,341)
SG&A expenses (1,268) (1,315) (2,596) (2,687)
--------- --------- --------- ---------
Segment operating profit $ 11 $ 74 $ 144 $ 241
========= ========= ========= =========
Sales percent increase/
(decrease)
Comparable stores 2.3% -1.5% 1.7% -2.5%
Total department stores -0.3% -2.2% -0.4% -2.6%
Catalog -23.3% 1.8% -17.3% 1.0%
Department stores and catalog -5.4% -1.3% -4.3% -1.8%
Ratios as a percent of sales
Gross margin 33.2% 34.1% 34.6% 35.4%
SG&A expense 32.9% 32.3% 32.8% 32.5%
Segment operating profit 0.3% 1.8% 1.8% 2.9%
EBITDA (1) 2.7% 4.1% 4.3% 5.2%
(1) EBITDA includes LIFO segment operating profit before depreciation and
amortization. EBITDA is provided as an alternative assessment of operating
performance and is not intended to be a substitute for GAAP measurements.
Calculations may vary for other companies.
-15-
Segment operating profit for department stores and catalog was $11 million in
the second quarter compared with $74 million last year. The decrease from last
year continues to be attributable to declines in catalog operations and lower
margins in department stores. Sales in department stores improved by 2.3% for
comparable stores, those stores open at least twelve months. For the second
quarter sales were strongest in women's apparel and home furnishings. Enhanced,
more aggressive marketing events in the second quarter, including new
promotions, contributed to the positive sales gains. These stepped up marketing
events resulted in higher promotional markdowns. Catalog sales decreased 23.3%
compared to last year. Catalog sales declines were primarily the result of a
planned delay in the circulation of the Fall/Winter general catalog, the
continued decline in both the number of catalog customers shopping and the
average order value, closing ten catalog outlet stores and eliminating
unproductive sale and specialty catalogs that were active during last year's
second quarter. E-commerce sales, which are included as a component of catalog
sales, increased by $9 million in the second quarter 2001 or 19.1% over last
year. New management is continuing an evaluation of the Company's catalog
operations and developing strategies intended to improve catalog performance.
Because of long lead times in the catalog business, improvements are not
expected to begin until 2002. In the second quarter, two additional catalog
units were approved for closing in the third quarter of 2001.
Gross margin for the segment totaled $1,279 million in the second quarter
compared with $1,389 million last year. As a percentage of sales, margins
declined 90 basis points and were impacted by the sales declines in catalog as
well as higher promotional and clearance markdowns resulting from increased
marketing events aimed at recapturing the Company's targeted customers.
Selling, general and administrative (SG&A) expenses improved $47 million, or
3.6%, over last year's second quarter. Improvements in expense levels as a
result of last year's cost savings initiatives were partially offset by planned
increases in advertising costs. While expense dollars were down, SG&A costs
were not leveraged and increased 60 basis points as a percent of sales,
principally due to the 23.3% decline in catalog sales.
Segment operating profit for the 26 weeks ended July 28, 2001 was $144 million
compared to $241 million last year. Sales for comparable department stores
increased by 1.7% while catalog sales declined by 17.3% compared with last
year's levels. Gross margin for the 26 weeks declined 80 basis points as a
percent of sales, primarily as a result of more aggressive planned promotional
and clearance programs which were effective in improving comparable store sales
growth. SG&A expenses decreased by 3.4% from last year but were not leveraged as
a percent of sales primarily due to catalog sales declines.
-16-
Eckerd Drugstores
13 weeks ended 26 weeks ended
------------------------ -----------------------
July 28, July 29, July 28, July 29,
2001 2000 2001 2000
--------- --------- --------- ---------
$ in millions
Retail sales $ 3,356 $ 3,134 $ 6,816 $ 6,466
Cost of goods sold (2,598) (2,418) (5,285) (5,065)
SG&A expenses (722) (709) (1,439) (1,424)
--------- --------- --------- ---------
Segment operating profit/
(loss) $ 36 $ 7 $ 92 $ (23)
========= ========= ========= =========
Gross margin impact from
non-comparable items $ - $ (5) $ - $ 61
SG&A impact from
non-comparable items (6) - (6) 12
Sales percent increase
Comparable stores 8.2% 9.7% 8.7% 8.3%
Total sales 7.1% 5.3% 5.4% 7.4%
Ratios as a percent of sales
FIFO gross margin 23.0% 23.3% 22.9% 22.1%
LIFO gross margin 22.6% 22.8% 22.5% 21.7%
SG&A expense 21.5% 22.6% 21.1% 22.0%
Segment operating profit 1.1% 0.2% 1.4% -0.3%
EBITDA (1) 2.7% 1.8% 3.0% 1.2%
Ratios as a percent of sales
before the effects of
non-comparable items
FIFO gross margin 23.0% 23.1% 22.9% 23.0%
LIFO gross margin 22.6% 22.7% 22.5% 22.6%
SG&A expense 21.7% 22.6% 21.2% 21.8%
Segment operating profit 0.9% 0.1% 1.3% 0.8%
EBITDA (1) 2.5% 1.7% 2.9% 2.4%
(1) EBITDA includes LIFO segment operating profit before depreciation and
amortization. EBITDA is provided as an alternative assessment of operating
performance and is not intended to be a substitute for GAAP measurements.
Calculations may vary for other companies.
LIFO segment operating profit for Eckerd improved to $30 million in the second
quarter compared with $2 million last year, before the effects of $6 million and
$5 million non-comparable credits in the respective periods. The increase in
segment operating profit in the second quarter this year was primarily related
to sales increases and leveraging of SG&A expenses. Sales for the second quarter
increased by 8.2% for comparable stores. The increase was comprised of
improvements of 11.9% in pharmacy sales and 1.6% in front-end sales. Eckerd has
implemented a more competitive pricing structure that, through the second
quarter has resulted in lowering prices on about 5,000 items. The impact of
these price reductions on sales was offset by increased customer transactions
and higher unit volume.
Gross margin ratios before the effects of non-comparable items remain relatively
flat as a percentage of sales despite the implementation of a more competitive
everyday pricing strategy designed to deliver more value to the customer. The
gross margin ratio was impacted by the improvement in front-end sales, more
favorable vendor costs and generic dispensing rates. Additionally, through the
end of the second quarter, approximately 200 newer freestanding locations have
been reconfigured and these drugstores have experienced improvement in front-end
sales results. Second quarter gross margin includes a LIFO charge of $14
million this year compared with $13 million last year.
-17-
SG&A expenses were well controlled, and improved by 90 basis points as a percent
of sales over last year as a result leveraging sales and eliminating certain
advertising programs.
Eckerd had an operating profit before the effects of non-comparable items of $86
million for the 26 weeks ended July 28, 2001 versus $50 million in last year's
comparable period. Sales increased on a comparable store basis by 8.7%, led by
pharmacy sales of 13.3%. The trend in gross margin continued to be basically
flat, even with implementation of a more competitive pricing structure. SG&A
improved by 60 basis points as a percent of sales, primarily from an emphasis on
cost management and the leverage of increased sales. Eckerd recorded LIFO
charges of $29 million this year compared with $25 million last year.
Other Unallocated
-----------------
Other unallocated consists of real estate activities, investment transactions,
and other items that are related to corporate initiatives or activities, which
are not allocated to an operating segment. Second quarter 2001 results include
$13 million of ACT initiative expenses, and a $6 million gain on the sale of
real estate. Also included was a $3 million loss from third party fulfillment
activities.
Second quarter 2000 results included $11 million of ACT initiative expenses.
Net Interest Expense
---------------------
Interest charges for the second quarter and for the year have decreased 7.8% and
10.7%, respectively, as a result of improved cash balances and declines in net
debt.
Restructuring and Other Charges, Net
------------------------------------
During the second quarter of 2001, the Company recorded a pretax charge of $7
million related to restructuring charges and adjustments to previously
established restructuring reserves. See additional discussion in Note 4 to the
Unaudited Interim Consolidated Financial Statements.
Income Taxes
------------
The Company's overall effective income tax rate was 38.9% for the second quarter
of 2001 compared with 36.8% for the same period last year. The overall
effective income tax rate for six months ended July 28, 2001 and July 29, 2000,
was 34.0% and 39.2%, respectively.
Dividends
---------
Dividends paid in the first half of 2001 were $80 million compared with $170
million for the same period last year. This reflects the reduction of quarterly
dividends from $0.2875 to $0.125 in the fourth quarter of last year. The
Company's Board of Directors considered the overall performance of the Company's
businesses and the need to reinvest earnings in those businesses in the
determination to reduce the quarterly dividend rate.
-18-
Benefit Plan Changes
--------------------
In order to continue to improve the Company's competitive position, in the
second quarter of 2001, the Company approved changes to its retiree medical and
dental plans that will reduce and cap Company contributions. Also in the second
quarter, the Company adopted an amendment to its pension plan to freeze benefits
for all drugstore associates effective July 31, 2001. The Company will be
replacing the pension plan benefits with an enhanced 401(k) savings program that
is more competitive in the drugstore industry and is designed to help attract
and retain qualified personnel, especially pharmacists.
Effect of Accounting Standards Not Yet Adopted
----------------------------------------------
The FASB issued two new statements, SFAS Nos. 141 and 142, "Business
Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS
No.141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS No.142 goodwill and
intangible assets with indefinite lives will cease being amortized, and will
instead be subject to an impairment review, to be done at least annually. The
Company is required to adopt these new statements at the beginning of fiscal
2002. The Company estimates that the impact of ceasing amortization of goodwill
and the Eckerd trade name should have a positive impact on earnings of
approximately 25 cents per share. The Company is currently evaluating the
impairment test provisions under the new rules and has not determined what
effect, if any, they might have on the consolidated financial position and
results of operations. See Note 2 to the Unaudited Interim Consolidated
Financial Statements for further discussion.
Financial Condition
-------------------
Merchandise inventories on a FIFO basis totaled $5,781 million at the end of the
second quarter compared with $6,336 million last year. Inventories for
department stores and catalog totaled $3,430 million at July 28, 2001, as
compared with $4,015 million at July 29, 2000, a decline of 14.5%. The decline
was principally due to lower warehouse and catalog inventories. On a comparable
store basis, inventories have declined 0.7% from last year's levels. The decline
in stores and catalog inventory levels is the result of continued emphasis on
reducing the number of weeks of inventory on hand and improving inventory
productivity coupled with the effects of store closings. Eckerd drugstore
inventories totaled $2,351 million compared with $2,321 million last year. The
current cost of inventories exceeded the LIFO basis amount carried on the
balance sheet by approximately $368 million at July 28, 2001, $339 million at
January 27, 2001, and $295 million at July 29, 2000.
Properties, net of accumulated depreciation, totaled $4,964 million at July 28,
2001, compared with $5,096 million at July 29, 2000.
Goodwill and other intangible assets, net, totaled $2,807 million this year
compared with $2,932 million at the end of 2000's second quarter.
At July 28, 2001, the consolidated balance sheet included reserves related to
restructuring activities totaling $202 million. These reserves were established
in connection with store closing programs and other restructuring activities
recorded in the first and second quarters of 2001, first and fourth quarters of
2000, as well as in 1997 and 1996. The reserves are related primarily to future
lease obligations, employee benefits, and other exit costs associated with store
closings. Reserves were increased by $4 million for new charges and reduced by
$60 million in the first six months of 2001 as a result of lease and other
payments ($57 million) and reserve adjustments ($3 million). See additional
discussion in Notes 4 and 5 to the Unaudited Interim Consolidated Financial
Statements.
-19-
Liquidity and Capital Resources
-------------------------------
The primary needs for liquidity are to acquire or construct new stores,
reconfigure and expand existing stores and provide working capital for new and
existing stores. The Company anticipates that cash generated from operations in
combination with the proceeds received from the sale of DMS assets will be
sufficient to fund its continuing operations and growth. In addition, the
Company has a committed revolving bank credit line in the amount of $1.5 billion
available which expires November 21, 2002. No borrowings have been made under
this facility.
Net cash provided by operating activities through the second quarter of 2001 was
$60 million compared to $212 million in the comparable period of 2000. The
change is due to an increase in inventory net of trade payables.
The Company had capital expenditures of $313 million through the second quarter
of 2001 compared with $276 million for the comparable 2000 period. These were
primarily for costs associated with reconfiguring approximately 200 Eckerd
drugstores and making improvements to existing JCPenney stores. Eckerd
anticipates reconfiguring approximately 460 drugstores by year-end and
remodeling 160 other drugstores, which are more costly on average.
$250 million of debt matured and was paid in the first half of 2001. The
Company had no commercial paper outstanding as of July 28, 2001.
Long-term debt continues to be rated Ba2 by Moody's Investors Service
("Moody's"),BBB- by Standard and Poor's Corporation ("S&P") and BB+ by Fitch
Investors Services, Inc ("Fitch") as of the end of the second quarter.
A quarterly dividend of $0.125 per share on the Company's outstanding common
stock was paid on August 1, 2001 to stockholders of record on July 10, 2001.
In May 2001, the Company received $200 million from the sale of certain Eckerd
managed care receivables. See Note 10 to the Unaudited Interim Consolidated
Financial Statements for further discussion.
As previously discussed, the Company completed the DMS sale on June 18, 2001.
The majority of the $1.3 billion cash proceeds of the sale will be held in
short-term investments and the majority of funds will be used to pay long-term
debt as it matures.
Seasonality
-----------
The Company's business depends to a great extent on the last quarter of the
year. Historically, sales for that period have averaged approximately one-third
of annual sales. Accordingly, the results of operations for the 13 and 26 weeks
ended July 28, 2001 are not necessarily indicative of the results for the entire
year.
-20-
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.
The Company believes that its exposure to market risk associated with
transactions using financial derivatives and other financial instruments, such
as investments and borrowings, is not material.
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties that
may cause the Company's actual results to be materially different from planned
or expected results. Those risks and uncertainties include, but are not limited
to, competition, consumer demand, seasonality, economic conditions, and
government activity. Investors should take such risks into account when making
investment decisions.
-21-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
The Company has no material legal proceedings pending against it.
Item 4 - Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on May 18,
2001, at which the three matters described below were submitted to a vote of
stockholders with the voting results as indicated.
(1) Election of directors for a three-year term expiring at the Year 2004
Annual Meeting of the Company's stockholders:
NOMINEE FOR AUTHORITY WITHHELD
------- --- ------------------
M. Anthony Burns 196,238,464 39,786,478
Allen Questrom 225,020,151 11,004,791
Charles S. Sanford, Jr. 195,989,520 40,035,422
(2) The Board of Directors' proposal regarding employment of KPMG LLP as
auditors for the fiscal year ending January 26, 2002:
FOR AGAINST ABSTAIN NOT VOTED
--- ------- ------- ---------
229,076,354 5,898,596 1,048,992 1,000
(3) The Board of Directors' proposal regarding approval of the J.C. Penney
Company, Inc. 2001 Equity Compensation Plan:
FOR AGAINST ABSTAIN NOT VOTED
--- ------- ------- ---------
163,771,152 35,735,887 2,842,012 33,675.891
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
The following documents are filed as exhibits to this report:
10(a) June 18, 2001 Amendment to the Supplemental Retirement Program
for Management Profit-Sharing Associates of J.C. Penney Company,
Inc.;
10(b) June 1, 2001 Amendments to the J.C. Penney Company, Inc.
Savings, Profit-Sharing and Stock Ownership Plan;
10(c) June 1, 2001 Amendment to the J.C.Penney Company, Inc. Mirror
Savings Plans I, II, and III.
(b) Reports on Form 8-K
-------------------
The Company filed the following report on Form 8-K during the period
covered in this report:
Current Report on Form 8-K dated June 18, 2001
(Item 2 - Acquisition or Disposition of Assets).
-22-
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, Controller, and
Chief Purchasing Officer
(Principal Accounting Officer)
Date: September 7, 2001