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 October 25, 2003 Commission file number 1-15274
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transitional period from ______________ to ________________
Commission File No. ______________
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 26-0037077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
(Address of principal executive offices)
(Zip Code)
(972) 431-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
273,024,835 shares of Common Stock of 50 cents par value, as of December 3,
2003.
<page>
<table>
INDEX
<c> <c> <c>
Page
----------
Item 1. Unaudited Financial Statements
Consolidated Statements of Operations
1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flows 4
Notes to the Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
Part II Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
Signature Page 28
</table>
-i- J. C. Penney Company, Inc.
<page>
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
J. C. Penney Company, Inc.
Consolidated Statements of Operations
(Unaudited)
<table>
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($ in millions, except per share data) 13 weeks ended 39 weeks ended
-------------------------- -----------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
------------ ----------- ------------- -------------
Retail sales, net $ 7,985 $ 7,872 $ 22,791 $ 22,798
Costs and expenses
Cost of goods sold 5,483 5,470 15,816 15,908
Selling, general and administrative expenses 2,261 2,153 6,428 6,289
Other unallocated 6 4 (12) 19
Net interest expense 107 97 319 291
Acquisition amortization 7 8 25 25
--------- --------- --------- ---------
Total costs and expenses 7,864 7,732 22,576 22,532
--------- --------- --------- ---------
Income from continuing operations before
income taxes 121 140 215 266
Income taxes (41) (51) (74) (97)
--------- --------- --------- ---------
Income from continuing operations $ 80 $ 89 $ 141 $ 169
Gain on sale of discontinued operations - 34 - 34
--------- --------- --------- ---------
Net income $ 80 $ 123 $ 141 $ 203
Less: preferred stock dividends (6) (6) (19) (20)
--------- --------- --------- ---------
Net income applicable to common
stockholders $ 74 $ 117 $ 122 $ 183
========== ========== ========== ==========
Earnings per share from continuing operations:
Basic $ 0.27 $ 0.31 $ 0.45 $ 0.56
Diluted $ 0.27 $ 0.30 $ 0.45 $ 0.55
Earnings per share:
Basic $ 0.27 $ 0.44 $ 0.45 $ 0.68
Diluted $ 0.27 $ 0.42 $ 0.45 $ 0.68
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
</table>
-1- J. C. Penney Company, Inc.
<page>
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
<table>
<c> <c> <c> <c>
($ in millions)
Oct. 25, Oct. 26, Jan. 25,
2003 2002 2003
------------- -------------- -------------
Assets
Current assets
Cash and short-term investments
(including restricted balances of $87, $89 and $86) $ 1,939 $ 1,748 $ 2,474
Receivables (net of bad debt reserves of
$14, $24 and $14) 736 764 705
Merchandise inventory (net of LIFO reserves
of $428, $410 and $403) 6,060 5,943 4,945
Prepaid expenses 172 137 118
------ ------ ------
Total current assets 8,907 8,592 8,242
Property and equipment (net of accumulated
depreciation of $3,464, $3,362 and $3,253) 4,859 4,866 4,901
Goodwill 2,311 2,302 2,304
Intangible assets (net of accumulated amortization
of $367, $300 and $322) 459 506 494
Other assets 2,068 1,516 1,815
------ ------ ------
Total Assets $ 18,604 $ 17,782 $ 17,756
======== ========= =========
</table>
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-2- J. C. Penney Company, Inc.
<page>
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
<table>
<c> <c> <c> <c>
($ in millions except per share data)
Oct. 25, Oct. 26, Jan. 25,
2003 2002 2003
------ ------ ------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 3,722 $ 3,988 $ 3,680
Short-term debt 29 15 13
Current maturities of long-term debt 502 28 288
Deferred taxes 197 161 80
------ ------ ------
Total current liabilities 4,450 4,192 4,061
Long-term debt 5,138 5,169 4,927
Deferred taxes 1,519 1,236 1,391
Other liabilities 994 967 1,007
------ ------ ------
Total Liabilities 12,101 11,564 11,386
Stockholders' Equity
Capital stock
Preferred stock, no par value and stated value of $600
per share: authorized, 25 million shares; issued
and outstanding, 0.5, 0.6 and 0.6 million shares of
Series B ESOP convertible preferred 310 339 333
Common stock, par value $0.50 per share: authorized,
1,250 million shares; issued and outstanding,
273, 268 and 269 million shares 3,505 3,414 3,423
------ ------ ------
Total capital stock 3,815 3,753 3,756
------ ------ ------
Reinvested earnings at beginning of year 2,817 2,573 2,573
Net income 141 203 405
Dividends declared (114) (114) (161)
------ ------ ------
Reinvested earnings at end of period 2,844 2,662 2,817
Accumulated other comprehensive (loss) (156) (197) (203)
------ ------ ------
Total Stockholders' Equity 6,503 6,218 6,370
------ ------ ------
Total Liabilities and Stockholders' Equity $ 18,604 $ 17,782 $ 17,756
======== ======== ========
</table>
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-3- J. C. Penney Company, Inc.
<page>
J. C. Penney Company, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<table>
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($ in millions)
39 weeks ended
-------------------------------------
Oct. 25, Oct. 26,
2003 2002
--------------- -------------
Cash flows from operating activities:
Income from continuing operations $ 141 $ 169
Adjustments to reconcile income from continuing operations
to net cash from operating activities:
Asset impairments, PVOL and other unit closing costs 27 30
Depreciation and amortization, including intangible assets 531 486
Net gains on sale of assets (51) (15)
Benefit plans expense 66 8
Pension contribution (300) -
Vesting of restricted stock awards 6 5
Deferred taxes 245 67
Change in cash from:
Receivables (31) (66)
Inventory (1,115) (1,013)
Prepaid expenses and other assets (13) (6)
Accounts payable 473 888
Current income taxes payable (196) (30)
Other liabilities (145) (156)
------- -------
Net cash (used in)/provided by operating activities (362) 367
------- -------
Cash flows from investing activities:
Capital expenditures (544) (451)
Proceeds from sale of assets 89 32
------- -------
Net cash (used in) investing activities (455) (419)
------- -------
Cash flows from financing activities:
Change in short-term debt 16 -
Proceeds from equipment financing 9 18
Net proceeds from issuance of long-term debt 586 -
Payment of long-term debt, including capital leases (221) (941)
Common stock issued, net 29 21
Preferred stock redeemed (23) (24)
Dividends paid (114) (114)
------- -------
Net cash provided by/(used in) financing activities 282 (1,040)
------- -------
Net (decrease) in cash and short-term investments (535) (1,092)
Cash and short-term investments at beginning of year 2,474 2,840
------- -------
Cash and short-term investments at end of period $ 1,939 $ 1,748
======== ========
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
</table>
-4- J. C. Penney Company, Inc.
<page>
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 25, 2003 (the "2002
10-K"). The accompanying unaudited Interim Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and
notes thereto in the 2002 10-K.
The accompanying Interim Consolidated Financial Statements are unaudited but, in
the opinion of management, include all material adjustments necessary for a fair
presentation. Because of the seasonal nature of the retail business, operating
results for interim periods are not necessarily indicative of the results that
may be expected for the full year. The January 25, 2003 financial information
has been derived from the audited Consolidated Financial Statements, with
related footnotes, included in the 2002 10-K.
Certain reclassifications have been made to prior year amounts to conform to the
current period presentation.
