Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended May 1, 2004 Commission file number 1-15274
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transitional period from ______________ to ________________
Commission File No. ______________
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 26-0037077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
(Address of principal executive offices)
(Zip Code)
(972) 431-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
282,126,202 shares of Common Stock of 50 cents par value, as of June 1, 2004.
INDEX
Page
-------
Part I Financial Information
Item 1. Unaudited Financial Statements
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flows 4
Notes to the Unaudited Interim Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part II Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
Certifications 25
i
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
J. C. Penney Company, Inc.
Consolidated Statements of Operations
(Unaudited)
($ in millions, except per share data) 13 weeks ended
-----------------------------
May 1, April 26,
2004 2003
-------------- ------------
Retail sales, net $ 4,033 $ 3,711
Cost of goods sold 2,418 2,255
-------------- ------------
Gross margin 1,615 1,456
Selling, general and administrative expenses 1,386 1,372
Net interest expense 57 65
Real estate and other (income) (8) (9)
-------------- ------------
Income from continuing operations before income taxes 180 28
Income tax expense 62 8
-------------- ------------
Income from continuing operations $ 118 $ 20
Discontinued operations, net of income tax
(benefit)/expense of $(90) and $25 (77) 41
-------------- ------------
Net income $ 41 $ 61
Less: preferred stock dividends 6 7
-------------- ------------
Net income applicable to common stockholders $ 35 $ 54
============== ============
Earnings per share from continuing operations:
Basic $0.40 $ 0.05
Diluted $0.38 $ 0.05
(Loss)/earnings per share from discontinued operations:
Basic $ (0.27) $ 0.15
Diluted $ (0.25) $ 0.15
Earnings per share:
Basic $0.13 $ 0.20
Diluted $0.13 $ 0.20
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-1-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
($ in millions) May 1, Apr. 26, Jan. 31,
2004 2003 2004
-------------- ------------ --------------
Assets
Current assets
Cash and short-term investments
(including restricted balances of $88,
$87 and $87) $ 3,027 $ 2,629 $ 2,994
Receivables (net of bad debt reserves
of $5, $4 and $5) 243 295 233
Merchandise inventory (net of LIFO
reserves of $43, $49 and $43) 3,338 3,326 3,156
Prepaid expenses 131 100 130
---------- --------- ---------
Total current assets 6,739 6,350 6,513
Property and equipment (net of accumulated
depreciation of $2,178, $2,191 and $2,122) 3,462 3,519 3,515
Prepaid pension 1,302 1,123 1,320
Goodwill 42 36 42
Other assets 538 503 556
Assets of discontinued operations (net of fair value
adjustment of $615, $- and $450) 6,077 6,706 6,354
---------- --------- ---------
Total Assets $ 18,160 $ 18,237 $ 18,300
========== ========= =========
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-2-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
($ in millions except per share data) May 1, Apr. 26, Jan. 31,
2004 2003 2004
-------------- ------------ -------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 2,411 $ 2,042 $ 2,551
Short-term debt 34 23 18
Current maturities of long-term debt 243 278 242
Deferred taxes 875 22 943
-------------- ------------ -------------
Total current liabilities 3,563 2,365 3,754
Long-term debt 5,113 5,505 5,114
Deferred taxes 1,204 1,201 1,217
Other liabilities 819 779 804
Liabilities of discontinued operations 1,863 1,925 1,986
-------------- ------------ -------------
Total Liabilities 12,562 11,775 12,875
Stockholders' equity
Capital stock
Preferred stock, no par value and stated value
of $600 per share: authorized, 25 million shares;
issued and outstanding, 0.5, 0.5 and 0.5 million
shares of Series B ESOP convertible preferred 297 325 304
Common stock, par value $0.50 per share:
authorized, 1,250 million shares; issued and
outstanding, 282, 271 and 274 million shares 3,717 3,479 3,531
-------------- ------------ -------------
Total capital stock 4,014 3,804 3,835
-------------- ------------ -------------
Reinvested earnings at beginning of year 1,728 2,817 2,817
Net income 41 61 (928)
Dividends declared (34) (34) (161)
-------------- ------------ -------------
Reinvested earnings at end of period 1,735 2,844 1,728
Accumulated other comprehensive (loss) (151) (186) (138)
-------------- ------------ -------------
Total Stockholders' Equity 5,598 6,462 5,425
-------------- ------------ -------------
Total Liabilities and Stockholders' Equity $18,160 $ 18,237 $ 18,300
============== ============ =============
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-3-
J. C. Penney Company, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
($ in millions) 13 weeks ended
----------------------------------------
May 1, Apr. 26,
2004 2003
------------------ -----------------
Cash flows from operating activities:
Income from continuing operations $ 118 $ 20
Adjustments to reconcile income from continuing operations
to net cash provided by/(used in) operating activities:
Depreciation and amortization 87 101
Net gains on sale of assets (2) (21)
Benefit plans expense 16 26
Deferred taxes 9 75
Change in cash from:
Receivables (22) (18)
Inventory (182) (356)
Prepaid expenses and other assets 20 40
Accounts payable and accrued expenses 137 66
Current income taxes payable 43 (64)
Other liabilities (244) (231)
------------------ -----------------
Net cash (used in) operating activities (20) (362)
------------------ -----------------
Cash flows from investing activities:
Capital expenditures (64) (67)
Proceeds from sale of assets 19 23
------------------ -----------------
Net cash (used in) investing activities (45) (44)
------------------ -----------------
Cash flows from financing activities:
Change in short-term debt 16 10
Net proceeds from issuance of long-term debt - 595
Payment of long-term debt, including capital leases (3) (2)
Common stock issued, net 137 7
Preferred stock redeemed (7) (8)
Dividends paid, preferred and common (34) (34)
------------------ -----------------
Net cash provided by financing activities 109 568
------------------ -----------------
Cash (paid to) discontinued operations (11) (7)
Net increase in cash and short-term investments 33 155
Cash and short-term investments at beginning of year 2,994 2,474
------------------ -----------------
Cash and short-term investments at end of period $3,027 $2,629
================== =================
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-4-
Notes to the Unaudited Interim Consolidated Financial Statements
1) Summary of Significant Accounting Policies
--------------------------------------------
A description of significant accounting policies is included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 2004 (the "2003
10-K"). The accompanying unaudited Interim Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and
notes thereto in the 2003 10-K.
The accompanying Interim Consolidated Financial Statements are unaudited but, in
the opinion of management, include all material adjustments necessary for a fair
presentation. Because of the seasonal nature of the retail business, operating
results for interim periods are not necessarily indicative of the results that
may be expected for the full year. The January 31, 2004 financial information
has been derived from the audited Consolidated Financial Statements, with
related footnotes, included in the 2003 10-K.
Certain reclassifications have been made to prior year amounts to conform to the
current period presentation.
Holding Company
Effective January 27, 2002, J. C. Penney Company, Inc. changed its corporate
structure to a holding company format. As part of this structure, J. C. Penney
Company, Inc. changed its name to J. C. Penney Corporation, Inc. (JCP) and
became a wholly owned subsidiary of a newly formed affiliated holding company
(Holding Company). The Holding Company assumed the name J. C. Penney Company,
Inc. The Holding Company has no direct subsidiaries other than JCP, nor does it
have any independent assets or operations. All outstanding shares of common and
preferred stock were automatically converted into the identical number and type
of shares in the Holding Company. Stockholders' ownership interests in the
business did not change as a result of the new structure. Shares of the Company
remain publicly traded under the same symbol (JCP) on the New York Stock
Exchange. The Holding Company is a co-obligor (or guarantor, as appropriate)
regarding the payment of principal and interest on JCP's outstanding debt
securities. The guarantee by the Holding Company of certain of JCP's outstanding
debt is full and unconditional. The Holding Company and its consolidated
subsidiaries, including JCP, are collectively referred to in this quarterly
report as "Company" or "JCPenney," unless indicated otherwise.
Stock-Based Compensation
The Company has a stock-based compensation plan that provides for grants to
associates of stock awards, stock appreciation rights or options to purchase the
Company's common stock. The Company accounts for stock options under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in the
consolidated statement of operations for stock options, as all options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. Compensation expense for fixed stock awards
with pro rata vesting is recorded on a straight-line basis over the vesting
period, which typically ranges from one to five years.
-5-
The following table illustrates the effect on net income and earnings per share
(EPS) as if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," to stock options.
($ in millions, except EPS) 13 weeks ended
--------------- --- -------------
May 1, Apr. 26,
2004 2003
--------------- -------------
Net income, as reported $ 41 $ 61
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects 2 1
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all stock options, net of related
tax effects (6) (6)
--------------- -------------
Pro forma net income $ 37 $ 56
=============== =============
Earnings per share:
Basic--as reported $0.13 $0.20
Basic--pro forma $0.11 $0.18
Diluted--as reported $0.13 $0.20
Diluted--pro forma(1) $0.12 $0.18
(1) Diluted EPS is calculated using diluted shares at the continuing operations
level.
Effect of New Accounting Standards
In December 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
Statement amends the disclosure requirements of SFAS No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The Statement requires interim disclosure that is addressed in Note
11 but did not change the recognition and measurement requirements of the
amended Statements.
On May 19, 2004, the FASB issued FASB Staff Position (FSP) FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." The referenced legislation
(the Act) was passed in December 2003, and provides for a federal subsidy to
employers who offer retiree prescription drug benefits that are at least
actuarially equivalent to those offered under the government sponsored Medicare
Part D. The provisions of FSP FAS 106-2 will be effective in the Company's third
quarter of 2004. Final regulations that would define actuarial equivalency have
not yet been issued. As a result, the expense amounts shown in Note 11 do not
reflect the potential effects of the Act, which, due largely to the cap on
Company contributions, are not expected to have a material effect on the
Company's consolidated financial statements.
The provisions of FASB Interpretation No. 46R (FIN 46R), "Consolidation of
Variable Interest Entities," became effective in the first quarter of 2004. FIN
46R replaced the same titled FIN 46 that was issued in January 2003. FIN 46R
identifies when entities must be consolidated with the financial statements of a
company where the investors in an entity do not have the characteristics of a
controlling financial interest or the entity does not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support. The adoption of FIN 46R did not have a material impact on the
Company's consolidated financial statements.
-6-
2) Discontinued Operations
-------------------------
Eckerd Drugstores
In the fourth quarter of 2003, the Company's Board of Directors authorized
Company management to sell the Eckerd drugstore operations. In accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
Eckerd's net assets were classified as "held for sale" and their results of
operations and financial position were presented as a discontinued operation as
of year-end 2003. All prior periods presented were reclassified to conform to
this accounting treatment. For fiscal 2003, the $1,275 million loss from Eckerd
discontinued operations, net of tax, included a non-cash charge of $450 million
to reflect the investment in Eckerd at its estimated fair value less costs to
sell and a charge of $875 million to recognize an estimated deferred tax
liability for the excess of estimated fair value over the tax basis of Eckerd's
net assets. The tax basis of Eckerd is lower than its book basis because the
Company's drugstore acquisitions were largely tax-free transactions.
