(CONFORMED COPY)
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 13 week period Commission file number 1-15274
ended April 27, 2002
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)
Registrant's telephone number, including area code (972) 431-1000
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
267,662,412 shares of Common Stock of 50 cents par value, as of June 6, 2002.
-1-
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements.
Consolidated Statements of Operations
(Amounts in millions, except per share data)
<table>
<caption>
13 weeks ended
---------------------------------
<c> <c>
Apr. 27, Apr. 28,
2002 2001
--------------- ---------------
Retail sales, net $7,728 $7,522
Costs and expenses
Cost of goods sold 5,375 5,288
Selling, general and administrative expenses 2,096 2,045
Other unallocated 8 (17)
Net interest expense 102 98
Acquisition amortization 10 35
Restructuring and other charges, net 2 5
--------------- ---------------
Total costs and expenses 7,593 7,454
--------------- ---------------
Income before income taxes 135 68
Income taxes 49 27
--------------- ---------------
--------------- ---------------
Net income $ 86 $ 41
=============== ===============
Earnings per common share:
Net income $ 86 $ 41
Less: preferred stock dividends, net of tax (7) (8)
--------------- ---------------
Income available to common stockholders $ 79 $ 33
Effect of dilutive securities:
Interest on 5% convertible debentures, net of tax 6 -
--------------- ---------------
Income for diluted EPS calculation $ 85 $ 33
=============== ===============
Shares:
Average shares outstanding (basic shares) 266 263
Effect of dilutive securities:
Stock options and restricted stock units 3 1
23 -
------- -------
Assumed conversion of 5% convertible debentures
--------------- ---------------
Average shares used for diluted EPS(1) 292 264
Earnings per share:
Basic $ 0.30 $ 0.13
Diluted $ 0.29 $ 0.13
(1) In each period, certain common stock equivalents and their effects on income
were excluded from the computation of diluted EPS because they were
anti-dilutive. Options to purchase 9.0 and 13.3 million shares of stock at
prices ranging from $22 to $71 and $16 to $71 per share were excluded from the
calculations of EPS for the 13 weeks ended April 27, 2002 and April 28, 2001,
respectively. In addition, outstanding preferred stock convertible into 11.8 and
12.9 million common shares at April 27, 2002 and April 28, 2001, respectively,
and related dividends were excluded from the calculation of diluted EPS for the
13 weeks ended the same dates.
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
</table>
-2-
Consolidated Balance Sheets
($ in millions except per share data)
<table>
<caption>
<c> <c>
Apr. 27, Apr. 28, Jan. 26,
2002 2001 2002
------------------ ----------------- -----------------
ASSETS
Current assets
Cash (including short-term investments
of $2,267, $560 and $2,834) $ 2,274 $ 568 $2,840
Receivables (net of bad debt
reserves of $25, $35 and $27) 785 946 698
Merchandise inventory (net of LIFO reserves of $393, $355
and $377) 4,902 5,372 4,930
Prepaid expenses 229 174 209
------------------ ----------------- -----------------
Total current assets 8,190 7,060 8,677
Property and equipment (net of
accumulated depreciation of $3,464,
$3,018 and $3,328) 4,921 5,024 4,989
Goodwill 2,320 2,376 2,321
Intangible assets (net of accumulated
amortization of $273, $245 and $278) 516 566 527
Other assets 1,517 1,379 1,534
Assets of discontinued operations
(including cash and short-term
investments of $0, $108 and $0) - 3,137 -
------------------ ----------------- -----------------
Total assets $ 17,464 $ 19,542 $ 18,048
================== ================= =================
</table>
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
-3-
Consolidated Balance Sheets
($ in millions except per share data)
<table>
<caption>
<c> <c> <c>
Apr. 27, Apr. 28, Jan. 26,
2002 2001 2002
----------------- ----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,433 $ 3,786 $ 3,465
Short-term debt 30 10 15
Current maturities of long-term debt 220 700 920
Deferred taxes 96 123 99
----------------- ----------------- -----------------
Total current liabilities 3,779 4,619 4,499
Long-term debt 5,175 4,746 5,179
Deferred taxes 1,244 1,120 1,231
Other liabilities 1,021 1,059 1,010
Liabilities of discontinued operations - 1,783 -
----------------- ----------------- -----------------
Total liabilities 11,219 13,327 11,919
Stockholders' equity
Capital stock
Preferred stock, no par value and stated value of $600 per share:
authorized, 25 million shares; issued and outstanding, 0.6, 0.6, 0.6
million shares of Series B
ESOP convertible preferred 353 388 363
Common stock, par value $0.50:
authorized, 1,250 million shares;
issued and outstanding 267, 263
and 264 million shares 3,391 3,301 3,324
----------------- ----------------- -----------------
-----------------
Total capital stock 3,744 3,689 3,687
----------------- ----------------- -----------------
Deferred stock compensation 7 - 6
Reinvested earnings
At beginning of year 2,573 2,636 2,636
Net income 86 41 98
Common stock dividends declared (33) (33) (128)
Preferred stock dividends
declared, net of tax - - (33)
----------------- ----------------- -----------------
Reinvested earnings at end
of period 2,626 2,644 2,573
Accumulated other comprehensive loss (132) (118) (137)
----------------- ----------------- -----------------
Total stockholders' equity 6,245 6,215 6,129
----------------- ----------------- -----------------
Total liabilities and
stockholders' equity $ 17,464 $ 19,542 $ 18,048
================= ================= =================
</table>
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
-4-
Consolidated Statements of Cash Flows
($ in millions)
<table>
<caption>
13 weeks ended
-------------------------------------------
<c> <c>
Apr. 27, Apr. 28,
2002 2001
------------------- --------------------
Cash flows from operating activities
Net income $ 86 $ 41
Non-cash adjustments to reconcile net income to net cash provided by
operating activities:
Restructuring, asset impairments and PVOL 19 4
Depreciation and amortization,
including intangible assets 163 192
Real estate (gain) - (26)
Pension (income) - (12)
Deferred stock compensation 1 -
Deferred taxes 10 (1)
Change in cash from:
Receivables (87) (53)
Inventory 28 (103)
Other assets (4) (33)
Trade payables 275 41
Current income taxes payable 5 182
Other liabilities (210) (153)
------------------- --------------------
286 79
------------------- --------------------
Cash flows from investing activities
Capital expenditures (126) (164)
------------------- ---------------------
(126) (164)
------------------- ---------------------
Cash flow from financing activities
Change in short-term debt 15 10
Payment of long-term debt (706) (252)
Common stock issued, net 8 7
Preferred stock redemption (10) (10)
Dividends paid, common (33) (33)
------------------- --------------------
(726) (278)
------------------- --------------------
Cash (paid to) discontinued operations - (13)
------------------- --------------------
Net (decrease) in cash and
short-term investments (566) (376)
Cash and short-term investments at
beginning of year 2,840 944
------------------- --------------------
Cash and short-term investments at
end of first quarter $ 2,274 $ 568
=================== ====================
Supplemental Cash Flow Information
Interest paid $ 166 $ 166
Interest received 12 10
Income taxes paid/(received) 33 (168)
</table>
Non-cash transactions: The Company issued 2.9 million shares of Company common
stock to fund an additional contribution to the savings plan granted on January
25, 2002.
The accompanying notes are an integral part of these Unaudited Interim
Consolidated Financial Statements.
-5-
Notes to the Unaudited Interim Consolidated Financial Statements
1) Summary of Significant Accounting Policies
A description of the Company's significant accounting policies is included in
the Company's Annual Report on Form 10-K for the fiscal year ended January 26,
2002 (the "2001 10-K"). The accompanying unaudited interim consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto in the 2001 10-K.
The accompanying interim consolidated financial statements are unaudited but, in
the opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation. Because of the seasonal
nature of the retail business, operating results for the three-month periods are
not necessarily indicative of the results that may be expected for the entire
year.
Certain reclassifications have been made to prior year amounts to conform to the
current period presentation.
As disclosed in the Company's 2001 10-K, effective January 27, 2002, J. C.
Penney Company, Inc. changed its corporate structure to a holding company
format. As part of this structure, J. C. Penney Company, Inc. changed its name
to J. C. Penney Corporation, Inc. (JCP) and became a wholly owned subsidiary of
a newly formed affiliated holding company (Holding Company). The new holding
company assumed the name J. C. Penney Company, Inc. The Holding Company has no
direct subsidiaries other than JCP, nor does it have any independent assets or
operations. All outstanding shares of common and preferred stock were
automatically converted into the identical number of and type of shares in the
new holding company. Stockholders' ownership interests in the business did not
change as a result of the new structure. Shares of the Company remain publicly
traded under the same symbol (JCP) on the New York Stock Exchange. The Holding
Company is a co-obligor (or guarantor, as appropriate) regarding the payment of
principal and interest on JCP's outstanding debt securities. The guarantee by
the Holding Company of certain of JCP's outstanding debt is full and
unconditional. The Holding Company and its consolidated subsidiaries, including
JCP, are collectively referred to in this report as "Company" or "JCPenney,"
unless indicated otherwise.
Implementation of New Accounting Standards
Effective January 27, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 142 requires goodwill and indefinite-lived intangible assets to remain
on the balance sheet and not be amortized. On an annual basis, or when there is
reason to believe that their values have been diminished or impaired, these
assets must be tested for impairment, and write-downs recorded if necessary. The
Company has discontinued amortization of goodwill and indefinite-lived
intangible assets, including the Eckerd trade name, as of January 27, 2002, for
financial reporting purposes. Other intangible assets with estimable useful
lives will continue to be amortized over their useful lives. As of April 27,
2002 and January 26, 2002, the Company had net unamortized goodwill, including
the Eckerd trade name, of $2,642 million and $2,643 million, respectively. The
Company has completed a fair value assessment of the Eckerd trade name as of
January 27, 2002 and determined that there is no impairment at this time. The
Company expects to complete the required transitional goodwill impairment test
during the quarter ended July 27, 2002. Based on preliminary analyses of
enterprise values for identified reporting units, management does not expect to
recognize an impairment charge.
<page>
-6-
The following table sets forth the condensed consolidated pro forma results of
operations for the 13-week periods ended April 27, 2002 and April 28, 2001 as if
Statement 142 had been in effect for both periods:
<table>
<caption>
$ in millions 13 weeks ended
<c> <c>
April 27, 2002 April 28, 2001
Reported net income $86 $41
Goodwill and trade name amortization - 21
---------------------- ---------------------
Adjusted net income $86 $62
Earnings per share - basic:
Reported net income $0.30 $0.13
Goodwill and trade name amortization - 0.07
---------------------- ---------------------
Adjusted net income $0.30 $0.20
Earnings per share - diluted:
Reported net income $0.29 $0.13
Goodwill and trade name amortization - 0.07
---------------------- ---------------------
Adjusted net income $0.29 $0.20
</table>
Other intangible assets consisted of the following:
<table>
<caption>
As of April 27, 2002
-----------------------------------------------------------------------
<c> <c> <c>
Gross Carrying Accumulated Carrying
Amount Amortization Amount
-----------------------------------------------------------------------
Amortized intangible assets:
Prescription Files $ 263 $ 130 $ 133
Favorable Lease rights 204 143 61
-----------------------------------------------------------------------
subtotal 467 273 194
Unamortized intangible assets:
Eckerd trade name 322
------------------------
Total Carrying Amount $ 516
------------------------
</table>
Amortization expense for the amortized intangible assets reflected above is
expected to be approximately $63 million, $61 million, $29 million, $20 million
and $12 million for fiscal years 2002, 2003, 2004, 2005 and 2006, respectively.
Included in the above numbers is amortization expense related to amortized
intangible assets acquired in major business acquisitions and reported as
acquisition amortization on the consolidated statements of operations.
Acquisition amortization expense is expected to be approximately $42 million,
$40 million, $9 million, $6 million and $1 million for fiscal years 2002, 2003,
2004, 2005, and 2006 respectively. The remaining amount of amortization expense
is included in SG&A expenses.
The carrying amount of goodwill was $2,321 million at the beginning of 2002 and
decreased to $2,320 million at April 27, 2002 due to currency translation
adjustments. At April 27, 2002 the total carrying amount of goodwill consisted
of $51 million for the Department Store and Catalog segment and $2,269 for the
Eckerd Drugstore segment.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which establishes a single accounting model to
be used for the impairment or disposal of long-lived assets and broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30 for the disposal of a
segment of a business, as previously defined. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company's adoption of SFAS
No. 144, effective January 27, 2002, did not have a material impact on its
financial statements.
-7-
Effect of New Accounting Standards Not Yet Adopted
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Statement 145 rescinds Statement 4, "Reporting Gains and Losses from
Extinguishment of Debt - an amendment of APB Opinion No. 30", which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria set forth by APB Opinion 30 will now be used to classify
those gains and losses. Statement 145 also amends Statement 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
This Statement also makes non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. The Company does not expect the
provisions of SFAS No. 145 to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
2) Eckerd Managed Care Receivable Securitization
As disclosed in the Company's 2001 10-K, Eckerd sells, on a continuous basis,
substantially all of the managed care receivables to ECR Receivables, a
subsidiary of Eckerd, who then sells to a third party an undivided interest in
all eligible receivables while retaining a subordinated interest in a portion of
the receivables. A three-year revolving receivables purchase facility agreement
was entered into in May 2001. As of April 27, 2002, securitized managed care
receivables totaled $327 million, of which the subordinated retained interest
was $127 million. Losses and expenses related to receivables sold under this
agreement in the first quarter totaled approximately $1.1 million.
3) Restructuring and Other Charges, Net
The Company recorded a net pretax charge of $2 million in this year's first
quarter primarily for imputed interest associated with discounting lease
obligations.
During the first quarter of 2001, the Company recorded a net pretax charge of $5
million related to unit closings ($2 million), Eckerd asset impairments ($1
million) and severance benefits paid ($2 million).
-8-
4) Restructuring Reserves
At April 27, 2002, the consolidated balance sheet included reserves related to
restructuring activities totaling $103 million. These reserves were established
in connection with store closing programs and other restructuring activities and
were recorded in the first and second quarters of 2001, as well as in 2000. The
remaining reserves are related primarily to future lease obligations for both
department stores and drugstores that have closed or were identified for
closing. Costs are being charged against the reserves as incurred. Reserves are
reviewed for adequacy on a periodic basis and are adjusted as appropriate based
on those reviews. During the first quarter of 2002, cash payments related to the
reserves were $10 million ($2 million for contract cancellations, $1 million for
severance paid to employees of units included in the 2001 store closing program,
and $7 million related to lease payments). The severance benefits were paid to
approximately 130 associates as part of the program that was announced last
year. Reserves were increased $2 million for interest on future lease
obligations as discussed in Note 3. Cash payments related to these reserves are
expected to be approximately $42 million in 2002 with the remaining cash
payments to be made by the end of 2005.
5) Comprehensive Income /(Loss) and Accumulated Other Comprehensive (Loss)
-----------------------------------------------------------------------
<table>
<caption>
Comprehensive Income /(Loss)
(Amounts in millions)
13 weeks ended
<c> <c>
---------------------------------------
April 27, April 28,
2002 2001
----------------- ------------------
Net income $ 86 $41
Other comprehensive income/(loss)
Foreign currency translation
adjustments (2) (9)
Minimum pension liability - (41)
Net unrealized changes in
investment securities 7 2
----------------- ------------------
5 (48)
----------------- ------------------
Total comprehensive income /(loss) $91 $(7)
================= ==================
</table>
<table>
<caption>
Accumulated Other Comprehensive (Loss)
(Amounts in millions)
<c> <c> <c>
April 27, April 28, Jan. 26,
2002 2001 2002
---------------- ---------------- --------------
Foreign currency translation adjustments $ (102) $ (82) $(100)
Non-qualified plan minimum liability adjustment (51) (41) (51)
Net unrealized changes in
investment securities 21 5 14
---------------- ---------------- --------------
Accumulated other comprehensive (loss) $ (132) $ (118) $ (137)
================ ================ ==============
</table>
Net unrealized changes in investment securities are shown net of deferred taxes
of $12 million, $3 million and $8 million as of April 27, 2002, April 28, 2001
and January 26, 2002, respectively. Minimum pension liability is shown net of a
deferred tax asset of $33 million, $27 million and $33 million as of April 27,
2002, April 28, 2001 and January 26, 2002, respectively. A deferred tax asset
has not been established for currency translation adjustments.
-9-
6) Segment Reporting
The Company operates in two business segments: Department Stores and Catalog
(including the Company's web site, jcpenney.com), and Eckerd Drugstores. The
results of Department Stores and Catalog are combined because they generally
serve the same customers and have virtually the same mix of merchandise. Other
items are shown in the following table for purposes of reconciling to total
Company amounts.
Business segment information
($ in millions)
<table>
<caption>
<c> <c> <c> <c>
Department
Stores & Eckerd Other Total
Catalog Drugstores Unallocated Company
- -------------------------------------------------------------------------------------------------------------------------------
1st Quarter - 2002
Retail sales, net $ 4,006 $ 3,722 $ - $ 7,728
---------------------------------------------------------------------------------
Segment operating profit 157 100 257
Net interest expense (102) (102)
Other unallocated (8) (8)
Acquisition amortization (10) (10)
Restructuring and other
charges, net (2) (2)
---------------------
Income before income taxes 135
Total assets 10,621 6,712 131 17,464
Depreciation and
amortization expense $ 92 $ 61 $ 10 $ 163
- -------------------------------------------------------------------------------------------------------------------------------
1st Quarter - 2001
Retail sales, net $ 4,062 $ 3,460 $ - $ 7,522
---------------------------------------------------------------------------------
Segment operating profit 133 56 189
Net interest expense (98) (98)
Other unallocated 17 17
Acquisition amortization (35) (35)
Restructuring and other
charges, net (5) (5)
---------------------
Income before income taxes 68
Total assets 9,357 6,932 3,253(1) 19,542
Depreciation and
amortization expense $ 101 $ 56 $ 35 $ 192
(1) Includes assets from discontinued operations.
</table>
-10-
7) Subsequent Event - New Credit Agreement
On May 31, 2002, JCP and the Holding Company entered into a three-year, $1.5
billion revolving bank line of credit with a syndicate of banks with JPMorgan
Chase Bank as administrative agent. The new revolving credit facility (new
credit facility) replaces a $1.5 billion facility that was scheduled to mature
on November 21, 2002, and a $630 million letter of credit facility. The new
credit facility may be used for general corporate purposes, including the
issuance of letters of credit. No cash borrowings have been made under either
the new or previous credit facilities.
The new credit facility contains the following terms:
o Indebtedness incurred by JCP under the new credit facility is
collateralized by all eligible domestic department store and catalog
inventory, as defined in the new credit facility agreement, which can be
released as performance improvements are achieved and ratings by the rating
agencies improve.
o Pricing is tiered based on the corporate credit ratings for JCP by Moody's
and Standard and Poor's.
o Obligations under the new credit facility are guaranteed by the Holding
Company and JCP Real Estate Holdings, Inc., which is a wholly owned
subsidiary of JCP.
o A financial performance covenant, which consists of a maximum ratio of
total debt to EBITDA as measured on a rolling four quarters basis. In
addition, the amount of outstanding indebtedness will be subject to a
limitation based on the value of collateral to total indebtedness, as
defined in the new credit facility agreement.
Copies of the agreement relating to the new credit facility were filed with the
Securities and Exchange Commission on Form 8-K dated May 31, 2002.
Following the completion of the new credit facility, JCP's credit rating were
impacted as follows:
<table>
<c> <c> <c> <c>
Corporate Senior Bank
Credit Unsecured Line of
Rating Debt Credit
---------------- ------------------- -----------------
Standard's and Poor's BBB- BBB- BBB-
(unchanged) (unchanged)
Moody's Investor Ba2 Ba3 Ba1
Service (unchanged) (lowered from Ba2)
Fitch Ratings Not Applicable BB BB+
(lowered from BB+)
</table>
-11-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
As disclosed in the Company's 2001 10-K, effective January 27, 2002, J. C.
Penney Company, Inc. changed its corporate structure to a holding company
format. As part of this structure, J. C. Penney Company, Inc. changed its name
to J. C. Penney Corporation, Inc. (JCP) and became a wholly owned subsidiary of
a newly formed affiliated holding company (Holding Company). The new holding
company assumed the name J. C. Penney Company, Inc. The Holding Company has no
direct subsidiaries other than JCP, nor does it have any independent assets or
operations. All outstanding shares of common and preferred stock were
automatically converted into the identical number of and type of shares in the
new holding company. Stockholders' ownership interests in the business did not
change as a result of the new structure. Shares of the Company remain publicly
traded under the same symbol (JCP) on the New York Stock Exchange. The Holding
Company is a co-obligor (or guarantor, as appropriate) regarding the payment of
principal and interest on JCP's outstanding debt securities. The guarantee by
the Holding Company of certain of JCP's outstanding debt is full and
unconditional. The Holding Company and its consolidated subsidiaries, including
JCP, are collectively referred to in this report as "Company" or "JCPenney,"
unless indicated otherwise.
Consolidated Results of Operations
<table>
<caption>
13 weeks ended
-----------------------------------
<c> <c>
Apr. 27, Apr. 28,
2002 2001
-------------- -----------------
$ in millions
Segment operating profit
Department Stores and Catalog $ 157 $ 133
Eckerd Drugstores 100 56
-------------- -----------------
Total segments 257 189
Other unallocated (8) 17
Net interest expense (102) (98)
Acquisition amortization (10) (35)
Restructuring and other charges, net (2) (5)
-------------- -----------------
Income before income taxes 135 68
Income taxes (49) (27)
-------------- -----------------
Net income $ 86 $ 41
============== =================
</table>
Net income was $86 million, or $0.29 per share, in this year's first quarter
compared to $41 million, or $0.13 per share, in last year's comparable period.
Results were affected by certain non-comparable charges or credits.
Non-comparable items are defined and discussed on the following page.
-12-
The following table reconciles earnings before the effects of non-comparable
items to income before income taxes. All references to EPS are on a diluted
basis.
<table>
<caption>
13 weeks ended 13 weeks ended
---------------------------- ----------------------------
April 27, 2002 April 28, 2001
<c> <c> <c> <c>
$ in millions, except EPS Pretax $ EPS Pretax $ EPS
-------------- ----------- -------------- -----------
Earnings before the effects
of non-comparable items $137 $0.29 $ 59 $0.11
Restructuring and other charges, net (2) (5)
Other non-comparable items:
Centralized merchandising process
costs(ACT) - (12)
Real estate gain - 26
-------------- ----------- -------------- -----------
Total non-comparable items (2) - 9 0.02
-------------- ----------- -------------- -----------
GAAP pre-tax income $135 $0.29 $ 68 $0.13
============== =========== ============== ===========
</table>
The Company considers non-comparable items to be significant charges or credits
that occur infrequently and any related subsequent adjustments that are not
reflective of normal operating performance. Examples of non-comparable items
would include significant real estate transactions that are not part of the
Company's core business, costs related to centralizing merchandising and other
processes and costs related to significant acquisitions. The financial impacts
of these transactions complicate comparisons of ongoing operating results and
therefore require discussion to clarify results and trends in the Company's
operations for multiple years.
First quarter 2002 included a non-comparable $2 million restructuring charge.
First quarter 2001 non-comparable items included a $26 million gain on the sale
of real estate and $12 million ACT (centralization of merchandising process)
initiative expenses, both of which were reported in other unallocated, and a $5
million restructuring charge.
Income before income taxes and the effects of non-comparable items for the first
quarter of 2002 was $137 million, or $0.29 per share, compared to $59 million,
or $0.11 per share, for the comparable period in 2001. The increase from prior
year results reflects strong comparable store sales gains for both department
stores and Eckerd drugstores. Operating profits also improved due to higher
gross margin ratios in both segments and expense management initiatives at
Eckerd. This year's EPS also includes an increase of $0.07 per share from the
elimination of amortization of goodwill in compliance with a new accounting
standard as discussed in Note 1, and a decrease of $0.03 per share from lower
non-cash pension income as previously disclosed in the 2001 10-K.
-13-
Segment Operating Results
Department Stores and Catalog
<table>
<caption>
13 weeks ended
---------------------------------------
<c> <c>
April 27, April 28,
2002 2001
--------------- ------------------
$ in millions
Retail sales, net $ 4,006 $4,062
Cost of goods sold (2,492) (2,601)
--------------- ------------------
FIFO/LIFO gross margin 1,514 1,461
SG&A expenses (1,357) (1,328)
--------------- ------------------
Segment operating profit $ 157 $ 133
=============== ==================
Sales percent increase/(decrease)
Comparable stores(1) 7.9% 1.1%
Total department stores 5.1% -0.5%
Catalog -24.8% -11.9%
Ratios as a percent of sales
FIFO/LIFO gross margin 37.8% 36.0%
SG&A expenses 33.9% 32.7%
Segment operating profit 3.9% 3.3%
</table>
(1) Comparable store sales include the sales of stores after having been opened
for 12 consecutive months. Stores become comparable on the first day of the 13th
month.
Segment operating profit improved 18% to $157 million in this year's first
quarter compared to $133 million in the same period last year. This represents
an increase of 60 basis points to 3.9% of sales. This improvement was driven by
improved gross margins in department stores and continued good inventory
management and expense control in the catalog operation.
Comparable department store sales increased 7.9%. Total department store sales
increased $162 million or 5.1% for the quarter. Home merchandise had the largest
increase in sales over last year, followed by Men's, Women's Apparel and
Children's. Specific categories performing well were sportswear, bedding, window
coverings, children's clothing and housewares. Sales gains reflect good customer
response to marketing programs and merchandise assortments, which are more
focused under the centralized buying process. The Company's 100th anniversary
promotion was particularly successful and it drove April sales to above plan
sales increases. While most categories gained in sales, some classifications
declined from last year's sales levels. Categories with sales declines were
dresses and jewelry. Catalog sales were $218 million below last year. Catalog
sales were expected to be down due to a reduction in both the circulation
quantities and the number of sale/value and specialty catalogs, as well as the
change requiring payment at the time an order is placed. In addition, customer
response was weaker than planned in the Spring catalogs. Total internet sales,
which are reported as a component of Catalog sales, were $82 million compared to
$73 million in last year's first quarter.
-14-
Gross margin for the quarter increased 180 basis points as a percentage of
sales. The improvement is related to better merchandise offerings coupled with
the overall benefits from centralization and significantly improved inventory
management for both department stores and catalog. Inventory for the segment was
down 12.3% from last year. Comparable store inventory was down 5.2%.
Selling, general and administrative (SG&A) expenses increased in the first
quarter of 2002 over last year and were not leveraged as a percent of sales.
Increases related primarily to higher advertising expenses, transition expenses
for the new distribution network for department stores and a reduction in
non-cash pension income. The new distribution network for department stores is
an integral part of centralization. At the end of the quarter, four centers were
in operation, providing coverage for over 300 stores. The network will
facilitate the movement of merchandise from suppliers to the stores and should
result in a more accurate allocation of merchandise based on sales trends and
other factors.
The Company is now in the second year of a five-year turnaround program for
department stores. Management has taken steps to ensure financial flexibility as
plans are executed to centralize the merchandising and logistics networks,
improve merchandise offerings and enhance systems to provide better inventory
data and more visibility into merchandise selling patterns. The profitability of
department stores is impacted by the customers' response to the merchandise
offerings as well as competitive conditions in the retail industry, the effects
of the current economic climate and consumer confidence.
Eckerd Drugstores
<table>
<caption>
13 weeks ended
--------------------------------------
<c> <c>
April 27, April 28,
2002 2001
------------------ -----------------
$ in millions
Retail sales $ 3,722 $ 3,460
Cost of goods sold (2,868) (2,672)
------------------ -----------------
FIFO gross margin 854 788
LIFO charge (15) (15)
------------------ -----------------
LIFO gross margin 839 773
SG&A expenses (739) (717)
------------------ -----------------
Segment operating profit $ 100 $ 56
================== =================
Sales percent increase
Comparable stores(1) 7.6% 9.3%
Total sales 7.6% 3.8%
Ratios as a percent of sales
FIFO gross margin 23.0% 22.8%
LIFO gross margin 22.5% 22.3%
SG&A expenses 19.8% 20.7%
Segment operating profit 2.7% 1.6%
</table>
(1) Comparable store sales include the sales of stores after having been opened
for at least one full year. Comparable store sales include the sales of
relocated stores.
-15-
Segment operating profit for Eckerd improved 79% to $100 million in this year's
first quarter compared with $56 million in the same period last year. This
represents an increase of 110 basis points to 2.7% of sales. The increase in
Eckerd's operating profit this year was primarily related to strong comparable
store sales growth, gross margin improvement and the leveraging of SG&A
expenses.
Comparable store sales increased by 7.6% for the quarter, with pharmacy sales
increasing 9.7% and general merchandise sales increasing 3.6%. Pharmacy sales
increased to 67.7% of total drugstore sales, up 120 basis points from last year,
with the managed care portion of pharmacy sales increasing 140 basis points to
92.2% of total pharmacy sales. General merchandise sales reflect continued
increases in transaction volumes as a result of lower, more competitive pricing,
improved promotional marketing and the new store format which has been rolled
out to approximately 925 drugstores, or approximately 35% of the total drugstore
base. The strongest general merchandise categories were cosmetics and skin care,
vitamins, baby and hygiene products, candy, food and snacks, beverages and
seasonal merchandise.
Gross margin for the quarter increased 20 basis points as a percent of sales,
and includes a LIFO charge of $15 million in the first quarter of both 2002 and
2001. This improvement was principally from pharmacy, due to a higher
penetration of generic drugs and also from improved procurement practices.
Margins in general merchandise sales were negatively impacted by the
implementation of the new competitive pricing strategy which was implemented
during the first quarter of 2001 and in effect for the entire first quarter of
2002. The impact of these price reductions on sales was somewhat offset by
higher transaction volumes.
As a percent of sales, SG&A expenses improved 90 basis points over last year,
primarily as a result of better leveraging from the strong sales growth,
combined with decreased payroll costs from eliminating redundancies in the back
office, especially in the more efficient reconfigured drugstores, and savings
from the in-sourcing of the information technology function.
Other Unallocated
Other unallocated consists of real estate activities, investment transactions,
and other items that are related to corporate initiatives or activities, which
are not allocated to an operating segment. Other unallocated expenses for the
first quarter of 2002 consist of $8 million of asset impairments on certain
underperforming department stores,$10 million recorded for the present value of
lease obligations on stores scheduled to close,$14 million of real estate gains
and operating activities and a $3 million loss from third party fulfillment
activities. In first quarter 2001, other unallocated primarily included a
non-cash gain of $26 million on the sale of real estate properties, ACT
initiative expenses of $12 million and a $4 million loss from third party
fulfillment activities.
-16-
Net Interest Expense
Interest charges for the first quarter increased by $4 million, primarily as a
result of the increase in average long-term debt outstanding. In the third
quarter of 2001, $650 million of 5% Convertible Subordinated Notes Due 2008 were
issued. In April 2002 the $700 million 7.25% Note due April 1, 2002 matured and
was paid.
Acquisition Amortization
Acquisition amortization decreased $25 million in first quarter compared to last
year. The decrease was primarily the result of the Company's adoption of SFAS
No. 142, which eliminated the amortization of goodwill and the Eckerd trade
name.
Restructuring and Other Charges, Net
The Company recorded pretax charges of $2 million and $5 million for first
quarter 2002 and 2001, respectively, related to restructuring charges and
adjustments to previously established restructuring reserves.
Income Taxes
The Company's overall effective income tax rate was 36.5% for the first quarter
of 2002 compared with 40.2% for the same period last year. The decrease is due
to recent changes to the tax law related to the deductibility of dividends paid
to the Company's savings plan. Additionally, the tax rate was high in the first
quarter of 2001 due to a higher percentage of non-deductible permanent book/tax
differences, principally goodwill, relative to income.
Financial Condition
Merchandise inventories on a FIFO basis totaled $5,295 million at the end of the
first quarter compared with $5,727 million last year. Inventories for Department
Stores and Catalog totaled $2,983 million and $3,400 million at April 27, 2002
and April 28, 2001, respectively. The decline is principally related to catalog
inventory. On a comparable store basis, inventories have declined 5.2% from last
year's levels. Inventories are down slightly from plan, particularly in juniors,
young men's, children's and footwear, due to better than expected sales.
Inventory purchases are anticipated to be above plan in the second quarter to
replenish key merchandise categories. Eckerd drugstore inventories totaled
$2,312 million compared with $2,327 million last year. The current cost of
inventories exceeded the LIFO basis amount carried on the balance sheet by
approximately $393 million at April 27, 2002, $377 million at January 26, 2002,
and $355 million at April 28, 2001.
Liquidity and Capital Resources
After paying off approximately $700 million of debt that matured in April, the
Company's liquidity remains strong with approximately $2.3 billion in cash and
short-term investments as of April 27, 2002. Cash flow from operating activities
for the first quarter of 2002 was $286 million compared to $79 million in the
comparable period of 2001. This increase is due to improved earnings and lower
inventory levels net of trade payables.
-17-
In May 2002, JCP executed a revolving credit agreement which replaced its
expiring $1.5 billion bank revolving credit facility and $630 million letter of
credit facility. Indebtedness incurred under the new credit facility is
collateralized by all eligible domestic department store and catalog inventory,
as defined in the new credit facility agreement. This new credit facility will
provide JCP with an additional source of liquidity for working capital needs and
letter of credit support. No borrowings, other than the issuance of letters of
credit, have been made under the existing or new credit facilities. The Company,
through its local subsidiary, did increase short-term borrowings under another
credit facility by $15 million for operating cash needs at its Renner department
store chain in Brazil.
Operating cash flows are impacted by the competitive conditions in the retail
industry, the effects of the current economic climate and consumer confidence.
Based on the nature of the Company's businesses, management considers the above
factors to be normal business risks. The Company has not identified any
circumstances that would likely impair the Company's ability to maintain its
planned level of operations, capital expenditures and dividends in the
foreseeable future.
The Company incurred capital expenditures of $126 million in the first quarter
of 2002 compared with $164 million for the comparable 2001 period. These were
primarily for costs associated with the continuing remodeling and
reconfiguration program for Eckerd drugstores, costs incurred in rolling out the
new merchandise distribution network and centralized checkouts for JCPenney
department stores.
A quarterly dividend of $0.125 per share on the Company's outstanding common
stock was paid on May 1, 2002 to stockholders of record on April 10, 2002.
Seasonality
The Company's business depends to a great extent on the last quarter of the
year. Historically, sales for that period have averaged approximately one-third
of annual sales. Accordingly, the results of operations for the 13 weeks ended
April 27, 2002 are not necessarily indicative of the results for the entire
year.
-18-
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks in the normal course of business due to
changes in interest rates and changes in currency exchange rates. The Company's
market risks related to interest rates at April 27, 2002 are similar to those
disclosed in the Company's Form 10-K for the year ended January 26, 2002. For
the 13 weeks ended April 27, 2002 the other comprehensive loss on foreign
currency translation was not material. Due to the relatively small size of
foreign operations, management believes that its exposure to market risk
associated with foreign currencies would not have a material impact on its
financial condition or results of operations.
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties that
may cause the Company's actual results to be materially different from planned
or expected results. Those risks and uncertainties include, but are not limited
to, competition, consumer demand, seasonality, economic conditions, and
government activity. Investors should take such risks into account when making
investment decisions.
-19-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
The Company has no material legal proceedings pending against it.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the period covered in
this report:
o Current Report on Form 8-K dated January 27, 2002 (Item 5-Other Events and
Regulation FD Disclosure)
o Current Report on Form 8-K dated April 16, 2002 (Item 5-Other Events and
Regulation FD Disclosure)
-20-
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 11, 2002