Holding Company
- ---------------
Effective January 27, 2002, J. C. Penney Company, Inc. changed its corporate
structure to a holding company format. As part of this structure, J. C. Penney
Company, Inc. changed its name to J. C. Penney Corporation, Inc. (JCP) and
became a wholly owned subsidiary of a newly formed affiliated holding company
(Holding Company). The Holding Company assumed the name J. C. Penney Company,
Inc. The Holding Company has no direct subsidiaries other than JCP, nor does it
have any independent assets or operations. All outstanding shares of common and
preferred stock were automatically converted into the identical number and type
of shares in the Holding Company. Stockholders' ownership interests in the
business did not change as a result of the new structure. Shares of the Company
remain publicly traded under the same symbol (JCP) on the New York Stock
Exchange. The Holding Company is a co-obligor (or guarantor, as appropriate)
regarding the payment of principal and interest on JCP's outstanding debt
securities. The guarantee by the Holding Company of certain of JCP's outstanding
debt is full and unconditional. The Holding Company and its consolidated
subsidiaries, including JCP, are collectively referred to in this quarterly
report as "Company" or "JCPenney," unless indicated otherwise.
Stock-Based Compensation
- -------------------------
The Company has a stock-based compensation plan for associates that provides for
grants of stock awards, stock appreciation rights or options to purchase the
Company's common stock. The Company accounts for stock options under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in the
consolidated statement of operations for stock options, as all options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. Compensation expense for fixed stock awards
with pro rata vesting is recorded on a straight-line basis over the vesting
period, which typically ranges from one to five years.
-5- J. C. Penney Company, Inc.
<page>
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," to stock options.
<table>
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$ in millions, except EPS 13 weeks ended 39 weeks ended
--------------------------- ---------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
---------- ----------- ----------- ----------
Net income - as reported $ 80 $ 123 $ 141 $ 203
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects 1 1 3 3
Deduct: Total stock-based employee compensation
expense determined under fair value
method(1) for all awards, net of related
tax effects (6) (6) (18) (18)
--------- ---------- ---------- ---------
Pro forma net income $ 75 $ 118 $ 126 $ 188
========= ========= ========== =========
Earnings per share:
Basic--as reported $ 0.27 $ 0.44 $ 0.45 $ 0.68
Basic--pro forma $ 0.25 $ 0.42 $ 0.39 $ 0.63
Diluted--as reported $ 0.27 $ 0.42 $ 0.45 $ 0.68
Diluted--pro forma $ 0.25 $ 0.40 $ 0.39 $ 0.62
(1) The fair value of each option grant for the Company's plans is estimated on
the date of the grant using the Black-Scholes option pricing model.
</table>
Effect of New Accounting Standards
- ----------------------------------
EITF 02-16
The Company adopted Emerging Issues Task Force (EITF) Issue No. 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," in the first quarter of 2003. This pronouncement
requires that vendor allowances be treated as a reduction of inventory costs
unless specifically identified as a reimbursement of costs to advertise the
vendor's products or payment for other services. In addition, any vendor
allowances received in excess of costs incurred should be treated as a reduction
of inventory costs. The adoption resulted in lower net income for the Company of
approximately $1 million for the third quarter and $5 million in the first nine
months of 2003.
FIN 45
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of Indebtedness of Others."
Disclosures related to this interpretation were effective for year-end 2002
reporting, and the accounting requirements are effective for guarantees entered
into or modified after December 31, 2002, and require all guarantees and
indemnifications within its scope to be recorded at fair value as liabilities,
and the maximum possible loss to the Company under these guarantees and
indemnifications to be disclosed. Current period disclosures related to
guarantees are included in Note 11. Adoption of FIN 45 did not have a material
impact on the Company's consolidated financial statements.
-6- J. C. Penney Company, Inc.
<page>
FIN 46
On January 17, 2003, FIN 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB 51," was issued. The primary objective of FIN 46 is to
provide guidance on the identification and consolidation of variable interest
entities, or VIEs, which are entities for which control is achieved through
means other than through voting rights. The provisions of FIN 46 are required to
be applied to VIEs created or in which the Company obtains an interest after
January 31, 2003. In October 2003, the FASB delayed the effective date of this
rule until the fourth quarter for any VIEs acquired before February 1, 2003 in
which a variable interest is held. The adoption of these provisions of FIN 46 is
not expected to have a material impact on its financial position, results of
operations or cash flows.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards that require companies to classify certain financial
instruments as liabilities that were previously classified as equity. SFAS 150
was effective for financial instruments entered into or modified after May 31,
2003, and there was no second quarter impact on the Company's financial
statements. The remaining provisions of SFAS 150 were adopted beginning in the
third quarter of 2003, and did not have a material impact on its consolidated
financial position or operating results.
EITF 01-8
Additionally, in May 2003, the EITF reached consensus on Issue 01-8,
"Determining Whether an Arrangement Contains a Lease." This pronouncement
provides guidance in determining whether an arrangement contains a lease that is
within the scope of SFAS 13, "Accounting for Leases." If the delivery of goods
or services is dependent on the use of specified property, plant and equipment
(property) and if the purchaser (lessee) has the right to operate or control the
property while controlling or obtaining more than a minor amount of the output
or other utility of the property, the arrangement may be required to be treated
as a lease. This consensus was required to be applied to new or modified
arrangements entered into in the Company's third quarter. The adoption of EITF
01-8 did not have a material impact on the Company's consolidated financial
position or operating results.
2) Discontinued Operations
-----------------------
In 2001, the Company closed on the sale of the assets of J. C. Penney Direct
Marketing Services, Inc. During 2002, a change in federal income tax regulations
was issued that entitled the Company to additional tax benefits on the
transaction from increased capital loss deductions. The Internal Revenue Service
concurred that the Company was entitled to an additional deduction and entered
into an agreement with the Company with respect to the reporting of this
additional deduction. The $34 million reduction of the tax liability from the
original tax provision on the sale is presented as a gain on sale of
discontinued operations in the third quarter of 2002 in the accompanying
consolidated statement of operations.
-7- J. C. Penney Company, Inc.
<page>
3) Earnings per Share
-------------------
Basic earnings per share (EPS) is computed by dividing income applicable to
common stockholders by the average number of common shares outstanding for the
period. Except when the effect would be anti-dilutive, the diluted EPS
calculation includes the impact of restricted stock awards and shares that could
be issued under outstanding stock options, as well as common shares that would
result from the conversion of convertible debentures and convertible preferred
stock.
The computation of basic and diluted earnings per share follows:
<table>
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(In millions, except per share data) 13 weeks ended 39 weeks ended
------------------------- -------------------------
------------------------- -------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
----------- ------------ ----------- -----------
Earnings:
Income from continuing operations $ 80 $ 89 $ 141 $ 169
Less: preferred stock dividends (6) (6) (19) (20)
----------- ------------ ----------- -----------
Income from continuing operations applicable
to common stockholders $ 74 $ 83 $ 122 $ 149
Adjustment for assumed dilution:
Interest on 5% convertible debt, net of tax 6 5 - -
----------- ------------ ----------- -----------
Income from continuing operations used
for diluted EPS $ 80 $ 88 $ 122 $ 149
=========== ============ =========== ===========
Income from continuing operations applicable to
common stockholders $ 74 $ 83 $ 122 $ 149
Gain on sale of discontinued operations - 34 - 34
----------- ------------ ----------- -----------
Net income applicable to common stockholders $ 74 $ 117 $ 122 $ 183
Adjustment for assumed dilution:
Interest on 5% convertible debt, net of tax 6 5 -
----------- ------------ ----------- -----------
Income used for diluted EPS $ 80 $ 122 $ 122 $ 183
=========== ============ =========== ===========
Shares:
Average shares outstanding (basic shares) 272 268 271 267
Adjustment for assumed dilution:
Stock options and restricted stock units 3 1 3 3
5% convertible debentures 23 23 - -
----------- ------------ ----------- -----------
Average shares used for diluted EPS 298 292 274 270
=========== ============ =========== ===========
Earnings per share from continuing operations:
Basic $ 0.27 $ 0.31 $ 0.45 $ 0.56
Diluted $ 0.27 $ 0.30 $ 0.45 $ 0.55
Earnings per share:
Basic $ 0.27 $ 0.44 $ 0.45 $ 0.68
Diluted $ 0.27 $ 0.42 $ 0.45 $ 0.68
</table>
-8- J. C. Penney Company, Inc.
