J C PENNEY CO INC - 10-Q Quarterly Report

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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 April 30, 2005 Commission file number 1-15274

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transitional period from ______________ to ________________
Commission file number _______________________

J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)

Delaware 26-0037077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6501 Legacy Drive, Plano, Texas 75024 - 3698
(Address of principal executive offices)
(Zip Code)

(972) 431-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes X No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

263,293,480 shares of Common Stock of 50 cents par value, as of June 7, 2005.

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 19
Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about 31
Market Risk

Item 4. Controls and Procedures 31

Part II Other Information

Item 1. Legal Proceedings 32

Item 2. Unregistered Sales of Equity Securities 32
and Use of Proceeds

Item 6. Exhibits 33

Signature Page 34

Certifications 35

i

PART I - FINANCIAL INFORMATION

Item 1 - Unaudited Financial Statements

J. C. Penney Company, Inc.
Consolidated Statements of Operations
(Unaudited)

($ in millions, except per share data) 13 weeks ended
--------------------------------------

Apr. 30, May 1,
2005 2004
----------------- -----------------

Retail sales, net $ 4,192 $ 4,033
Cost of goods sold 2,463 2,418
----------------- -----------------
Gross margin 1,729 1,615
Selling, general and administrative expenses 1,416 1,386
Net interest expense 53 57
Bond premiums and unamortized costs 13 -
Real estate and other (income) (22) (8)
----------------- -----------------
Income from continuing operations before income taxes 269 180
Income tax expense 97 62
----------------- -----------------
Income from continuing operations $ 172 $ 118
Discontinued operations, net of income tax (benefit)
of $- and $(90) - (77)
----------------- -----------------
Net income $ 172 $ 41

Less: preferred stock dividends - 6
----------------- -----------------
Net income applicable to common stockholders $ 172 $ 35
================= =================

Basic earnings/(loss) per share:
Continuing operations $ 0.63 $ 0.40
Discontinued operations - (0.27)
----------------- -----------------
Net income $ 0.63 $ 0.13
================= =================

Diluted earnings/(loss) per share:
Continuing operations $ 0.63 $ 0.38
Discontinued operations - (0.25)
----------------- -----------------
Net income $ 0.63 $ 0.13
================= =================

The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.

-1-

J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)

($ in millions) Apr. 30, May 1, Jan. 29,
2005 2004 2005
--------------- ------------ --------------

Assets
Current assets
Cash and short-term investments
(including restricted balances of $64,
$88 and $63) $ 4,147 $ 3,027 $ 4,687

Receivables (net of bad debt reserves
of $7, $5 and $7) 382 243 404

Merchandise inventory (net of LIFO
reserves of $25, $43 and $25) 3,293 3,338 3,169

Prepaid expenses 173 203 167
--------------- ------------ --------------

Total current assets 7,995 6,811 8,427

Property and equipment (net of accumulated
depreciation of $2,150, $2,178 and $2,077) 3,636 3,462 3,638

Prepaid pension 1,524 1,302 1,538

Other assets 544 508 524

Assets of discontinued operations (net of fair value
adjustment of $-, $615 and $-) - 6,077 -
--------------- ------------ --------------
Total Assets $13,699 $ 18,160 $ 14,127
=============== ============ ==============

The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.

-2-

J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)

($ in millions, except per share data) Apr. 30, May 1, Jan. 29,
2005 2004 2005
-------------- ------------ -------------
Liabilities and Stockholders' Equity
Current liabilities
Trade payables $ 1,193 $ 1,302 $ 1,200
Accrued expenses and other 1,549 1,109 1,766
Short-term debt 111 34 22
Current maturities of long-term debt 264 243 459
Deferred taxes - 875 -
-------------- ------------ -------------
Total current liabilities 3,117 3,563 3,447

Long-term debt 3,461 5,113 3,464
Deferred taxes 1,328 1,204 1,318
Other liabilities 1,031 819 1,042
Liabilities of discontinued operations - 1,863 -
-------------- ------------ -------------
Total Liabilities 8,937 12,562 9,271

Stockholders' equity
Capital stock
Preferred stock(1) - 297 -
Common stock and additional paid-in capital(2) 4,192 3,717 4,176
-------------- ------------ -------------
Total capital stock 4,192 4,014 4,176
-------------- ------------ -------------
Reinvested earnings at beginning of year 812 1,728 1,728

Net income 172 41 524
Retirement of common stock (259) - (1,290)
Dividends declared (34) (34) (150)
-------------- ------------ -------------
Reinvested earnings at end of period 691 1,735 812

Accumulated other comprehensive (loss) (121) (151) (132)
-------------- ------------ -------------
Total Stockholders' Equity 4,762 5,598 4,856
-------------- ------------ -------------
Total Liabilities and Stockholders' Equity $13,699 $ 18,160 $14,127
============== ============ =============

(1) Preferred stock has a stated value of $600 per share; 25 million shares are
authorized. At April 30, 2005 and January 29, 2005, no shares were issued
and outstanding due to the redemption of all preferred shares into common
stock during 2004. At May 1, 2004, 0.5 million shares of Series B ESOP
convertible preferred stock were issued and outstanding.

(2) Common stock has a par value of $0.50 per share; 1,250 million shares are
authorized. At April 30, 2005, May 1, 2004 and January 29, 2005, 267
million shares, 282 million shares and 271 million shares were issued and
outstanding, respectively.

The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.

-3-

J. C. Penney Company, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

($ in millions) 13 weeks ended
----------------------------------------
Apr. 30, May 1,
2005 2004
------------------ -----------------
Cash flows from operating activities:
Income from continuing operations $ 172 $ 118
Adjustments to reconcile income from continuing operations
to net cash provided by/(used in) operating activities:
Asset impairments, PVOL and other unit closing costs 1 1
Depreciation and amortization 90 87
Net gains on sale of assets (14) (2)
Benefit plans expense 20 16
Stock-based compensation 22 3
Deferred taxes 42 9
Change in cash from:
Receivables (9) (22)
Inventory (124) (182)
Prepaid expenses and other assets (20) 20
Trade payables (7) 137
Current income taxes payable 45 43
Accrued expenses and other liabilities (206) (248)
------------------ -----------------
Net cash provided by/(used in) operating activities 12 (20)
------------------ -----------------
Cash flows from investing activities:
Capital expenditures (99) (64)
Proceeds from sale of assets 16 19
------------------ -----------------
Net cash (used in) investing activities (83) (45)
------------------ -----------------
Cash flows from financing activities:
Change in short-term debt 17 16
Payment of long-term debt, including capital
leases and bond premiums (138) (3)
Common stock repurchased (318) -
Common stock dividends paid (35) (34)
Proceeds from stock options exercised 75 130
------------------ -----------------
Net cash (used in)/provided by financing activities (399) 109
------------------ -----------------
Cash (paid to) discontinued operations (70) (11)
------------------ -----------------

Net (decrease)/increase in cash and short-term investments (540) 33
Cash and short-term investments at beginning of year 4,687 2,994
------------------ -----------------
Cash and short-term investments at end of period $ 4,147 $ 3,027
================== =================

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 29, 2005 (the "2004
10-K"). The accompanying unaudited Interim Consolidated Financial Statements
present the results of J. C. Penney Company, Inc. and its subsidiaries (the
Company or JCPenney) and should be read in conjunction with the Consolidated
Financial Statements and notes thereto in the 2004 10-K. All significant
intercompany transactions and balances have been eliminated in consolidation.

The accompanying Interim Consolidated Financial Statements are unaudited but, in
the opinion of management, include all material adjustments necessary for a fair
presentation. Because of the seasonal nature of the retail business, operating
results for interim periods are not necessarily indicative of the results that
may be expected for the full year. The January 29, 2005 financial information
was derived from the audited Consolidated Financial Statements, with related
footnotes, included in the 2004 10-K.

Certain reclassifications were made to prior year amounts to conform to the
current period presentation. Additionally, as a result of guidance issued by the
Securities and Exchange Commission, the Company reviewed its lease accounting
policies at year-end 2004. As a result of this review, a cumulative pre-tax
expense adjustment was recorded in the fourth quarter of 2004 related to
recognizing rent on a straight-line basis over the lease term and synchronizing
depreciation periods for fixed assets with the related lease terms. The impact
on prior years was not material. The Company also recorded a $111 million
balance sheet adjustment at January 29, 2005 to increase net Property and
Equipment and establish a deferred rent liability, included in Other Liabilities
in the Company's Consolidated Balance Sheet, for the unamortized balance of
developer/tenant allowances. As of April 30, 2005, the balance of the deferred
rent liability was $111 million.

Certain debt securities were issued by J. C. Penney Corporation, Inc. (JCP), the
wholly owned operating subsidiary of the Company. The Company is a co-obligor
(or guarantor, as appropriate) regarding the payment of principal and interest
on JCP's outstanding debt securities. The guarantee by the Company of certain of
JCP's outstanding debt securities is full and unconditional.

Stock-Based Compensation
The Company has a stock-based compensation plan that provides for grants to
associates of stock awards, stock appreciation rights or options to purchase the
Company's common stock. Prior to fiscal year 2005, the Company accounted for the
plan under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
and related Interpretations. No stock-based employee compensation cost was
reflected in the Consolidated Statements of Operations for stock options prior
to fiscal year 2005, since all options granted under the plan have an exercise
price equal to the market value of the underlying common stock on the date of
grant.