On April 4, 2004, the Company and certain of its subsidiaries signed definitive
agreements with The Jean Coutu Group (PJC) Inc. (Coutu), and CVS Corporation and
CVS Pharmacy, Inc. (collectively, CVS) for the sale of the Company's Eckerd
drugstore operations for a total of $ 4.525 billion in cash. In the Coutu
transaction, the Company and its indirect wholly owned subsidiary, TDI
Consolidated Corporation, will sell the stock of Eckerd Corporation (Eckerd),
Genovese Drug Stores, Inc. (Genovese), and Thrift Drug, Inc. (Thrift) for $2.375
billion. Coutu will acquire Eckerd drugstores and support facilities located in
13 Northeast and Mid-Atlantic states, as well as the Eckerd Home Office located
in Florida. In the CVS transaction, the Company, Eckerd, Genovese, Thrift and
Eckerd Fleet, Inc. will sell Eckerd drugstores and support facilities located in
the remaining southern states, principally Florida and Texas, and Eckerd's
pharmacy benefits management, mail order and specialty pharmacy businesses, to
CVS for $2.150 billion. After closing adjustments, taxes, fees and other
expenses relating to the transactions, the Company expects to generate
approximately $3.5 billion in cash proceeds. Closing of the transactions, which
are subject to normal and customary regulatory approvals, is anticipated to
occur by the end of the second quarter of 2004. For the first quarter, the $77
million loss from Eckerd discontinued operations, net of tax, included a pre-tax
charge of $167 million, and a $90 million reduction to the estimated deferred
tax liability, to reflect the results of final negotiations and tax elections
made by the buyers, and included estimated transaction fees, closing
adjustments, taxes, employee severance, fees and other expenses associated with
the sale. Closing adjustments related to the sale are expected to be recorded in
the second quarter of 2004.
Mexico Department Stores
Effective November 30, 2003, the Company closed on the sale of its six Mexico
department stores to Grupo Sanborns S.A. de C.V. of Mexico City. The stock sale
transaction, which included the Mexico holding company and operating companies
comprising JCPenney's Mexico department store operation, resulted in a loss of
$14 million, net of a $27 million tax benefit. The loss was principally related
to currency translation losses of $25 million accumulated since operations began
in 1995 that were previously reflected as reductions to stockholders' equity.
Additional components of the loss include potential liability on certain real
estate leases and merchandise and transaction costs.
-7-
The Company's financial statements continue to reflect Eckerd and Mexico as
discontinued operations for the periods presented. Results of the discontinued
operations are summarized below:
($ in millions) 13 weeks ended
-------------------------------------------
May 1, 2004 Apr. 26, 2003
-------------------------------------------
Eckerd
Net sales $ 3,722 $ 3,770
-------------------------------------------
Gross margin 843 866
Selling, general and administrative expenses 794 748
Interest expense (1) 46 39
Acquisition amortization 2 10
Other 1 2
Fair value adjustment 167 -
-------------------------------------------
(Loss)/income before income taxes (167) 67
Income tax (benefit)/expense (90) 25
-------------------------------------------
Eckerd (loss)/income (77) 42
Mexico (loss) from operations, net of income
tax expense of $- and $- - (1)
-------------------------------------------
Total discontinued operations, net $ (77) $ 41
===========================================
(1) Eckerd interest expense consists primarily of interest on the intercompany
loan between Eckerd and JCPenney, which bears interest at JCPenney's weighted
average interest rate on its net debt (long-term debt net of short-term
investments) calculated on a monthly basis.
The assets and liabilities of discontinued operations were as follows:
($ in millions)
May 1, 2004 Apr. 26, 2003 Jan. 31, 2004
---------------- --------------------------------------- -----------------
Eckerd Eckerd Mexico Total Eckerd
---------------- --------------------------------------- -----------------
Current assets $ 2,381 $ 2,468 $ 24 $ 2,492 $ 2,467
Other assets 4,311 4,210 4 4,214 4,337
---------------- --------------------------------------- -----------------
Total Assets $ 6,692 $ 6,678 $ 28 $ 6,706 $ 6,804
---------------- --------------------------------------- -----------------
Current liabilities $ 1,375 $1 ,492 1 $ 1,493 $ 1,509
Other liabilities 488 432 - 432 477
---------------- --------------------------------------- -----------------
Total Liabilities $ 1,863 $ 1,924 $ 1 $ 1,925 $ 1,986
---------------- --------------------------------------- -----------------
JCPenney's net investment $ 4,829 $ 4,754 $ 27 $ 4,781 $ 4,818
=======================================
Fair value adjustment (615) (450)
---------------- -----------------
Fair value of JCPenney's $ 4,214 $ 4,368
investment in Eckerd ================ =================
Effective May 20, 2004, the Company terminated Eckerd's managed care receivables
securitization program. Upon termination and final payment of $221 million, the
receivables under the program were conveyed back to Eckerd. This transaction was
included in the determination of the fair value of the Company's investment in
Eckerd.
-8-
3) Earnings per Share
-------------------
Basic earnings per share (EPS) is computed by dividing net income/(loss) less
dividend requirements on the Series B ESOP Convertible Preferred Stock, net of
tax as applicable, by the weighted average number of common shares outstanding
for the period. Except where the effect would be anti-dilutive at the continuing
operations level, the diluted EPS calculation includes the impact of restricted
stock units and shares that could be issued under outstanding stock options as
well as common shares that would result from the conversion of convertible
debentures and convertible preferred stock. In addition, the related interest on
convertible debentures (net of tax) and preferred stock dividends (net of tax)
are added back to income, since these would not be paid if the debentures or
preferred stock were converted to common stock.
Income from continuing operations and shares used to compute EPS from continuing
operations, basic and diluted, are reconciled below:
(in millions, except per share data) 13 weeks ended
------------------------------
May 1, Apr. 26,
2004 2003
-------------- -------------
Earnings:
- ---------
Income from continuing operations $ 118 $ 20
Less: preferred stock dividends, net of tax 6 7
-------------- -------------
Income from continuing operations, basic 112 13
Adjustment for assumed dilution:
Interest on 5% convertible debt, net of tax 5 -
-------------- -------------
Income from continuing operations, diluted $ 117 $ 13
============== =============
Shares:
- --------
Average common shares outstanding (basic shares) 278 270
Adjustment for assumed dilution:
Stock options and restricted stock units
5 3
Shares from convertible debt 23 -
-------------- -------------
Average shares assuming dilution (diluted shares) 306 273
============== =============
EPS from continuing operations:
- -------------------------------
Basic $ 0.40 $ 0.05
Diluted $ 0.38 $ 0.05
The following potential shares of common stock were excluded from the diluted
EPS calculations because their effect would be anti-dilutive:
(shares in millions)
May 1, Apr. 26,
2004 2003
-------------- --------------
Stock options (1) 7 16
$650 million notes convertible at $28.50 per share - 23
Preferred stock 10 11
-------------- --------------
Total anti-dilutive potential shares 17 50
-------------- --------------
(1) Represents stock options with exercise prices higher than the average market
price per share. Exercise prices per share ranged from $34 to $71 and $19 to $71
for the first quarters of 2004 and 2003, respectively.