<page>
The following average potential shares of common stock were excluded from the
diluted EPS calculations because their effect would be anti-dilutive:
<table>
<c> <c> <c> <c> <c>
(Shares in millions) 13 weeks ended 39 weeks ended
------------------------- ------------------------
------------------------- ------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
---------- ----------- ---------- ----------
Stock options 7.8 (1) 13.7 (2) 17.2 (3) 13.1 (4)
$650 million notes convertible at $28.50 per share - - 22.8 22.8
Preferred stock 10.4 11.4 10.7 11.6
---------- ----------- ---------- ----------
Total anti-dilutive potential shares 18.2 25.1 50.7 47.5
========== =========== ========== ==========
(1) Exercise prices ranged from $21 to $71.
(2) Exercise prices ranged from $17 to $71.
(3) Exercise prices ranged from $19 to $71.
(4) Exercise prices ranged from $20 to $71.
</table>
4) Cash and Restricted Short-Term Investment Balances
--------------------------------------------------
Restricted short-term investment balances of $87 million, $89 million and $86
million as of October 25, 2003, October 26, 2002 and January 25, 2003,
respectively, were included in the total cash and short-term investment balances
of $1,939 million, $1,748 million and $2,474 million for the respective periods.
Restricted balances are pledged as collateral for import letters of credit,
which are not included in the bank credit facility, and for a portion of
casualty insurance program liabilities. Cash and short-term investments on the
consolidated balance sheet included $23 million, $5 million and $6 million of
cash as of October 25, 2003, October 26, 2002 and January 25, 2003,
respectively.
5) Supplemental Cash Flow Information
----------------------------------
($ in millions) 39 weeks ended
-----------------------------------
Oct. 25, 2003 Oct. 26, 2002
----------------- --------------
Interest paid $370 $ 371
Interest received
19 29
Income taxes paid 41 47
Non-cash transactions:
- ----------------------
o The Company issued 2.4 million shares of common stock in February 2003 and
2.9 million shares of common stock in March 2002 to fund savings plan
contributions of $47 million for 2002 and $58 million for 2001.
o The Company acquired $29 million and $5 million of drugstore equipment
utilizing capital leases in the first nine months of 2003 and 2002,
respectively.
o During the first nine months of 2002, the Company exchanged certain notes
and debentures with a net carrying amount of $227 million for new notes
recorded at a fair value of $225 million.
6) Eckerd Managed Care Receivables Securitization
----------------------------------------------
The outstanding balance of Eckerd's managed care receivable financing program at
the end of the third quarter was approximately $201 million, or $43 million less
than the second quarter of 2003. The outstanding balance fluctuates monthly,
based on the managed care receivable balances and their related concentration
limits for third party processors and program reserves. Losses and expenses
related to receivables sold under this agreement for the third quarter and first
nine months of 2003 were $1 million and $4 million, respectively, and are
included in other unallocated in the accompanying consolidated statements of
operations. Losses and expenses for the third quarter and first nine months of
2002 were $1 million and $3 million, respectively.
-9- J. C. Penney Company,Inc.
<page>
7) Goodwill
---------
Effective January 27, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Upon adoption, the Company ceased amortization of
goodwill and other indefinite-lived intangible assets, primarily the Eckerd
trade name. These assets are now subject to an impairment test on an annual
basis (as of the end of the fiscal year), or when there is reason to believe
that their values have been diminished or impaired. These tests are performed on
each business of the Company where goodwill is recorded. There were no
impairment losses related to goodwill or intangible assets recorded during the
first nine months of 2003 or 2002.
The carrying amounts of goodwill were $2,311 million, $2,302 million and $2,304
million as of October 25, 2003, October 26, 2002 and January 25, 2003,
respectively. The changes in carrying value are related to foreign currency
translation adjustments. At October 25, 2003, the total carrying amount of
goodwill consisted of $42 million for the Department Store and Catalog segment
and $2,269 million for the Eckerd Drugstore segment.
8) Intangible Assets
-----------------
Intangible assets, all of which are included in the Eckerd Drugstore segment,
consisted of the following:
<table>
<c> <c> <c> <c>
($ in millions) Oct. 25, Oct 26, Jan. 25,
2003 2002 2003
--------------- ---------------- -----------------
Intangible assets:
Prescription files $ 299 $ 279 $ 289
Less accumulated amortization 184 146 157
--------------- ---------------- -----------------
Prescription files, net 115 133 132
--------------- ---------------- -----------------
Favorable lease rights 205 205 205
Less accumulated amortization 183 154 165
--------------- ---------------- -----------------
Favorable lease rights, net 22 51 40
--------------- ---------------- -----------------
Eckerd trade name (non-amortizing) 322 322 322
--------------- ---------------- -----------------
Total intangible assets $ 459 $ 506 $ 494
=============== ================ =================
</table>
The net carrying amount of intangible assets decreased $35 million during the
first nine months of 2003 due to $45 million of amortization, which was
partially offset by $10 million of prescription files acquired.
Amortization Expense
- --------------------
The following table provides amortization expense for the periods presented.
<table>
<c> <c> <c> <c> <c>
($ in millions) 13 weeks ended 39 weeks ended
-------------------------- ---------------------------
Oct. 25, Oct 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
---------- ------------ ------------ -----------
Major business acquisitions (1) $ 7 $ 8 $ 25 $ 25
Other acquisitions (2) 8 6 20 17
---------- ------------ ------------ -----------
------------ -----------
Total for amortizing intangible assets $ 15 $ 14 $ 45 $ 42
========== ============ ============ ===========
</table>
(1) Acquisition amortization on the consolidated statements of operations
represents the amortization expense related to major business acquisitions,
including Eckerd Corporation acquired in early 1997, Lojas Renner S.A.
acquired in January 1999 and Genovese Drug Stores, Inc. acquired in March
1999.
(2) Amortization expense for other acquisitions is included in selling, general
and administrative (SG&A) expenses.
-10- J. C. Penney Company, Inc.
<page>
Amortization expense related to major business acquisitions is expected to be
approximately (in millions) $40, $9, $6 and $1 for fiscal years 2003, 2004, 2005
and 2006, respectively. Amortization expense for other acquisitions is expected
to be approximately (in millions) $27, $26, $21, $16 and $11 for fiscal years
2003, 2004, 2005, 2006 and 2007, respectively.
9) Restructuring Reserves
----------------------
At October 25, 2003, the consolidated balance sheet included $86 million of
reserves established in connection with prior year restructuring initiatives
compared to $122 million at October 26, 2002 and $113 million at January 25,
2003. The reserves are related to future lease obligations for both department
stores and drugstores that have closed. Costs are charged against the reserve as
incurred. Reserves are periodically reviewed for adequacy and adjusted as
appropriate, with adjustments recorded in other unallocated. During the first
nine months of 2003, cash payments related to the reserves were $30 million. The
reserves were increased by approximately $3 million for adjustments, including
imputed interest, during the first nine months of 2003. Cash payments for the
fourth quarter of 2003 are expected to approximate $10 million. Most of the
remaining obligations should be paid by the end of 2005 when the majority of the
leases will have terminated.
10) Financing Transactions
-----------------------
Issuance of $600 Million Debt
On February 28, 2003, JCP issued $600 million principal amount of 8.0% Notes Due
2010 ("Notes") priced at 99.342% of their principal amount to yield 8.125%. J.
C. Penney Company, Inc. is a co-obligor on the Notes. The Notes pay interest on
March 1 and September 1 each year. The Notes are redeemable in whole or in part,
at the Company's option at any time, at a redemption price equal to the greater
of (i) 100% of the principal amount of such Notes or (ii) the sum of the present
values of the remaining scheduled payments, discounted to the redemption date on
a semi-annual basis at the "treasury yield" plus 50 basis points, together in
either case with accrued interest to the date of redemption.
Payments Related to Put Bonds and Sinking Fund Debt
On August 15, 2003, bondholders exercised their option to redeem approximately
$117 million of the $119 million 6.9% Debentures Due 2026. On the same date, JCP
retired $37.5 million of its 8.25% Debentures Due 2022 at par, through the
mandatory sinking fund payment of $12.5 million and available optional sinking
fund payments totaling $25 million. Also in August 2003, JCP purchased
approximately $12.8 million of the 8.25% Sinking Fund Debentures Due 2022.
Year-to-date, approximately $16.9 million of these Debentures have been
purchased and will be applied to unspecified future mandatory sinking fund
payments.
On June 16, 2003, JCP retired $25 million of its 9.75% Debentures Due 2021 at
par through a mandatory sinking fund payment of $12.5 million and an optional
sinking fund payment of $12.5 million.
-11- J. C. Penney Company, Inc.
<page>
11) Comprehensive Income/(Loss) and Accumulated Other Comprehensive
--------------------------------------------------------------------------
(Loss)/Income
-------------
Comprehensive Income /(Loss)
<table>
<c> <c> <c> <c> <c>
($ in millions) 13 weeks ended 39 weeks ended
-------------------------- -----------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
------------ ----------- ---------- -----------
Net income $ 80 $ 123 $141 $ 203
Other comprehensive income/(loss):
Foreign currency translation adjustments (4) (36) 22 (67)
Net unrealized gains in real estate investment trusts 7 25 7
3
------------ ----------- ---------- -----------
3 (33) 47 (60)
------------ ----------- ---------- -----------
Total comprehensive income $ 83 $ 90 $188 $ 143
============ =========== ========== ===========
</table>
Accumulated Other Comprehensive (Loss)/Income
<table>
<c> <c> <c> <c>
($ in millions) Oct. 25, Oct. 26, Jan. 25,
2003 2002 2003
------------- -------------- -------------
Foreign currency translation adjustments $(142) $ (167) $ (164)
Non-qualified plan minimum liability adjustment (58) (51) (58)
Net unrealized gains in real estate investment trusts 44 21 19
------------- -------------- -------------
Accumulated other comprehensive (loss) $ (156) $ (197) $ (203)
============= ============== =============
</table>
Net unrealized gains in real estate investment trusts are shown net of deferred
taxes of $24 million, $11 million and $10 million as of October 25, 2003,
October 26, 2002 and January 25, 2003, respectively. The non-qualified plan
minimum liability is shown net of deferred tax asset of $39 million, $33 million
and $39 million as of October 25, 2003, October 26, 2002 and January 25, 2003,
respectively. A deferred tax asset has not been established for foreign currency
translation adjustments due to the historical reinvestment of earnings in the
foreign subsidiaries.
12) Guarantees
-----------
JCP had guarantees, which are described in detail in the 2002 10-K, totaling
$257 million at October 25, 2003. These guarantees include: $165 million
potential remaining obligation for building and equipment leases entered into by
third party operators of certain of the Company's store support centers (SSCs)
upon termination of services for any reason; $43 million related to loans
associated with an investment in a real estate investment trust; $20 million
maximum exposure on insurance reserves established by a former subsidiary
included in the sale of the Company's Direct Marketing Services business; and
$29 million of lease guarantees on certain sold drugstores, $22 million of which
is recorded in other liabilities.
-12- J. C. Penney Company, Inc.
<page>
13) Other Unallocated
------------------
Other unallocated consists of real estate activities, investment transactions
and other items related to corporate initiatives or activities, which are not
allocated to an operating segment but are included in total Company operating
results.
<table>
<c> <c> <c> <c> <c>
($ in millions) 13 weeks ended 39 weeks ended
----------------------------- ------------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
-------------- ------------- ------------- ----------------
Asset impairments, PVOL and other unit closing costs $ 12 $ 8 $ 51 $ 38
Gains on sale of real estate - (2) (51) (15)
Real estate operations (8) (5) (18) (17)
Other 2 3 6 13
-------------- ------------- ------------- ----------------
Total $ 6 $ 4 $ (12) $ 19
============== ============= ============= ================
</table>
The Company recorded charges of $12 million for the third quarter of 2003 for
asset impairments, the present value of lease obligations (PVOL) and other unit
closing costs. These charges were comprised of $8 million of asset impairments,
$3 million related primarily to remaining lease obligations for closed units and
$1 million of other unit closing costs. For the third quarter of 2002 these
costs included $8 million of asset impairments. Asset impairments, PVOL and
other unit closing costs for the first nine months of 2003 included $22 million
of accelerated depreciation for catalog facilities closed in the second quarter
of 2003, $17 million of asset impairments and $11 million of expenses related
primarily to remaining lease obligations for closed units and $1 million of
other unit closing costs. Charges for the first nine months of 2002 consisted of
$25 million of asset impairments and $13 million related to remaining lease
obligations and other costs for closed units.
Real estate gains were recorded from the sale of facilities that were no longer
being used in Company operations.
Real estate operations consist primarily of operating income of the Company's
real estate subsidiary.
Other consists of losses and expenses related to receivables sold as part of the
Eckerd managed care receivables securitization (see Note 6), other corporate
costs, and in 2002, operating losses related to third party fulfillment
operations that were discontinued in 2002.
-13- J. C. Penney Company, Inc.
<page>
14) Segment Reporting
-----------------
The Company operates in two business segments: Department Stores and Catalog
(including internet), and Eckerd Drugstores. Reportable segments are determined
based on similar economic characteristics, the nature of products and services
and the method of distribution. Performance of the segments is evaluated based
on segment operating profit. Segment operating profit is LIFO gross margin less
SG&A expenses. Segment assets include goodwill and intangible assets; however,
segment operating profit does not include the amortization of intangible assets
related to major business acquisitions. Other unallocated is provided for
purposes of reconciling to total Company amounts.
<table>
<c> <c> <c> <c> <c>
Business Segment Information
($ in millions)
Dept. Stores Eckerd Other Total
& Catalog Drugstores Unallocated Company
- -------------------------------------------------------------------------------------------------------------------------
3rd Quarter - 2003
Retail sales, net $ 4,343 $ 3,642 $ - $ 7,985
Segment operating profit 207 34 241
Net interest expense (107) (107)
Other unallocated (6) (6)
Acquisition amortization (7) (7)
--------
Income from continuing operations before income taxes 121
--------
Depreciation and amortization expense 92 77 7 176
- -------------------------------------------------------------------------------------------------------------------------
October YTD - 2003
Retail sales, net $ 11,724 $ 11,067 $ - $ 22,791
Segment operating profit 341 206 547
Net interest expense (319) (319)
Other unallocated 12 12
Acquisition amortization (25) (25)
--------
Income from continuing operations before income taxes 215
--------
Depreciation and amortization expense 269 215 47 531
Total assets 11,480 6,947 177 18,604
- -------------------------------------------------------------------------------------------------------------------------
3rd Quarter - 2002
Retail sales, net $ 4,310 $ 3,562 $ - $ 7,872
Segment operating profit 170 79 - 249
Net interest expense (97) (97)
Other unallocated (4) (4)
Acquisition amortization (8) (8)
--------
Income from continuing operations before income taxes 140
--------
Depreciation and amortization expense 90 64 8 162
- -------------------------------------------------------------------------------------------------------------------------
October YTD - 2002
Retail sales, net $ 11,939 $ 10,859 $ - $ 22,798
Segment operating profit 349 252 - 601
Net interest expense (291) (291)
Other unallocated (19) (19)
Acquisition amortization (25) (25)
--------
Income from continuing operations before income taxes 266
--------
Depreciation and amortization expense 276 185 25 486
Total assets $ 10,788 $ 6,846 $ 148 $ 17,782
</table>
-14- J. C. Penney Company, Inc.
<page>
15) Subsequent Events
-----------------
Sale of Mexico Department Store Operations
On December 1, 2003, JCP closed on the sale of its holding and operating
companies comprising JCPenney's Mexico department store operation (six
department stores). This transaction was effective November 30, 2003, and was
previously announced on October 29, 2003, when an agreement was signed by JCP,
J. C. Penney Mexico, Inc. and Grupo Sanborns S.A. de C.V. of Mexico City. The
Company's book loss was approximately $40 million, $13 million net of tax, or
$0.05 per share. The majority of the $40 million loss on the sale is related to
previously unrealized currency translation losses accumulated since operations
began in 1995 that have previously been reflected through reductions to
stockholders' equity. In accordance with SFAS No. 52, "Foreign Currency
Translation," upon completion of the sale, the accumulated translation
adjustment will be removed from the separate component of equity and reported as
part of the loss on the sale.
As of October 25, 2003, the end of the third quarter of 2003, due to significant
uncertainties surrounding the resolution of closing conditions including
regulatory approvals from the Mexican government, the above sale transaction did
not meet the criteria in SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," to be reflected as a discontinued operation.
Subsequent to the end of the third quarter of 2003, with the resolution of these
uncertainties and the closing of the sale in the fourth quarter of 2003, the
Mexico JCPenney department store operation will be classified as a discontinued
operation in the fourth quarter of 2003, as well as any prior periods that may
be presented.
Payment of Notes Due
On November 17, 2003, the remaining outstanding amount of JCP's 6.125% Notes Due
2003, totaling $246 million, matured and was paid in full.
-15- J. C. Penney Company, Inc.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Holding Company
- ----------------
Effective January 27, 2002, J. C. Penney Company, Inc. changed its corporate
structure to a holding company format. As part of this structure, J. C. Penney
Company, Inc. changed its name to J. C. Penney Corporation, Inc. (JCP) and
became a wholly owned subsidiary of a newly formed affiliated holding company
(Holding Company). The Holding Company assumed the name J. C. Penney Company,
Inc. The Holding Company has no direct subsidiaries other than JCP, nor does it
have any independent assets or operations. All outstanding shares of common and
preferred stock were automatically converted into the identical number and type
of shares in the Holding Company. Stockholders' ownership interests in the
business did not change as a result of the new structure. Shares of the Company
remain publicly traded under the same symbol (JCP) on the New York Stock
Exchange. The Holding Company is a co-obligor (or guarantor, as appropriate)
regarding the payment of principal and interest on JCP's outstanding debt
securities. The guarantee by the Holding Company of certain of JCP's outstanding
debt is full and unconditional. The Holding Company and its consolidated
subsidiaries, including JCP, are collectively referred to in this report as
"Company" or "JCPenney," unless indicated otherwise.
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; revenue recognition; valuation of long-lived and intangible assets,
including goodwill; estimation of reserves and valuation allowances specifically
related to closed stores, insurance, income taxes, litigation and environmental
contingencies; and pension accounting. Actual results may differ from these
estimates under different assumptions or conditions. Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in the
2002 10-K includes detailed descriptions of certain judgments that management
makes in applying its accounting policies in these areas.
Discontinued Operations
- ------------------------
The $34 million gain on sale of discontinued operations in the third quarter of
2002 related to additional capital loss deductions on the 2001 sale of the
assets of J. C. Penney Direct Marketing Services, Inc., as a result of a 2002
tax regulation change. The final federal tax liability on the transaction was
determined in an agreement with the Internal Revenue Service.
-16- J. C. Penney Company, Inc.
<page>
<table>
<c> <c> <c> <c> <c>
Consolidated Results of Operations
($ in millions) 13 weeks ended 39 weeks ended
-------------------------------- ----------------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
------------ ------------- ------------- ---------------
Segment operating profit
Department Stores and Catalog 207 170 $ 341 $ 349
Eckerd Drugstores 34 79 206 252
------------ ------------- ------------- ---------------
Total segments 241 249 547 601
Other unallocated (6) (4) (19)
12
Net interest expense (107) (97) (319)
(291)
Acquisition amortization (7) (8) (25) (25)
------------ ------------- ------------- ---------------
Income from continuing operations
before income taxes 121 140 215 266
Income taxes (41) (51) (74) (97)
------------ ------------- ------------- ---------------
Income from continuing operations $ 80 $ 89 $ 141 $ 169
============ ============= ============= ===============
EPS (continuing operations), diluted $ 0.27 $ 0.30 $ 0.45 $ 0.55
</table>
For the third quarter of 2003, income from continuing operations was $80
million, or $0.27 per share compared to $89 million, or $0.30 per share for the
comparable 2002 period. Sales growth and improved margins in Department Stores
and Catalog, including internet, were offset by weak sales and lower profits for
Eckerd. This year's third quarter was negatively impacted by higher incremental
non-cash pension expense.
For the first nine months of 2003, income from continuing operations was $141
million, or $0.45 per share, compared to $169 million, or $0.55 per share for
the comparable 2002 period. The decline in year-to-date earnings was primarily
the result of weak sales trends at Eckerd, soft sales in the first quarter for
Department Stores and Catalog, and as expected, higher selling, general and
administrative (SG&A) expenses in both segments. SG&A expense for Department
Stores and Catalog included higher incremental non-cash pension expense this
year. In addition, other unallocated, which is a component of income from
continuing operations, was $31 million better than last year. Other unallocated
includes gains on the sale of assets, as well as asset impairments and unit
closing costs, and is discussed in detail on pages 21-22 and in Note 13.
-17- J. C. Penney Company, Inc.
<page>
<table>
<c> <c> <c> <c> <c>
Segment Operating Results
Department Stores and Catalog
- -----------------------------
($ in millions) 13 weeks ended 39 weeks ended
----------------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
-------------- --------------- -------------- -------------
Retail sales, net 4,343 $ 4,310 $ 11,724 $ 11,939
-------------- --------------- -------------- -------------
FIFO/LIFO gross margin 1,670 1,579 4,444 4,400
SG&A expenses (1,463) (1,409) (4,103) (4,051)
-------------- --------------- -------------- -------------
Segment operating profit 207 $ 170 $ 341 $ 349
============== =============== ============== =============
Sales percent increase/(decrease):
Comparable stores(1) 1.7% 3.9% (0.4)% 3.0%
Total department stores 0.2% 3.4% (1.9)% 2.0%
Catalog 4.1% (21.2)% (1.4)% (22.6)%
Ratios as a percent of sales:
FIFO/LIFO gross margin 38.5% 36.6% 37.9% 36.8%
SG&A expenses 33.7% 32.7% 35.0% 33.9%
Segment operating profit 4.8% 3.9% 2.9% 2.9%
</table>
(1) Comparable store sales include sales from stores that have been open for 12
consecutive months. A store's sales become comparable on the first day of
the 13th fiscal month.
Segment operating profit for Department Stores and Catalog in this year's third
quarter improved 22%, or 90 basis points as a percent of sales, to $207 million
compared to $170 million last year. Comparable department store sales gains and
continued strengthening in catalog/internet sales, as well as gross margin
improvements led to the increase.
Comparable department store sales increased 1.7% in the third quarter, on top of
a 3.9% gain last year. Total department store sales increased 0.2%. All
merchandise categories, except Women's apparel, generated positive sales gains
for the quarter. Sales were driven by strong trends in Home, Back-to-School
apparel, Family Shoes and Fine Jewelry. Sales in both Men's and Women's seasonal
apparel categories, including outerwear and sweaters, were soft. Unseasonably
warm weather across much of the country was a primary factor for the slowdown in
seasonal categories.