Effective January 30, 2005, the Company early-adopted Statement of Financial
Accounting Standards No. 123 (revised), "Share-Based Payment" (SFAS No. 123R),
which requires the use of the fair value method for accounting for all
stock-based compensation, including stock options. The statement was adopted
using the modified prospective method of application. Under this method, in
addition to reflecting compensation expense for new share-based awards, expense
is also recognized to reflect the remaining vesting period of awards that had
been included in pro-forma disclosures in prior periods. The impact of expensing
stock options on the Company's first quarter of 2005 was compensation expense of
$19 million ($12 million after tax), a reduction of $0.05 for both basic and
diluted earnings per share. In the first quarter of 2005, the adoption of SFAS
No. 123R had no impact on the Company's Consolidated Statement of Cash Flows

-5-

related to the new treatment of excess tax benefits, which requires such
benefits to be reflected as financing cash inflows. The Company has not adjusted
prior year financial statements under the optional modified retrospective method
of adoption.

Under APB No. 25, pro-forma expense for stock options with pro-rata vesting was
calculated on a straight-line basis over the stated vesting period, which
typically ranges from one to five years. Upon the adoption of SFAS No. 123R, the
Company records compensation expense on a straight-line basis over the employee
service period, which is to the earlier of the retirement eligibility date or
the stated vesting period (the non-substantive vesting period approach).

The following table illustrates the effect on net income and earnings per share
as if the fair value method had been applied to all outstanding awards in the
first quarter of 2004. The 2005 information is provided in the table for
purposes of comparability.

($ in millions, except EPS) 13 weeks ended
---------------- -----------------
Apr.30 May 1,
2005 2004(1)
---------------- -----------------
Net income, as reported $ 172 $ 41
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects 14 2
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (14) (6)
---------------- -----------------
Pro-forma net income $ 172 $ 37
================ =================

Earnings per share:
Basic--as reported $ 0.63 $ 0.13
Basic--pro forma $ 0.63 $ 0.11
Diluted--as reported $ 0.63 $ 0.13
Diluted--pro forma $ 0.63 $ 0.12

(1) If the prior year pro-forma expense had been attributed using the
non-substantive vesting period approach, total stock-based employee
compensation expense would have been $12 million, net of tax, and pro-forma
net income would have been $31 million. Basic and diluted pro-forma
earnings per share would have been $0.09 and $0.10 for last year's first
quarter, respectively.

Prior to fiscal year 2005, the Company used the Black-Scholes option-pricing
model to estimate the grant date fair value of its stock option awards. For
grants subsequent to the adoption of SFAS No. 123R, the Company estimates the
fair value of stock option awards on the date of grant using a binomial lattice
model. The Company believes that the binomial lattice model is a more accurate
model for valuing employee stock options since it better reflects the impact of
stock price changes on option exercise behavior.

The expected volatility used in the binomial lattice model is based on an
analysis of historical prices of JCPenney's stock and open market exchanged
options, and was developed in consultation with an outside valuation specialist
and the Company's financial advisors. The expected volatility reflects the
volatility implied from a price quoted for a hypothetical call option with a
duration consistent with the expected life of the options, and the volatility
implied by the trading of options to purchase the Company's stock on open-market
exchanges. As a result of the Company's turnaround over the past four years and
the disposition of the Eckerd drugstore operations, a significant portion of the
historical volatility is not considered to be a good indicator of future
volatility. The expected term of options

-6-

granted is based primarily on historical exercise patterns, but also
incorporates an early exercise assumption in the event of a significant increase
in stock price. The risk-free rate is based on zero-coupon U.S. Treasury yields
in effect at the date of grant with the same period as the expected option life.
The dividend yield is assumed to increase ratably to the Company's expected
dividend yield level based on targeted payout ratios over the expected life of
the options. The option cancellation assumption, which impacts the total expense
recognized as opposed to the fair value of the award, takes into account
historical patterns, adjusted to reflect the Company's turnaround efforts.

The following table presents the assumptions utilized to estimate the grant date
fair value of stock options:

13 weeks ended
Apr. 30, 2005 May 1, 2004
----------------------- ------------------------
Valuation model Binomial Lattice Black-Scholes
Expected volatility 30.0% 30.0%
Expected dividend yield 1.12%-1.20% 1.40%
Expected term 5.0 years 5.0 years
Risk-free rate 4.0% 3.0%
Weighted-average fair value of options at grant date $ 12.81 $ 8.43

See Note 10 for additional discussion of the Company's stock-based compensation.

Effect of New Accounting Standards
On May 19, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) SFAS No. 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 that offer retiree prescription drug
benefits that are at least actuarially equivalent to those offered under the
government sponsored Medicare Part D. While the provisions of FSP SFAS No. 106-2
were effective in the Company's third quarter of 2004, final regulations that
define actuarial equivalency were not issued until January 2005. 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.

2) Discontinued Operations
------------------------

Eckerd Drugstores
On July 31, 2004, the Company and certain of its subsidiaries closed on the sale
of its Eckerd drugstore operations for a total of approximately $4.7 billion in
cash proceeds that included a $209 million adjustment for the estimated increase
in Eckerd's working capital from January 31, 2004 to July 31, 2004. After
deducting taxes, fees and other transaction costs, and estimated post-closing
adjustments, the ultimate net cash proceeds from the sale total approximately
$3.5 billion. The Jean Coutu Group (PJC) Inc. (Coutu) acquired Eckerd drugstores
and support facilities located in 13 Northeast and Mid-Atlantic states, as well
as the Eckerd Home Office located in Florida. CVS Corporation and CVS Pharmacy,
Inc. (collectively, CVS) acquired Eckerd drugstores and support facilities
located in the remaining Southern states, principally Florida and Texas, as well
as Eckerd's pharmacy benefits management, mail order and specialty pharmacy
businesses. Proceeds from the sale are being used for common stock repurchases
and debt reduction, as announced in August 2004, and more fully discussed in
Note 3.

-7-

The loss on the sale was $713 million pre-tax, or $1,433 million on an after-tax
basis. The relatively high tax cost is a result of the tax basis of Eckerd being
lower than its book basis because the Company's previous drugstore acquisitions
were largely tax-free transactions. Of the total after-tax loss on the sale,
$1,325 million was recorded in 2003 to reflect Eckerd at its estimated fair
value less costs to sell. During the first and second quarters of 2004,
after-tax losses of $77 million and $31 million, respectively, were recorded to
reflect revised estimates of certain post-closing adjustments and resulting
sales proceeds.

Additionally, $3.4 billion of the present value of operating lease obligations
(PVOL), which was an off-balance sheet obligation under generally accepted
accounting principles (GAAP), was eliminated with the transfer of these leases
to the purchasers of the Eckerd drugstore operations upon the closing of the
sale.

The Company established reserves at July 31, 2004 for estimated transaction
costs and post-closing adjustments. Certain of these reserves involved
significant judgment and actual costs incurred over time could vary from these
estimates. The more significant estimates relate to the estimated working
capital adjustment, the costs to exit the Colorado and New Mexico markets,
assumption of the Eckerd Pension Plan and various post-employment benefit
obligations and environmental indemnifications. Management is currently
negotiating with both CVS and Coutu regarding the working capital adjustment as
required in the respective sale agreements. Management continues to review and
update the reserves on a quarterly basis. While adjustments have been made to
individual reserves, management believes that, in total, the reserves remain
adequate at the end of the first quarter of 2005. Cash payments for the
Eckerd-related reserves are included in the Company's Consolidated Statements of
Cash Flows as Cash Paid to Discontinued Operations.

As part of the Asset Purchase Agreement with CVS, it was agreed that, with
respect to the Colorado and New Mexico locations (CN real estate interests), at
closing any of these properties that were not disposed of would be transferred
to CVS. On August 25, 2004, the Company and CVS entered into the CN Rescission
Agreement, whereby the Company received a one-time payment from CVS of $21.4
million, which represented the agreed-upon limit of CVS's liability regarding
the CN real estate interests plus net proceeds from dispositions as of August 25
minus expenses borne and paid by CVS as of August 25 relating to the CN real
estate interests. Effective August 25, CVS transferred to the Company all CN
real estate interests not disposed of, corresponding third party agreements and
liabilities. The Company has engaged a third-party real estate firm and is
working through disposition plans for each individual property.

At the closing of the sale of Eckerd on July 31, 2004, the Company assumed
sponsorship of the Eckerd Pension Plan, the Eckerd Contingent Separation Pay
Programs and various other terminated non-qualified retirement plans and
programs. The Company further assumed all severance and post-employment health
and welfare benefit obligations under various Eckerd plans, employment and other
specific agreements. The Company is evaluating its options with respect to these
assumed liabilities, including, but not limited to, termination of the
agreements, plans or programs and/or settlement of the underlying benefit
obligations.

As part of the Eckerd sale agreements, the Company retained responsibility to
remediate environmental conditions that existed at the time of the sale. Certain
properties, principally distribution centers, were identified as having such
conditions at the time of sale. Preliminary cost estimates have been established
by management, in consultation with an environmental engineering firm, for
specifically identified properties, as well as a certain percentage of the
remaining properties, considering such factors as age, location and prior use of
the properties. Further studies are underway to develop remediation plans and
refine cost estimates, which could vary from preliminary estimates.

-8-

Both CVS and Coutu entered into agreements with the Company and the Company's
insurance provider in order to assume the obligations for general liability and
workers' compensation claims that had been transferred to the purchasers at
closing. The agreement with CVS was entered into concurrent with the closing,
while the agreement with Coutu was finalized in the third quarter of 2004. At
closing, the Company had approximately $64 million in letters of credit pledged
as collateral to its insurance provider in support of general liability and
workers' compensation claims that were transferred to Coutu as part of the
Eckerd sale. Upon the finalization of the insurance assumption agreements, this
amount was reduced to approximately $8.5 million. Based on a separate agreement
between Coutu and the Company, Coutu will provide replacement letters of credit
to the insurance company no later than September 17, 2006, which will release
the Company from any further potential obligation.

The Company is providing to the purchasers certain information systems,
accounting, banking, vendor contracting, tax and other transition services as
set forth in the Company's Transition Services Agreements (Transition
Agreements) with CVS and Coutu for a period of 12 months from the closing date,
unless terminated earlier by the purchasers. One Transition Agreement with
Pharmacare Management Services, Inc., a subsidiary of CVS, involves the
provision of information and data management services for a period of up to 15
months from the closing date. Under the Transition Agreements, the Company
receives monthly service fees, which are designed to recover the estimated costs
of providing the specified services. To the extent actual costs to provide such
services exceed the estimates, any additional costs incurred are reflected in
Discontinued Operations.

Discontinued Operations in the Consolidated Statements of Operations reflect
Eckerd's operating results for all periods presented, including allocated
interest expense. Interest expense was allocated to the discontinued operation
based on Eckerd's outstanding balance on its intercompany loan payable to
JCPenney, which accrued interest at JCPenney's weighted-average interest rate on
its net debt (long-term debt net of short-term investments) calculated on a
monthly basis.

There was no operating activity during the first quarter of 2005 related to
discontinued operations. Results of the Eckerd discontinued operation as
reflected in the Consolidated Statement of Operations for the 13 weeks ended May
1, 2004 are summarized below:

($ in millions) 13 weeks ended
May 1, 2004
-----------------------
Net sales $3,722
-----------------------
Gross margin 843
Selling, general and administrative expenses 794
Interest expense 46
Acquisition amortization 2
Other 1
-----------------------
Income before income taxes -
Income tax expense -
-----------------------
Income from operations -
(Loss) on sale of Eckerd, net of income tax
(benefit) of $(90) (77)
-----------------------
Total discontinued operations, net $ (77)
=======================

-9-

With the closing of the Eckerd sale on July 31, 2004, there were no assets or
liabilities of discontinued operations as of April 30, 2005 or January 29, 2005.
Assets and liabilities of the Eckerd discontinued operation as of May 1, 2004
were as follows:

($ in millions) May 1,
2004
-----------------

Current assets $ 2,381
Other assets 4,311
-----------------
Total assets $ 6,692
-----------------
Current liabilities $ 1,375
Other liabilities 488
-----------------
Total liabilities $ 1,863
-----------------
JCPenney's net investment in Eckerd $ 4,829
Fair value adjustment (615)
-----------------
Fair value of JCPenney's investment in Eckerd $ 4,214
=================

3) Capital Structure Repositioning
-------------------------------

In August 2004, the Company initiated a major equity and debt reduction program
focused on enhancing stockholder value, strengthening the capital structure and
improving the credit rating profile. On March 18, 2005, the JCPenney Board of
Directors authorized additional common stock repurchases and debt retirements.
The Company is using the $3.5 billion in net cash proceeds from the sale of the
Eckerd drugstore operations and existing cash and short-term investment balances
to fund the programs, which consist of the following:

Common Stock Repurchases
- --------------------------
The Company is executing common stock repurchase programs of up to $3.75
billion, including $3.0 billion authorized in 2004 and $750 million authorized
in 2005. Share repurchases have been and will continue to be made in open-market
transactions, subject to market conditions, legal requirements and other
factors. During the first quarter of 2005, the Company repurchased and retired
7.7 million shares of common stock at a cost of approximately $360 million,
bringing the total purchases up to date under the programs to 57.8 million
shares of common stock at a cost of approximately $2.3 billion. This represents
approximately 60% of the planned repurchases. As of April 30, 2005,
approximately $1.4 billion remained authorized under the programs for share
repurchases.

Debt Reduction
- ---------------
The Company's debt reduction programs currently consist of planned debt
retirements of $2.13 billion, including approximately $1.88 billion authorized
in 2004 and $250 million authorized in 2005. JCP's $400 million 7.4% Debentures
Due 2037, which were subject to redemption at the option of the holders, had
initially been included in the 2004 program, but upon expiration of the put
option on March 1, 2005, virtually all of the holders extended their debentures
to the stated 2037 maturity date.

By the end of the first quarter of 2005, the Company had reduced debt by
approximately $1.9 billion, including $194 million of open-market debt
repurchases completed in the first quarter, and 2004 transactions that consisted
of $650 million of debt converted to common stock, $822 million of cash payments
and the termination of the $221 million Eckerd securitized receivables program.
Of the $194 million of JCP's outstanding debt repurchased in the first quarter,
$125 million principal amount cash settled in the first quarter, and the
remaining $69 million principal amount cash settled in the first week of the
second quarter. The Company incurred pre-tax charges of $13 million in the first
quarter related to these early debt retirements. As of the end of the first
quarter, $56 million of authorized open-market

-10-

debt purchases remained under the 2005 program. During the third and fourth
quarters of 2004, the Company incurred total pre-tax charges of $47 million
related to early debt retirements.

The 2004 debt reduction program was completed during the second quarter of 2005
upon the payment of $193 million of long-term debt at the scheduled maturity
date in May 2005.

Series B Convertible Preferred Stock Redemption
- ------------------------------------------------

On August 26, 2004, the Company redeemed, through conversion to common stock,
all of its outstanding shares of Series B ESOP Convertible Preferred Stock
(Preferred Stock), all of which were held by the Company's Savings,
Profit-Sharing and Stock Ownership Plan, a 401(k) savings plan. Each holder of
Preferred Stock received 20 equivalent shares of JCPenney common stock for each
one share of Preferred Stock in their Savings Plan account in accordance with
the original terms of the Preferred Stock. Preferred Stock shares, which were
included in the diluted earnings per share calculation as appropriate, were
converted into approximately nine million common stock shares.

Common Stock Outstanding
During the first three months of 2005, common stock outstanding decreased 4.8
million shares to 266.6 million shares from 271.4 million shares at the
beginning of the year. The decline in outstanding shares is attributable to
approximately eight million shares repurchased and retired partially offset by
approximately three million shares issued due to the exercise of stock options.

4) Earnings/(Loss) per Share
--------------------------

Basic earnings/(loss) per share (EPS) is computed by dividing net income less
dividend requirements on the Series B ESOP Convertible Preferred Stock, net of
tax as applicable, by the weighted-average number of shares of common stock
outstanding for the period. Except when the effect would be anti-dilutive at the
continuing operations level, the diluted EPS calculation includes the impact of
restricted stock units and shares that, during the period, could have been
issued under outstanding stock options, as well as common shares that would have
resulted from the conversion of convertible debentures and convertible preferred
stock. If the applicable shares are included in the calculation, the related
interest on convertible debentures (net of tax) and preferred stock dividends
(net of tax) are added back to income, since these would not be paid if the
debentures or preferred stock were converted to common stock. Both the
convertible debentures and preferred stock were converted to common stock in the
second half of 2004. See Note 3.

-11-

Income from continuing operations and shares used to compute EPS from continuing
operations, basic and diluted, are reconciled below:

(in millions, except EPS) 13 weeks ended
--------------------------
Apr. 30, May 1,
2005 2004
------------ ----------
Earnings:
Income from continuing operations $ 172 $ 118
Less: preferred stock dividends, net of tax - 6
------------ ----------
Income from continuing operations, basic 172 112
Adjustment for assumed dilution:
Interest on 5% convertible debt, net of tax - 5
------------ ----------
Income from continuing operations, diluted $ 172 $ 117
============ ==========

Shares:
Average common shares outstanding (basic
shares) 271 278
Adjustments for assumed dilution:
Stock options and restricted stock units 3 5

Shares from convertible debt - 23
------------ ----------
Average shares assuming dilution (diluted
shares) 274 306
============ ==========

EPS from continuing operations:
Basic $ 0.63 $0.40
Diluted $ 0.63 $0.38

The following potential shares of common stock were excluded from the EPS
calculation:

(shares in millions)
13 weeks ended
--------------------------
Apr. 30, May 1,
2005 2004
----------- -----------
Stock options (1) 2 7
Preferred stock - 10(2)

(1) These stock options had exercise prices per
share above the average price of the Company's
common stock for the period. Such exercise prices
for the respective periods ranged from: $48 to $71 $34 to $71

(2) The effect of these potential shares of common
stock was anti-dilutive.

5) Cash and Short-Term Investments
--------------------------------

($ in millions) Apr. 30, May 1, Jan. 29,
2005 2004 2005
------------------- ----------------- ---------------
Cash $ 144 $ 96 $ 46
Short-term investments 4,003 2,931 4,641
------------------- ----------------- ---------------
Total cash and short-term investments $ 4,147 $3,027 $4,687
=================== ================= ===============

-12-

Restricted Short-Term Investment Balances
Short-term investments include restricted balances of $64 million, $88 million
and $63 million as of April 30, 2005, May 1, 2004 and January 29, 2005,
respectively. Restricted balances are pledged as collateral for import letters
of credit not included in the Company's bank credit facility and/or for a
portion of casualty insurance program liabilities.

6) Supplemental Cash Flow Information
-----------------------------------

($ in millions) 13 weeks ended
---------------------------------------
Apr. 30, 2005 May 1, 2004
----------------- ----------------
Total interest paid $ 112 $ 168
Less: interest paid attributable to discontinued operations - 44
----------------- ----------------
Interest paid by continuing operations $ 112 $ 124
================= ================
Interest received by continuing operations(1) $ 21 $ 6
================= ================
Income taxes paid by continuing operations(1) $ 17 $ 5
================= ================

(1) There was no interest received or income taxes paid attributable to
discontinued operations in the first quarters of 2005 or 2004.

7) Goodwill
---------

The carrying amount of goodwill for Renner Department Stores in Brazil, which is
reflected in Other Assets in the Company's Consolidated Balance Sheets, was $42
million, $42 million and $43 million as of April 30, 2005, May 1, 2004 and
January 29, 2005, respectively. 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 2005 or 2004.

8) Credit Agreement
----------------

On April 7, 2005, the Company, JCP and J. C. Penney Purchasing Corporation
entered into a five-year $1.2 billion revolving credit facility (2005 Credit
Facility) with a syndicate of lenders with JPMorgan Chase Bank, N.A., as
administrative agent. The 2005 Credit Facility replaces the Company's $1.5
billion credit facility that was scheduled to expire in May 2005. The 2005
Credit Facility is unsecured, and all collateral securing the previously
existing $1.5 billion credit facility has been released. The 2005 Credit
Facility is available for general corporate purposes, including the issuance of
letters of credit. Pricing under the 2005 Credit Facility is tiered based on
JCP's senior unsecured long-term debt ratings by Moody's and Standard & Poor's.
Obligations under the 2005 Credit Facility are guaranteed by the Company.

The 2005 Credit Facility includes a requirement that the Company maintain, as of
the last day of each fiscal quarter, a maximum ratio of total Funded
Indebtedness to Consolidated EBITDA (Leverage Ratio, as defined in the 2005
Credit Facility), as measured on a trailing four-quarters basis, of no more than
3.0 to 1.0. Additionally, the 2005 Credit Facility requires that the Company
maintain, for each period of four consecutive fiscal quarters, a minimum ratio
of Consolidated EBITDA plus Consolidated Rent Expense to Consolidated Interest
Expense plus Consolidated Rent Expense (Fixed Charge Coverage Ratio, as defined
in the 2005 Credit Facility) of at least 3.2 to 1.0. As of April 30, 2005, the
Company's Leverage Ratio was 2.2 to 1.0 and the Fixed Charge Coverage Ratio was
4.2 to 1.0, both in compliance with the requirements.

-13-

No borrowings, other than the issuance of trade and standby letters of credit,
which totaled $149 million as of the end of the first quarter of 2005, have
been, or are expected to be, made under this facility.

9) Comprehensive Income and Accumulated Other Comprehensive (Loss)
---------------------------------------------------------------

Comprehensive Income/(Loss)

($ in millions) 13 weeks ended
-----------------------------
Apr. 30, May 1,
2005 2004
-------------- ------------
Net income $ 172 $ 41
Other comprehensive (loss)/income:
Foreign currency translation adjustments (1) (1)
Net unrealized gains/(losses)
in real estate investment 12 (12)
trusts ------------ ------------
11 (13)
------------ ------------
Total comprehensive income $ 183 $ 28
============ ============

Accumulated Other Comprehensive (Loss)/Income

($ in millions) Apr. 30, May 1, Jan. 29,
2005 2004 2005
--------------- --------------- --------------
Foreign currency translation adjustments (1) $ (105) $ (116) $ (104)
Net unrealized gains in real estate investment trusts (2) 86 48 74
Non-qualified retirement plan minimum liability adjustment (3) (102) (82) (102)
Other comprehensive (loss) from discontinued operations - (1)(4) -
--------------- --------------- --------------
Accumulated other comprehensive (loss) $ (121) $ (151) $ (132)
=============== =============== ==============

(1) A deferred tax asset has not been established due to the historical
reinvestment of earnings in the Company's Brazilian subsidiary.

(2) Shown net of a deferred tax liability of $47 million, $26 million and $41
million as of April 30, 2005, May 1, 2004 and January 29, 2005,
respectively.

(3) Shown net of a deferred tax asset of $66 million, $52 million and $66
million as of April 30, 2005, May 1, 2004 and January 29, 2005,
respectively.

(4) Shown net of a deferred tax asset of $1 million.

10) Stock-Based Compensation
------------------------

In May 2001, the Company's stockholders approved the 2001 Equity Compensation
Plan (2001 Plan), which initially reserved 16 million shares of common stock for
issuance, plus 1.2 million shares reserved but not subject to awards under the
Company's 1997 and 2000 equity plans. No future grants are being made under the
1997 and 2000 plans. The 2001 Plan provides for grants to associates of options
to purchase the Company's common stock, restricted and non-restricted stock
awards (shares and units) and stock appreciation rights. The 2001 Plan also
provides for grants of restricted and non-restricted stock awards (shares and
units) and stock options to non-employee members of the Board of Directors. At
April 30, 2005, 2.8 million shares of stock were available for future grants.
Stock options and awards typically vest over performance periods ranging from
one to five years. The number of option shares is fixed at the grant date, and
the exercise price of stock options is generally set at the market price on the
date of grant. The 2001 Plan does not permit awarding stock options below
grant-date market value. Options have a maximum term of 10 years. Over the past
three years, the Company's

-14-

annual stock option grants have averaged about 1.4% of total outstanding stock.
The Company issues new shares upon the exercise of stock options.

The cost that has been charged against income for all stock-based compensation
was $22 million and $3 million for the quarters ended April 30, 2005 and May 1,
2004, respectively. The total income tax benefit recognized in the Consolidated
Statements of Operations for stock-based compensation arrangements was $8
million and $1 million for the first quarters of 2005 and 2004, respectively.
Compensation cost for the first quarter of 2005 includes $19 million ($12
million after tax) of costs related to early-adopting SFAS No. 123R.

Stock Options
On April 30, 2005, options to purchase 13.6 million shares of common stock were
outstanding. If all options were exercised, common stock outstanding would
increase by 5.1%. As of the end of the first quarter of 2005, 8.5 million, or
62% of the 13.6 million outstanding options, were exercisable. Of those, 6.3
million, or 75%, were "in-the-money" or had an exercise price below the closing
stock price of $47.41 on April 30, 2005.

The following table summarizes stock options outstanding as of April 30, 2005 as
well as activity during the quarter then ended:

Shares (in Weighted-Average Weighted-Average Aggregate
thousands) Exercise Price Remaining Intrinsic
Contractual Term Value ($ in
(in years) millions)
---------------- ---------------- ------------------ --------------

Outstanding at January 30, 2005 13,831 $ 33
Granted 3,096 45
Exercised (2,848) 26
Forfeited or expired (514) 45
----------------
Outstanding at April 30, 2005 13,565 $ 36 6.6 $ 174
================ ================ ================== ==============

Exercisable at April 30, 2005 8,474 $ 35 5.0 $ 133
================ ================ ================== ==============

The weighted-average grant date fair value of stock options granted during the
quarters ended April 30, 2005 and May 1, 2004 was $12.81 and $8.43 per share,
respectively. The total intrinsic value of options exercised during those
periods was $55 million and $104 million, respectively.

Net cash proceeds from the exercise of stock options were $75 million and $130
million for the quarters ended April 30, 2005 and May 1, 2004, respectively. The
actual tax benefit realized for tax deductions from stock option exercises
totaled $22 million and $40 million for those periods.

Stock Awards
As previously indicated, the 2001 Plan provides for grants of restricted and
non-restricted stock awards (shares and units) to associates and non-employee
members of the Board of Directors.

-15-

The following is a summary of the status of the Company's associate restricted
stock awards as of April 30, 2005 and activity during the quarter then ended:

(shares in thousands)
Shares Weighted-Average
Grant Date Fair Value
------------------- ----------------------

Nonvested at January 30, 2005 303 $ 32
Granted 37 44
Vested (1) 19
Forfeited (1) 24
-------------------
Nonvested at April 30, 2005 338 $ 33
===================

As of April 30, 2005, there was $9 million of total unrecognized compensation
expense related to associate restricted stock awards. That cost is expected to
be recognized over a weighted-average period of 2.2 years. Non-restricted stock
awards of 14 thousand and 15 thousand shares were granted to associates and
expensed during the first quarters of 2005 and 2004, respectively.

Restricted stock awards for non-employee members of the Board of Directors are
expensed when granted. These awards are not transferable until a director
terminates services. No such awards were granted in the first quarters of 2005
or 2004.

The total compensation cost for stock awards was $3 million for both the first
quarter of 2005 and the first quarter of 2004.

11) Retirement Benefit Plans
--------------------------

Net Periodic Benefit Cost/(Credit)
The components of net periodic benefit cost/(credit) for the qualified and
non-qualified pension plans and the postretirement plans for the 13 weeks ended
April 30, 2005 and May 1, 2004 follow:

Pension Plans
-------------------------------------------------------

Qualified Supplemental Postretirement
(Non-Qualified) Plans
--------------------------- --------------------------- ---------------------------

($ in millions) 13 weeks ended 13 weeks ended 13 weeks ended
--------------------------- --------------------------- ---------------------------
Apr. 30, May 1, Apr. 30, May 1, Apr. 30, May 1,
2005 2004 2005 2004 2005 2004
--------------------------- --------------------------- ---------------------------
Service cost $ 20 $ 14 $ 1 $ 1 $ 1 $ 1

Interest cost 45 33 5 4 2 2

Expected return on plan assets (73) (48) - - - -
Net amortization 23 18 3 1 (5) (5)
--------------------------- --------------------------- ---------------------------
Net periodic benefit cost/(credit) $ 15 $ 17 $ 9 $ 6 $ (2) $ (2)
=========================== =========================== ===========================

Employer Contributions
As previously disclosed in the 2004 10-K, the Company does not expect to be
required to make a contribution to its qualified plan in 2005 under the Employee
Retirement Income Security Act of 1974.

-16-

It may decide to make a discretionary contribution, however, depending on market
conditions and the resulting funded status of the plan.

12) Real Estate and Other (Income)/Expense
---------------------------------------

($ in millions) 13 weeks ended
-----------------------------
Apr. 30, 2005 May 1, 2004
-------------- -------------
Real estate activities $ (9) $ (7)
Net gains from sale of real estate (14) (2)
Asset impairments, PVOL and other unit
closing costs 1 1
-------------- -------------
Total $ (22) $ (8)
============== =============

Real estate activities consist 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. For the first quarter
of 2005, the gain from the sale of real estate was primarily from the sale of a
vacant merchandise processing facility that was made obsolete by the centralized
network of store distribution centers put in place by mid-2003.

Asset impairments, the present value of remaining operating lease obligations
(PVOL) and other unit closing costs totaled $1 million for both the first
quarter of 2005 and the first quarter of 2004, consisting primarily of PVOL for
closed stores.

13) Guarantees
-----------

As of April 30, 2005, JCP had guarantees totaling $76 million, which are
described in detail in the 2004 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; $28 million for
certain personal property leases assumed by the purchasers of Eckerd, which were
previously reported as operating leases; and $10 million related to certain
leases for stores that were sold in 2003, which is recorded in Accrued Expenses
and Other. Subsequent to April 30, 2005, the guarantee related to the personal
property leases assumed by the purchasers of Eckerd was reduced by $6 million.

14) Subsequent Events
-----------------

Common Stock Repurchases
From May 1, 2005 through June 7, 2005, the Company repurchased an additional 3.9
million shares of common stock at a cost of approximately $202 million, bringing
the total repurchases for the capital structure repositioning programs to date
up to 61.7 million shares at a cost of approximately $2,514 million. This
represents approximately 67% of the total planned common stock repurchases under
the programs.

-17-

Repayment of Debt
In May 2005, the Company paid the $193 million of JCP's 7.05% Notes Due 2005 at
the scheduled maturity date. This payment marked the completion of the Company's
planned debt reduction under the 2004 capital structure repositioning program.
The Company also purchased $21 million principal amount of its debt on the open
market from May 1, 2005 through June 7, 2005 under the 2005 capital structure
repositioning program.

2005 Equity Compensation Plan
At the May 20, 2005 Annual Meeting, the Company's stockholders approved the 2005
Equity Compensation Plan (2005 Plan), which reserves 14.4 million shares of
common stock for issuance to certain associates and non-employee directors, plus
up to 2.8 million shares reserved but not subject to awards under the 2001 Plan.
The 2005 Plan provides for grants to associates of options to purchase Company
common stock, restricted and non-restricted stock awards (shares and units) and
stock appreciation rights. The 2005 Plan also provides for grants of restricted
and non-restricted stock awards (shares and units) and stock options to
non-employee members of the Board of Directors. The effective date of the 2005
Plan is June 1, 2005.

Lojas Renner S.A.
On May 9, 2005, the Company announced that, through an indirect wholly owned
subsidiary, it has filed with the Brazilian Securities Commission preliminary
offering materials that would allow the sale of all or a portion of its
controlling interest in the Brazilian department store Lojas Renner S.A., as
part of a primary and secondary offering of common shares of Lojas Renner S.A.
Any offering would be registered in Brazil.

-18-

Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion, which presents the results of J. C. Penney Company,
Inc. and its subsidiaries (the Company or JCPenney), should be read in
conjunction with the Company's consolidated financial statements as of January
29, 2005, and the year then ended, and Management's Discussion and Analysis of
Financial Condition and Results of Operations, both contained in the Company's
Annual Report on Form 10-K for the year ended January 29, 2005 (the "2004
10-K").

This discussion is intended to provide the reader with information that will
assist in understanding the Company's financial statements, the changes in
certain key items in those financial statements from period to period, and the
primary factors that accounted for those changes, how operating results affect
the financial condition and results of operations of the Company as a whole, as
well as how certain accounting principles affect the Company's financial
statements.

Certain debt securities were issued by J. C. Penney Corporation, Inc. (JCP), the
wholly owned operating subsidiary of the Company. The Company is a co-obligor
(or guarantor, as appropriate) regarding the payment of principal and interest
on JCP's outstanding debt securities. The guarantee by the Company of certain of
JCP's outstanding debt securities is full and unconditional.

Key Items
- ---------

o Income from continuing operations increased to $172 million, or $0.63 per
share, compared to $118 million, or $0.38 per share, for the comparable
2004 period. This represents an increase of 66% on a per share basis from
the first quarter of 2004. Net income per share increased to $0.63 in the
first quarter of 2005, compared to $0.13 in the comparable 2004 period. Net
income for the first quarter of 2005 reflects the impact of early-adopting
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment," (SFAS No. 123R), which resulted in compensation
expense of $19 million ($12 million after tax), or about $0.05 per share.
Net income in the first quarter of 2004 reflected after-tax charges of $77
million, or $0.25 per share, related to the Eckerd discontinued operations.
All references to earnings per share (EPS) are on a diluted basis.

o Comparable department store sales increased by 3.0% for the first quarter
of 2005, on top of a 9.5% increase in last year's first quarter.
Catalog/Internet sales increased 5.4% for the first quarter of 2005, with
the Internet channel increasing approximately 35%. In last year's first
quarter, Catalog/Internet sales increased 6.5%, with Internet increasing
approximately 45%.

o Operating profit, as defined on page 21, was $313 million, or 7.5% of
sales, compared with $229 million, or 5.7% of sales, last year. This
represents an increase of nearly 37% on a dollar basis, or 180 basis points
as a percent of sales.

o In April 2005, senior management announced the Company's new 2005-2009
Long-Range Plan. The plan builds on the Company's accomplishments over the
past four years, and includes strategies, initiatives and execution points
focused on the vision of making JCPenney the preferred shopping choice for
middle America, while attaining a leadership position in financial
performance within the department store sector. The four key strategies
include: making an emotional connection with the JCPenney customer,
creating an easy and exciting shopping environment, becoming a leader in
performance and execution, and making JCPenney a great place to work.
Several long-range financial objectives have been established, which
include: having low single-digit comparable department store sales
increases and low-to-mid single-digit Catalog/Internet sales increases each
year, continuing to improve annual gross margin to more than 39% of sales
by fiscal 2009 and continuing to reduce and

-19-

leverage selling, general and administrative expenses to a level that is
less than 30% of sales by fiscal 2009, ultimately achieving a 9% to 9.5%
operating profit margin in fiscal 2009.

o During the first quarter of 2005, the Company's Board of Directors approved
an additional $750 million of common stock repurchases and $250 million of
debt reductions.

o The Company ended the first quarter of 2005 with $4.1 billion of cash and
short-term investments. The Company is progressing on its capital structure
repositioning programs and accomplished the following during the first
quarter:

o The repurchase of 7.7 million shares of common stock for approximately
$360 million; and

o The purchase of $194 million principal amount of the Company's debt on
the open market.

o On April 7, 2005, the Company entered into a five-year $1.2 billion
unsecured revolving credit facility, which replaces the Company's $1.5
billion credit facility that was scheduled to expire in May 2005.

o On March 8, 2005, Standard & Poor's raised its credit rating outlook on the
Company from "Stable" to "Positive." On April 7, 2005, Moody's raised its
senior unsecured credit rating for the Company from Ba2 to Ba1, the highest
non-investment grade rating, citing the Company's new credit facility.

Discontinued Operations
- ------------------------

As previously reported, on July 31, 2004, the Company and certain of its
subsidiaries closed on the sale of its Eckerd drugstore operations and received
gross cash proceeds of approximately $4.7 billion. Net proceeds from the sale of
approximately $3.5 billion are being used for common stock repurchases and debt
reduction, as announced in August 2004, and more fully discussed under Capital
Structure Repositioning on pages 27-28.

The loss on the sale was $713 million pre-tax, or $1,433 million on an after-tax
basis. The relatively high tax cost is a result of the tax basis of Eckerd being
lower than its book basis because the Company's previous drugstore acquisitions
were largely tax-free transactions. Of the total after-tax loss on the sale,
$1,325 million was recorded in 2003 to reflect Eckerd at its estimated fair
value less costs to sell. During the first and second quarters of 2004,
after-tax losses of $77 million and $31 million, respectively, were recorded to
reflect revised estimates of certain post-closing adjustments and resulting
sales proceeds.

The Company established reserves at July 31, 2004 for estimated transaction
costs and post-closing adjustments. Certain of these reserves involved
significant judgment and actual costs incurred over time could vary from these
estimates. The more significant estimates relate to the working capital
adjustment, the costs to exit the Colorado and New Mexico markets, assumption of
the Eckerd Pension Plan and various post-employment benefit obligations and
environmental indemnifications. Management is currently negotiating with both
CVS and Coutu regarding the working capital adjustment as required in the
respective sale agreements. Management continues to review and update the
reserves on a quarterly basis. While adjustments have been made to individual
reserves, management believes that, in total, the reserves remain adequate at
the end of the first quarter of 2005. Cash payments for the Eckerd-related
reserves are included in the Company's Consolidated Statements of Cash Flows as
Cash Paid to Discontinued Operations.

-20-

Results of Operations
- ---------------------

The following discussion and analysis, consistent with all other financial data
throughout this report, focuses on the results of operations and financial
condition from the Company's continuing operations.

($ in millions, except EPS) 13 weeks ended
-----------------------------
Apr. 30, May 1,
2005 2004
------------- --------------
Retail sales, net $ 4,192 $ 4,033
------------- --------------
Gross margin 1,729 1,615
SG&A expenses 1,416 1,386
------------- --------------
Operating profit 313 229
Net interest expense 53 57
Bond premiums and unamortized costs 13 -
Real estate and other (income) (22) (8)
------------- --------------
Income from continuing operations
before income taxes 269 180
Income tax expense 97 62
------------- --------------
Income from continuing operations $ 172 $ 118
============= ==============

Diluted EPS from continuing operations $ 0.63 $ 0.38

Ratios as a percent of sales:
Gross margin 41.3% 40.1%
SG&A expenses 33.8% 34.4%
Operating profit 7.5% 5.7%

Depreciation and amortization included
in operating profit $ 90 $ 87

The Company continued to improve its profitability during the first quarter of
2005 as reflected in income from continuing operations of $172 million, or $0.63
per share, compared to $118 million, or $0.38 per share, for the comparable 2004
period. The increase over 2004 reflects improved operating profit, resulting
from continued improvement in sales productivity, growth in gross margin and
leveraging of selling, general and administrative (SG&A) expenses. Earnings per
share also benefited from the Company's ongoing stock buyback programs. The
Company currently expects second quarter earnings from continuing operations to
range from $0.25 to $0.30 per share, and full-year earnings to be in the range
of $2.96 to $3.08 per share.

Operating Profit
- -----------------

Operating profit for the first quarter of 2005 increased 37% to $313 million, or
7.5% of sales, compared to $229 million, or 5.7% 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 are
recorded in Real Estate and Other in the Consolidated Statements of Operations.

-21-

Retail Sales, Net

($ in millions)
13 weeks ended
------------------------------------
Apr. 30, May 1,
2005 2004
------------------- --------------
Retail sales, net $ 4,192 $ 4,033
------------------- --------------
Sales percent increase:
Comparable stores (1) 3.0% 9.5%
Total department stores 3.7% 9.2%
Catalog/Internet 5.4% 6.5%

(1) Comparable store sales include sales of stores after having been open for
12 full consecutive fiscal months. New and relocated stores become
comparable on the first day of the 13th full fiscal month.

Comparable department store sales increased 3.0% for the quarter, representing
the eighth consecutive quarter with a comparable store sales increase. Total
department store sales increased 3.7% for the quarter. These increases were on
top of first quarter 2004 increases of 9.5% for comparable store sales and 9.2%
for total department store sales. First quarter sales reflect improvements in
all merchandise divisions and across all regions of the country, good
sell-through in both fashion and basic merchandise and strong sales gains in the
Company's key private brands. Department store sales have continued to benefit
from positive customer response to the style, quality, selection and value
offered in the Company's merchandise assortments, compelling marketing programs
and continued improvement in the store shopping experience.

Catalog/Internet sales increased 5.4% for the first quarter of 2005, driven by
an approximate 35% increase in Internet sales. In last year's first quarter,
Catalog/Internet sales increased 6.5%, with Internet increasing approximately
45%. Sales continue to reflect a focus on targeted specialty media and the
expanded assortments and convenience of the Internet, which is attracting new,
younger customers.

The Company continues to edit its merchandise assortments to help ensure it is
meeting the needs and wants of its targeted moderate customer. The Chris Madden
for JCPenney Home Collection, originally launched in the second quarter of 2004,
continues to perform well and is being expanded with new furniture, bedding and
window covering collections. In the first quarter of 2005, the Company launched
nicole by Nicole Miller, and W-work to weekend, an extension of the Company's
Worthington private brand. Management is pleased with initial customer response
and early sales results for both of these new dressy casual brands for women.

Gross Margin
Gross margin improved 120 basis points as a percent of sales in this year's
first quarter to $1,729 million compared to $1,615 million in the comparable
2004 period. The continued improvement reflects better inventory management,
good seasonal transition, better timing of clearance markdowns, consistency of
execution and continuing benefits from the centralized merchandising model.
Benefits of the centralized model, which was substantially in place by the end
of 2004, have included enhanced merchandise offerings, an integrated marketing
plan, leverage in the buying and merchandising process and more efficient
selection and allocation of merchandise to individual department stores. Gross
margin also reflects initial benefits from the Company's new planning,
allocation and replenishment systems, which were rolled out in the latter part
of 2004.

-22-

SG&A Expenses
SG&A expenses in this year's first quarter were $1,416 million compared to
$1,386 million in last year's first quarter. Expenses continued to be well
leveraged, improving by 60 basis points as a percent of sales. The improvement
reflects savings in labor costs, centralized store expense management and
planned savings from the Company's previously announced cost savings
initiatives, offset to some extent by the impact of expensing employee stock
options starting in the first quarter of 2005. First quarter SG&A expenses
include approximately $19 million, or about $0.05 per share, related to the
expensing of employee stock options. The full-year 2005 impact of expensing
stock-based awards is expected to total approximately $33 million, or
approximately $0.08 per share.

The Company has focused on consistent execution and sustained operating
performance in a centralized environment, with improved merchandise offerings, a
more integrated and powerful marketing message and better leveraging of
expenses. The Company's previously stated financial goal was to generate
operating profit of 6% to 8% of sales by 2005. This goal was reached in 2004,
when the Company hit the mid-point of this range one year ahead of plan. With
the new 2005-2009 Long-Range Plan announced in April 2005, which is discussed on
pages 19-20, the Company has established a goal to generate operating profit of
9% to 9.5% of sales in 2009. The Company's financing strategy and risk
management are detailed in its 2004 Annual Report.

Net Interest Expense
- --------------------

Net interest expense was $53 million and $57 million for the first quarters of
2005 and 2004, respectively. Net interest expense benefited from an increase in
interest income resulting from larger average short-term investment balances
coupled with higher short-term interest rates, as well as the Company's debt
reduction programs. In last year's first quarter, $44 million of net interest
expense was attributed to Eckerd that is now attributed to continuing
operations. Since the initiation of the debt reduction programs in 2004, $1.9
billion of long-term debt had been retired through the first quarter of 2005.

Bond Premiums and Unamortized Costs
- -----------------------------------

During the first quarter of 2005, the Company incurred $13 million of bond
premiums, commissions and unamortized costs related to the purchase of debt in
the open market under the capital structure repositioning plan, which is
discussed on pages 27-28. Management currently expects full-year 2005 bond
premiums, commissions and unamortized costs to total approximately $20 million,
the remaining $7 million of which is expected to be incurred in the second
quarter.

Real Estate and Other (Income)
- ------------------------------

Real Estate and Other (Income) consists of real estate activities, gains and
losses on the sale of real estate properties, asset impairments and other
charges associated with closing store and catalog facilities. Real Estate and
Other for the first quarter of 2005 resulted in a credit of $22 million, which
consisted of a $9 million credit for real estate operations, $14 million of
gains on the sale of closed units, primarily a vacant merchandise processing
facility, and $1 million of costs related to asset impairments, the present
value of operating lease obligations (PVOL) and other costs of closed stores.

-23-

For the first quarter of 2004, Real Estate and Other 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.

Income Taxes
- --------------

The Company's effective income tax rate for continuing operations was 36.0% for
the first quarter of 2005 compared with 34.5% for the first quarter of 2004. 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 Company's savings plan. Additionally, this deduction for
dividends paid decreased due to the redemption, through conversion to common
stock, of all shares of the Series B ESOP Convertible Preferred Stock that had
been held by the savings plan, which occurred in the third quarter of 2004.

Merchandise Inventory
- ---------------------

Merchandise inventory was $3,293 million at April 30, 2005 compared to $3,338
million at May 1, 2004 and $3,169 million at January 29, 2005. With a decrease
of 1.3% compared to last year, inventory at the end of the first quarter of 2005
was in line with plan, was well managed and reflected a good balance among
seasonal, basics and key items with less clearance. Using new systems and the
network of store distribution centers, the Company has continued to enhance its
ability to allocate and flow merchandise to stores in-season by recognizing
sales trends earlier and accelerating receipts, replenishing individual stores
based on rates of sale and consistently providing high in-stock levels in basics
and advertised items. This continued improvement of inventory management has
helped to drive more profitable sales.

Liquidity and Capital Resources
- --------------------------------

The Company ended the first quarter with approximately $4.1 billion in cash and
short-term investments and approximately $3.7 billion of long-term debt,
including current maturities. Cash and short-term investments included
restricted short-term investment balances of $64 million as of April 30, 2005,
which are pledged as collateral for a portion of casualty program liabilities.
During the remainder of 2005, the Company plans to use approximately $1.7
billion of cash to complete the capital structure repositioning programs, which
include $1,438 million of common stock repurchases and $249 million of debt
retirements. See pages 27-28 for additional information related to the progress
of the Company's capital structure repositioning programs.

On April 7, 2005, the Company, JCP and J. C. Penney Purchasing Corporation
entered into a five-year $1.2 billion revolving credit facility (2005 Credit
Facility) with a syndicate of lenders with JPMorgan Chase Bank, N.A., as
administrative agent. The 2005 Credit Facility replaces the Company's $1.5
billion credit facility that was scheduled to expire in May 2005. The 2005
Credit Facility is unsecured, and all collateral securing the previously
existing $1.5 billion credit facility has been released. The 2005 Credit
Facility is available for general corporate purposes, including the issuance of
letters of credit. Pricing under the 2005 Credit Facility is tiered based on
JCP's senior unsecured long-term debt ratings by Moody's and Standard & Poor's.
Obligations under the 2005 Credit Facility are guaranteed by the Company.

The 2005 Credit Facility includes a requirement that the Company maintain, as of
the last day of each fiscal quarter, a maximum ratio of total Funded
Indebtedness to Consolidated EBITDA (Leverage Ratio, as defined in the 2005
Credit Facility), as measured on a trailing four-quarters basis, of no more than
3.0

-24-

to 1.0. Additionally, the 2005 Credit Facility requires that the Company
maintain, for each period of four consecutive fiscal quarters, a minimum ratio
of Consolidated EBITDA plus Consolidated Rent Expense to Consolidated Interest
Expense plus Consolidated Rent Expense (Fixed Charge Coverage Ratio, as defined
in the 2005 Credit Facility) of at least 3.2 to 1.0. As of April 30, 2005, the
Company's Leverage Ratio was 2.2 to 1.0 and the Fixed Charge Coverage Ratio was
4.2 to 1.0, both in compliance with the requirements.

Cash Flows
The following is a summary of the Company's cash flows from operating, financing
and investing activities:

($ in millions)
13 weeks ended
-------------------------------
Apr. 30, May 1,
2005 2004
------------- -------------
Net cash provided by/(used in):
Operating activities $ 12 $ (20)
Investing activities (83) (45)
Financing activities (399) 109
Cash (paid to) discontinued operations (70) (11)
------------- -------------
Net (decrease)/increase in cash and cash equivalents $ (540) $ 33
============= =============

Cash Flow from Operating Activities
The improvement in net cash provided by/(used in) operating activities in the
first quarter of 2005 compared with the same period in 2004 was primarily
attributable to improved operating performance and better inventory management.

Cash Flow from Investing Activities
Capital expenditures were $99 million for the first quarter of 2005 compared
with $64 million for the comparable 2004 period. Capital spending was for new
stores, store renewals and modernizations and initial costs related to new
point-of-sale technology. During the first quarter of 2005, the Company opened
one new store and two relocated stores. Management continues to expect total
capital expenditures for the full year to be in the area of $700 million.

Proceeds from the sale of closed units were $16 million for the first three
months of 2005 compared with $19 million for the comparable 2004 period.

Cash Flow from Financing Activities
During the first quarter of 2005, the Company cash settled $125 million of the
$194 million principal amount of its outstanding debt purchased in open-market
transactions under the capital structure repositioning plan, which is discussed
on pages 27-28. Premiums and commissions paid by the Company related to these
purchases were $11 million. Due to the customary practice of cash settlement
occurring three days after the trade date, $69 million principal amount of the
purchases were cash settled in the first week of the second quarter.

The Company repurchased 7.7 million shares of common stock for approximately
$360 million during the first quarter of 2005, $93 million of which was settled
after the end of the quarter. In addition, approximately $51 million of cash was
paid during the first quarter of 2005 for settlement of 2004 share repurchases.
Common stock is retired on the same day it is repurchased and the related cash
settlements are completed on the third business day following the repurchase. No
common stock repurchases were made

-25-

during the first quarter of 2004. Net proceeds from the exercise of stock
options were approximately $75 million and $130 million for the first quarter of
2005 and 2004, respectively.

Quarterly dividends of $0.125 per share, or approximately $35 million, were paid
on the Company's outstanding common stock on February 1, 2005 to stockholders of
record on January 10, 2005. The payment of common stock dividends is subject to
approval by the Company's Board of Directors.

For the remainder of 2005, management believes that cash flow generated from
operations, combined with existing cash and short-term investments, will be
adequate to execute the common stock repurchase and debt reduction programs and
fund capital expenditures, working capital and dividend payments and, therefore,
no external funding will be required. At the present time, management does not
expect to access the capital markets for any external financing for the
remainder of 2005. However, the Company may access the capital markets on an
opportunistic basis. Management believes that the Company's financial position
will continue to provide the financial flexibility to support its strategic
plan. The Company's cash flows may be impacted by many factors, including the
competitive conditions in the retail industry, and the effects of the current
economic environment and consumer confidence. Based on the nature of the
Company's business, management considers the above factors to be normal business
risks.

On March 8, 2005, Standard & Poor's raised its credit rating outlook on the
Company from "Stable" to "Positive." On April 7, 2005, Moody's raised its senior
unsecured credit rating for the Company from Ba2 to Ba1, the highest
non-investment grade rating, citing the Company's new credit facility.

Additional liquidity strengths include the new $1.2 billion credit facility
discussed previously. No borrowings, other than the issuance of trade and
standby letters of credit, which totaled $149 million as of the end of the first
quarter of 2005, have been, or are expected to be, made under this facility.

Free Cash Flow
In addition to cash flow from operating activities, management also evaluates
free cash flow from continuing operations, an important financial measure that
is widely focused upon by investors, the rating agencies and banks. Free cash
flow from continuing operations is defined as cash provided by operating
activities less dividends and capital expenditures, net of proceeds from the
sale of assets. The Company's calculation of free cash flow may differ from that
used by other companies and therefore comparability may be limited. While free
cash flow is a non-GAAP financial measure, it is derived from components of the
Company's consolidated GAAP cash flow statement. Management believes free cash
flow from continuing operations is important in evaluating the Company's
financial performance and measuring the ability to generate cash without
incurring additional external financing.

Through the first quarter of 2005, free cash flow from continuing operations was
a deficit of $106 million, compared to a deficit of $99 million for the
comparable 2004 period. The small decrease in free cash flow was due to the
planned increase in capital expenditures, partially offset by better earnings
and inventory leverage. The Company expects to generate approximately $100
million of positive free cash flow for the full year of 2005.

-26-

The following table reconciles net cash provided by/(used in) operating
activities (GAAP) to free cash flow from continuing operations (a non-GAAP
measure) for the 13 weeks ended April 30, 2005 and May 1, 2004:

($ in millions) 13 weeks ended
------------------------------------
Apr. 30, 2005 May 1, 2004
---------------- ----------------
Net cash provided by/(used in) operating activities - (GAAP) $ 12 $ (20)
Less:
Capital expenditures (99) (64)
Dividends paid (35) (34)
Plus:
Proceeds from sale of assets 16 19
---------------- ----------------
Free cash flow from continuing operations $(106) $ (99)
================ ================

Capital Structure Repositioning
- --------------------------------

In August 2004, the Company initiated a major equity and debt reduction program
focused on enhancing stockholder value, strengthening the capital structure and
improving the credit rating profile. On March 18, 2005, the JCPenney Board of
Directors authorized additional common stock repurchases and debt retirements.
The Company is using the $3.5 billion in net cash proceeds from the sale of the
Eckerd drugstore operations and existing cash and short-term investment balances
to fund the programs. The programs, which are expected to be completed by the
end of fiscal 2005, consist of the following:

Common Stock Repurchases
- ------------------------

The Company is executing common stock repurchase programs of up to $3.75
billion, including $3.0 billion authorized in 2004 and $750 million authorized
in 2005. Share repurchases have been and will continue to be made in open-market
transactions, subject to market conditions, legal requirements and other
factors. During the first quarter of 2005, the Company repurchased and retired
7.7 million shares of common stock at a cost of approximately $360 million,
bringing the total purchases up to date under the programs to 57.8 million
shares of common stock at a cost of approximately $2.3 billion. This represents
approximately 60% of the planned repurchases. As of April 30, 2005,
approximately $1.4 billion remained authorized under the programs for share
repurchases.

From May 1, 2005 through June 7, 2005, the Company repurchased an additional 3.9
million shares of common stock at a cost of approximately $202 million, bringing
the total repurchases for the capital structure repositioning programs to date
up to 61.7 million shares at a cost of approximately $2,514 million.

Debt Reduction
- ---------------

The Company's debt reduction programs currently consist of planned debt
retirements of $2.13 billion, including approximately $1.88 billion authorized
in 2004 and $250 million authorized in 2005. JCP's $400 million 7.4% Debentures
Due 2037, which were subject to redemption at the option of the holders, had
initially been included in the 2004 program, but upon expiration of the put
option on March 1, 2005, virtually all of the holders extended their debentures
to the stated 2037 maturity date.

By the end of the first quarter of 2005, the Company had reduced debt by
approximately $1.9 billion, including $194 million of open-market debt
repurchases completed in the first quarter, and 2004 transactions that consisted
of $650 million of debt converted to common stock, $822 million of cash

-27-

payments and the termination of the $221 million Eckerd securitized receivables
program. The Company incurred pre-tax charges of $13 million in the first
quarter related to these early debt retirements. As of the end of the first
quarter, $56 million of authorized open-market debt purchases remained under the
2005 program. The Company expects to incur pre-tax charges of approximately $7
million in the second quarter of 2005 related to the remaining planned
open-market debt retirements. During the third and fourth quarters of 2004, the
Company incurred total pre-tax charges of $47 million related to early debt
retirements.

Subsequent to the end of the first quarter, the Company retired $193 million of
long-term debt in May 2005 at the scheduled maturity date and purchased an
additional $21 million principal amount of its debt on the open market.

Series B Convertible Preferred Stock Redemption
- -----------------------------------------------

On August 26, 2004, the Company redeemed, through conversion to common stock,
all of its outstanding shares of Series B ESOP Convertible Preferred Stock
(Preferred Stock), all of which were held by the Company's Savings,
Profit-Sharing and Stock Ownership Plan, a 401(k) savings plan. Each holder of
Preferred Stock received 20 equivalent shares of JCPenney common stock for each
one share of Preferred Stock in their Savings Plan account in accordance with
the original terms of the Preferred Stock. Preferred Stock shares, which were
included in the diluted earnings per share calculation as appropriate, were
converted into approximately nine million common stock shares. Annual dividend
savings will approximate $11 million after tax.

Common Stock Outstanding
During the first three months of 2005, common stock outstanding decreased 4.8
million shares to 266.6 million shares from 271.4 million shares at the
beginning of the year. The decline in outstanding shares is attributable to
approximately eight million shares repurchased and retired partially offset by
approximately three million shares issued due to the exercise of stock options.

Stock Option Accounting
- -------------------------

As discussed in the 2004 10-K, prior to fiscal year 2005, the Company followed
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," which did not require expense recognition for stock options when
the exercise price of an option equaled, or exceeded, the fair market value of
the common stock on the date of grant. Effective January 30, 2005, the Company
early-adopted SFAS No. 123R, which requires the use of the fair value method for
accounting for stock options. The statement was adopted using the modified
prospective method of application. Under this method, in addition to reflecting
compensation expense for new share-based awards, expense is also recognized to
reflect the remaining vesting period of awards that had been included in
pro-forma disclosures in prior periods. Accordingly, in the first quarter of
2005, the Company recorded compensation expense of $19 million ($12 million
after tax), reflecting the requirements of the final accounting rules to
recognize compensation expense over the employee service period, which is to the
earlier of the retirement eligibility date or the normal vesting period. This
resulted in a reduction in diluted earnings per share of about $0.05. The
Company currently expects total compensation expense related to stock options
for full-year 2005 of approximately $33 million ($21 million after tax), or
approximately $0.08 per share.

Prior to fiscal year 2005, the Company used the Black-Scholes option-pricing
model to estimate the grant date fair value of its stock option awards. For
grants subsequent to the adoption of SFAS No. 123R, the Company estimates the
fair value of stock option awards on the date of grant using a binomial lattice
model. The Company believes that the binomial lattice model is a more accurate
model for valuing employee stock options since it better reflects the impact of
stock price changes on option exercise behavior.

-28-

The expected volatility used in the binomial lattice model is based on an
analysis of historical prices of JCPenney's stock and open market exchanged
options, and was developed in consultation with an outside valuation specialist
and the Company's financial advisors. The expected volatility reflects the
volatility implied from a price quoted for a hypothetical call option with a
duration consistent with the expected life of the options, and the volatility
implied by the trading of options to purchase the Company's stock on open-market
exchanges. As a result of the Company's turnaround over the past four years and
the disposition of the Eckerd drugstore operations, a significant portion of the
historical volatility is not considered to be a good indicator of future
volatility. The expected term of options granted is based primarily on
historical exercise patterns, but also incorporates an early exercise assumption
in the event of a significant increase in stock price. The risk-free rate is
based on zero-coupon U.S. Treasury yields in effect at the date of grant with
the same period as the expected option life. The dividend yield is assumed to
increase ratably to the Company's expected dividend yield level based on
targeted payout ratios over the expected life of the options. The option
cancellation assumption, which impacts the total expense recognized as opposed
to the fair value of the award, takes into account historical patterns, adjusted
to reflect the Company's turnaround efforts.

The Company has not adjusted prior year financial statements under the optional
modified retrospective method of adoption, but has disclosed the pro-forma
impact of expensing stock options on the first quarter of 2004 in Note 1 to the
Unaudited Interim Consolidated Financial Statements.

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 assets; estimation of reserves and valuation
allowances specifically related to closed stores, insurance, income taxes,
litigation and environmental contingencies; and pension accounting. Actual
results may differ from these estimates under different assumptions or
conditions. Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, in the 2004 10-K includes detailed descriptions of
certain judgments that management makes in applying its accounting policies in
these areas.

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 2005, the Audit Committee of the Company's Board of
Directors approved estimated fees for the remainder of 2005 related to the
performance of both audit, including Sarbanes-Oxley Section 404 attestation
work, as well as allowable non-audit services by the Company's external
auditors, KPMG LLP.

-29-

Seasonality
- ------------

The results of operations and cash flows for the 13 weeks ended April 30, 2005
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 the fourth quarter, 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.

-30-

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 April 30, 2005 are similar to those disclosed
in the Company's 2004 10-K. For the 13 weeks ended April 30, 2005, 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 were
no changes in the Company's internal control over financial reporting during the
Company's first quarter ended April 30, 2005, that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which reflect the Company's
current view of future events and financial performance. The words expect, plan,
anticipate, believe, intent, should, will and similar expressions identify
forward-looking statements. Any such forward-looking statements are subject to
risks and uncertainties that may cause the Company's actual results to be
materially different from planned or expected results. Those risks and
uncertainties include, but are not limited to, competition, consumer demand,
seasonality, economic conditions, including gasoline prices, changes in
management, retail industry consolidations, acts of terrorism or war and
government activity. Please refer to the Company's 2004 Annual Report on Form
10-K and subsequent filings for a further discussion of risks and uncertainties.
The Company intends the forward-looking statements in this Report on Form 10-Q
to speak only at the time of its release and does not undertake to update or
revise these forward-looking statements as more information becomes available.

-31-

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

The Company has no material legal proceedings pending against it.

In the matter of Vicente Balderaz v. J. C. Penney Direct Marketing Services,
Inc., ("DMS"), AEGON Direct Marketing Services, Inc., and J. C. Penney Life
Insurance Company n/k/a/ Stonebridge Insurance Company, in the First Judicial
District, State of New Mexico, County of Santa Fe (No. D-0101-CV2005-00249)
("the New Mexico Lawsuit"), first reported in the Company's Annual Report on
Form 10-K for the fiscal year ended January 29, 2005, DMS has been dismissed
without prejudice.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Securities

The table below sets forth the information with respect to purchases made by or
on behalf of the Company of the Company's common stock during the quarter ended
April 30, 2005:

Period Total Average Cumulative Number Maximum
Number of Price of Shares Approximate
Shares Paid Per Purchased as Dollar Value
Purchased Share Part of Publicly of Shares that
During Announced May Yet Be
Period Plans or Purchased
Programs (1)(2) Under the
Plans or
Programs (in
millions)
----------------------------- ------------- ------------ ------------------- ----------------

January 30, 2005 through
March 5, 2005 423,900 $ 44.23 50,516,400 $1,029(1)

March 6, 2005 through
April 2, 2005 3,409,100 $ 47.14 53,925,500 $1,618(1)(2)

April 3, 2005 through
April 30, 2005 3,837,000 $ 47.05 57,762,500 $1,438(1)(2)
------------- -------------------

Total 7,670,000 57,762,500
============= ===================

(1) In 2004, the Company's Board of Directors approved a common stock
repurchase program of up to $3.0 billion for common stock repurchases (not
to exceed 133 million shares), including up to $650 million that had been
contingent upon the conversion of the Company's 5.0% Convertible
Subordinated Notes Due 2008, which occurred from October 26, 2004, through
November 16, 2004. This repurchase program, which the Company announced on
August 2, 2004, has no expiration date, but is expected to be completed by
the end of the second quarter of 2005.

(2) In 2005, the Board of Directors approved a common stock repurchase program
of up to $750 million. This program, which the Company announced on March
18, 2005, has no expiration date, but is expected to be completed by the
end of fiscal year 2005.

-32-

Item 6 - Exhibits

Exhibit Nos.
------------

10.1 J. C. Penney Company, Inc. 2005 Equity Compensation Plan
(incorporated by reference to Annex A to Company's
definitive Notice of Annual Meeting and Proxy Statement for
its Annual Meeting of Stockholders held on May 20, 2005, SEC
File No. 1-15274).

10.2 Terms of Agreement between M. T. Theilmann and J. C. Penney
Company, Inc. (incorporated by reference to Exhibit 10.1 to
Company's Form 8-K dated May 9, 2005, SEC File No. 1-15274).

10.3 Form of Restricted Stock Unit Award - 2005 Non-Associate
Director Annual Grant (incorporated by reference to Exhibit
10.1 to Company's Form 8-K dated May 24, 2005, SEC File No.
1-15274).

10.4 Form of Grant of Stock Option(s), Special Stock Option Grant
(incorporated by reference to Exhibit 10.1 to Company's Form
8-K dated May 31, 2005, SEC File No. 1-15274).

10.5 Form of Notice of Restricted Stock Award (incorporated by
reference to Exhibit 10.2 to Company's Form 8-K dated May
31, 2005, SEC File No. 1-15274).

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

-33-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

J. C. PENNEY COMPANY,INC.
By /s/ W. J. Alcorn
--------------------------------
W. J. Alcorn
Senior Vice President and Controller
(Principal Accounting Officer)

Date: June 8, 2005

-34-

Exhibit 31.1

CERTIFICATION

I, Myron E. Ullman, III, 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;

(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

-35-

(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 8, 2005.
/s/ Myron E. Ullman, III
---------------------------
Myron E. Ullman, III
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.

-36-

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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;

(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

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(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 8, 2005.
/s/ Robert B. Cavanaugh
---------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
J. C. Penney Company, Inc.

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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 April 30, 2005 (the "Report"), I,
Myron E. Ullman, III, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.

DATED this 8th day of June 2005.

/s/ Myron E. Ullman, III
-----------------------------
Myron E. Ullman, III
Chairman and Chief Executive Officer

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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 April 30, 2005 (the "Report"), I,
Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.

DATED this 8th day of June 2005.

/s/ Robert B. Cavanaugh
-----------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer

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