-9-
4) Cash and Restricted Short-Term Investment Balances
--------------------------------------------------
Restricted short-term investment balances of $88 million, $87 million and $87
million as of May 1, 2004, April 26, 2003 and January 31, 2004, respectively,
were included in the total cash and short-term investment balances of $3,027
million, $2,629 million and $2,994 million for the same periods. Restricted
balances are pledged as collateral for import letters of credit not included in
the Company's bank credit facility and for a portion of casualty insurance
program liabilities. Cash and short-term investments on the consolidated balance
sheet include $96 million, $21 million and $8 million of cash as of May 1, 2004,
April 26, 2003 and January 31, 2004, respectively.
5) Supplemental Cash Flow Information
----------------------------------
($ in millions) 13 weeks ended
----------------------------------------
May 1, 2004 Apr. 26, 2003
----------------- -------------------
Total interest paid $168 $ 151
Less interest paid attributable to
discontinued operations 44 38
----------------- -------------------
Interest paid by continuing operations 124 113
Interest received 6 7
Income taxes paid 5 33
o Non-cash transactions: The Company issued 2.4 million shares of common
stock in the first quarter of 2003 to fund savings plan contributions of
$47 million for 2002.
6) Goodwill
--------
The carrying amount of goodwill for Renner Department Stores in Brazil was $42
million, $36 million and $42 million as of May 1, 2004, April 26, 2003 and
January 31, 2004, respectively. The changes in carrying value are related to
foreign currency translation adjustments. There were no impairment losses
related to goodwill recorded during the first quarter of 2004 or 2003.
7) Restructuring Reserves
----------------------
At May 1, 2004, the consolidated balance sheet included $13 million of reserves
established principally in 2000 in connection with the Company's restructuring
initiatives compared to $24 million at April 26, 2003 and $15 million at January
31, 2004. The remaining reserves are related primarily to future lease
obligations for department stores that have closed. Costs are being charged
against the reserves as incurred. Reserves are periodically reviewed for
adequacy and adjusted as appropriate. Imputed interest expense associated with
the discounting of these lease obligations and any other adjustments to the
reserves are included in real estate and other (income)/expense. During the
first quarter of 2004, cash payments related to the reserves were $2 million.
The majority of the reserves will be paid out by the end of 2005 when most of
the leases will have terminated.
-10-
8) Comprehensive Income and Accumulated Other Comprehensive (Loss)
---------------------------------------------------------------
Comprehensive Income/(Loss)
($ in millions) 13 weeks ended
--------------------------------
May 1, Apr. 26,
2004 2003
--------------- ---------------
Net income $ 41 $ 61
Other comprehensive (loss)/income:
Foreign currency translation adjustments (1) 8
Net unrealized (losses)/gains in real estate
investment trusts (12) 9
--------------- ---------------
(13) 17
--------------- ---------------
Total comprehensive income $ 28 $ 78
=============== ===============
Accumulated Other Comprehensive (Loss)/Income
($ in millions) May 1, Apr. 26, Jan. 31,
2004 2003 2004
---------------- --------------- ---------------
Foreign currency translation adjustments (1) $ (116) $ (133) $(115)
Non-qualified plan minimum liability adjustment (2) (82) (58) (82)
Net unrealized gains in real estate investment trusts (3) 48 28 60
Other comprehensive (loss) from discontinued operations (4) (1) (23) (1)
---------------- --------------- ---------------
Accumulated other comprehensive (loss) $ (151) $ (186) $(138)
================ =============== ===============
(1) A deferred tax asset has not been established due to the historical
reinvestment of earnings in the Company's Brazilian subsidiary.
(2) Shown net of a deferred tax asset of $52 million, $39 million and $52
million as of May 1, 2004, April 26, 2003 and January 31, 2004,
respectively.
(3) Shown net of a deferred tax liability of $26 million, $16 million and $32
million as of May 1, 2004, April 26, 2003 and January 31, 2004,
respectively.
(4) Shown net of a deferred tax asset of $1 million, $- million and $1 million
as of May 1, 2004, April 26, 2003 and January 31, 2004, respectively.
9) Contractual Obligations and Guarantees
--------------------------------------
Contractual Obligations
In December 2003, JCP notified the third-party service providers of the six
outsourced store support centers (SSCs) of its intent to terminate contracted
services during the first half of 2004. In accordance with the related service
contracts, JCP assumed $61 million of building leases on four of the six SSCs
during the first quarter of 2004. In the second quarter of 2004, JCP will assume
the remaining $56 million of building and equipment leases. Additional
contractual obligations are disclosed in the 2003 10-K.
Guarantees
As of May 1, 2004, JCP had guarantees totaling $48 million, which are described
in detail in the 2003 10-K. These guarantees include: $18 million related to
investments in a real estate investment trust; $20 million maximum exposure on
insurance reserves established by a former subsidiary included in the sale of
the Company's Direct Marketing Services business; and $10 million related to
certain leases for stores that were sold in 2003, which is recorded in accounts
payable and accrued expenses.
-11-
10) Real Estate and Other (Income)/Expense
($ in millions) 13 weeks ended
------------------------------
April 26,
May 1, 2004 2003
------------------------------
Real estate activities $ (7) $ (4)
Net gains from sale of real estate (2) (21)
Asset impairments, PVOL and other unit closing costs 1 15
Other - 1
-------------- --------------
Total $ (8) $ (9)
============== ==============
Real estate activities consisted primarily of income from the Company's real
estate subsidiaries.
Net real estate gains were recorded from the sale of facilities that are no
longer used in Company operations.
Asset impairments, the present value of lease obligations (PVOL) and other unit
closing costs for the first quarter of 2004 consisted of a $1 million charge
related to PVOL for closed stores. For the first quarter of 2003, asset
impairments, PVOL and other unit closing costs totaled $15 million and consisted
of $12 million of accelerated depreciation for catalog facilities scheduled to
close by the end of the second quarter of 2003 and $3 million of charges related
to the PVOL for closed stores.