Catalog/internet sales increased 4.1% for the quarter compared to last year's
third quarter, and represented the second consecutive quarterly sales increase.
Customers responded favorably to better merchandise assortments, value pricing
and certain marketing events, including free shipping. Sales reflected a better
print business and an increase in internet sales. Customer response to the
Fall/Winter Big Book, certain specialty catalogs and the Christmas catalog has
been positive. Total internet sales, which are an integral part of the Company's
three-channel retailing strategy, increased more than 45% to $153 million.
As discussed in Note 1, the Company adopted EITF Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor," in the first quarter of 2003. This adoption resulted in a decrease in
segment operating profit of approximately $2 million in the third quarter and $8
million in the first nine months of 2003.
Gross margin improved 190 basis points as a percent of sales in this year's
third quarter, reflecting better execution and continuing benefits from the
centralized merchandising model. Benefits of a centralized model resulted in
better merchandise offerings, a more integrated marketing plan, more leverage in
the buying process and more efficient selection and allocation of merchandise to
individual department stores.
-18- J. C. Penney Company, Inc.
<page>
As anticipated, SG&A expenses for the quarter were higher than last year, and
were not leveraged as a percent of sales. The increase was from higher non-cash
pension expense and reflects the completion of the store distribution center
network, or Store Support Centers (SSC's), an integral part of the Company's
centralization efforts. All 13 SSC's are currently operational, compared to last
year's third quarter when only seven SSC's were open. In addition, investments
continue to be made in advertising. Partially offsetting these expense increases
were labor savings from programs including centralized checkouts (also referred
to as customer service centers) and the elimination of in-store receiving. SG&A
expenses were also favorably impacted by the previously announced catalog
restructuring initiatives. As part of the turnaround strategy for catalog, since
January 2000, the Company has eliminated approximately 40% of catalog's
infrastructure, including fulfillment centers, telemarketing centers and outlet
stores.
Segment operating profit for the first nine months of 2003 was $8 million lower
than last year, principally as a result of weak sales in the first quarter.
Comparable store sales declined 0.4% and catalog sales declined 1.4%. Gross
margin improved 110 basis points as a percent of sales. The gross margin ratio
improved as a result of better merchandise offerings and benefits from the
centralized merchandising model, offset to a large extent by the clearance
strategies in the second quarter. As anticipated, SG&A dollars for the first
nine months of 2003 increased $52 million, and as a percent of sales were higher
than last year by 110 basis points. SG&A expenses levels reflect planned
increases in advertising, transition costs for the SSC distribution network and
higher non-cash pension expense. Offsetting these increases were savings in
store labor costs as a result of the transition to centralized checkouts in
department stores, catalog expense management and benefits from centralized
management of store expenses.
The Company continues to evaluate the productivity of its store base, and for
the full year of 2003 management expects to close about 25 domestic department
stores (13 closed through the third quarter) and open six stores, including four
relocations. In addition, on December 1, 2003, JCP closed on the sale of it
Mexico department store operation, which consisted of six department stores.On a
combined basis, including the 25 domestic stores and the six Mexico department
stores ,square footage wwill be reduced by about 1.8 million gross square feet
in 2003. Since the beginning of its turnaround in 2000 through the end of 2003,
the Company will have closed approximately 10% of its department stores and
reduced square footage by about 10 million square feet.
Looking ahead to the upcoming holiday season, management anticipates favorable
trends in the consumer environment. Customers are impacted by, among other
things, job growth, low interest rates and energy prices. Overall these factors
are currently improving, and for the fourth quarter, Department Stores and
Catalog is expected to generate improvements in sales and profit. Comparable
department store sales and catalog sales on a 13-week basis are expected to
increase low single digits. This fiscal year includes a fifty-third week, which
should add sales of about $150 million in department stores and $35 million in
catalog, and should add approximately $65 million in additional SG&A expenses.
As the Company continues executing its turnaround strategy for Department Stores
and Catalog, steps have been taken to continue to improve the merchandise
offerings, present a more integrated and powerful marketing message and lower
expenses. The Company's financial goal is to generate segment operating profit
of 6-8% of sales by 2005. The successful execution of the turnaround and
progress toward improving the profitability of Department Stores and Catalog is
impacted by customers' response to the Company's merchandise offerings,
competitive conditions, the effects of the current economic conditions,
continued improvement of gross margin and the reduction of the expense
structure.
-19- J. C. Penney Company, Inc.
<page>
<table>
<c> <c> <c> <c> <c>
Eckerd Drugstores
($ in millions) 13 weeks ended 39 weeks ended
------------------------------------- ----------------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
--------------- ---------------- ------------- ---------------
Retail sales, net 3,642 3,562 $ 11,067 $ 10,859
--------------- ---------------- ------------- ---------------
FIFO gross margin 839 832 2,556 2,523
LIFO charge (7) (9) (25) (33)
--------------- ---------------- ------------- ---------------
LIFO gross margin 832 823 2,531 2,490
SG&A expenses (798) (744) (2,325) (2,238)
--------------- ---------------- ------------- ---------------
Segment operating profit 34 79 $ 206 $ 252
=============== ================ ============= ===============
Sales percent (decrease)/increase:
Comparable stores(1) (1.0)% 4.9% (0.9)% 6.2%
Total sales 2.2% 5.7% 1.9% 6.6%
Ratios as a percent of sales:
FIFO gross margin 23.0% 23.3% 23.1% 23.2%
LIFO gross margin 22.8% 23.1% 22.9% 22.9%
SG&A expenses 21.9% 20.9% 21.0% 20.6%
Segment operating profit 0.9% 2.2% 1.9% 2.3%
</table>
(1) Comparable store sales include the sales from stores that have been open
for at least one full year. Comparable store sales include the sales for
relocated stores.
Eckerd's segment operating profit was $34 million in this year's third quarter
compared to $79 million last year. Sales in both pharmacy and general
(front-end) merchandise were softer than planned. As a percent of sales,
operating profit declined 130 basis points principally as a result of weak sales
trends.
For the quarter, total sales increased 2.2%, while on a comparable basis, store
sales decreased 1.0%, pharmacy sales increased 1.4% and front-end sales
decreased 6.5% from last year. As a percent of total drugstore sales, pharmacy
sales were 71.2% for the quarter, an increase of 140 basis points. Sales to
customers covered by third party programs such as managed care organizations, as
well as government and private insurance, have continued to increase as a
percent of total pharmacy sales. Third party pharmacy sales for the third
quarter of 2003 increased 60 basis points to 93.4% of total pharmacy sales.
Total pharmacy sales were negatively impacted by approximately 370 basis points
from a shift from branded drugs to lower priced generic drugs and other changes
in branded drugs, such as Claritin being made available over the counter.
LIFO gross margin for the quarter decreased 30 basis points as a percent of
sales compared to last year. The decline was caused principally by front-end
margin investments to drive sales, which did not produce results as planned.
SG&A expenses for the quarter increased 7.3% and were 100 basis points higher
than last year as a percent of sales. The increase was related principally to
higher rent and depreciation expense associated with new, relocated and
remodeled stores. The Company remodeled 266 stores and added or relocated
another 103 stores through the end of the third quarter, with another 111 new or
relocated stores planned for the fourth quarter of 2003. Further, the company
opened about 30 stores in late January 2003. Other factors contributing to the
increase in SG&A expense were advertising and higher payroll costs resulting
from expanded service hours.
Segment operating profit dollars for the first nine months of 2003 were 18.3%
below last year, and declined 40 basis points as a percent of sales. Comparable
store sales were down 0.9%, while total sales were up 1.9%. LIFO gross margin
dollars were up 1.6% compared to last year, and as a percent to sales were flat
with last year. SG&A
-20- J. C. Penney Company, Inc.
<page>
expenses were up 3.9%, principally as a result of higher rent and depreciation
expenses from the new, relocated and remodeled stores and investments in
advertising. As a percent of sales, SG&A expenses were 40 basis points higher
than last year.
Looking ahead, the fourth quarter will continue to be challenging. Comparable
store sales on a 13-week basis are expected to be down slightly. The fifty-third
week should add about $280 million to sales and about $55 million to SG&A
expenses. FIFO operating profit for the fourth quarter is expected to be about
25% to 30% below last year.
Eckerd is in the third year of its turnaround initiative. Operating results in
the third quarter, as well as the first nine months of 2003, were below original
expectations, and these trends are expected to continue in the fourth quarter.
Changes continue to be made to the Eckerd business model to improve the
fundamentals of the business and long-term competitive position in the industry.
To regain sales and profit momentum, Eckerd is focusing on six areas:
competitive pricing, competitive marketing, in-stock levels, store environment,
customer service and the new and relocated store program. The new and relocated
store program is more competitive with other drugstore chains and should serve
to increase market share. The technology and operation initiatives underway are
expected to benefit the long-term position in the industry. These initiatives
include the supply chain initiative (Quantum Leap) and the Pharmacy Vision
technology initiative. Quantum Leap is expected to deliver benefits in terms of
improving in-stock levels, inventory turns, direct-store deliveries and
shrinkage reduction. Quantum Leap will be in about 600 stores by year-end, and
will be rolled out in its entirety in 2004. Pharmacy Vision is a program that is
intended to drive workflow improvements for pharmacists through features such as
centralized pharmacy files and reducing calls to doctors. Management believes
that this initiative should ultimately result in lower SG&A costs. Pharmacy
Vision will be tested in a group of stores in 2004, and management plans for the
technology to be rolled out to all the stores in the next two to three years.
The successful continuation of the Eckerd turnaround is dependent on Eckerd's
ability to attract and retain customers through various marketing and
merchandising programs, to secure suitable new drugstore locations at favorable
lease terms, to attract and retain qualified pharmacists, and to maintain
favorable reimbursement rates from managed care organizations, governmental and
other third-party payors.
As previously announced, the Company is currently in the process of evaluating
strategic alternatives for Eckerd and expects to make an announcement by the end
of the year. Among the options under consideration for Eckerd are retention,
merger, spin-off or sale.
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 but are included in total Company
operating results. Other unallocated for the third quarter of 2003 was a net
charge of $6 million, which consisted of $8 million of asset impairments, $3
million of expense related primarily to remaining lease obligations for closed
units, $1 million of other unit closing costs, $8 million of operating income
from real estate activities and $2 million of other corporate costs. Other
unallocated for the third quarter of 2002 was a net charge of $4 million, which
included $8 million of asset impairments on certain underperforming department
stores, remaining lease obligations for units scheduled to close and other unit
closing activities, $2 million of gains on the sale of closed units, $5 million
of operating income from real estate activities and a $3 million loss from third
party fulfillment and other corporate activities.
For the first nine months of 2003, other unallocated was a net credit of $12
million, which included $51 million of net gains on the sale of closed units,
$22 million of accelerated depreciation primarily related to the closing of
certain catalog facilities, $17 million of asset impairments, $11 million of
expenses related primarily to remaining lease obligations for closed units, $1
million of other unit closing costs, $18 million of operating income from real
estate activities and $6 million of other corporate expenses. Other unallocated
for the first nine months of 2002 was a net expense of $19 million and included
$38 million of asset impairments on certain underperforming department stores,
remaining lease obligations for units scheduled to close and other unit closing
activities, $15
-21- J. C. Penney Company, Inc.
<page>
million of net gains on the sale of closed units, $17 million of income from
real estate operations and a $13 million loss from third party fulfillment and
other corporate activities.
Net Interest Expense
- --------------------
<table>
<c> <c> <c> <c> <c>
($ in millions) 13 weeks ended 39 weeks ended
------------------------------------- ----------------------------------
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
2003 2002 2003 2002
--------------- ---------------- ------------- ---------------
Interest expense 113 106 $ 342 325
Short-term interest income (6) (9) (23) (34)
--------------- ---------------- ------------- ---------------
Net interest expense 107 97 $ 319 $ 291
=============== ================ ============= ===============
</table>
Net interest expense for the quarter, as well as the first nine months, is
higher than last year primarily because the Company's average long-term
borrowing levels are higher, reflecting the issuance of the $600 million 8%
Notes Due 2010 issued in February 2003. Additionally, the average interest rate
on the long-term debt was slightly higher and returns on cash investments were
lower for both the quarter and year-to-date.
Acquisition Amortization
- ------------------------
Amortization of intangible assets related to major business acquisitions was $7
million and $8 million for third quarter of 2003 and 2002, respectively.
Acquisition amortization was $25 million for the first nine months of 2003 and
2002. The Company expects to record approximately $40 million of acquisition
amortization for the full year of 2003.
Income Taxes
- -------------
The Company's effective income tax rate was 33.7% for the third quarter and
34.5% for the first nine months of 2003 compared with 36.3% and 36.4% for the
same periods last year. The improved rate is primarily due to increased
utilization of state tax benefits. The effective tax rate is less than the
statutory rate due primarily to the deductibility of dividends paid to the
employee stock ownership plan. The state effective tax rate (net of federal
benefit) for the first nine months of 2003 is 2.75%.
Merchandise Inventories
- ------------------------
On October 25, 2003, consolidated merchandise inventories on the first-in,
first-out (FIFO) basis were $6,488 million compared to $6,353 million at October
26, 2002 and $5,348 million at January 25, 2003. The 2.1% increase compared to
last year's third quarter reflects higher inventories primarily in Department
Stores and Catalog.
Inventories on a FIFO basis for the Department Stores and Catalog segment
totaled $3,993 million and $3,887 million at October 25, 2003 and October 26,
2002, respectively. Inventory levels entering the fourth quarter are up about 2%
in comparable stores, and are balanced and in line with sales expectations.
Inventories are well positioned in basic merchandise and fresh, new assortments,
as well as key categories and gift items for the holiday selling season.
Eckerd Drugstore inventories on a FIFO basis totaled $2,495 million at the end
of the quarter compared to $2,466 million at the end of last year's third
quarter, and increased about 1.9% on a comparable store basis. This increase is
due primarily to additional inventory for relocated stores as well as higher
levels of store inventory to help Eckerd's in-stock position.
-22- J. C. Penney Company, Inc.
<page>
The current cost of consolidated inventories exceeded the LIFO basis amount
carried on the balance sheet by approximately $428 million at October 25, 2003,
$410 million at October 26, 2002 and $403 million at January 25, 2003. The
drugstore segment comprises the majority of the LIFO reserve and is
predominantly the result of inflation on pharmacy inventories.
Liquidity and Capital Resources
- -------------------------------
The Company's financial condition remains strong, with approximately $1.9
billion in cash and short-term investments as of October 25, 2003. Cash levels
are lower than earlier in the year due to seasonal inventory build-up and the
$300 million pension contribution made in October 2003. Long-term debt,
including current maturities, at the end of the quarter was $5.6 billion.
Long-term debt net of cash and short-term investments was $3.7 billion. Included
in the total cash and short-term investment balances were restricted short-term
investment balances of $87 million, which are pledged as collateral for import
letters of credit not included in the bank credit facility and for a portion of
casualty program liabilities. Cash flow used in operating activities for the
first nine months of 2003 was $362 million compared to cash flow generated from
operating activities of $367 million in the comparable period of 2002. The
decrease was primarily due to the third quarter 2003 cash contribution to the
Company's qualified pension plan and a more normalized level of accounts payable
relative to merchandise inventories in 2003.
On December 1, 2003, JCP closed on the sale of its holding and operating
companies comprising JCPenney's Mexico department store operation (six
department stores). This transaction was effective November 30, 2003, and was
previously announced on October 29, 2003, when an agreement was signed by JCP,
J. C. Penney Mexico, Inc. and Grupo Sanborns S.A. de C.V. of Mexico City. The
Company's book loss was approximately $40 million, $13 million net of tax, or
$0.05 per share. This transaction is expected to result in positive cash flow of
approximately $25 million, including future anticipated tax benefits. The
majority of the $40 million loss on the sale is related to previously unrealized
currency translation losses accumulated since operations began in 1995 that have
previously been reflected through reductions to stockholders' equity. In
accordance with SFAS No. 52, "Foreign Currency Translation," upon completion of
the sale, the accumulated translation adjustment will be removed from the
separate component of equity and reported as part of the loss on the sale.
As of October 25, 2003, the end of the third quarter of 2003, due to significant
uncertainties surrounding the resolution of closing conditions including
regulatory approvals from the Mexican government, the above sale transaction did
not meet the criteria in SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," to be reflected as a discontinued operation.
Subsequent to the end of the third quarter of 2003, with the resolution of these
uncertainties and the closing of the sale in the fourth quarter of 2003, the
Mexico JCPenney department store operation will be classified as a discontinued
operation in the fourth quarter of 2003, as well as any prior periods that may
be presented.
On November 17, 2003, the remaining outstanding 6.125% Notes due 2003, totaling
$246 million, matured and were paid in full.
On August 15, 2003, bondholders exercised their option to redeem approximately
$117 million of the $119 million 6.9% Debentures Due 2026. On the same date, JCP
retired $37.5 million of its 8.25% Debentures Due 2022 at par, through the
mandatory sinking fund payment of $12.5 million and available optional sinking
fund payments totaling $25 million. Also in August 2003, JCP purchased
approximately $12.8 million of the 8.25% Sinking Fund Debentures Due 2022.
Year-to-date, approximately $16.9 million of these Debentures have been
purchased and will be applied to unspecified future mandatory sinking fund
payments.
During the second quarter of 2003, JCP retired $25 million of its 9.75%
Debentures Due 2021 at par through the mandatory sinking fund payment and an
optional sinking fund payment.
-23- J. C. Penney Company, Inc.
<page>
During the first quarter, the Company completed two transactions that
strengthened its overall liquidity position. First, on February 3, 2003, the
Company raised approximately $50 million by securitizing additional Eckerd
managed care receivables (See Note 6). Second, on February 28, 2003, JCP issued
$600 million principal amount of unsecured 8% Notes Due 2010 ("Notes") at an
effective rate of 8.125% with J.C. Penney Company, Inc. as co-obligor (See Note
9). Additional liquidity strengths include the available $1.5 billion credit
facility discussed in the 2002 10-K and significant unencumbered assets that
could be used to secure additional short-term funding, if needed. No borrowings,
other than the issuance of trade and stand-by letters of credit, which totaled
$219 million as of the end of the third quarter of 2003, have been made under
this credit facility. The Company was in compliance with all financial covenants
of the credit facility at October 25, 2003.
For the remainder of 2003, management believes that cash flow generated from
operations, combined with the short-term investment position, will be adequate
to fund cash requirements for capital expenditures, working capital and dividend
payments and, therefore, no external funding will be required. The payment of
dividends is subject to approval by the Company's Board of Directors. Management
does not currently expect to access the capital markets for any external
financing for the remainder of 2003. However, the Company manages its financial
position on a multi-year basis and may access the capital markets on an
opportunistic basis. On May 29, 2003, Standard & Poor's (S&P) downgraded the
Company's corporate credit, senior unsecured and secured bank loan ratings to
BB+ from BBB-. This change brought the S&P rating more in line with the Moody's
and Fitch ratings. This change has not impacted the Company's liquidity or
financial position as the lower credit rating had already been incorporated into
the long-term financing strategy. Management believes that the Company's
financial position will continue to provide the financial flexibility to support
its turnaround initiatives.
Operating cash flows may be impacted by many factors, including the competitive
conditions in the retail industry and the effects of the current economic
conditions. Based on the nature of the Company's businesses, management
considers the above factors to be normal business risks.
Capital expenditures were $544 million through the first nine months of 2003
compared with $451 million for the comparable 2002 period. This year's
investments were primarily to support the implementation of the SSC distribution
network for department stores, department store modernizations and renewals and
technology improvements, as well as for new and relocated Eckerd drugstores and
the continued remodeling of existing Eckerd drugstores. Management currently
expects capital expenditures for the full year will be somewhat less than $900
million, about evenly split between department stores and Eckerd.
A quarterly dividend of $0.125 per share on the Company's outstanding common
stock was paid on November 1, 2003 to stockholders of record on October 10,
2003.
-24- J. C. Penney Company, Inc.
<page>
Stock Option Accounting
- ------------------------
As discussed in the 2002 10-K, the Company follows Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," which does not
require recognition of expense for stock options when the exercise price of an
option equals, or exceeds, the fair market value of the common stock on the date
of grant. Among other reasons, the Company follows APB 25 accounting because
management believes the impact of options is already factored into the earnings
calculation through the dilutive effect of option shares.
The Financial Accounting Standards Board (FASB) is currently reviewing the rules
governing stock option accounting and has made a tentative decision to require
expense recognition of stock options in the statement of operations. The FASB
intends to develop revised rules that would be effective for 2004. The Company
will adopt any new rules required by the FASB when they are effective. The pro
forma impact on the third quarters and first nine months of 2003 and 2002 of
expensing unvested stock options is disclosed in Note 1 to the unaudited Interim
Consolidated Financial Statements.
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 2003, the Audit Committee of the Company's Board of
Directors approved estimated fees for the remainder of 2003 related to the
performance of both audit and allowable non-audit services by the Company's
external auditors, KPMG LLP.
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 and comprise about 45% of the Company's annual profits.
Accordingly, the results of operations for the 13 and 39 weeks ended October 25,
2003 are not necessarily indicative of the results for the entire year.
-25- J. C. Penney Company, Inc.
<page>
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 currency exchange rates. The Company's market
risks related to interest rates at October 25, 2003 are similar to those
disclosed in the Company's 2002 10-K. For the 39 weeks ended October 25, 2003
the other comprehensive income on foreign currency translation was $22 million.
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.
Item 4 - Controls and Procedures
Based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) 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 design and operation of the Company's disclosure
controls and procedures are effective for the purpose of ensuring that material
information required to be in this Quarterly Report is made known to them by
others on a timely basis. There have not been any changes in the Company's
internal control over financial reporting that occurred during the Company's
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties that
may cause the Company's actual results to be materially different from planned
or expected results. Those risks and uncertainties include, but are not limited
to, competition, consumer demand, seasonality, economic conditions, and
government activity. Investors should take such risks into account when making
investment decisions.
-26- J. C. Penney Company, Inc.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company has no material legal proceedings pending against it.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- ------------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the period
covered in this report:
o Current Report on 8-K dated August 12, 2003 (Item 12--Results of
Operations and Financial Condition)
-27- J. C. Penney Company, Inc.
<page>
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: December 8, 2003
-28- J. C. Penney Company, Inc.
<page>
Exhibit 31.1
CERTIFICATION
I, Allen Questrom, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) [Intentionally omitted]
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 8, 2003.
/s/ Allen Questrom
___________________________
Allen Questrom
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.
<page>
Exhibit 31.2
CERTIFICATION
I, Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) [intentionally omitted]
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 8, 2003.
/s/ Robert B. Cavanaugh
___________________________
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
J. C. Penney Company, Inc.
<page>
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 October 25, 2003 (the "Report"),
I, Allen Questrom, Chairman and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATED this 8th day of December 2003.
/s/ Allen Questrom
____________________________
Allen Questrom
Chairman and Chief Executive Officer
<page>
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 October 25, 2003 (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 December 2003.
/s/ Robert B. Cavanaugh
_____________________________
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer