SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 13 and 39 week periods Commission file number 1-777
ended October 27, 2001
J. C. PENNEY COMPANY, INC.
-----------------------------------------------------
(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
----------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
263,812,265 shares of Common Stock of 50 cents par value, as of November 30,
2001.
-1-
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
Statements of Operations
(Amounts in millions, except per share data)
13 weeks ended 39 weeks ended
------------------------------- -------------------------------
Oct. 27, Oct. 28, Oct. 27, Oct. 28,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Retail sales $ 7,729 $ 7,538 $22,462 $22,273
Costs and expenses
Cost of goods sold 5,446 5,369 15,908 15,775
Selling, general and administrative expenses 2,105 2,151 6,140 6,262
Other unallocated 15 4 9 22
Net interest expense 93 110 285 325
Acquisition amortization 17 18 73 76
Restructuring and other charges, net 2 (3) 14 204
-------- -------- -------- --------
Total costs and expenses 7,678 7,649 22,429 22,664
-------- -------- -------- --------
Income/(loss) from continuing operations before income taxes 51 (111) 33 (391)
Income taxes 20 (41) 14 (146)
-------- -------- -------- --------
Income/(loss) from continuing operations 31 (70) 19 (245)
Income from discontinued operations, net of income tax - 40 - 120
(Loss) on sale of discontinued operations, net of income tax - - (16) -
-------- -------- -------- --------
Net income/(loss) $ 31 $ (30) $ 3 $ (125)
======== ======== ======== ========
Earnings/(loss) per common share:
--------------------------------
Income/(loss) from continuing operations $ 31 $ (70) $ 19 $ (245)
Less: preferred stock dividends, net of tax (7) (8) (22) (25)
-------- -------- -------- --------
Earnings/(loss) from continuing operations for EPS calculation 24 (78) (3) (270)
Income from discontinued operations - 40 - 120
(Loss) on sale of discontinued operations - - (16) -
-------- -------- -------- --------
Earnings/(loss) for EPS calculation $ 24 $ (38) $ (19) $ (150)
Shares:
-------
Average shares outstanding (used for basic EPS) 264 262 263 262
Dilutive common stock equivalents 4 - - -
-------- -------- -------- --------
Average dilutive shares outstanding 268 262 263 262
Earnings/(loss) per share from continuing operations:
Basic and diluted $ 0.09 $ (0.30) $ (0.01) $ (1.03)
Earnings/(loss) per share:
Basic and diluted $ 0.09 $ (0.15) $ (0.07) $ (0.57)
See Notes to the Unaudited Interim Consolidated Financial Statements.
-2-
Balance Sheets
(Amounts in millions)
Oct. 27, Oct. 28, Jan. 27,
2001 2000 2001
------------ ------------ ------------
ASSETS
Current assets
Cash (including short-term investments
of $1,786, $119 and $935) $ 1,791 $ 125 $ 944
Receivables, net 824 920 893
Merchandise inventory 6,273 6,842 5,269
Prepaid expenses 173 141 151
---------- --------- ---------
Total current assets 9,061 8,028 7,257
Properties, net of accumulated depreciation
of $3,224, $3,184 and $2,948 4,949 5,110 5,114
Goodwill and other intangible assets,
net of accumulated amortization of $525,
$406 and $452 2,782 2,913 2,870
Other assets 1,549 1,439 1,474
Assets of discontinued operations
(including cash and short-term
investments of $0, $58 and $156) - 2,923 3,027
---------- --------- ---------
Total assets $ 18,341 $ 20,413 $ 19,742
========== ========= =========
See Notes to the Unaudited Interim Consolidated Financial Statements.
-3-
Balance Sheets
(Amounts in millions)
Oct. 27, Oct. 28, Jan. 27,
2001 2000 2001
------------ ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,944 $ 3,609 $ 3,877
Short-term debt 19 357 -
Current maturities of long-term debt 907 250 250
Deferred taxes 129 166 108
------------ ----------- ------------
Total current liabilities 4,999 4,382 4,235
Long-term debt 5,193 5,423 5,448
Deferred taxes 1,132 1,170 1,136
Other liabilities 954 969 978
Liabilities of discontinued operations - 1,595 1,686
------------ ----------- ------------
Total liabilities 12,278 13,539 13,483
Stockholders' equity
Capital stock
Preferred stock, without par value:
Authorized, 25 million shares - issued
and outstanding, 0.6, 0.7 and 0.6 million
shares of Series B ESOP convertible preferred 371 407 399
Common stock, par value $0.50:
Authorized, 1,250 million shares -
issued, 263, 262 and 263 million
shares 3,321 3,288 3,294
------------ ----------- ------------
Total capital stock 3,692 3,695 3,693
------------ ----------- ------------
Reinvested earnings
at beginning of year 2,636 3,590 3,590
Net income/(loss) 3 (125) (705)
Common stock dividends declared (99) (184) (216)
Preferred stock dividends (15) (16) (33)
------------ ----------- ------------
Reinvested earnings at end
of period 2,525 3,265 2,636
Accumulated other comprehensive
(loss) (154) (86) (70)
------------ ----------- ------------
Total stockholders' equity 6,063 6,874 6,259
------------ ----------- ------------
Total liabilities and
stockholders' equity $ 18,341 $ 20,413 $ 19,742
============ =========== ============
See Notes to the Unaudited Interim Consolidated Financial Statements.
-4-
Statements of Cash Flows
(Amounts in millions)
39 weeks ended
---------------------------------
Oct. 27, Oct. 28,
2001 2000
--------- ---------
Cash flows from operating activities
Income/(loss) from continuing operations $ 19 $ (245)
Restructuring and other charges, net 14 204
Depreciation and amortization,
including intangible assets 522 504
Non-cash real estate gain (26) -
Deferred taxes 17 (3)
Change in cash from:
Receivables (131) 1
Sale of receivables-Eckerd 200 -
Merchandise inventory, net of trade payables (556) (28)
Current income taxes payable (48) (128)
Other assets and liabilities, net (269) (265)
--------- ---------
(258) 40
--------- ---------
Cash flows from investing activities
Capital expenditures (493) (450)
Proceeds from sale of discontinued operations 1,306 -
Proceeds from sale of assets - 30
Proceeds from the sale of investment
securities - 268
--------- ---------
813 (152)
--------- ---------
Cash flows from financing activities
Change in short-term debt 19 27
Proceeds from the issuance of long-term debt 630 -
Payment of long-term debt (255) (813)
Common stock issued, net 27 23
Preferred stock redemption (28) (39)
Dividends paid, preferred and common (114) (245)
--------- ---------
279 (1,047)
--------- ---------
Cash received from discontinued operations 13 129
Net increase/(decrease) in cash and
short-term investments 847 (1,030)
Cash and short-term investments at
beginning of year 944 1,155
--------- ---------
Cash and short-term investments at
end of third quarter $ 1,791 $ 125
========= =========
Supplemental disclosures
Interest paid $ 371 $ 438
Interest received 35 40
Income taxes paid 27 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 39-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.
2) Effect of Accounting Standards Not Yet Adopted
----------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", for the disposal of a
segment of a business. SFAS No. 144 excludes goodwill and other intangible
assets that are not amortized.
For long-lived assets to be held and used, this statement retains the provisions
of SFAS No. 121 to test an asset for recoverability based on undiscounted cash
flows and measure any potential impairment loss as the difference between the
carrying amount and the fair value of the asset. For long-lived assets to be
disposed of other than by sale, this statement requires that the assets be
classified as held and used until disposed of. For assets to be disposed of by
abandonment, depreciation estimates should be revised to reflect the use of the
asset over its shortened useful life. This statement establishes specific
criteria to classify a long-lived asset or group as held for sale and
contemplates that the sale will occur within one year. It retains the
requirement of SFAS No. 121 to measure a long-lived asset held for sale at the
lower of its carrying amount or fair value and to cease depreciation.
Discontinued operations, which is broadened to include a component of an entity,
are no longer measured on a net realizable value basis, and future operating
losses are no longer recognized before they occur. This statement is effective
at the beginning of the Company's fiscal 2002 year. The Company does not expect
the implementation of this statement to have a material effect on its financial
position or results of operations.
-6-
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets with indefinite useful lives will no longer be amortized but will be
subject to annual impairment tests using a fair-value based approach, as set
forth in the new standard. Other intangible assets with estimable useful lives
will continue to be amortized over their useful lives. Under SFAS No. 142, the
Eckerd trade name qualifies as an intangible asset with an indefinite useful
life; therefore amortization will cease upon adoption of the new rules.
The Company will apply these new rules beginning in the first quarter of fiscal
2002. The Company has approximately $2,667 million of unamortized goodwill,
including the Eckerd trade name, as of October 27, 2001. Application of the
non-amortization provisions of the Statement is expected to result in an
increase to per share earnings of approximately $0.25 per year. During the first
half of fiscal 2002, the Company will perform the first of the required
impairment tests as of January 27, 2002 and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
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, with an
estimated net loss on the sale of $296 million. Upon completion of the
transaction, the loss was adjusted to $312 million. The additional net loss of
approximately $16 million is reflected in 39-week period ended October 27, 2001
as a loss on the sale of discontinued operations.
4) Restructuring and Other Charges, Net
------------------------------------
During the third quarter of 2001, the Company recorded a net pretax charge of $2
million related to adjustments of previously established restructuring reserves.
The year-to-date amount of $14 million also includes charges related to JCPenney
unit closings ($15 million), severance benefits for certain members of senior
management ($3 million), Eckerd asset impairments ($1 million), and downward
adjustments ($7 million) of Eckerd reserves.
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 October 27, 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 $90 million in 2001 and the remaining
cash payments are expected to be made by the end of 2005.
-7-
2000 3rd Qtr 2001 YTD
-----------------------------------------------------------
Year End 2001 Cash Other Ending
Reserve Charges Payments Changes Balance
----------------------------------------------------------------------------
($ in millions)
1996 and 1997 charges
Department stores and catalog
Future lease obligations $ 4 $ - $ (1) $ (1) $ 2
Eckerd drugstores
Future lease obligations 68 - (4) - 64
----------------------------------------------------------------------------
Total 1996 and 1997 72 - (5) (1) 66
2000 charges
Department stores and catalog
Future lease obligations 68 - (20) 7 55
Severance 6 - (6) - -
Contract cancellations 11 - (3) - 8
Headcount reductions 9 - (8) - 1
Eckerd drugstores
Future lease obligations 63 - (9) - 54
Other exit costs 2 - (1) (1) -
Contract cancellations 24 - (14) (5) 5
Headcount reductions 3 - (3) - -
----------------------------------------------------------------------------
Total 2000 186 - (64) 1 123
2001 charges
Department stores and catalog
Future lease obligations - 2 - - 2
Severance - 2 (1) - 1
----------------------------------------------------------------------------
Total 2001 - 4 (1) - 3
============================================================================
Total $ 258 $ 4 $ (70) $ - $ 192
============================================================================
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. Reserves were established for future
lease obligations for these stores. Severance reserves were established for all
those stores that had been announced. Approximately 3,400 associates (1,800 in
2000 and 1,600 in 2001) from the 87 stores that have closed were paid severance
benefits. Five stores, which were included in the 2000 plan, are expected to
close in the fourth quarter of 2001. In 2001, a $1 million reserve was
established for the severance costs of three stores included in the 2000 plan
but announced in 2001. Also in 2001, the restructuring plan was modified to
include two additional units and a $3 million reserve. Severance benefits have
been paid to about 300 out of 800 associates included in the 2001 reserves.
-8-
Headcount reductions - During the fourth quarter of 2000, the Company approved a
plan to eliminate 300 JCPenney Home Office and field positions. This program is
expected to be completed by the end of the year.
Eckerd drugstores
-----------------
By the end of the second quarter of 2001, Eckerd had closed all 279
underperforming drugstores identified in fiscal 2000 for closing.
6) Earnings/(Loss) per Share (EPS)
-------------------------------
The following potential common shares were excluded from the EPS calculations
due to an anti-dilutive effect:
. Subordinated notes convertible into 22.8 million common shares were issued
on October 15, 2001. The $650 million of notes are convertible at any time
prior to maturity, unless previously redeemed, at the option of the holders
into shares of common stock at a conversion price of $28.50 per share,
subject to certain adjustments.
. Preferred stock totaling 618 and 679 thousand shares, convertible into 12.4
million and 13.6 million common shares were issued and outstanding at
October 27, 2001 and October 28, 2000, respectively.
. Options to purchase 9 million and 11 million shares of stock, with exercise
prices ranging from $24 to $71 and $13 to $71, were excluded from the
computation of diluted earnings per share for the 13 and 39 weeks ended
October 27, 2001 and October 28, 2000, respectively, because their exercise
prices were greater than the average market price.
. For the 39 weeks ended October 27, 2001 as well as the 13 and 39 weeks
ended October 28, 2000, all common stock equivalents were anti-dilutive. In
addition to the items listed above, restricted stock units and stock
options equivalent to 3 million shares of stock were excluded for the 39
weeks ended October 27, 2001. For the 13 and 39 weeks ended October 28,
2000, restricted stock units convertible into 1 million shares of stock
were excluded from the EPS calculation.
-9-
7) Comprehensive Income / (Loss) and Accumulated Other Comprehensive (Loss)
------------------------------------------------------------------------
Comprehensive Income / (Loss)
(Amounts in millions)
13 weeks ended 39 weeks ended
---------------------------- ---------------------------
Oct. 27, Oct. 28, Oct. 27, Oct. 28,
2001 2000 2001 2000
------------- ------------ ------------- -----------
Net income / (loss) $ 31 $ (30) $ 3 $ (125)
Other comprehensive income/(loss)
Foreign currency translation
adjustments (19) (7) (48) (9)
Minimum pension liability - - (41) -
Net unrealized changes in
investment securities (4) (9) 5 (6)
Other comprehensive income from
discontinued operations - 8 - 2
------------- ------------ ------------- -----------
(23) (8) (84) (13)
------------- ------------ ------------- -----------
Total comprehensive income / (loss) $ 8 $ (38) $ (81) $ (138)
============= ============ ============= ===========
Accumulated Other Comprehensive (Loss)
(Amounts in millions)
Oct. 27, Oct. 28, Jan. 27,
2001 2000 2001
-------------- ------------ ------------
Foreign currency translation
adjustments $ (121) $ (68) $(73)
Minimum SRP liability (41) - -
Net unrealized changes in
investment securities 8 (4) 3
Other comprehensive (loss) from
discontinued operations - (14) -
-------------- ------------ ------------
Accumulated other comprehensive (loss) $ (154) $ (86) $(70)
============== ============ ============
Net unrealized changes in investment securities are shown net of deferred taxes
of $4, $(2), and $2 million as of October 27, 2001, October 28, 2000 and January
27, 2001, respectively. Minimum pension liability is shown net of deferred tax
of $(27) million as of October 27, 2001. A deferred tax asset has not been
established for currency translation adjustments.
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
-----------------------------------------------------------------------------------------------------------------------
3rd Quarter - 2001
Retail sales, net $ 4,360 $ 3,369 $ - $ 7,729
Segment operating profit 148 30 - 178
Net interest expense (93) (93)
Other unallocated (15) (15)
Acquisition amortization (17) (17)
Restructuring and other
charges, net (2) (2)
---------
Pretax income from
continuing operations 51
---------
Depreciation and
amortization expense 86 57 17 160
3rd Quarter YTD - 2001
Retail sales, net 12,277 10,185 - 22,462
Segment operating profit 292 122 - 414
Net interest expense (285) (285)
Other unallocated (9) (9)
Acquisition amortization (73) (73)
Restructuring and other
charges, net (14) (14)
---------
Pretax loss from
continuing operations 33
---------
Depreciation and
amortization expense 282 167 73 522
Total assets $ 11,334 $ 6,870 $ 137 $ 18,341
-----------------------------------------------------------------------------------------------------------------------
3rd Quarter - 2000
Retail sales, net $ 4,402 $ 3,136 $ - $ 7,538
Segment operating profit 81 (63) - 18
Net interest expense (110) (110)
Other unallocated (4) (4)
Acquisition amortization (18) (18)
Restructuring and other
charges, net 3 3
---------
Pretax loss from
continuing operations (111)
---------
Depreciation and
amortization expense 85 51 18 154
3rd Quarter YTD - 2000
Retail sales, net 12,671 9,602 - 22,273
Segment operating profit 322 (86) - 236
Net interest expense (325) (325)
Other unallocated (22) (22)
Acquisition amortization (76) (76)
Restructuring and other
charges, net (204) (204)
---------
Pretax loss from
continuing operations (391)
---------
Depreciation and
amortization expense 275 154 76 505
Total assets $ 10,234 $ 7,178 $ 3,001 $ 20,413
-11-
9) Benefit Plan Changes
--------------------
Included in the Eckerd segment results for the 39 weeks ended October 27, 2001
is a curtailment gain of approximately $11 million resulting from the freezing
of pension benefits for drugstore associates effective July 31, 2001. These
benefits will be replaced with a new 401(k) plan. Benefit costs were also
slightly lower in the third quarter as a result of recognizing changes to the
retiree benefit plans, approved in the second quarter, which will reduce and cap
Company contributions.
10) Issuance of Convertible Debt
----------------------------
The Company issued $650 million of 5% convertible subordinated notes in private
placements in October 2001. The notes will mature in October 2008. Interest is
payable on April 15 and October 15 of each year. These notes are convertible at
any time prior to maturity, unless previously redeemed, at the option of the
holders into shares of the Company's common stock at a conversion price of
$28.50 per share, subject to certain adjustments. The notes are subordinated to
the Company's senior indebtedness and structurally subordinated to all
indebtedness and other liabilities of the Company and its subsidiaries. The
Company may redeem the notes on or after October 20, 2004. The net proceeds will
be used primarily to repay upcoming debt maturities but also, to the extent
available, for general corporate purposes, including investments in working
capital and capital expenditures.
-12-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Discontinued Operations
-----------------------
For the 39 weeks ended October 27, 2001, an additional loss of $16 million has
been reflected as a result of the completion of the sale of J. C. Penney Direct
Marketing Services, Inc. (DMS). DMS was reflected as a discontinued operation in
the Company's 2000 10-K with an estimated $296 million net loss on the sale of
DMS assets included in the results of operations for the year. 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 39 weeks ended
--------------------- --------------------
Oct. 27, Oct. 28, Oct. 27, Oct. 28,
2001 2000 2001 2000
---------- --------- ---------- ---------
$ in millions
Segment operating profit/(loss)
Department stores and catalog $ 148 $ 81 $ 292 $ 322
Eckerd drugstores 30 (63) 122 (86)
------- ------- ------ ------
Total segments 178 18 414 236
Other unallocated (15) (4) (9) (22)
Net interest expense (93) (110) (285) (325)
Acquisition amortization (17) (18) (73) (76)
Restructuring and other charges, net (2) 3 (14) (204)
------- ------- ------ ------
Income/(loss) from continuing
operations before income taxes 51 (111) 33 (391)
Income taxes 20 (41) 14 (146)
------- ------- ------ ------
Income/(loss) from continuing operations $ 31 $ (70) $ 19 $ (245)
======= ======= ====== ======
For the third quarter ended October 27, 2001, the Company had earnings from
continuing operations of $31 million, or $0.09 per share, as compared to a loss
of $70 million, or $0.30 per share, for the comparable 2000 period. For the 39
weeks ended October 27, 2001, income from continuing operations was $19 million,
or a loss of $0.01 per share (due to preferred stock dividends, net of tax),
compared to a loss of $245 million, or $1.03 per share, for the comparable 2000
period. Results for these periods were affected by non-comparable items,
consisting mainly of expenses related to the centralized merchandise process
(ACT) and real estate gains and asset impairments, net. The effects on
operations of the non-comparable items are summarized in the following table.
-13-
2001
13 weeks ended 39 weeks ended
$ in millions, except EPS October 27, 2001 October 27, 2001
---------------------------- -------------------------------
Pre-tax $ EPS Pre-tax $ EPS
---------------------------- -------------------------------
Income from continuing
operations before the effects of
non-comparable items $ 68 $ 0.13 $ 53 $ 0.04
Restructuring and other charges, net (2) (14)
Other non-comparable items:
Eckerd pension curtailment gain
included in Eckerd segment results 11
Information technology transition
costs included in Eckerd
segment results (5)
Centralized merchandising
process costs (ACT) (7) (32)
Real estate gains and asset impairments,
net (8) 20
--------------- ------------ ------------------- -----------
Total restructuring and other
non-comparable items (17) (0.04) (20) (0.05)
--------------- ------------ ------------------- -----------
Income/(loss) from continuing operations 51 $ 0.09 $ 33 $ (0.01)
=============== ============ =================== ===========
2000
13 weeks ended 39 weeks ended
$ in millions, except EPS October 28, 2000 October 28, 2000
---------------------------- -------------------------------
Pre-tax $ EPS Pre-tax $ EPS
---------------------------- -------------------------------
(Loss) from continuing
operations before the effects
of non-comparable items $ (99) $ (0.24) $ (74) $ (0.26)
Restructuring and other charges, net 3 (204)
Other non-comparable items:
Store closing activities in
Eckerd segment results (73)
Centralized merchandising
process costs (ACT) (15) (40)
--------------- ------------ ------------------- -----------
Total restructuring and other
non-comparable items (12) (0.06) (317) (0.77)
--------------- ------------ ------------------- -----------
(Loss) from continuing operations $ (111) $ (0.30) $ (391) $ (1.03)
=============== ============ =================== ===========
Income from continuing operations before the effects of all non-comparable items
for the third quarter of 2001 was $68 million, or $0.13 per share, compared to a
loss of $99 million, or $0.24 per share, for the comparable 2000 period. Income
from continuing operations before the effects of all non-comparable items for
the 39 weeks ending October 27, 2001, was $53 million, or $0.04 per share,
compared to a loss of $74 million, or $0.26 per share, for the comparable 2000
period. The increases from prior year results reflect strong comparable store
sales gains for both department stores and Eckerd. Operating profits also
improved for both segments due to higher gross margin ratios and expense
management initiatives.
-14-
Non-comparable items totaling $17 million or $0.04 per share in third quarter
2001 included $2 million of restructuring and other charges, net (see Note 4 to
the Unaudited Interim Consolidated Financial Statements for additional
discussion) and $15 million of expenses reported as other unallocated ($7
million of ACT initiative expenses and $8 million of real estate gains and asset
impairments, net). Non-comparable items totaling $12 million or $0.06 per share
in third quarter 2000 included $15 million of Act initiative expenses reported
as other unallocated and a net credit of $3 million related to restructuring
charges and previously established restructuring reserves.
Segment Operating Results
Department Stores and Catalog
13 weeks ended 39 weeks ended
------------------------- -------------------------
Oct. 27, Oct. 28, Oct. 27, Oct. 28,
2001 2000 2001 2000
----------- ------------ ------------- -----------
$ in millions
Retail sales $ 4,360 $ 4,402 $ 12,277 $ 12,671
Cost of goods sold (2,821) (2,909) (7,998) (8,250)
SG&A expenses (1,391) (1,412) (3,987) (4,099)
----------- ------------ ------------ -----------
Segment operating profit $ 148 $ 81 $ 292 $ 322
=========== ============ ============ ===========
Sales percent increase/
(decrease)
Comparable stores 5.1% -3.7% 2.9% -2.9%
Total department stores 3.9% -4.5% 1.1% -3.3%
Catalog -17.7% -6.1% -17.5% -1.6%
Department stores and catalog -1.0% -4.9% -3.1% -2.9%
Ratios as a percent of sales
Gross margin 35.3% 33.9% 34.9% 34.9%
SG&A expense 31.9% 32.1% 32.5% 32.4%
Segment operating profit 3.4% 1.8% 2.4% 2.5%
EBITDA (1) 5.4% 3.8% 4.7% 4.7%
(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 $148 million in
the third quarter compared with $81 million last year. The increase from last
year was attributable to improved gross margin and lower expenses. Sales in
department stores improved by 5.1% for comparable stores, those stores open at
least twelve months. Continued improvements in merchandise assortments coupled
with enhancements to marketing events contributed to the positive sales gains in
department stores. Sales were strongest in women's apparel, children's, and home
furnishings. Catalog sales decreased 17.7 % compared to last year. Catalog sales
declines were primarily the result of soft demand for the general catalogs,
which is reflected in the decline of both the number of catalog customers
shopping and the average order value. E-commerce sales, which are included as a
component of catalog sales, increased by $8 million in the third quarter 2001 or
11% over last year. While Catalog sales have declined, inventory management and
expense initiatives had a positive impact on results. Management is continuing a
review of the Company's catalog operations and developing and implementing
strategies intended to improve catalog performance. In the third quarter, four
additional units were approved for closing in 2002.
Gross margin for the segment totaled $1,539 million in the third quarter
compared with $1,493 million last year. Gross margin as a percent of sales
improved by 140 basis points as a result of good customer response to
back-to-school and fall merchandise combined with improved inventory
productivity.
Selling, general and administrative (SG&A) expenses improved $21 million
compared to last year, or 20 basis points as a percent of sales. Payroll costs
were down which offset higher planned advertising costs. Catalog expenses
decreased compared to last year but were not leveraged with the decline in
sales.
Segment operating profit for the 39 weeks ended October 27, 2001 was $292
million compared to $322 million last year. Sales for comparable department
stores increased by 2.9% while catalog sales declined by 17.5% compared with
last year's levels. Gross margin for the 39 weeks as a percent of sales were
flat with last year. SG&A expense decreased by 2.7% from last year but were not
leveraged as a percent of sales primarily due to catalog sales declines.
-16-
Eckerd Drugstores
13 weeks ended 39 weeks ended
----------------------- -----------------------
Oct. 27, Oct. 28, Oct. 27, Oct. 28,
2001 2000 2001 2000
---------- ----------- ---------- -----------
$ in millions
Retail sales $ 3,369 $ 3,136 $ 10,185 $ 9,602
Cost of goods sold (2,625) (2,460) (7,910) (7,525)
SG&A expenses (714) (739) (2,153) (2,163)
-------- --------- -------- ---------
Segment operating profit/
(loss) $ 30 $ (63) $ 122 $ (86)
======== ========= ======== =========
Gross margin impact from
non-comparable items $ - $ - $ - $ 61
SG&A impact from
non-comparable items - - (6) 12
Sales percent increase
Comparable stores 8.4% 9.1% 8.6% 8.6%
Total sales 7.4% 4.2% 6.1% 6.3%
Ratios as a percent of sales
FIFO gross margin 22.4% 22.0% 22.7% 22.0%
LIFO gross margin 22.1% 21.6% 22.3% 21.6%
SG&A expense 21.2% 23.6% 21.1% 22.5%
Segment operating profit 0.9% -2.0% 1.2% -0.9%
EBITDA (1) 2.6% -0.4% 2.8% 0.7%
Ratios as a percent of sales
before the effects of
non-comparable items
FIFO gross margin 22.4% 22.0% 22.7% 22.7%
LIFO gross margin 22.1% 21.6% 22.3% 22.3%
SG&A expense 21.2% 23.6% 21.2% 22.4%
Segment operating profit 0.9% -2.0% 1.1% -0.1%
EBITDA (1) 2.6% -0.4% 2.8% 1.5%
(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 third
quarter compared with a loss of $63 million last year. The increase in segment
operating profit was a result of a continued generation of strong comparable
store sales increases, with improving front-end sales combined with improvements
in both gross margin and SG&A expenses. Comparable store sales increased by 8.4%
for the quarter, with pharmacy sales increasing 11.2% and front-end sales
increasing 3.1%. Sales results reflect continued increases in transaction
volumes and unit sales from reduced pricing, improved promotional marketing and
store reconfiguration initiatives. The strongest front-end merchandise
categories were cosmetics and skin care, baby and hygiene products, seasonal
merchandise and candy, food and snacks, including beverages. As of the end of
the third quarter, Eckerd reduced prices on 5,000 items by approximately 5% and
implemented temporary low pricing on 1,000 items. Additionally, through the end
of the third quarter, approximately 350 newer freestanding locations have been
reconfigured and these drugstores have experienced a 12% increase in front-end
sales and increased pharmacy sales. Gross margin ratios increased 50 basis
points as a percent of sales, despite implementation of more competitive
pricing, reflecting a better product mix, higher generic dispensing rates in
pharmacy and better control over shrinkage rates.
-17-
Third quarter gross margin includes a LIFO charge of $12 million this year
compared with $13 million last year.
SG&A expenses improved by 240 basis points as a percent of sales over last year
as a result of better leveraging from the strong sales combined with decreased
payroll costs and savings on information technology costs from bringing this
function in-house. In addition, pension costs were down due to the curtailment
of Eckerd's participation in the JCPenney pension plan.
Eckerd had an operating profit before the effects of non-comparable items of
$116 million for the 39 weeks ended October 27, 2001 versus a loss of $13
million in last year's comparable period. Sales increased on a comparable store
basis by 8.6%, led by pharmacy sales of 12.6%. Gross margin continued to be
flat, even with implementation of a more competitive pricing structure. SG&A
improved by 120 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 $41 million this year compared with $38 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. Third quarter 2001 results include
non-comparable costs of $7 million of ACT initiative expenses, $36 million of
department store and catalog asset impairments and $28 million of real estate
gains. Also included was a $3 million loss from third party fulfillment
activities.
Third quarter 2000 results included $15 million of ACT initiative expenses.
Net Interest Expense
--------------------
Interest charges for the third quarter and for the year have decreased 15.5% and
12.3%, respectively, as a result of improved cash balances and the declines in
average debt outstanding. The issuance of convertible debt in October 2001 did
not have a material impact on interest charges for the third quarter 2001.
Restructuring and Other Charges, Net
------------------------------------
During the third quarter of 2001, the Company recorded a pretax charge of $2
million related to restructuring charges and adjustments to previously
established restructuring reserves.
Income Taxes
------------
The Company's overall effective income tax rate was 38.3% for the third quarter
of 2001 compared with 37.2% for the same period last year. The overall effective
income tax rates for 39 weeks ended October 27, 2001 and October 28, 2000, were
40.5% and 37.3%, respectively.
Dividends
---------
Dividends paid in the 39 weeks ended October 27, 2001 were $114 million compared
with $245 million for the same period last year. This reflects the reduction of
quarterly common stock 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
--------------------
Benefit costs in Department Stores and Catalog were slightly lower in the third
quarter as a result of recognizing costs under amended retiree benefit plans.
The amendments reduce and cap Company contributions and were approved in the
second quarter. Additionally, included in the Eckerd segment results for the 39
weeks ended October 27, 2001 is a curtailment gain of approximately $11 million
resulting from an amendment to the Company's pension plan to freeze benefits for
all drugstore associates effective July 31, 2001. The Company will be replacing
the pension plan benefits with a more competitive 401(k) savings program for
drugstore associates.
Effect of Accounting Standards Not Yet Adopted
----------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement retains the provisions of SFAS
No. 121 to test an asset to be held and used for recoverability based on
undiscounted cash flows. It sets forth more stringent criteria for an asset to
be classified as held for sale. Discontinued operations, which is broadened to
include a component of an entity, are no longer measured on a net realizable
value basis, and future operating losses are no longer recognized before they
occur. This statement is effective at the beginning of fiscal 2002. The Company
does not expect the implementation of this statement to have a material effect
on its financial statements going forward.
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 $6,653 million at the end of the
third quarter compared with $7,150 million last year. Inventories for department
stores and catalog totaled $4,215 million at October 27, 2001, compared with
$4,667 million at October 28, 2000, a decline of 9.7%. The decline was due to
lower warehouse and catalog inventories, offset by a slight increase in stores
inventory. The decline in catalog and warehouse inventory levels is the result
of continued emphasis on reducing the number of weeks of inventory on hand and
improving inventory productivity. On a comparable store basis, inventories
increased 2.4% from last year's levels, with better in-stock position in basics
and fashion merchandise and improved assortments of seasonal gift merchandise.
Eckerd drugstore inventories totaled $2,438 million compared with $2,483 million
last year. The current cost of inventories exceeded the LIFO basis amount
carried on the balance sheet by approximately $380 million at October 27, 2001,
$339 million at January 27, 2001, and $308 million at October 28, 2000.
At October 27, 2001, the consolidated balance sheet included reserves related to
restructuring activities totaling $192 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
-19-
obligations, employee benefits, and other exit costs associated with store
closings. Reserves were increased by $4 million for new charges and reduced by
$70 million for cash payments made in the 39-weeks ended October 27, 2001. See
additional discussion in Notes 4 and 5 to the Unaudited Interim Consolidated
Financial Statements.
Liquidity and Capital Resources
-------------------------------
In 2001, approximately $2 billion has been raised which will enhance the
Company's financial flexibility. This consisted of approximately $1.3 billion
($1.1 billion after-tax)from the sale of DMS in June 2001, a $650 million
private placement of convertible subordinated notes completed in October
2001(net proceeds of approximately $630 million) and approximately $200 million
received in May 2001 from the sale of certain Eckerd managed care receivables.
The Company anticipates that this additional liquidity combined with cash
generated from operations will be sufficient to fund 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 used for operating activities through the third quarter of 2001 was
$258 million compared to $40 million of cash provided from operations in the
comparable period of 2000. The change is due to an increased spending on
inventory net of trade payables over the comparable nine month period last year.
The Company had capital expenditures of $493 million through the third quarter
of 2001 compared with $450 million for the comparable 2000 period. These were
primarily for costs associated with constructing new stores for both JCPenney
Department Stores and Eckerd, making improvements to existing JCPenney
Department Stores and reconfiguring approximately 350 Eckerd drugstores. Eckerd
anticipates reconfiguring approximately 460 drugstores by year-end and
remodeling 157 other drugstores.
$250 million of debt matured and was paid in the 39 weeks ended October 27,
2001. The Company had no commercial paper outstanding as of October 27, 2001.
Long-term debt is 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 third quarter.
A quarterly dividend of $0.125 per share on the Company's outstanding common
stock was paid on November 1, 2001 to stockholders of record on October 10,
2001.
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 39 weeks
ended October 27, 2001 are not necessarily indicative of the results for the
entire year.
-20-
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks in the normal course of business due to
changes in interest rates and changes in currency exchange rates. The Company's
market risks related to interest rates at October 27, 2001 are similar to those
disclosed in the Company's Form 10-K for the year ended January 27, 2001. For
the 39 weeks ended October 27, 2001 the accumulated other comprehensive loss on
foreign currency translation was approximately $48 million as disclosed in Note
7 to the Unaudited Interim Consolidated Financial Statements. Due to the size of
foreign operations, management believes that its exposure to market risk
associated with foreign currencies would not have a material impact on its
financial condition or results of operations.
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties that
may cause the Company's actual results to be materially different from planned
or expected results. Those risks and uncertainties include, but are not limited
to, competition, consumer demand, seasonality, economic conditions, and
government activity. Investors should take such risks into account when making
investment decisions.
-21-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
The Company has no material legal proceedings pending against it.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
The following document is filed as an exhibit to this report:
10(a) October 10, 2001 Amendments to the
J.C. Penny Company, Inc. Mirror Savings
Plans I, II and III.
(b) Reports on Form 8-K
-------------------
The Company filed the following reports on Form 8-K during the period
covered in this report:
Current Report on Form 8-K dated September 10, 2001
(Item 5 - Other Events and Regulation FD Disclosure,
Item 7 - Financial Statements and Exhibits).
Current Report on Form 8-K dated September 21, 2001
(Item 5 - Other Events and Regulation FD Disclosure,
Item 7 - Financial Statements and Exhibits)
Current Report on Form 8-K dated October 9, 2001
(Item 5 - Other Events and Regulation FD Disclosure,
Item 7 - Financial Statements and Exhibits)
-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: December 7, 2001