11) Retirement Benefit Plans
-------------------------
Net Periodic Cost
The components of net periodic benefit costs for the qualified and non-qualified
pension plans and the postretirement plans follow:
Pension Plans
-----------------------------------------------------
Qualified Supplemental Postretirement
($ in millions) (non-qualified) Plans
----------------------------------------------------- --------------------------
13 weeks ended 13 weeks ended 13 weeks ended
----------------------------------------------------- --------------------------
May 1, Apr. 26, May 1, Apr. 26, May 1, Apr. 26,
2004 2003 2004 2003 2004 2003
----------------------------------------------------- --------------------------
Service cost $ 14 $ 15 $ 1 $ 1 $ 1 $ 1
Interest cost 33 39 4 4 2 3
Expected return on plan assets (48) (50) - - - -
Net amortization 18 22 1 1 (5) (5)
----------------------------------------------------- --------------------------
Net periodic benefit costs $ 17 $ 26 $ 6 $ 6 $ (2) $ (1)
===================================================== ==========================
-12-
Employer Contributions
As previously disclosed in the 2003 10-K, the Company does not expect to be
required to make a contribution to its qualified plan in 2004 under the Employee
Retirement Income Security Act of 1974. However, depending on market conditions
and the funded status of the qualified plan, the Company may decide to make a
discretionary contribution up to the maximum amount deductible for tax purposes.
12) Subsequent Events
------------------
The Company's Credit Agreement dated as of May 31, 2002 with JPMorgan Chase Bank
as administrative agent was amended effective June 2, 2004. The amendments
permit the sale of the Eckerd Corporation, and its affiliates and assets, permit
a broader range of cash investments, and permit issuing banks to extend
maturities of certain letters of credit past the expiration of the Credit
Agreement as long as they are collateralized with cash at that time. No
borrowings, other than the issuance of trade and standby letters of credit, have
been, or are expected to be, made under this facility.
Effective May 20, 2004, the Company terminated Eckerd's managed care receivables
securitization program. Upon termination and final payment of $221 million, the
receivables under the program were conveyed back to Eckerd. This transaction was
included in the determination of the fair value of the Company's investment in
Eckerd. See Note 2.
On May 17, 2004, the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (HSR) expired in connection with the Company's sale of
that portion of its Eckerd drugstore operations to Coutu. On June 1, 2004, the
Company announced that the Federal Trade Commission had completed its review of
the Company's sale of that portion of its Eckerd drugstore operations to CVS,
and granted early termination of the waiting period under the HSR.
-13-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
- --------
In the first quarter of 2004, the Company recorded income from continuing
operations of $118 million, or $0.38 per share compared to $20 million, or $0.05
per share for the comparable 2003 period, as a result of strong sales and
operating profit. Operating profit and its components are discussed beginning on
page 16. All references to earnings per share (EPS) are on a diluted basis. The
Company ended the first quarter of 2004 with $3 billion of cash and short-term
investments, or 57% of the $5.4 billion outstanding long-term debt. In addition,
the Company improved free cash flow compared to 2003 as discussed on page 19.
With the Company's major centralization initiatives implemented, JCPenney has
entered into a new phase, the growth of its core three-channel retailing
business. The Company's strategies for growing its business include a focus on
consistent execution, new growth opportunities and attracting new customers. The
Company's financial goal is to generate operating profit of 6% to 8% of sales in
2005. The successful execution of the turnaround, growth of the business and
progress toward improving profitability is impacted by customers' response to
the Company's merchandise offerings, competitive conditions, the effects of
current economic conditions, continued improvement in gross margin and the
reduction of the expense structure. The Company's Strategic Plan, Financing
Strategy and Risk Management are detailed in the 2003 10-K.
Holding Company
- ----------------
Effective January 27, 2002, J. C. Penney Company, Inc. changed its corporate
structure to a holding company format. As part of this structure, J. C. Penney
Company, Inc. changed its name to J. C. Penney Corporation, Inc. (JCP) and
became a wholly owned subsidiary of a newly formed affiliated holding company
(Holding Company). The holding company assumed the name J. C. Penney Company,
Inc. The Holding Company has no direct subsidiaries other than JCP, nor does it
have any independent assets or operations. All outstanding shares of common and
preferred stock were automatically converted into the identical number and type
of shares in the Holding Company. Stockholders' ownership interests in the
business did not change as a result of the new structure. Shares of the Company
remain publicly traded under the same symbol (JCP) on the New York Stock
Exchange. The Holding Company is a co-obligor (or guarantor, as appropriate)
regarding the payment of principal and interest on JCP's outstanding debt
securities. The guarantee by the Holding Company of certain of JCP's outstanding
debt is full and unconditional. The Holding Company and its consolidated
subsidiaries, including JCP, are collectively referred to in this report as
"Company" or "JCPenney," unless indicated otherwise.
-14-
Critical Accounting Policies
- -----------------------------
Management's discussion and analysis of its financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. Management bases its estimates on
historical experience and on other assumptions that are believed to be
reasonable under the circumstances. On an ongoing basis, management evaluates
estimates used, including those related to inventory valuation under the retail
method; valuation of long-lived and intangible assets, including goodwill;
estimation of reserves and valuation allowances specifically related to closed
stores, insurance, income taxes, litigation and environmental contingencies; and
pension accounting. Actual results may differ from these estimates under
different assumptions or conditions. Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, in the 2003 10-K
includes detailed descriptions of certain judgments that management makes in
applying its accounting policies in these areas.
Discontinued Operations
- -------------------------
Eckerd Drugstores
On April 4, 2004, the Company and certain of its subsidiaries signed definitive
agreements with The Jean Coutu Group (PJC) Inc. (Coutu), and CVS Corporation and
CVS Pharmacy, Inc. (collectively, CVS) for the sale of the Company's Eckerd
drugstore operations for a total of $ 4.525 billion in cash. In the Coutu
transaction, the Company and its indirect wholly owned subsidiary, TDI
Consolidated Corporation, will sell the stock of Eckerd Corporation (Eckerd),
Genovese Drug Stores, Inc. (Genovese), and Thrift Drug, Inc. (Thrift) for $2.375
billion. Coutu will acquire Eckerd drugstores and support facilities located in
13 Northeast and Mid-Atlantic states, as well as the Eckerd Home Office located
in Florida. In the CVS transaction the Company, Eckerd, Genovese, Thrift, and
Eckerd Fleet, Inc. will sell Eckerd drugstores and support facilities located in
the remaining southern states, principally Florida and Texas, and Eckerd's
pharmacy benefits management, mail order and specialty pharmacy businesses, to
CVS for $2.150 billion. After closing adjustments, taxes, fees and other
expenses relating to the transactions, the Company expects to generate
approximately $3.5 billion in cash proceeds. Closing of the transactions, which
are subject to normal and customary regulatory approvals, is anticipated to
occur by the end of the second quarter of 2004.
In the first quarter of 2004, the Company recorded a $77 million charge, net of
taxes, to adjust the fair value that was estimated at year-end 2003, based on
the results of the final negotiations and signed agreements. See Note 2 for a
more detailed discussion, including the adjustment that was recorded at year-end
2003.
Mexico Department Stores
Effective November 30, 2003, the Company closed on the sale of its six Mexico
department stores to Grupo Sanborns S.A. de C.V. of Mexico City. The stock sale
transaction, which included the Mexico holding company and operating companies
comprising JCPenney's Mexico department store operation, resulted in a loss of
$14 million, net of a $27 million tax benefit. The loss was principally related
to currency translation losses of $25 million accumulated since operations began
in 1995 that were previously reflected as reductions to stockholders' equity.
Additional components of the loss include potential liability on certain real
estate leases and merchandise and transaction costs.
-15-
Results of Operations
- ----------------------
The following discussion and analysis, consistent with all other financial data
throughout this report, focuses on the results of operations and financial
condition from the Company's continuing operations.
($ in millions, except EPS) 13 weeks ended
-------------------------------
May 1, Apr. 26,
2004 2003
-------------- ----------------
Retail sales, net $ 4,033 $ 3,711
-------------- ----------------
Gross margin 1,615 $ 1,456
SG&A expenses 1,386 1,372
-------------- ----------------
Operating profit 229 84
Net interest expense 57 65
Real estate and other (income) (8) (9)
-------------- ----------------
Income from continuing operations before
income taxes 180 28
Income tax expense 62 8
-------------- ----------------
Income from continuing operations $ 118 $ 20
============== ================
Diluted EPS from continuing operations $ 0.38 $ 0.05
Ratios as a percent of sales:
Gross margin 40.1% 39.2%
SG&A expenses 34.4% 37.0%
Operating profit 5.7% 2.2%
Depreciation and amortization in operating profit $ 87 $ 89
The Company continued its trend of improved profitability during the first
quarter of 2004 as reflected in income from continuing operations of $118
million, or $0.38 per share compared to $20 million, or $0.05 per share for the
comparable 2003 period. The significant increase over the soft first quarter of
2003 reflects improved operating profit, resulting from strong sales growth,
continued gross margin improvement and leveraging of selling, general and
administrative (SG&A) expenses.
Operating Profit
- -----------------
Operating profit for the first quarter of 2004 more than doubled to $229 million
or 5.7% of sales as compared to $84 million or 2.2% of sales for the comparable
period last year.
Operating profit and its components (sales, gross margin and SG&A) are the key
measurements on which management evaluates the financial performance of the
retail operations. Real estate activities, gains and losses on the sale of real
estate properties, asset impairments and other charges associated with closing
store and catalog facilities are evaluated separately from operations, and
recorded in real estate and other in the consolidated statement of operations.
-16-
Retail Sales, Net
($ in millions)
13 weeks ended
------------------------------
May 1, Apr. 26,
2004 2003
-------------- --------------
Retail sales, net $ 4,033 $ 3,711
-------------- --------------
Sales percent increase/(decrease):
Comparable stores (1) 9.5% (4.9)%
Total department stores 9.2% (6.3)%
Catalog/Internet 6.5% (11.1)%
(1) Comparable store sales include sales from stores which have been open for 12
consecutive months. A store's sales become comparable on the first day of the
13th fiscal month.
Department store sales were strong for the first quarter of 2004, with
particular strength in February and March. Comparable department store sales
increased 9.5% for the quarter, while total department store sales increased
9.2%. Sales, which reflect good customer response to both fashion and basic
merchandise, planned marketing events, improved store environment, particularly
visual presentation, and added convenience, continued to be strong across the
country and in most merchandise divisions. The fashionable merchandise program
and fresh receipts of new seasonal assortments contributed to the improvement in
apparel sales.
Catalog/Internet sales increased 6.5% for the first quarter of 2004 compared to
last year, and similar to Department Stores, Catalog/Internet sales were
particularly strong in February and March. Sales reflect less reliance on Big
Books, a focus on targeted specialty media and the expanded assortments and
convenience of the Internet. Total Internet sales, which are an integral part of
the Company's three-channel retailing strategy, increased more than 45% in the
first quarter.
The Company is launching two programs in the second and third quarters of 2004.
In May, the Company launched the Chris Madden home furnishings collection, which
demonstrates the Company's continuing commitment to delivering affordable,
trend-right fashion with remarkable quality to its customers. Chris Madden's
"Turning Home Into Haven" collection is JCPenney's largest home furnishings
launch ever and was introduced with a comprehensive national advertising
campaign. In addition, the Company is partnering with Colin Cowie, a nationally
recognized wedding planner, to launch in the third quarter of 2004, a new
innovative technology-based wedding registry and a new line of tableware and
giftware.
-17-
Gross Margin
Gross margin improved 90 basis points as a percent of sales in this year's first
quarter to $1,615 million compared to $1,456 million in the comparable 2003
period. The improvement reflects better inventory management, good sell-through
of seasonal merchandise, better execution and continuing benefits from the
centralized merchandising model. Benefits of the centralized model have included
enhanced merchandise offerings, a more integrated marketing plan, more leverage
in the buying and merchandising process and more efficient selection and
allocation of merchandise to individual department stores.
SG&A Expenses
SG&A expenses in this year's first quarter were $1,386 million compared to
$1,372 million in last year's first quarter. Expenses were well leveraged,
improving by 260 basis points as a percent of sales. The improvement reflects
savings in labor costs, centralized store expense management, a decline in
non-cash pension costs and early savings from the Company's previously announced
cost savings initiatives, offset by additional implementation costs related to
the initiative.
Net Interest Expense
- ---------------------
Net interest expense was $57 million and $65 million for the first quarters of
2004 and 2003. The $8 million decrease is primarily related to lower average
borrowing levels.
For the first quarter of 2004, net interest expense allocated to Eckerd
discontinued operations was $44 million compared to $38 million for the same
period last year. The higher interest expense is the result of increases in both
the Company's weighted average interest rate and the intercompany loan balance
between Eckerd and JCPenney. Upon closing of the Eckerd sale transactions, JCP
interest expense will increase as debt and related interest that had been
attributed to Eckerd will remain an obligation of the Company. See page 20 for a
discussion of the use of estimated proceeds from the Eckerd sale transaction.
Real Estate and Other (Income)/Expenses
- ----------------------------------------
Real estate and other consists of real estate activities, gains and losses on
the sale of real estate properties, and asset impairments, and other charges
associated with closing store and catalog facilities. Real estate and other for
the first quarter of 2004 was a net credit of $8 million, which consisted of a
$7 million credit for real estate operations, $2 million of gains on the sale of
closed units and $1 million of costs related to PVOL for closed stores.
For the first quarter of 2003, real estate and other was a net credit of $9
million, which consisted of a $4 million credit for real estate operations, $21
million of gains on the sale of closed units, $12 million of accelerated
depreciation of catalog facilities scheduled to close, $3 million of expenses
related to future rent for closed units and $1 million of other expenses.
Income Taxes
- -------------
The Company's effective income tax rate for continuing operations was 34.5% for
the first quarter of 2004 compared with 28.2% for the same period last year. The
rate increase is primarily due to improved earnings, which decreased the
favorable impact of permanent adjustments, principally the deduction for
dividends paid to the employee stock ownership plan.
-18-
Merchandise Inventory
- ---------------------
Merchandise inventory was $3,338 million at May 1, 2004 compared to $3,326
million at April 26, 2003 and $3,156 million at January 31, 2004. While
basically flat compared to last year, inventory at the end of the first quarter
of 2004 was well managed and reflected a good balance of seasonal and basic
merchandise, with less clearance. The Company has enhanced its ability to
allocate and flow merchandise to stores in season by recognizing sales trends
earlier and accelerating receipts, replenishing individual stores based on rates
of sale, and consistently providing high in-stock levels in basics and
advertised items.
Liquidity and Capital Resources
- -------------------------------
The Company's financial condition remains strong with approximately $3.0 billion
in cash and short-term investments as of May 1, 2004, which represents 57% of
the $5.4 billion of outstanding consolidated long-term debt, including current
maturities. Included in the total cash and short-term investment balance were
restricted short-term investment balances of $88 million and $87 million as of
May 1, 2004 and April 26, 2003, respectively, which are pledged as collateral
for import letters of credit not included in the bank credit facility and for a
portion of casualty program liabilities. Cash flow used in operating activities
for the first quarter of 2004 was $20 million compared to $362 million used in
operating activities in the comparable period of 2003. The improvement was due
primarily to better earnings and inventory leverage.
Free cash flow from continuing operations was a deficit of $99 million in the
first quarter of 2004, a significant improvement compared to a deficit of $440
million for the comparable 2003 period. Better earnings and inventory leverage
contributed to the improvement. While free cash flow is a non-GAAP financial
measure, management believes it is important in evaluating the Company's
financial performance and measuring the ability to generate cash without
incurring additional external financing. Free cash flow should be considered in
addition to, rather than as a substitute for, cash flows from operating
activities. The following table reconciles net cash used in operating activities
(GAAP) to free cash flows from continuing operations (non-GAAP measure):
($ in millions) 13 weeks ended
----------------------------------------
May 1, 2004 Apr. 26, 2003
------------------ ------------------
Net cash (used in) operating activities (GAAP) $ (20) $ (362)
Less:
Capital expenditures (64) (67)
Dividends paid (34) (34)
Plus:
Proceeds from sale of assets 19 23
------------------ ------------------
Free cash flow from continuing operations $ (99) $ (440)
================== ==================
Capital expenditures were $64 million the first quarter of 2004 compared with
$67 million for the comparable 2003 period. Capital spending was in the
strategic areas of new stores, store renewals and modernizations, and
technology, including gift registry. Management continues to expect total
capital expenditures for the full year to be in the area of $500 million.
Net proceeds from the exercise of stock options were approximately $130 million
for the first quarter of 2004 and immaterial for 2003.
The Company's next scheduled debt maturity is the $208 million of 7.375% Notes
Due on June 15, 2004.
-19-
As discussed in Note 2 and on page 15, the Company continues to expect the
Eckerd sale transactions to close by the end of the second quarter of 2004.
After closing adjustments, taxes, fees and other expenses related to the
transactions, the Company expects to generate approximately $3.5 billion in cash
proceeds. Subject to approval by the Company's Board of Directors, management
anticipates that the proceeds will be used for an appropriate mix of both common
stock repurchases and debt retirements. Effective May 20, 2004, Eckerd's managed
care receivables securitization program was paid off in the amount of $221
million and terminated. On May 17, 2004, the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) expired in connection
with the Company's sale of that portion of its Eckerd drugstore operations to
Coutu. On June 1, 2004, the Company announced that the Federal Trade Commission
had completed its review of the Company's sale of that portion of its Eckerd
drugstore operations to CVS, and granted early termination of the waiting period
under the HSR.
For the remainder of 2004, management believes that cash flow generated from
operations, combined with the short-term investment position, will be adequate
to fund cash requirements for capital expenditures, working capital and dividend
payments and, therefore, no external funding will be required. The payment of
dividends is subject to approval by the Company's Board of Directors on a
quarterly basis. At the present time, management does not expect to access the
capital markets for any external financing for the remainder of 2004. However,
the Company may access the capital markets on an opportunistic basis. Management
believes that the Company's financial position will continue to provide the
financial flexibility to support its turnaround initiatives.
Additional liquidity strengths include the available $1.5 billion credit
facility discussed in the 2003 10-K and in Note 12, which was amended effective
June 2, 2004 to permit the sale of the Eckerd Corporation, and its affiliates
and assets, allow a broader range of cash investments, and permit issuing banks
to extend maturities of certain letters of credit past the expiration of the
Credit Agreement as long as they are collateralized with cash at that time. No
borrowings, other than the issuance of trade and standby letters of credit,
which totaled $235 million as of the end of the first quarter of 2004, have
been, or are expected to be, made under this facility. On a consolidated basis,
the Company was in compliance with all financial covenants of the credit
facility as of May 1, 2004.
Operating cash flows may be impacted by many factors, including the competitive
conditions in the retail industry, and the effects of the current economic
conditions and consumer confidence. Based on the nature of the Company's
businesses, management considers the above factors to be normal business risks.
Quarterly dividends of $0.125 per share on the Company's outstanding common
stock were paid on February 1, 2004 to stockholders of record on January 10,
2004 and on May 1, 2004 to stockholders of record on April 10, 2004.
Stock Option Accounting
- -----------------------
As discussed in the 2003 10-K, the Company follows Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," which does not
require expense recognition for stock options when the exercise price of an
option equals, or exceeds, the fair market value of the common stock on the date
of grant. The Financial Accounting Standards Board (FASB) proposed a new rule
that would require expense recognition of stock options in the statement of
operations beginning in 2005. The Company will adopt any new rules required by
the FASB when they are effective. As required by Statement of Finanical
Accounting Standards (SFAS) No. 123 for companies retaining APB 25 accounting,
the Company discloses the estimated impact of fair value accounting for stock
options granted. See Note 1 for the pro forma impact on the first quarters of
2004 and 2003.
-20-
Recently Issued Accounting Pronouncements
- ------------------------------------------
Recently issued accounting pronouncements are discussed in Note 1 to the
unaudited Interim Consolidated Financial Statements.
Pre-Approval of Auditor Services
- --------------------------------
During the first quarter of 2004, the Audit Committee of the Company's Board of
Directors approved estimated fees for the remainder of 2004 related to the
performance of both audit and allowable non-audit services by the Company's
external auditors, KPMG LLP.
Seasonality
- -----------
The results of operations and cash flows for the 13 weeks ended May 1, 2004 are
not necessarily indicative of the results for the entire year. The Company's
business depends to a great extent on the last quarter of the year. Historically
for that period, Department Stores and Catalog/Internet sales have averaged
approximately one-third of annual sales and income from continuing operations
has averaged about 60% of the full year total.
-21-
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks in the normal course of business due to
changes in interest rates and currency exchange rates. The Company's market
risks related to interest rates at May 1, 2004 are similar to those disclosed in
the Company's 2003 10-K. For the 13 weeks ended May 1, 2004, the other
comprehensive loss on foreign currency translation was $1 million. Due to the
limited nature of foreign operations, management believes that its exposure to
market risk associated with foreign currencies would not have a material impact
on its financial condition or results of operations.
Item 4 - Controls and Procedures
Based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934) as of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company's principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective
for the purpose of ensuring that material information required to be in this
Quarterly Report is made known to them by others on a timely basis. There have
not been changes in the Company's internal control over financial reporting that
occurred during the Company's last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties that
may cause the Company's actual results to be materially different from planned
or expected results. Those risks and uncertainties include, but are not limited
to, competition, consumer demand, seasonality, economic conditions, and
government activity. Investors should take such risks into account when making
investment decisions.
-22-
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
Exhibit Nos.
-------------
10.1 Amendment No.1 dated as of June 2, 2004 to the Credit
Agreement dated as of May 31, 2002 among the Company, JCP,
J. C. Penney Purchasing Corporation, the Lenders party
thereto, JPMorgan Chase Bank, as Administrative Agent, and
Wachovia Bank, N.A. as Letter of Credit Agent
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the period
covered in this report:
o Current Report on Form 8-K dated February 26, 2004 (Item 12 -
Results of Operations and Financial Condition)
o Current Report on Form 8-K dated March 29, 2004 (Item 5 - Other
Events and Regulation FD Disclosure)
o Current Report on Form 8-K dated April 4, 2004 (Item 5 - Other
Events and Regulation FD Disclosure)
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J. C. PENNEY COMPANY, INC.
By /s/ William J. Alcorn
------------------------------
W. J. Alcorn
Senior Vice President and Controller
(Principal Accounting Officer)
Date: June 9, 2004
-24-
Exhibit 31.1
CERTIFICATION
- -------------
I, Allen Questrom, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) [Intentionally omitted]
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 9, 2004.
/s/ Allen Questrom
--------------------------
Allen Questrom
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.
-25-
Exhibit 31.2
CERTIFICATION
- --------------
I, Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) [intentionally omitted]
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 9, 2004.
/s/ Robert B. Cavanaugh
---------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
J. C. Penney Company, Inc.
-25-
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of J. C. Penney Company, Inc. (the
"Company") on Form 10-Q for the period ending May 1, 2004 (the "Report"), I,
Allen Questrom, Chairman and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATED this 9th day of June 2004.
/s/ Allen Questrom
-----------------------------
Allen Questrom
Chairman and Chief Executive Officer
-27-
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of J. C. Penney Company, Inc. (the
"Company") on Form 10-Q for the period ending May 1, 2004 (the "Report"), I,
Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATED this 9th day of June 2004.
/s/ Robert B. Cavanaugh
-----------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer