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 29, 2005
Commission file number 1-15274
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transitional period from ______________ to ________________
Commission file number _______________________
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 26-0037077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
(Address of principal executive offices)
(Zip Code)
(972) 431-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
232,240,862 shares of Common Stock of 50 cents par value, as of December 2,
2005.
<table>
<c> <c> <c>
INDEX
Page
----------
Part I Financial Information
Item 1. Unaudited Financial Statements
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flows 4
Notes to the Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
Item 4. Controls and Procedures 34
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 6. Exhibits 36
Signature Page 37
Certifications 38
</table>
i
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
J. C. Penney Company, Inc.
Consolidated Statements of Operations
(Unaudited)
<table>
<c> <c> <c> <c> <c>
($ in millions, except per share data) 13 weeks ended 39 weeks ended
------------------------------- ------------------------------
Oct. 29, Oct. 30, Oct.29, Oct. 30,
2005 2004 2005 2004
--------------- ------------- ------------- ---------------
Retail sales, net $ 4,479 $ 4,391 $ 12,578 $ 12,141
Cost of goods sold 2,605 2,602 7,494 7,359
--------------- ------------- ------------- ---------------
Gross margin 1,874 1,789 5,084 4,782
Selling, general and administrative expenses 1,473 1,447 4,162 4,067
Net interest expense 41 68 130 170
Bond premiums and unamortized costs - 47 18 47
Real estate and other (income) (5) - (41) (13)
--------------- ------------- ------------- ---------------
Income from continuing operations
before income taxes 365 227 815 511
Income tax expense 131 79 288 178
--------------- ------------- ------------- ---------------
Income from continuing operations $ 234 $ 148 $ 527 $ 333
Income/(loss) from discontinued operations,
net of income tax expense/(benefit) of $-,
$-, $28 and $(176) - 1 10 (142)
--------------- ------------- ------------- ---------------
Net income $ 234 $ 149 $ 537 $ 191
Less: preferred stock dividends, net of tax - - - 12
--------------- ------------- ------------- ---------------
Net income applicable to common
stockholders $ 234 $ 149 $ 537 $ 179
=============== ============= ============= ===============
Basic earnings/(loss) per share:
Continuing operations $ 0.95 $ 0.53 $ 2.03 $ 1.15
Discontinued operations - - 0.04 (0.51)
--------------- ------------- ------------- ---------------
Net income $ 0.95 $ 0.53 $ 2.07 $ 0.64
=============== ============= ============= ===============
Diluted earnings/(loss) per share:
Continuing operations $ 0.94 $ 0.50 $ 2.01 $ 1.10
Discontinued operations - - 0.04 (0.46)
--------------- ------------- ------------- ---------------
Net income $ 0.94 $ 0.50 $ 2.05 $ 0.64
=============== ============= ============= ===============
</table>
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-1-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
<table>
<c> <c> <c> <c>
($ in millions) Oct. 29, Oct. 30, Jan. 29,
2005 2004 2005
--------------- ------------ --------------
Assets
Current assets
Cash and short-term investments
(including restricted balances of $65,
$64 and $63) $ 2,044 $ 4,541 $ 4,649
Receivables 279 145 274
Merchandise inventory (net of LIFO
reserves of $25, $43 and $25) 4,229 4,207 3,142
Prepaid expenses 190 249 167
--------------- ------------ --------------
Total current assets 6,742 9,142 8,232
Property and equipment (net of accumulated
depreciation of $2,250, $2,272 and $2,032) 3,655 3,439 3,575
Prepaid pension 1,498 1,570 1,538
Other assets 498 488 473
Assets of discontinued operations - 250 309
--------------- ------------ --------------
Total Assets $ 12,393 $ 14,889 $ 14,127
=============== ============ ==============
</table>
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-2-
J. C. Penney Company, Inc.
Consolidated Balance Sheets
(Unaudited)
<table>
<c> <c> <c> <c>
($ in millions, except per share data) Oct. 29, Oct. 30, Jan. 29,
2005 2004 2005
-------------- ------------ -------------
Liabilities and Stockholders' Equity
Current liabilities
Trade payables $ 1,693 $ 1,731 $ 1,143
Accrued expenses and other 1,386 1,360 1,627
Current maturities of long-term debt 15 603 459
Current income taxes, payable and deferred 119 103 68
-------------- ------------ -------------
Total current liabilities 3,213 3,797 3,297
Long-term debt 3,454 3,955 3,464
Deferred taxes 1,293 1,291 1,319
Other liabilities 1,010 997 1,042
Liabilities of discontinued operations - 106 149
-------------- ------------ -------------
Total Liabilities 8,970 10,146 9,271
Stockholders' Equity
Common stock and additional paid-in capital(1) 3,434 3,741 4,176
-------------- ------------ -------------
Reinvested earnings at beginning of year 812 1,728 1,728
Net income 537 191 524
Retirement of common stock (1,253) (674) (1,290)
Dividends declared (96) (116) (150)
-------------- ------------ -------------
Reinvested earnings at end of period - 1,129 812
Accumulated other comprehensive (loss) (11) (127) (132)
-------------- ------------ -------------
Total Stockholders' Equity 3,423 4,743 4,856
-------------- ------------ -------------
Total Liabilities and Stockholders' Equity $12,393 $14,889 $14,127
============== ============ =============
</table>
(1) Common stock has a par value of $0.50 per share; 1,250 million shares
are authorized. At October 29, 2005, October 30, 2004 and January 29, 2005, 232
million shares, 267 million shares and 271 million shares were issued and
outstanding, respectively.
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-3-
J. C. Penney Company, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<table>
<c> <c> <c>
($ in millions) 39 weeks ended
----------------------------------------
Oct. 29, Oct. 30,
2005 2004
------------------ -----------------
Cash flows from operating activities:
Income from continuing operations $ 527 $ 333
Adjustments to reconcile income from continuing operations
to net cash provided by/(used in) operating activities:
Asset impairments, PVOL and other unit closing costs 7 10
Depreciation and amortization 271 257
Net gains on sale of assets (24) (3)
Benefit plans expense 57 45
Pension contribution - (300)
Stock-based compensation 32 9
Deferred taxes 38 71
Change in cash from:
Receivables (69) (31)
Inventory (1,087) (1,072)
Prepaid expenses and other assets 30 (15)
Trade payables 550 610
Current income taxes payable 26 32
Accrued expenses and other liabilities (182) (93)
------------------ -----------------
Net cash provided by/(used in) operating activities 176 (147)
------------------ -----------------
Cash flows from investing activities:
Capital expenditures (395) (308)
Proceeds from the sale of Eckerd drugstores - 4,666
Proceeds from the sale of Renner shares 283 -
Proceeds from sale of assets 28 28
------------------ -----------------
Net cash (used in)/provided by investing activities (84) 4,386
------------------ -----------------
Cash flows from financing activities:
Payment of long-term debt, including capital
leases and bond premiums (470) (850)
Common stock repurchased (2,161) (1,040)
Dividends paid, common and preferred (101) (116)
Proceeds from stock options exercised 125 191
Excess tax benefits on stock options exercised 46 -
------------------ -----------------
Net cash (used in) financing activities (2,561) (1,815)
------------------ -----------------
Cash (paid for) discontinued operations (136) (847)
------------------ -----------------
Net (decrease)/increase in cash and short-term investments (2,605) 1,577
Cash and short-term investments at beginning of year 4,649 2,964
------------------ -----------------
Cash and short-term investments at end of period $ 2,044 $ 4,541
================== =================
</table>
The accompanying notes are an integral part of these unaudited Interim
Consolidated Financial Statements.
-4-
Notes to the Unaudited Interim Consolidated Financial Statements
1) Summary of Significant Accounting Policies
------------------------------------------
A description of significant accounting policies is included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 2005 (the 2004
10-K). The accompanying unaudited Interim Consolidated Financial Statements
present the results of J. C. Penney Company, Inc. and its subsidiaries (the
Company or JCPenney) and should be read in conjunction with the Consolidated
Financial Statements and notes thereto in the 2004 10-K. All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying Interim Consolidated Financial Statements are unaudited but, in
the opinion of management, include all material adjustments necessary for a fair
presentation. Because of the seasonal nature of the retail business, operating
results for interim periods are not necessarily indicative of the results that
may be expected for the full year. The January 29, 2005 financial information
was derived from the audited Consolidated Financial Statements, with related
footnotes, included in the 2004 10-K.
Certain reclassifications were made to prior year amounts to conform to the
current period presentation, including the reclassification of the results of
operations and financial position of Lojas Renner S.A. to discontinued
operations for all periods presented (see Note 2). Additionally, as a result of
guidance issued by the Securities and Exchange Commission, the Company reviewed
its lease accounting policies at year-end 2004. As a result of this review, a
cumulative pre-tax expense adjustment was recorded in the fourth quarter of 2004
related to recognizing rent on a straight-line basis over the lease term and
synchronizing depreciation periods for fixed assets with the related lease
terms. The impact on prior years was not material. The Company also recorded a
$111 million balance sheet adjustment at January 29, 2005 to increase net
Property and Equipment and establish a deferred rent liability, included in
Other Liabilities in the Company's Consolidated Balance Sheet, for the
unamortized balance of developer/tenant allowances. As of October 29, 2005, the
balance of the deferred rent liability was $123 million.
Certain debt securities have been issued by J. C. Penney Corporation, Inc.
(JCP), the wholly owned operating subsidiary of the Company. The Company is a
co-obligor (or guarantor, as appropriate) regarding the payment of principal and
interest on JCP's outstanding debt securities. The guarantee by the Company of
certain of JCP's outstanding debt securities is full and unconditional.
Stock-Based Compensation
The Company has a stock-based compensation plan that provides for grants to
associates of stock awards, stock appreciation rights or options to purchase the
Company's common stock. Prior to fiscal year 2005, the Company accounted for the
plan under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
and related Interpretations. No compensation cost was reflected in the
Consolidated Statements of Operations for stock options prior to fiscal year
2005, since all options granted under the plan had an exercise price equal to
the market value of the underlying common stock on the date of grant.
Effective January 30, 2005, the Company early-adopted Statement of Financial
Accounting Standards No. 123 (revised), "Share-Based Payment" (SFAS No. 123R),
which requires the use of the fair value method of accounting for all
stock-based compensation, including stock options. The statement was adopted
using the modified prospective method of application. Under this method, in
addition to reflecting compensation expense for new share-based awards, expense
is also recognized to reflect the remaining vesting period of awards that had
been included in pro-forma disclosures in prior periods. The Company has not
adjusted prior year financial statements under the optional modified
retrospective method of application.
-5-
Compensation expense attributable to stock options in the third quarter of 2005
was $4 million ($2 million after tax), a reduction of $0.01 for both basic and
diluted earnings per share. Compensation expense for the first nine months of
2005 was $28 million ($17 million after tax), reducing both basic and diluted
earnings per share by $0.07.
SFAS No. 123R also requires that excess tax benefits related to stock option
exercises be reflected as financing cash inflows instead of operating cash
inflows. For the 39 weeks ended October 29, 2005, this new treatment resulted in
cash flows from financing activities of $46 million, which reduced cash flows
from operating activities by the same amount. For the 39 weeks ended October 30,
2004, the tax benefit included in cash flows from operating activities was $29
million.
Under APB No. 25, pro-forma expense for stock options was calculated on a
straight-line basis over the stated vesting period, which typically ranges from
one to five years. Upon the adoption of SFAS No. 123R, the Company records
compensation expense on a straight-line basis over the employee service period,
which is to the earlier of the retirement eligibility date, if the grant
contains provisions such that the award becomes fully vested upon retirement, or
the stated vesting period (the non-substantive vesting period approach).
The cost charged against income for all stock-based compensation, including the
2005 impact of expensing stock options discussed above, was $5 million and $2
million for the quarters ended October 29, 2005 and October 30, 2004,
respectively, or $3 million and $1 million after tax. For the first nine months
of 2005 and 2004, this amounted to $32 million and $9 million, respectively, or
$19 million and $5 million after tax.
The following table illustrates the effect on net income and earnings per share
as if the fair value method had been applied to all outstanding awards in 2004.
The 2005 information is provided in the table for purposes of comparability.
<table>
<c> <c> <c> <c> <c>
($ in millions, except EPS) 13 weeks ended 39 weeks ended
------------------------ -------------------------
Oct. 29, Oct.30, Oct. 29, Oct. 30,
2005 2004 (1) 2005 2004(1)
------------------------ -------------------------
Net income, as reported $ 234 $ 149 $ 537 $ 191
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects 3 1 19 5
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (3) (1) (19) (13)
------------ ------------ ------------- ------------
Pro-forma net income $ 234 $ 149 $ 537 $ 183
============ ============ ============= ============
Earnings per share:
Basic--as reported $ 0.95 $ 0.53 $ 2.07 $ 0.64
Basic--pro forma $ 0.95 $ 0.53 $ 2.07 $ 0.61
Diluted--as reported $ 0.94 $ 0.50 $ 2.05 $ 0.64
Diluted--pro forma $ 0.94 $ 0.50 $ 2.05 $ 0.61
</table>
(1) If the prior year pro-forma expense had been attributed using the
non-substantive vesting period approach, total stock-based employee compensation
expense for the third quarter and first nine months would have been $1 million
and $17 million, net of tax, respectively, and pro-forma net income would have
been $149 million and $179 million, respectively. Basic and diluted pro-forma
earnings per share would have been $0.53 and $0.50, respectively, for last
year's third quarter, and $0.60 for the first nine months of last year.
-6-
Prior to fiscal year 2005, the Company used the Black-Scholes option pricing
model to estimate the grant date fair value of stock option awards. For grants
subsequent to the adoption of SFAS No. 123R, the Company estimates the fair
value of stock option awards on the date of grant using a binomial lattice model
developed by outside consultants who worked with the Company in the
implementation of SFAS No. 123R. The Company believes that the binomial lattice
model is a more accurate model for valuing employee stock options since it
better reflects the impact of stock price changes on option exercise behavior.
The expected volatility used in the binomial lattice model is based on an
analysis of historical prices of JCPenney's stock and open market exchanged
options, and was developed in consultation with an outside valuation specialist
and the Company's financial advisors. The expected volatility reflects the
volatility implied from a price quoted for a hypothetical call option with a
duration consistent with the expected life of the options, and the volatility
implied by the trading of options to purchase the Company's stock on open-market
exchanges. As a result of the Company's turnaround that has been ongoing since
2001 and the disposition of the Eckerd drugstore operations, a significant
portion of the historical volatility is not considered to be a good indicator of
future volatility. The expected term of options granted is derived from the
output of the binomial lattice model, and represents the period of time that the
options are expected to be outstanding. This model incorporates an early
exercise assumption in the event of a significant increase in stock price. The
risk-free rate is based on zero-coupon U.S. Treasury yields in effect at the
date of grant with the same period as the expected option life. The dividend
yield is assumed to increase ratably to the Company's expected dividend yield
level based on targeted payout ratios over the expected life of the options.
The following table presents the assumptions utilized to estimate the grant date
fair value of stock options:
<table>
<c> <c> <c> <c> <c>
13 weeks ended 39 weeks ended
-------------------------------------- ---------------------------------------
Oct. 29, 2005 Oct. 30, 2004 Oct. 29, 2005 Oct. 30, 2004
------------------- ------------------ -------------------- ------------------
Valuation model Binomial Lattice - Binomial Lattice Black-Scholes
Expected volatility 30.0% - 30.0% 30.0%
Expected dividend yield 1.02%-1.20% - 0.92%-1.20% 1.40%
Expected term 5 years - 5 years 5 years
Risk-free rate 4.1% - 4.0% 3.0%
Weighted-average fair value
of options at grant date $ 14.29 - $ 12.87 $ 8.44
</table>
See Note 9 for additional discussion of the Company's stock-based compensation.
Effect of New Accounting Standards
On October 6, 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) FAS 13-1, "Accounting for Rental Costs Incurred during a
Construction Period." FSP FAS 13-1 requires rental costs associated with ground
or building operating leases that are incurred during a construction period to
be treated as rental expense, as opposed to capitalizing them as a part of the
building or leasehold improvement. The provisions of this FSP must be applied to
the first reporting period beginning after December 15, 2005, and therefore,
beginning in the first quarter of fiscal 2006, the Company will no longer
capitalize rental costs incurred during the construction period. The Company
does not expect FSP FAS 13-1 to have a material impact on the Company's
consolidated financial statements, and will not adjust prior year financial
statements under the optional retrospective method of application.
-7-
2) Discontinued Operations
------------------------
Lojas Renner S.A.
On July 5, 2005, the Company's wholly owned subsidiary, J. C. Penney Brazil,
Inc., closed on the sale of its shares of Lojas Renner S.A. (Renner), a
Brazilian department store chain, through a public stock offering registered in
Brazil. The Company generated cash proceeds of $283 million from the sale of its
interest in Renner. After taxes and transaction costs, net proceeds approximated
$260 million. As announced in July 2005, proceeds from the sale were used for
common stock repurchases, which are more fully discussed in Note 3.
The sale resulted in a pre-tax gain of $26 million and a loss of $8 million on
an after-tax basis. The relatively high tax cost is largely due to the tax basis
of the Company's investment in Renner being lower than its book basis as a
result of accounting for the investment under the cost method for tax purposes.
Included in the pre-tax gain on the sale was $83 million of foreign currency
translation losses that had accumulated since the Company acquired its
controlling interest in Renner. For all periods presented, Renner's results of
operations and financial position have been reclassified and reflected as a
discontinued operation.
Eckerd Drugstores
On July 31, 2004, the Company and certain of its subsidiaries closed on the sale
of its Eckerd drugstore operations to the Jean Coutu Group (PJC) Inc. (Coutu)
and CVS Corporation and CVS Pharmacy, Inc. (together, CVS) for a total of
approximately $4.7 billion in cash proceeds. After taxes, fees and other
transaction costs, and estimated post-closing adjustments, the ultimate net cash
proceeds from the sale totaled approximately $3.5 billion. Proceeds from the
sale were used for common stock repurchases and debt reduction, as announced in
August 2004, and more fully discussed in Note 3.
There were no adjustments to the loss on the sale of Eckerd during the third
quarter of 2005. During the second quarter of 2005, an after-tax credit of $5
million was recorded to reflect reserve and income tax adjustments. Through the
third quarter of 2005, the cumulative loss on the sale was $721 million pre-tax,
or $1,428 million on an after-tax basis. The relatively high tax cost is a
result of the tax basis of Eckerd being lower than its book basis because the
Company's previous drugstore acquisitions were largely tax-free transactions.
Upon closing on the sale of Eckerd on July 31, 2004, the Company established
reserves for estimated transaction costs and post-closing adjustments. Certain
of these reserves involved significant judgment and actual costs incurred over
time could vary from these estimates. The more significant remaining estimates
relate to the costs to exit the Colorado and New Mexico markets, assumption of
the Eckerd Pension Plan and various post-employment benefit obligations and
environmental indemnifications. During the second quarter of 2005, the Company
reached final settlement with both Coutu and CVS regarding the working capital
adjustments as required in the respective sale agreements. The reserves that had
been previously established were adequate to cover the respective payments under
the settlement. Management continues to review and update the remaining reserves
on a quarterly basis, and believes that the overall reserves, as adjusted, are
adequate at the end of the third quarter of 2005 and consistent with original
estimates. Cash payments for the Eckerd-related reserves are included in the
Company's Consolidated Statements of Cash Flows as Cash Paid for Discontinued
Operations.
As part of the Asset Purchase Agreement with CVS, it was agreed that, with
respect to the Colorado and New Mexico locations (CN real estate interests), at
closing any of these properties that were not disposed of would be transferred
to CVS. On August 25, 2004, the Company and CVS entered into the CN Rescission
Agreement, whereby the Company received a one-time payment from CVS of $21.4
million, which represented the agreed-upon limit of CVS's liability regarding
the CN real estate interests plus net proceeds from dispositions as of August
-8-
<page>
25, 2004 minus expenses borne and paid by CVS as of August 25, 2004 relating to
the CN real estate interests. Effective August 25, 2004, CVS transferred to the
Company all CN real estate interests not disposed of, corresponding third party
agreements and liabilities. The Company engaged a third-party real estate firm
and has disposed of most of the properties and is working through disposition
plans for the remaining properties.
At or immediately prior to the closing of the sale of Eckerd on July 31, 2004,
JCP assumed sponsorship of the Pension Plan for Former Drugstore Associates, the
Eckerd Contingent Separation Pay Programs and various other terminated
non-qualified retirement plans and programs. JCP further assumed all severance
and post-employment health and welfare benefit obligations under various Eckerd
plans, employment and other specific agreements. JCP has evaluated its options
with respect to these assumed liabilities, and has either settled the
obligations in accordance with the provisions of the applicable plan or program
or determined in most other cases to terminate the agreements, plans or programs
and settle the underlying benefit obligations. On June 20, 2005, the Board of
Directors of JCP approved the termination of JCP's Pension Plan for Former
Drugstore Associates; and the notice of intent to terminate was sent to affected
parties on October 28, 2005. JCP is in the process of seeking regulatory
approval for the termination and selecting an annuity provider to settle the
underlying benefit obligations.
As part of the Eckerd sale agreements, the Company retained responsibility to
remediate environmental conditions that existed at the time of the sale. Certain
properties, principally distribution centers, were identified as having such
conditions at the time of sale. Reserves were established by management, after
consultation with an environmental engineering firm, for specifically identified
properties, as well as a certain percentage of the remaining properties,
considering such factors as age, location and prior use of the properties.
Both CVS and Coutu entered into agreements with the Company and the Company's
insurance provider in order to assume the obligations for general liability and
workers' compensation claims that had been transferred to the purchasers at
closing. The agreement with CVS was entered into concurrent with the closing,
while the agreement with Coutu was finalized in the third quarter of 2004. At
closing, the Company had approximately $64 million in letters of credit pledged
as collateral to its insurance provider in support of general liability and
workers' compensation claims that were transferred to Coutu as part of the
Eckerd sale. Upon the finalization of the insurance assumption agreements, this
amount was reduced to approximately $8.5 million. In September 2005, the
insurance provider released the Company's remaining collateral, and the $8.5
million letter of credit was cancelled.
For a period of 12 months from the closing date, the Company provided to the
purchasers certain information systems, accounting, banking, vendor contracting,
tax and other transition services as set forth in the Company's Transition
Services Agreements (Transition Agreements) with Coutu and CVS. These transition
services ended as planned on July 31, 2005. One Transition Agreement with
Pharmacare Management Services, Inc., a subsidiary of CVS, involved the
provision of information and data management services for a period of up to 15
months from the closing date. That agreement also ended as planned on October
31, 2005. Under the Transition Agreements, the Company received monthly service
fees that were designed to recover the estimated costs of providing the
specified services.
Income/(Loss) from Discontinued Operations in the Consolidated Statements of
Operations reflects Eckerd's operating results prior to the closing of the sale
on July 31, 2004, including allocated interest expense. Interest expense was
allocated to the discontinued operation based on Eckerd's outstanding balance on
its intercompany loan payable to JCPenney, which accrued interest at JCPenney's
weighted-average interest rate on its net debt (long-term debt net of short-term
investments) calculated on a monthly basis.
-9-
<page>
Results of discontinued operations as reflected in the Consolidated Statements
of Operations for the 13 and 39 weeks ended October 29, 2005 and October 30,
2004 are summarized below:
<table>
<c> <c> <c> <c> <c>
($ in millions) 13 weeks ended 39 weeks ended
----------------------------- -----------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
----------------------------- -----------------------------
Eckerd ----------------------------- -----------------------------
Net sales $ - $ - $ - $7,254
----------------------------- -----------------------------
Gross margin - - - 1,676
Selling, general and administrative expenses - - - 1,635
Interest expense - - - 97
Acquisition amortization - - - 5
Other - - - 2
----------------------------- -----------------------------
(Loss) before income taxes - - - (63)
Income tax (benefit) - - - (23)
----------------------------- -----------------------------
Eckerd (loss) from operations - - - (40)
Gain/(loss) on sale of Eckerd, net of income
tax (benefit) of $-, $-, $(13) and $(155) - - 5 (108)
Renner income from operations, net of income
tax expense of $-, $-, $4 and $2 - 1 7 6
(Loss) on sale of Renner, net of income tax
expense of $-, $-, $34 and $- - - (8) -
Other discontinued operations, net of income
tax expense of $-, $-, $3 and $- - - 6 -
----------------------------- -----------------------------
Total income/(loss) from discontinued $ - $ 1 $ 10 $ (142)
operations, net ============================= =============================
</table>
There were no net sales related to Renner in the third quarter of 2005. Included
in the Renner income from operations amounts provided above were net sales of
$70 million for the third quarter of 2004 and $187 million and $210 million,
respectively, for the first nine months of 2005 and 2004.
With the closing of the Eckerd sale on July 31, 2004, there were no assets or
liabilities of the Eckerd discontinued operation as of October 29, 2005, October
30, 2004 or January 29, 2005. With the closing of the sale of Renner shares on
July 5, 2005, there were no assets or liabilities of the Renner discontinued
operation at October 29, 2005. Assets and liabilities of the Renner discontinued
operation as of October 30, 2004 and January 29, 2005 were as follows:
($ in millions) Oct. 30, Jan. 29,
2004 2005
----------------- ------------------
Current assets $ 146 $ 195
Goodwill 40 43
Other assets 64 71
----------------- ------------------
Total assets $ 250 $ 309
----------------- ------------------
Current liabilities $ 106 $ 149
Other liabilities - -
----------------- ------------------
Total liabilities $ 106 $ 149
----------------- ------------------
JCPenney's net investment in Renner $ 144 $ 160
================= ==================
The carrying amount of goodwill for Renner, which is reflected in Assets of
Discontinued Operations in the Company's Consolidated Balance Sheets, was $40
million and $43 million as of October 30, 2004 and January 29, 2005,
respectively. Changes in carrying value were related to foreign currency
-10-
<page>
translation adjustments. There were no impairment losses related to goodwill
recorded up to the sale date in 2005 or during the first nine months of 2004.
3) Capital Structure Repositioning
-------------------------------
By the end of the third quarter of 2005, the Company had substantially completed
its major equity and debt reduction program that was initiated in August 2004,
which focused on enhancing stockholder value, strengthening the Company's
capital structure and improving its credit rating profile. In addition to the
2004 authorizations, on March 18, 2005, the Board of Directors authorized
additional common stock repurchases and debt retirements, and on July 15, 2005,
the Company announced additional Board authorization for repurchases of common
stock. The Company used the $3.5 billion in net cash proceeds from the sale of
the Eckerd drugstore operations, $260 million in net cash proceeds from the sale
of Renner shares, cash proceeds from the exercise of employee stock options and
existing cash and short-term investment balances, including free cash flow
generated in 2004, to fund the programs, which consisted of the following:
Common Stock Repurchases
- ------------------------
The Company's common stock repurchase programs totaled $4.15 billion, consisting
of a 2004 authorization of $3.0 billion and 2005 authorizations of $750 million
and $400 million. As of October 29, 2005, only $12 million remained authorized
for repurchase under the $400 million program, and the other programs were
complete. Share repurchases have been made in open-market transactions, subject
to market conditions, legal requirements and other factors. During the third
quarter of 2005, 23.8 million shares of common stock were repurchased for a
total cost of approximately $1.2 billion. During the first nine months of 2005,
the Company repurchased 44.0 million shares of common stock at a cost of
approximately $2.2 billion, bringing the total purchases as of October 29, 2005
under all programs to 94.1 million shares of common stock at a cost of $4.138
billion. This represents over 99% of the planned repurchases and nearly 30% of
the common share equivalents the Company had outstanding at the time the 2004
program was initiated, including shares issuable under convertible debt
securities.
Common stock is retired on the same day it is repurchased, with the excess of
the purchase price over the par value being allocated between Reinvested
Earnings and Additional Paid-In Capital. As a result of retiring the common
stock repurchased since August 2004, Reinvested Earnings at the end of the third
quarter of 2005 reflected a balance of zero in the Company's Consolidated
Balance Sheet.
Debt Reduction
- --------------
The Company's debt reduction programs, which were complete by the end of the
second quarter of 2005, consisted of approximately $2.14 billion of debt
retirements, including approximately $1.89 billion authorized in 2004 and $250
million authorized in 2005.
The Company's debt retirements included $250 million of open-market debt
repurchases in the first half of 2005, the payment of $193 million of long-term
debt at the scheduled maturity date in May 2005, and 2004 transactions that
consisted of $650 million of debt converted to common stock, $822 million of
cash payments and the termination of the $221 million Eckerd securitized
receivables program. The Company incurred pre-tax charges of $18 million in the
first half of 2005 related to these early debt retirements. During the third
quarter of 2004, the Company incurred total pre-tax charges of $47 million
related to early debt retirements.
Series B Convertible Preferred Stock Redemption
- ------------------------------------------------
On August 26, 2004, the Company redeemed, through conversion to common stock,
all of its outstanding shares of Series B ESOP Convertible Preferred Stock
(Preferred Stock), all of which were held by the Company's Savings,
Profit-Sharing and Stock Ownership Plan, a 401(k) savings plan. Each holder of
-11-
<page>
Preferred Stock received 20 equivalent shares of JCPenney common stock for each
share of Preferred Stock in their Savings Plan account in accordance with the
original terms of the Preferred Stock. Preferred Stock shares, which were
included in the diluted earnings per share calculation as appropriate, were
converted into approximately nine million common stock shares. Subsequent to the
redemption, the Company no longer has any outstanding preferred stock, although
25 million shares remain authorized.
Common Stock Outstanding
During the first nine months of 2005, common stock outstanding decreased 39
million shares to 232 million shares from 271 million shares at the beginning of
the year. The decline in outstanding shares is attributable to approximately 44
million shares repurchased and retired, partially offset by approximately five
million shares issued due to the exercise of employee stock options.
4) Earnings/(Loss) per Share
-------------------------
Basic earnings/(loss) per share (EPS) is computed by dividing net income less
dividend requirements on the Series B ESOP Convertible Preferred Stock, net of
tax as applicable, by the weighted-average number of shares of common stock
outstanding for the period. Except when the effect would be anti-dilutive at the
continuing operations level, the diluted EPS calculation includes the impact of
restricted stock units and shares that, during the period, could have been
issued under outstanding stock options, as well as common shares that would have
resulted from the conversion of convertible debentures and convertible preferred
stock. If the applicable shares are included in the calculation, the related
interest on convertible debentures (net of tax) and preferred stock dividends
(net of tax) are added back to income, since these would not be paid if the
debentures or preferred stock were converted to common stock. Both the
convertible debentures and preferred stock were converted to common stock in the
second half of 2004. See Note 3.
Income from continuing operations and shares used to compute EPS from continuing
operations, basic and diluted, are reconciled below:
<table>
<c> <c> <c> <c> <c>
($ in millions, except EPS) 13 weeks ended 39 weeks ended
------------------------- --------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
------------ ----------- ----------- ------------
Earnings:
Income from continuing operations $ 234 $ 148 $ 527 $ 333
Less: preferred stock dividends, net of tax - - - 12
------------ ----------- ----------- ------------
Income from continuing operations, basic 234 148 527 321
Adjustment for assumed dilution:
Interest on 5% convertible debt, net of tax - 5 - 16
------------ ----------- ----------- ------------
Income from continuing operations, diluted $ 234 $ 153 $ 527 $ 337
============ =========== =========== ============
Shares:
Average common shares outstanding (basic shares) 246 279 260 280
Adjustments for assumed dilution:
Stock options and restricted stock units 3 5 2 5
Shares from convertible preferred stock - 2 - -
Shares from convertible debt - 23 - 23
------------ ----------- ----------- ------------
Average shares assuming dilution (diluted shares) 249 309 262 308
============ =========== =========== ============
EPS from continuing operations:
Basic $0.95 $0.53 $2.03 $1.15
Diluted $0.94 $0.50 $2.01 $1.10
</table>
The following potential shares of common stock were excluded from the EPS
calculation since they were anti-dilutive:
-12-
<page>
<table>
<c> <c> <c> <c> <c>
(shares in millions)
13 weeks ended 39 weeks ended
-------------------------------- ------------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
--------------- ---------------- -------------- ---------------
Stock options 4 3 4 6
Preferred stock - - - 7
</table>
5) Cash and Short-Term Investments
--------------------------------
<table>
<c> <c> <c> <c>
($ in millions) Oct. 29, Oct. 30, Jan. 29,
2005 2004 2005
------------------- ----------------- ---------------
Cash $ 123 $ 85 $ 39
Short-term investments 1,921 4,456 4,610
------------------- ----------------- ---------------
Total cash and short-term investments $ 2,044 $4,541 $4,649
=================== ================= ===============
</table>
Restricted Short-Term Investment Balances
Short-term investments include restricted balances of $65 million, $64 million
and $63 million as of October 29, 2005, October 30, 2004 and January 29, 2005,
respectively. Restricted balances are pledged as collateral for a portion of
casualty insurance program liabilities.
6) Supplemental Cash Flow Information
----------------------------------
<table>
<c> <c> <c>
($ in millions) 39 weeks ended
----------------------------------------
Oct. 29, 2005 Oct. 30, 2004
----------------- -----------------
Total interest paid $ 300 $ 432
Less: interest paid attributable to discontinued operations 6 104
----------------- -----------------
Interest paid by continuing operations(1) $ 294 $ 328
================= =================
Interest received by continuing operations(2) $ 86 $ 35
================= =================
Total income taxes paid $ 200 $ 720
Less: income taxes (received)/paid attributable to discontinued
operations (52) 625
----------------- -----------------
Income taxes paid by continuing operations $ 252 $ 95
================= =================
</table>
(1) Includes cash paid for bond premiums and commissions of $15 million and $47
million for the 39 weeks ended October 29, 2005 and October 30, 2004,
respectively.
(2) There was no interest received attributable to discontinued operations in
the first nine months of 2005 or 2004.
-13-
7) Credit Agreement
----------------
On April 7, 2005, the Company, JCP and J. C. Penney Purchasing Corporation
entered into a five-year $1.2 billion revolving credit facility (2005 Credit
Facility) with a syndicate of lenders with JPMorgan Chase Bank, N.A., as
administrative agent. The 2005 Credit Facility replaced the Company's $1.5
billion credit facility that expired in May 2005. The 2005 Credit Facility is
unsecured, and all collateral securing the previously existing $1.5 billion
credit facility has been released. The 2005 Credit Facility is available for
general corporate purposes, including the issuance of letters of credit. Pricing
under the 2005 Credit Facility is tiered based on JCP's senior unsecured
long-term debt ratings by Moody's and Standard & Poor's. Obligations under the
2005 Credit Facility are guaranteed by the Company.
The 2005 Credit Facility includes a requirement that the Company maintain, as of
the last day of each fiscal quarter, a maximum ratio of total Funded
Indebtedness to Consolidated EBITDA (Leverage Ratio, as defined in the 2005
Credit Facility), as measured on a trailing four-quarters basis, of no more than
3.0 to 1.0. Additionally, the 2005 Credit Facility requires that the Company
maintain, for each period of four consecutive fiscal quarters, a minimum ratio
of Consolidated EBITDA plus Consolidated Rent Expense to Consolidated Interest
Expense plus Consolidated Rent Expense (Fixed Charge Coverage Ratio, as defined
in the 2005 Credit Facility) of at least 3.2 to 1.0. As of October 29, 2005, the
Company's Leverage Ratio was 1.9 to 1.0 and the Fixed Charge Coverage Ratio was
5.0 to 1.0, both in compliance with the requirements.
No borrowings, other than the issuance of trade and standby letters of credit,
which totaled $145 million as of the end of the third quarter of 2005, have been
made under this facility.
8) Comprehensive Income and Accumulated Other Comprehensive (Loss)
---------------------------------------------------------------
<table>
<c> <c> <c> <c> <c>
Comprehensive Income/(Loss)
($ in millions) 13 weeks ended 39 weeks ended
------------------------------ -------------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
--------------- ------------- -------------- --------------
Net income $ 234 $ 149 $ 537 $ 191
--------------- ------------- -------------- --------------
Other comprehensive (loss)/income:
Net unrealized (losses)/gains in real estate
investment trusts (25) 16 17 12
Non-qualified retirement plan minimum
liability adjustment - - - (1)
Reclassification adjustment for currency
translation loss included in discontinued
operations - - 83 -
Other comprehensive income from
discontinued operations - 9 21 -
--------------- ------------- -------------- --------------
(25) 25 121 11
--------------- ------------- -------------- --------------
Total comprehensive income $ 209 $ 174 $ 658 $ 202
=============== ============= ============== ==============
</table>
-14-
Accumulated Other Comprehensive Income/(Loss)
<table>
<c> <c> <c> <c>
($ in millions) Oct. 29, Oct. 30, Jan. 29,
2005 2004 2005
----------------- ----------------- ---------------
Net unrealized gains in real estate investment trusts (1) $ 91 $ 72 $ 74
Non-qualified retirement plan minimum liability
adjustment (2) (102) (83) (102)
Other comprehensive (loss) from discontinued operations - (116) (3) (104) (3)
----------------- ----------------- ---------------
Accumulated other comprehensive (loss) $ (11) $ (127) $ (132)
================= ================= ===============
</table>
(1) Shown net of a deferred tax liability of $49 million, $39 million and $41
million as of October 29, 2005, October 30, 2004 and January 29, 2005,
respectively.
(2) Shown net of a deferred tax asset of $66 million, $53 million and $66
million as of October 29, 2005, October 30, 2004 and January 29, 2005,
respectively.
(3) Represents foreign currency translation adjustments related to Renner. A
deferred tax asset was not established due to the historical reinvestment of
earnings in the Company's Brazilian subsidiary.
9) Stock-Based Compensation
------------------------
At the May 20, 2005 Annual Meeting of Stockholders, the Company's stockholders
approved the 2005 Equity Compensation Plan (2005 Plan), which reserved an
aggregate of 17.2 million shares of common stock for issuance to associates and
non-employee directors. The 2005 Plan replaces the Company's 2001 Equity
Compensation Plan (2001 Plan). Effective June 1, 2005, all future grants will be
made under the 2005 Plan. The 2005 Plan provides for grants to associates of
options to purchase the Company's common stock, restricted and non-restricted
stock awards (shares and units) and stock appreciation rights. The 2005 Plan
also provides for grants of restricted and non-restricted stock awards (shares
and units) and stock options to non-employee members of the Board of Directors.
At October 29, 2005, 17.0 million shares of stock were available for future
grants.
Stock options and awards typically vest over performance periods ranging from
one to five years. The number of option shares is fixed at the grant date, and
the exercise price of stock options equals or exceeds the market value of the
Company's common stock on the date of grant. The 2005 Plan does not permit
awarding stock options below grant-date market value. Options have a maximum
term of 10 years. Over the past three years, the Company's annual stock option
grants have averaged about 1.5% of total outstanding stock. The Company issues
new shares upon the exercise of stock options.
The cost charged against income for all stock-based compensation was $5 million
and $2 million for the quarters ended October 29, 2005 and October 30, 2004,
respectively. For the first nine months of 2005 and 2004, this amounted to $32
million and $9 million, respectively. The total income tax benefit recognized in
the Consolidated Statements of Operations for stock-based compensation
arrangements was $2 million and $1 million for the third quarters of 2005 and
2004, respectively, and $13 million and $4 million on a year-to-date basis for
2005 and 2004. Compensation cost for the third quarter and first nine months of
2005 includes $4 million and $28 million ($2 million and $17 million after tax),
respectively, of costs related to early-adopting SFAS No. 123R.
Stock Options
On October 29, 2005, options to purchase 11.8 million shares of common stock
were outstanding. If all options were exercised, common stock outstanding would
increase by 5.1%. As of the end of the third quarter of 2005, 6.8 million, or
58% of the 11.8 million outstanding options, were exercisable. Of those, 5.9
million, or 86%, were "in-the-money," or had an exercise price below the closing
stock price of $49.01 on October 29, 2005.
-15-
The following table summarizes stock options outstanding as of October 29, 2005
as well as activity during the nine months then ended:
<table>
<c> <c> <c> <c> <c>
Weighted- Weighted- Aggregate
Average Average Intrinsic
Shares (in Exercise Remaining Value ($ in
thousands) Price Contractual millions)
Term(in years)
---------------- ---------------- ------------------ --------------
Outstanding at January 30, 2005 13,831 $ 33
Granted 3,201 45
Exercised (4,555) 28
Forfeited or expired (674) 48
----------------
Outstanding at October 29, 2005 11,803 $ 37 6.4 $ 160
================ ================ ================== ==============
Exercisable at October 29, 2005 6,831 $ 35 4.6 $ 114
================ ================ ================== ==============
</table>
The intrinsic value of a stock option is the amount by which the market value of
the underlying stock exceeds the exercise price of the option.
The weighted-average grant date fair value of stock options granted during the
third quarter and first nine months of 2005 was $14.29 and $12.87, respectively.
While there were substantially no stock options granted during the third quarter
of 2004, the weighted-average grant date fair value of stock options granted
during the first nine months of 2004 was $8.44.
Cash proceeds, tax benefits and intrinsic value related to total stock options
exercised during the third quarter and first nine months of 2005 and 2004 are
provided in the following table:
<table>
<c> <c> <c> <c> <c>
($ in millions) 13 weeks ended 39 weeks ended
--------------------------- --------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
------------ ----------- ----------- ------------
Proceeds from stock options exercised $ 7 $ 22 $ 125 $ 191
Tax benefit related to stock options exercised - 4 36 53
Intrinsic value of stock options exercised 5 20 94 154
</table>
Cash payments for income taxes made during the first nine months of 2005 were
reduced by $46 million for excess tax benefits realized on stock options
exercised. In accordance with the new treatment required by SFAS No. 123R, these
excess tax benefits are reported as financing cash inflows. For the first nine
months of 2004, excess tax benefits were included in operating cash flows and
totaled $29 million.
Stock Awards
Both the 2005 Plan and the 2001 Plan provide for grants of restricted and
non-restricted stock awards (shares and units) to associates and non-employee
members of the Board of Directors.
-16-
The following is a summary of the status of the Company's associate restricted
stock awards as of October 29, 2005 and activity during the nine months then
ended:
(shares in thousands) Weighted-
Average Grant
Shares Date Fair Value
--------------- ---------------------
Nonvested at January 30, 2005 303 $ 32
Granted 140 48
Vested (11) 18
Forfeited (2) 31
---------------
Nonvested at October 29, 2005 430 $ 37
===============
As of October 29, 2005, there was $12 million of compensation cost not yet
recognized related to associate restricted stock awards. That cost is expected
to be recognized over a weighted-average period of 2.2 years. The aggregate fair
value of shares vested during the first nine months of 2005 was $0.6 million at
the date of vesting, compared to an aggregate fair value of $0.2 million on the
grant date.
Non-restricted stock awards of 14,000 and 16,000 shares were granted to
associates and expensed during the first nine months of 2005 and 2004,
respectively.
Restricted stock awards for non-employee members of the Board of Directors are
expensed when granted. Shares or units arising from these awards are not
transferable until a director terminates service. During the second quarters of
2005 and 2004, 13,000 units and 24,000 shares of such awards were granted,
respectively. No such awards were granted in the first or third quarters of 2005
or 2004.
10) Retirement Benefit Plans
------------------------
Net Periodic Benefit Cost/(Credit)
The components of net periodic benefit cost/(credit) for the qualified and
non-qualified pension plans and the postretirement plans for the 13 weeks ended
October 29, 2005 and October 30, 2004 are as follows:
<table>
<c> <c> <c> <c>
Pension Plans
-------------------------------------------------------
Supplemental Postretirement
Qualified (Non-Qualified) Plans
($ in millions) ------------------------------- -------------------------- -----------------------
13 weeks ended 13 weeks ended 13 weeks ended
----------------------------------------------------------------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------
Service cost $ 22 $ 29 $ - $ - $ 1 $ 1
Interest cost 51 67 7 5 2 3
Expected return on plan assets (83) (101) - - - -
Net amortization 26 32 5 2 (8) (6)
----------------------------------------------------------------------------------
Net periodic benefit cost/(credit) $ 16 $ 27 $ 12 $ 7 $ (5) $ (2)
==================================================================================
</table>
-17-
The components of net periodic benefit cost/(credit) for the qualified and
non-qualified pension plans and the postretirement plans for the 39 weeks ended
October 29, 2005 and October 30, 2004 are as follows:
<table>
<c> <c> <c> <c>
Pension Plans
-------------------------------------------------------
Supplemental Postretirement
Qualified (Non-Qualified) Plans
($ in millions) ------------------------------- -------------------------- -----------------------
39 weeks ended 39 weeks ended 39 weeks ended
----------------------------------------------------------------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------
Service cost $ 55 $ 52 $ 1 $ 1 $ 2 $ 3
Interest cost 124 122 14 11 4 8
Expected return on plan assets (202) (183) - - - -
Net amortization 63 58 10 6 (17) (17)
----------------------------------------------------------------------------------
Net periodic benefit cost/(credit) $ 40 $ 49 $ 25 $ 18 $ (11) $ (6)
==================================================================================
</table>
Employer Contributions
As previously disclosed in the 2004 10-K, the Company does not expect to be
required to make a contribution to its qualified pension plan in 2005 under the
Employee Retirement Income Security Act of 1974. No discretionary contributions
have been made to the qualified pension plan during the first nine months of
2005. However, the Company may make a discretionary contribution during the
fourth quarter of 2005, depending on market conditions, the resulting funded
status of the plan and legislative developments. During the third quarter of
2004, the Company made a $300 million discretionary contribution to its
qualified pension plan ($190 million after income taxes).
Postretirement Medical Benefits
Effective June 7, 2005, the Company amended its medical plan to reduce the
Company-provided subsidy to post-age 65 retirees by 45% beginning January 1,
2006, and then fully eliminate the subsidy after December 31, 2006. This change
is expected to result in an incremental credit of approximately $6.5 million in
fiscal 2005 and $8 million in fiscal 2006 to postretirement medical plan
expense, which is a component of selling, general and administrative expenses.
11) Real Estate and Other (Income)/Expense
--------------------------------------
<table>
<c> <c> <c> <c> <c>
($ in millions) 13 weeks ended 39 weeks ended
-------------------------------- -------------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
--------------- -------------- -------------- --------------
Real estate activities $ (8) $ (6) $ (25) $ (20)
Net gains from sale of real estate (1) - (23) (3)
Asset impairments, PVOL and other unit
closing costs 4 6 7 10
--------------- -------------- -------------- --------------
Total $ (5) $ - $ (41) $ (13)
=============== ============== ============== ==============
</table>
Real estate activities consist primarily of income from the Company's real
estate subsidiaries. Net real estate gains were recorded from the sale of
facilities that are no longer used in Company operations. For
-18-
<page>
the first nine months of 2005, the gain from the sale of real estate was
primarily from the sale of a vacant merchandise processing facility that was
made obsolete by the centralized network of store distribution centers put in
place by mid-2003.
Asset impairments, the present value of remaining operating lease obligations
(PVOL) and other unit closing costs totaled $4 million and $7 million for the
third quarter and first nine months of 2005. Approximately half of the charges
for the third quarter of 2005 consisted of asset impairments, with the remaining
charges related to PVOL for closed stores. On a year-to-date basis, the total
reflected $4 million of PVOL for closed stores, with the balance reflecting
asset impairments and other unit closing costs.
Asset impairments, PVOL and other unit closing costs totaled $6 million for the
third quarter of 2004 and $10 million for the first nine months of 2004.
Approximately half of the charges for each respective period consisted of asset
impairments, with the remaining charges related to PVOL for closed stores.
12) Guarantees
----------
As of October 29, 2005, JCP had guarantees totaling $59 million, which are
described in detail in the 2004 10-K. These guarantees consist of: $18 million
related to investments in a real estate investment trust; $20 million maximum
exposure on insurance reserves established by a former subsidiary included in
the sale of the Company's Direct Marketing Services business; and $21 million
for certain personal property leases assumed by the purchasers of Eckerd, which
were previously reported as operating leases.
13) Subsequent Events
------------------
Common Stock Repurchases
In November 2005, the Company completed its outstanding common stock repurchase
program with the repurchase of an additional 0.2 million shares of common stock
at a cost of $12 million, bringing the total repurchases for the capital
structure repositioning programs to 94.3 million shares at a principal cost of
$4.15 billion.
-19-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion, which presents the results of J. C. Penney Company,
Inc. and its subsidiaries (the Company or JCPenney), should be read in
conjunction with the Company's consolidated financial statements as of January
29, 2005, and for the year then ended, and Management's Discussion and Analysis
of Financial Condition and Results of Operations, both contained in the
Company's Annual Report on Form 10-K for the year ended January 29, 2005 (the
2004 10-K).
This discussion is intended to provide the reader with information that will
assist in understanding the Company's financial statements, including the
changes in certain key items in those financial statements from period to period
and the primary factors that accounted for those changes, how operating results
affect the financial condition and results of operations of the Company as a
whole, and how certain accounting principles affect the Company's financial
statements.
Certain debt securities have been issued by J. C. Penney Corporation, Inc.
(JCP), the wholly owned operating subsidiary of the Company. The Company is a
co-obligor (or guarantor, as appropriate) regarding the payment of principal and
interest on JCP's outstanding debt securities. The guarantee by the Company of
certain of JCP's outstanding debt securities is full and unconditional.
Key Items
- ---------
o Income from continuing operations increased 88% to $0.94 per share in the
third quarter of 2005 from $0.50 per share in last year's third quarter. On
a dollar basis, income from continuing operations increased 58% to $234
million in the third quarter of 2005, compared to $148 million last year.
For the first nine months of 2005, income from continuing operations
increased to $527 million, or $2.01 per share, compared to $333 million, or
$1.10 per share, for the first nine months of 2004. All references to
earnings per share (EPS) are on a diluted basis.
o Net income per share increased to $0.94 in the third quarter of 2005,
compared to $0.50 in the comparable 2004 period. For the first nine months
of 2005, net income per share increased to $2.05, compared to $0.64 in the
first nine months of 2004. There was no impact from discontinued operations
in the third quarter of 2005. Discontinued operations added $10 million to
net income for the first nine months of 2005, or $0.04 on a per share
basis. Net income in the third quarter of 2004 reflected after-tax income
from discontinued operations of $1 million, with no per share impact. For
the first nine months of 2004, discontinued operations resulted in
after-tax charges of $142 million, or $0.46 on a per share basis. Net
income for the third quarter and first nine months of 2005 reflects the
impact of early-adopting Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), which resulted
in pre-tax compensation expense of $4 million and $28 million ($2 million
and $17 million after tax), respectively. On a per share basis, this
amounted to a reduction to net income of $0.01 for the third quarter and
$0.07 for the first nine months of 2005.
o Comparable department store sales increased 2.5% for the third quarter of
2005, on top of a 2.6% increase in last year's third quarter. Direct
(catalog/Internet) sales decreased 0.9%, with the Internet channel sales
increasing more than 25%. For the first nine months of 2005, comparable
department store sales increased 3.0% and Direct sales increased 3.5%, with
the Internet channel sales increasing over 30%.
-20-
<page>
o Operating profit (gross margin less selling, general and administrative
expenses) was $401 million in the third quarter of 2005, or 8.9% of sales,
compared with $342 million, or 7.8% of sales, last year. This represents an
increase of 17% on a dollar basis, or 110 basis points as a percent of
sales. For the first nine months of 2005, operating profit was $922
million, or 7.3% of sales, compared with $715 million, or 5.9% of sales,
for the comparable 2004 period. Gross margin continued to be the key driver
for improved operating performance.
o By the end of the third quarter of 2005, the Company had substantially
completed its capital structure repositioning programs, which were
initiated in conjunction with the sale of Eckerd on July 31, 2004, and
included authorizations for an aggregate $4.15 billion of common stock
repurchases and an aggregate $2.14 billion of debt reductions. As of
October 29, 2005, the debt reduction programs were complete. The remaining
$12 million of authorized common stock repurchases was completed early in
the fourth quarter of 2005. To fund the programs, the Company used the $3.5
billion in net cash proceeds from the sale of the Eckerd drugstore
operations, $260 million in net cash proceeds from the sale of Lojas Renner
S.A. (Renner) shares, cash proceeds from the exercise of employee stock
options and existing cash and short-term investment balances, including
free cash flow generated in 2004 (free cash flow is defined on page 30
under Free Cash Flow).
o On October 13, 2005, Fitch Ratings raised its credit rating on the
Company's senior unsecured notes and debentures and its $1.2 billion
revolving credit facility from BB+ to BBB-, the lowest investment grade
rating, and revised its outlook for the Company to "Stable." On August 16,
2005, Moody's raised its credit rating outlook on the Company from "Stable"
to "Positive," and affirmed its corporate family debt rating of Ba1 and
liquidity rating of SGL-1.
Discontinued Operations
- -----------------------
Discontinued operations had no impact on net income in the third quarter of
2005. For the first nine months of 2005, discontinued operations added $0.04 per
share to net income, principally related to adjustments associated with the
earlier sale of the Eckerd drugstore operation and the Company's international
operations, and operating income for Renner, the Company's Brazilian department
store chain, to the date of sale, offset by the loss on the sale of Renner
shares. These are discussed in more detail below.
Lojas Renner S.A.
As previously reported, on July 5, 2005, the Company's wholly owned subsidiary,
J. C. Penney Brazil, Inc., closed on the sale of its shares of Renner through a
public stock offering registered in Brazil. The Company generated cash proceeds
of $283 million from the sale of its interest in Renner. After taxes and
transaction costs, net proceeds approximated $260 million. As announced in July
2005, proceeds from the sale were used for common stock repurchases, which are
more fully discussed under Capital Structure Repositioning on pages 30-31.
The sale resulted in a pre-tax gain of $26 million and a loss of $8 million on
an after-tax basis. The relatively high tax cost is largely due to the tax basis
of the Company's investment in Renner being lower than its book basis as a
result of accounting for the investment under the cost method for tax purposes.
Included in the pre-tax gain on the sale was $83 million of foreign currency
translation losses that had accumulated since the Company acquired its
controlling interest in Renner. For all periods presented, Renner's results of
operations and financial position have been reclassified and reflected as a
discontinued operation.
-21-
Eckerd Drugstores
As previously reported, on July 31, 2004, the Company and certain of its
subsidiaries closed on the sale of its Eckerd drugstore operations to the Jean
Coutu Group (PJC) Inc. (Coutu) and CVS Corporation and CVS Pharmacy, Inc.
(together, CVS) and received gross cash proceeds of approximately $4.7 billion.
Net after-tax cash proceeds from the sale of approximately $3.5 billion were
used for common stock repurchases and debt reduction, as announced in August
2004, and more fully discussed under Capital Structure Repositioning on pages
30-31.
There were no adjustments to the loss on the sale of Eckerd during the third
quarter of 2005. During the second quarter of 2005, an after-tax credit of $5
million was recorded to reflect reserve and income tax adjustments. Through the
third quarter of 2005, the cumulative loss on the sale was $721 million pre-tax,
or $1,428 million on an after-tax basis. The relatively high tax cost is a
result of the tax basis of Eckerd being lower than its book basis because the
Company's previous drugstore acquisitions were largely tax-free transactions.
Upon closing on the sale of Eckerd on July 31, 2004, the Company established
reserves for estimated transaction costs and post-closing adjustments. Certain
of these reserves involved significant judgment and actual costs incurred over
time could vary from these estimates. The more significant remaining estimates
relate to the costs to exit the Colorado and New Mexico markets, assumption of
the Eckerd Pension Plan and various post-employment benefit obligations and
environmental indemnifications. During the second quarter of 2005, the Company
reached final settlement with both Coutu and CVS regarding the working capital
adjustments as required in the respective sale agreements. The reserves that had
been previously established were adequate to cover the respective payments under
the settlement. Management continues to review and update the remaining reserves
on a quarterly basis, and believes that the overall reserves, as adjusted, are
adequate at the end of the third quarter of 2005 and consistent with original
estimates. Cash payments for the Eckerd-related reserves are included in the
Company's Consolidated Statements of Cash Flows as Cash Paid for Discontinued
Operations.
-22-
Results of Operations
- ---------------------
The following discussion and analysis, consistent with all other financial data
throughout this report, focuses on the results of operations and financial
condition from the Company's continuing operations.
<table>
<c> <c> <c> <c> <c>
($ in millions, except EPS) 13 weeks ended 39 weeks ended
------------------------------- ------------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
-------------- --------------- --------------- --------------
Retail sales, net $ 4,479 $ 4,391 $12,578 $ 12,141
-------------- --------------- --------------- --------------
Gross margin 1,874 1,789 5,084 4,782
SG&A expenses 1,473 1,447 4,162 4,067
-------------- --------------- --------------- --------------
Operating profit 401 342 922 715
Net interest expense 41 68 130 170
Bond premiums and unamortized costs - 47 18 47
Real estate and other (income) (5) - (41) (13)
-------------- --------------- --------------- --------------
Income from continuing operations
before income taxes 365 227 815 511
Income tax expense 131 79 288 178
-------------- --------------- --------------- --------------
Income from continuing operations $ 234 $ 148 $ 527 $ 333
============== =============== =============== ==============
Diluted EPS from continuing operations $ 0.94 $ 0.50 $ 2.01 $ 1.10
Ratios as a percent of sales:
Gross margin 41.8% 40.7% 40.4% 39.4%
SG&A expenses 32.9% 32.9% 33.1% 33.5%
Operating profit 8.9% 7.8% 7.3% 5.9%
Depreciation and amortization included
in operating profit $ 96 $ 89 $ 271 $ 257
</table>
The Company continued to improve its profitability during the third quarter of
2005 as reflected in income from continuing operations of $234 million, or $0.94
per share, compared to $148 million, or $0.50 per share, for the comparable 2004
period. For the first nine months of 2005, income from continuing operations
increased to $527 million, or $2.01 per share, compared to $333 million, or
$1.10 per share, for the comparable period in the prior year. The increase over
2004 reflects improved operating profit, resulting from continued improvement in
sales productivity, growth in gross margin and leveraging of selling, general
and administrative (SG&A) expenses, combined with lower interest expense and
bond premiums. Earnings per share for the third quarter and first nine months of
2005 also benefited from the Company's ongoing common stock repurchase programs,
which were completed early in the fourth quarter of 2005. The Company currently
expects 2005 fourth quarter and full year earnings from continuing operations to
be approximately $1.58 and $3.51 per share, respectively.
Operating Profit
- -----------------
Operating profit for the third quarter of 2005 increased 17% to $401 million, or
8.9% of sales, due to continued strong operating performance during 2005,
compared to $342 million, or 7.8% of sales, for the comparable period last year.
For the first nine months of 2005, operating profit increased to $922 million,
or 7.3% of sales, compared to $715 million, or 5.9% of sales, in the first nine
months of 2004. For the full year, the Company currently expects operating
profit to exceed 8% of sales.
-23-
Operating profit (gross margin less SG&A expenses) is the key measurement on
which management evaluates the financial performance of the retail operations.
Real estate activities, gains and losses on the sale of real estate properties,
restructuring costs, if applicable, asset impairments and other charges
associated with closing store and catalog facilities are evaluated separately
from operations, and are recorded in Real Estate and Other in the Consolidated
Statements of Operations.
<table>
<c> <c> <c> <c> <c>
Retail Sales, Net
($ in millions)
13 weeks ended 39 weeks ended
------------------------------------ ----------------------------------
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
2005 2004 2005 2004
------------------ ---------------- --------------- -----------------
Retail sales, net $ 4,479 $ 4,391 $12,578 $ 12,141
------------------ ---------------- --------------- -----------------
Sales percent increase/(decrease):
Comparable stores (1) 2.5% 2.6% 3.0% 6.0%
Total department stores 2.6% 2.7% 3.6% 5.9%
Direct (catalog/Internet) (0.9)% 3.6% 3.5% 2.9%
</table>
(1) Comparable store sales include sales of stores after having been open for 12
full consecutive fiscal months. For the 13 weeks and 39 weeks ended October 29,
2005, the five stores that were closed for an extended period from the effects
of Hurricanes Katrina and Rita are not included in the comparable store sales
calculation. Those stores represented approximately 0.5% of the Company's total
2004 sales. As of November 19, 2005, all but one of these stores had reopened.
New and relocated stores, and the reopened stores impacted by the hurricanes,
become comparable on the first day of the 13th full fiscal month of operation.
Comparable department store sales increased 2.5% for the third quarter of 2005,
and total department store sales increased 2.6%. For the first nine months of
2005, comparable store sales increased 3.0%, while total department store sales
increased 3.6%. These year-to-date increases were on top of increases of 6.0%
for comparable store sales and 5.9% for total department store sales for the
first nine months of 2004. Third quarter sales reflect improvements in the
majority of merchandise divisions, while on a year-to-date basis, all
merchandise divisions reflect improvements. From a regional perspective, for
both the third quarter and first nine months of 2005, the strongest performance
was in the southeastern and western regions of the country. Both third quarter
and year-to-date sales reflect good sell-through in both fashion and basic
merchandise and strong sales gains in the Company's key private brands.
Department store sales have continued to benefit from positive customer response
to the style, quality, selection and value offered in the Company's merchandise
assortments, compelling marketing programs and continued improvement in the
store shopping experience.
Direct sales decreased 0.9% for the third quarter of 2005 compared to a 3.6%
increase last year, primarily due to the decline in catalog print media sales.
The Internet channel continues to experience strong sales growth, increasing
over 25% in the current quarter, on top of an almost 30% increase in last year's
third quarter. Internet sales represented approximately 36% of total Direct
sales for the third quarter, up from approximately 28% in last year's third
quarter. For the first nine months of 2005, Direct sales increased 3.5%, with
the Internet component increasing over 30%. Direct sales continue to reflect a
focus on targeted specialty catalogs and the expanded assortments and
convenience of the Internet, which is attracting new, younger customers, in
addition to existing customers migrating from printed catalogs.
The Company continues to edit its merchandise assortments to help ensure it is
meeting the needs and wants of its targeted moderate customer. The Company's key
private brands continue to grow and play a key role in building customer loyalty
and differentiating the Company's merchandise offerings. Consistent with the
Company's strategy of making an emotional connection with the JCPenney customer,
management remains focused on increasing the style, quality and value of the
Company's key private brand offerings, making them even more relevant and
exciting for the customer. Additionally, the Chris Madden for JCPenney
-24-
<page>
Home Collection, originally launched in the second quarter of 2004, continues to
perform well and has been expanded with new furniture, bedding and window
covering collections. In the first quarter of 2005, the Company launched nicole
by Nicole Miller, and W-work to weekend, an extension of the Company's
Worthington private brand. Management is pleased with initial customer response
and early sales results for the Company's new merchandise launches, especially
nicole and W, both new dressy casual brands for women, as well as the
performance of the expanded Chris Madden offerings.
For the fourth quarter, both comparable store sales and Direct sales are
expected to increase low-single digits.
Gross Margin
Gross margin improved 110 basis points in this year's third quarter to 41.8% of
sales, or $1,874 million, from 40.7% of sales, or $1,789 million, in the
comparable 2004 period. Through the first nine months of 2005, gross margin was
40.4% of sales, or $5,084 million, compared to 39.4% of sales, or $4,782
million, in the first nine months of 2004, an increase of 100 basis points as a
percent of sales. The continued improvement in gross margin reflects better
management of inventory flow and seasonal transition, better timing of clearance
markdowns, continued strength in the performance of the Company's private brand
merchandise, consistency of execution and continuing benefits from the
centralized merchandising model. Benefits of the centralized model, which was
substantially in place by the end of 2004, have included enhanced merchandise
offerings, an integrated marketing plan, leverage in the buying and
merchandising process and more efficient selection and allocation of merchandise
to individual department stores. Gross margin also reflects initial benefits
from the Company's new planning, allocation and replenishment systems, which
were rolled out in the latter part of 2004.
SG&A Expenses
SG&A expense dollars increased 1.8% in this year's third quarter to $1,473
million, from $1,447 million in last year's third quarter, in support of higher
sales. On a year-to-date basis, SG&A expenses were $4,162 million in 2005,
compared to $4,067 million in 2004. Expenses were flat as a percent of sales for
the third quarter of 2005 compared to the same period in 2004, but improved by
40 basis points as a percent of sales on a year-to-date basis.
During the third quarter of 2005, the Company experienced increases in
advertising, utilities and costs to support new store openings, as well as costs
related to the new point-of-sale system rollout, although these increases were
partially offset by initial leverage in salary costs and benefits from ongoing
store workload management initiatives. Third quarter SG&A also reflects a
previously announced one-time credit of $13 million related to the Company's
share of expected proceeds from the Visa Check/MasterMoney Antitrust Litigation
settlement, which was essentially offset by hurricane-related costs, net of
probable insurance recoveries. In addition to these items, the year-to-date
improvement also reflects savings in labor costs, centralized management of
store expenses and savings from the Company's previously announced cost
reduction initiatives, partially offset by the impact of expensing employee
stock options starting in the first quarter of 2005. Third quarter and
year-to-date SG&A expenses include approximately $4 million and $28 million,
respectively, or about $0.01 and $0.07 per share, related to the expensing of
employee stock options. The full-year 2005 impact of expensing stock options is
expected to total approximately $33 million, or about $0.08 per share.
Goals
The Company is focused on consistent execution and sustained operating
performance in a centralized environment, with enhanced merchandise offerings,
improved inventory systems, a more integrated and powerful marketing message and
better leveraging of expenses. With the 2005-2009 Long-Range Plan announced in
April 2005, the Company has established a goal to generate annual operating
profit of 9% to 9.5% of sales by 2009. To achieve this goal, specific long-range
financial objectives include having low single-digit comparable department store
sales increases and low-to-mid single-digit Direct sales increases each year,
continuing to improve annual gross margin to more than 39% of sales by 2009 and
continuing
-25-
<page>
to reduce and leverage SG&A expenses to a level that is less than 30% of sales
by 2009. The Company's financing strategy and risk management are detailed in
its 2004 Annual Report.
Net Interest Expense
- ---------------------
Net interest expense was $41 million and $68 million for the third quarters of
2005 and 2004, respectively, and benefited from higher short-term rates on cash
and short-term investment balances, as well as the Company's debt reduction
programs. On a year-to-date basis, net interest expense was $130 million in
2005, compared to $170 million in 2004. Net interest expense of $95 million was
attributed to Eckerd through the sale date of July 31, 2004, which coincided
with the end of last year's second quarter. Since the initiation of the debt
reduction programs in 2004, which were complete by the end of the second quarter
of 2005, $2.14 billion of long-term debt has been retired.
Bond Premiums and Unamortized Costs
- ------------------------------------
No bond premiums or unamortized costs were incurred during the third quarter of
2005. On a year-to-date basis, the Company incurred $18 million of bond
premiums, commissions and unamortized costs related to the purchase of debt in
the open market under the capital structure repositioning plan, which is
discussed on pages 30-31. Currently, management does not expect to incur any
additional charges related to the early retirement of debt during the remainder
of fiscal year 2005. For the third quarter and first nine months of 2004, such
costs totaled $47 million.
Real Estate and Other
- ----------------------
Real Estate and Other consists of real estate activities, gains and losses on
the sale of real estate properties, asset impairments and other charges
associated with closing store and catalog facilities. Real Estate and Other for
the third quarter of 2005 resulted in a credit of $5 million, which consisted of
an $8 million credit for real estate operations, $1 million of gains on the sale
of closed units, offset by $4 million of costs related to asset impairments, the
present value of operating lease obligations (PVOL) and other costs of closed
stores. On a year-to-date basis, Real Estate and Other was a credit of $41
million, which consisted of a $25 million credit for real estate operations, $23
million of gains on the sale of closed units, primarily a vacant merchandise
processing facility, and $7 million of costs related to asset impairments, PVOL
and other costs of closed stores.
For the third quarter of 2004, Real Estate and Other resulted in a near-zero
balance, which consisted of a $6 million credit for real estate operations and
$6 million of costs related to asset impairments, PVOL and other costs of closed
stores. For the first nine months of 2004, Real Estate and Other was a net
credit of $13 million, which consisted of a $20 million credit for real estate
operations, $3 million of net gains on the sale of closed units and $10 million
of charges related to asset impairments, PVOL and other costs of closed stores.
-26-
Income Taxes
- ---------------
The Company's effective income tax rate for continuing operations was 36.0% for
the third quarter of 2005, compared with 34.9% for the third quarter of 2004.
For the first nine months of 2005, the Company's effective tax rate for
continuing operations was 35.4%, compared to 34.9% in the comparable period of
2004. The increase in the effective tax rate was primarily due to improved
earnings, which decreased the favorable impact of permanent adjustments,
principally the deduction for dividends paid to the Company's savings plan.
Additionally, this deduction for dividends paid decreased compared to the prior
year due to the redemption, through conversion to common stock, of all shares of
the Series B ESOP Convertible Preferred Stock that had been held by the savings
plan, which occurred in the third quarter of 2004. The effective tax rate for
the first nine months of 2005 was positively impacted by a one-time credit of $5
million in the second quarter related to changes in state income tax laws. The
Company expects the effective income tax rate for the fourth quarter and full
year of 2005 to be approximately 36.0% and 35.6%, respectively.
Merchandise Inventory
- ---------------------
Merchandise inventory was $4,229 million at October 29, 2005, compared to $4,207
million at October 30, 2004 and $3,142 million at January 29, 2005. With an
increase of 0.5% compared to last year, inventory at the end of the third
quarter of 2005 was at planned levels entering the holiday season, was well
managed and reflected a good balance between seasonal and basic merchandise.
Using new systems and the network of store distribution centers, the Company has
continued to enhance its ability to allocate and flow merchandise to stores
in-season by recognizing sales trends earlier and accelerating receipts,
replenishing individual stores based on rates of sale and consistently providing
high in-stock levels in basics and advertised items. This continued improvement
of inventory management has helped to drive more profitable sales.
Liquidity and Capital Resources
- --------------------------------
The Company ended the third quarter with approximately $2.0 billion in cash and
short-term investments and approximately $3.5 billion of long-term debt,
including current maturities. Cash and short-term investments included
restricted short-term investment balances of $65 million as of October 29, 2005,
which are pledged as collateral for a portion of casualty insurance program
liabilities. During the course of 2005, cash balances have been reduced as the
Company progressed on its capital structure repositioning programs, which were
completed early in the fourth quarter of 2005 (see pages 30-31 for additional
information on the capital structure repositioning programs).
The Company, JCP and J. C. Penney Purchasing Corporation are parties to a
five-year $1.2 billion revolving credit facility (2005 Credit Facility) with a
syndicate of lenders with JPMorgan Chase Bank, N.A., as administrative agent.
The 2005 Credit Facility is unsecured, and all collateral securing the
previously existing $1.5 billion credit facility has been released. The 2005
Credit Facility is available for general corporate purposes, including the
issuance of letters of credit. Pricing under the 2005 Credit Facility is tiered
based on JCP's senior unsecured long-term debt ratings by Moody's and Standard &
Poor's. Obligations under the 2005 Credit Facility are guaranteed by the
Company. No borrowings, other than the issuance of trade and standby letters of
credit, which totaled $145 million as of the end of the third quarter of 2005,
have been made under this facility.
The 2005 Credit Facility includes a requirement that the Company maintain, as of
the last day of each fiscal quarter, a maximum ratio of total Funded
Indebtedness to Consolidated EBITDA (Leverage Ratio, as defined in the 2005
Credit Facility), as measured on a trailing four-quarters basis, of no more than
-27-
<page>
3.0 to 1.0. Additionally, the 2005 Credit Facility requires that the Company
maintain, for each period of four consecutive fiscal quarters, a minimum ratio
of Consolidated EBITDA plus Consolidated Rent Expense to Consolidated Interest
Expense plus Consolidated Rent Expense (Fixed Charge Coverage Ratio, as defined
in the 2005 Credit Facility) of at least 3.2 to 1.0. As of October 29, 2005, the
Company's Leverage Ratio was 1.9 to 1.0 and the Fixed Charge Coverage Ratio was
5.0 to 1.0, both in compliance with the requirements.
Cash Flows
The following is a summary of the Company's cash flows from operating, investing
and financing activities:
($ in millions)
39 weeks ended
---------------------------------
Oct. 29, Oct. 30,
2005 2004
--------------- --------------
Net cash provided by/(used in):
Operating activities $ 176 $ (147)
Investing activities (84) 4,386
Financing activities (2,561) (1,815)
Cash (paid for) discontinued operations (136) (847)(1)
--------------- --------------
Net (decrease)/increase in cash and short-term $ (2,605) $ 1,577
investments
=============== ==============
(1) Includes an income tax payment of $624 million related to the taxable gain
on the sale of Eckerd.
Cash Flow from Operating Activities
The improvement in cash provided by/(used in) operating activities in the first
nine months of 2005 compared with the same period in 2004 was primarily due to
the Company making no contribution to its qualified pension plan during the
first nine months of 2005, combined with improved operating performance,
partially offset by higher income tax payments. In the third quarter of 2004, a
$300 million discretionary contribution was made to the Company's qualified
pension plan and reflected in cash used in operating activities. The Company may
make a discretionary pension contribution in the fourth quarter of 2005,
depending on market conditions, the funded status of the plan and legislative
developments. Additionally, due to the adoption of SFAS No. 123R, $46 million of
excess tax benefits from stock options exercised is reflected in cash flows from
financing activities for the first nine months of 2005, whereas for the
comparable 2004 period, $29 million of excess tax benefits from stock options
exercised is reflected in cash flows from operating activities.
Cash Flow from Investing Activities
Capital expenditures were $395 million for the first nine months of 2005,
compared with $308 million for the comparable 2004 period. Capital spending was
principally for new stores, store renewals and modernizations and costs related
to new point-of-sale technology. During the first nine months of 2005, the
Company opened five new stores and ten relocated stores. Management continues to
expect total capital expenditures for the full year to be in the area of $650
million.
Cash proceeds of $283 million were received from the sale of the Company's
interest in Renner, which closed on July 5, 2005. After deducting taxes, fees
and other transaction costs, the net cash proceeds approximated $260 million.
Investing activities for the first nine months of 2004 included approximately
$4.7 billion of gross cash proceeds related to the sale of Eckerd.
Proceeds from the sale of closed units were $28 million for both the first nine
months of 2005 and 2004.
-28-
Cash Flow from Financing Activities
For the first nine months of 2005, cash payments for long-term debt, including
capital leases and bond premiums and commissions, totaled $470 million. For the
first nine months of 2004, cash payments of $850 million were made related to
long-term debt reductions, including capital leases and bond premiums and
commissions. Debt reductions are discussed further under Capital Structure
Repositioning on page 31.
The Company repurchased 44.0 million shares of common stock for $2,188 million
during the first nine months of 2005, including commissions of $0.03 per share
purchased. Of the total cost, $78 million was settled after the end of the third
quarter. In addition, approximately $51 million of cash was paid during the
first quarter of 2005 for settlement of 2004 share repurchases. Common stock is
retired on the same day it is repurchased and the related cash settlements are
completed on the third business day following the repurchase. During the first
nine months of 2004, cash payments of $1,040 million were made related to share
repurchases.
Net proceeds from the exercise of stock options were $125 million and $191
million through the third quarters of 2005 and 2004, respectively.
Quarterly dividends of $0.125 per share, or approximately $35 million each
quarter, were paid on the Company's outstanding common stock on August 1, 2005,
May 2, 2005 and February 1, 2005 to stockholders of record on July 8, 2005,
April 8, 2005 and January 10, 2005, respectively. The payment of common stock
dividends is subject to approval by the Company's Board of Directors. Dividends
paid on common and preferred stock during the first nine months of 2004 totaled
$116 million.
Due to the adoption of SFAS No. 123R in 2005, excess tax benefits on stock
option exercises of $46 million for the first nine months of the year are
reflected as cash inflows from financing activities. Previously, such amounts
were included in cash flows from operating activities.
For the remainder of 2005, management believes that cash flow generated from
operations, combined with existing cash and short-term investments, will be
adequate to fund capital expenditures, working capital and dividend payments
and, therefore, no external funding will be required. At the present time,
management does not expect to access the capital markets for any external
financing for the remainder of 2005. However, the Company may access the capital
markets on an opportunistic basis. Management believes that the Company's
financial position will continue to provide the financial flexibility to support
its strategic plan. The Company's cash flows may be impacted by many factors,
including the competitive conditions in the retail industry, and the effects of
the current economic environment and consumer confidence. Based on the nature of
the Company's business, management considers the above factors to be normal
business risks.
On October 13, 2005, Fitch Ratings raised its credit rating on the Company's
senior unsecured notes and debentures and its $1.2 billion revolving credit
facility from BB+ to BBB-, its lowest investment grade rating, and revised its
outlook for the Company to "Stable." On August 16, 2005, Moody's raised its
credit rating outlook on the Company from "Stable" to "Positive," and affirmed
its corporate family debt rating of Ba1 and liquidity rating of SGL-1. On April
7, 2005, Moody's raised its senior unsecured credit rating for the Company from
Ba2 to Ba1, the highest non-investment grade rating, citing the Company's new
credit facility. On March 8, 2005, Standard & Poor's raised its credit rating
outlook on the Company from "Stable" to "Positive."
-29-
Free Cash Flow
In addition to cash flow from operating activities, management also evaluates
free cash flow from continuing operations, an important financial measure that
is widely used by investors, the rating agencies and banks. Free cash flow from
continuing operations is defined as cash provided by/(used in) operating
activities less dividends and capital expenditures, net of proceeds from the
sale of assets. The Company's calculation of free cash flow may differ from that
used by other companies and therefore comparability may be limited. While free
cash flow is a non-GAAP financial measure, it is derived from components of the
Company's consolidated GAAP cash flow statement. Management believes free cash
flow from continuing operations is important in evaluating the Company's
financial performance and measuring the ability to generate cash without
incurring additional external financing.
Based on the seasonality of the Company's business, cumulative free cash flow
generally runs negative the first nine months of the year, and turns positive in
the fourth quarter. Through the first nine months of 2005, free cash flow from
continuing operations was a deficit of $292 million, a $251 million improvement
compared to a deficit of $543 million for the comparable 2004 period. The
improvement was primarily due the fact that no qualified pension plan
contribution was made during the first nine months of 2005, discussed
previously, combined with improved operating performance, partially offset by
higher income tax payments and the planned increase in capital expenditures. As
a result of strong operating performance in the first nine months of 2005, the
Company currently expects to generate at least $300 million of positive free
cash flow for the full year, assuming the Company makes a discretionary
contribution to its pension plan during the fourth quarter at a level similar to
that contributed in 2004.
The following table reconciles net cash provided by/(used in) operating
activities (GAAP) to free cash flow (deficit) from continuing operations (a
non-GAAP measure) for the 39 weeks ended October 29, 2005 and October 30, 2004:
<table>
<c> <c> <c>
($ in millions) 39 weeks ended
-----------------------------------
Oct. 29, Oct. 30,
2005 2004
---------------- ---------------
Net cash provided by/(used in) operating activities $ 176 $ (147)
Less:
Capital expenditures (395) (308)
Dividends paid (101) (116)
Plus:
Proceeds from sale of assets 28 28
---------------- ---------------
Free cash flow (deficit) from continuing operations $ (292) $ (543)
================ ===============
</table>
Although free cash flow is not a GAAP measure, it is derived from
components of the Company's consolidated GAAP cash flow statement.
Capital Structure Repositioning
- --------------------------------
By the end of the third quarter of 2005, the Company had substantially completed
its major equity and debt reduction program that had been initiated in August
2004, which focused on enhancing stockholder value, strengthening the Company's
capital structure and improving its credit rating profile. In addition to the
2004 authorizations, on March 18, 2005, the Board of Directors authorized
additional common stock repurchases and debt retirements, and on July 15, 2005,
the Board authorized additional repurchases of common stock. The Company used
the $3.5 billion in net cash proceeds from the sale of the Eckerd drugstore
operations, $260 million in net cash proceeds from the sale of Renner shares,
cash proceeds from the exercise of employee stock options and existing cash and
short-term investment
-30-
<page>
balances, including free cash flow generated in 2004, to fund the programs,
which consisted of the following:
Common Stock Repurchases
- ------------------------
The Company's common stock repurchase programs totaled $4.15 billion, consisting
of a 2004 authorization of $3.0 billion and 2005 authorizations of $750 million
and $400 million. As of October 29, 2005, only $12 million remained authorized
for repurchase under the $400 million program, and the other programs were
complete. Share repurchases have been made in open-market transactions, subject
to market conditions, legal requirements and other factors. During the third
quarter of 2005, 23.8 million shares of common stock were repurchased for a
total cost of approximately $1.2 billion. During the first nine months of 2005,
the Company repurchased 44.0 million shares of common stock at a cost of
approximately $2.2 billion, bringing the total purchases as of October 29, 2005
under all programs to 94.1 million shares of common stock at a cost of $4.138
billion. This represents over 99% of the planned repurchases and nearly 30% of
the common share equivalents the Company had outstanding at the time the 2004
program was initiated, including shares issuable under convertible debt
securities.
In November 2005, the Company completed its outstanding common stock repurchase
program with the repurchase of an additional 0.2 million shares of common stock
at a cost of $12 million, bringing the total repurchases for the common stock
repurchase programs to 94.3 million shares at a principal cost of $4.15 billion.
Debt Reduction
- ---------------
The Company's debt reduction programs, which were completed by the end of the
second quarter of 2005, consisted of approximately $2.14 billion of debt
retirements, including approximately $1.89 billion authorized in 2004 and $250
million authorized in 2005.
The Company's debt retirements included $250 million of open-market debt
repurchases in the first half of 2005, the payment of $193 million of long-term
debt at the scheduled maturity date in May 2005, and 2004 transactions that
consisted of $650 million of debt converted to common stock, $822 million of
cash payments and the termination of the $221 million Eckerd securitized
receivables program. The Company incurred pre-tax charges of $18 million in the
first half of 2005 related to these early debt retirements. During the third
quarter of 2004, the Company incurred total pre-tax charges of $47 million
related to early debt retirements.
Series B Convertible Preferred Stock Redemption
- -----------------------------------------------
On August 26, 2004, the Company redeemed, through conversion to common stock,
all of its outstanding shares of Series B ESOP Convertible Preferred Stock
(Preferred Stock), all of which were held by the Company's Savings,
Profit-Sharing and Stock Ownership Plan, a 401(k) savings plan. Each holder of
Preferred Stock received 20 equivalent shares of JCPenney common stock for each
share of Preferred Stock in their Savings Plan account in accordance with the
original terms of the Preferred Stock. Preferred Stock shares, which were
included in the diluted earnings per share calculation as appropriate, were
converted into approximately nine million common stock shares. Annual dividend
savings approximate $11 million after tax.
Common Stock Outstanding
- ------------------------
During the first nine months of 2005, common stock outstanding decreased 39
million shares to 232 million shares from 271 million shares at the beginning of
the year. The decline in outstanding shares is attributable to approximately 44
million shares repurchased and retired, partially offset by approximately five
million shares issued due to the exercise of employee stock options.
-31-
Stock Option Accounting
- -----------------------
As discussed in the 2004 10-K, prior to fiscal year 2005, the Company followed
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," which did not require expense recognition for stock options when
the exercise price of an option equaled, or exceeded, the fair market value of
the common stock on the date of grant. Effective January 30, 2005, the Company
early-adopted SFAS No. 123R, which requires the use of the fair value method for
accounting for stock options. The statement was adopted using the modified
prospective method of application. Under this method, in addition to reflecting
compensation expense for new share-based awards, expense is also recognized to
reflect the remaining vesting period of awards that had been included in
pro-forma disclosures in prior periods. Accordingly, in the third quarter and
first nine months of 2005, the Company recorded compensation expense of $4
million and $28 million ($2 million and $17 million after tax), respectively.
This reflects the requirements of the final accounting rules to recognize
compensation expense over the employee service period, which is to the earlier
of the retirement eligibility date, if the grant contains provisions such that
the award becomes fully vested upon retirement, or the normal vesting period.
This resulted in a reduction in diluted earnings per share of about $0.01 for
the third quarter and $0.07 for the first nine months of 2005. The Company
currently expects total compensation expense related to stock options for
full-year 2005 of approximately $33 million ($21 million after tax), or
approximately $0.08 per share.
Prior to fiscal year 2005, the Company used the Black-Scholes option pricing
model to estimate the grant date fair value of its stock option awards. For
grants subsequent to the adoption of SFAS No. 123R, the Company estimates the
fair value of stock option awards on the date of grant using a binomial lattice
model developed by outside consultants who worked with the Company in the
implementation of SFAS No. 123R. The Company believes that the binomial lattice
model is a more accurate model for valuing employee stock options since it
better reflects the impact of stock price changes on option exercise behavior.
The expected volatility used in the binomial lattice model is based on an
analysis of historical prices of JCPenney's stock and open market exchanged
options, and was developed in consultation with an outside valuation specialist
and the Company's financial advisors. The expected volatility reflects the
volatility implied from a price quoted for a hypothetical call option with a
duration consistent with the expected life of the options, and the volatility
implied by the trading of options to purchase the Company's stock on open-market
exchanges. As a result of the Company's turnaround that has been ongoing since
2001 and the disposition of the Eckerd drugstore operations, a significant
portion of the historical volatility is not considered to be a good indicator of
future volatility. The expected term of options granted is derived from the
output of the binomial lattice model, and represents the period of time that the
options are expected to be outstanding. This model incorporates an early
exercise assumption in the event of a significant increase in stock price. The
risk-free rate is based on zero-coupon U.S. Treasury yields in effect at the
date of grant with the same period as the expected option life. The dividend
yield is assumed to increase ratably to the Company's expected dividend yield
level based on targeted payout ratios over the expected life of the options.
The Company has not adjusted prior year financial statements under the optional
modified retrospective method of application, but has disclosed the pro-forma
impact of expensing stock options on the third quarter and first nine months of
2004 in Note 1 to the Unaudited Interim Consolidated Financial Statements.
-32-
Critical Accounting Policies
- -----------------------------
Management's discussion and analysis of its financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. Management bases its estimates on
historical experience and on other assumptions that are believed to be
reasonable under the circumstances. On an ongoing basis, management evaluates
estimates used, including those related to inventory valuation under the retail
method; valuation of long-lived assets; estimation of reserves and valuation
allowances specifically related to closed stores, insurance, income taxes,
litigation and environmental contingencies; and pension accounting. Actual
results may differ from these estimates under different assumptions or
conditions. Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, in the 2004 10-K includes detailed descriptions of
certain judgments that management makes in applying its accounting policies in
these areas.
Recently Issued Accounting Pronouncements
- -----------------------------------------
Recently issued accounting pronouncements are discussed in Note 1 to the
Unaudited Interim Consolidated Financial Statements.
Pre-Approval of Auditor Services
- --------------------------------
During the first quarter of 2005, the Audit Committee of the Company's Board of
Directors approved estimated fees for the remainder of 2005 related to the
performance of both audit, including Sarbanes-Oxley Section 404 attestation
work, as well as allowable non-audit services by the Company's external
auditors, KPMG LLP.
Seasonality
- -------------
The results of operations and cash flows for the 13 and 39 weeks ended October
29, 2005 are not necessarily indicative of the results for the entire year. The
Company's business depends to a great extent on the last quarter of the year
when a significant portion of the sales and profits are recorded.
-33-
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks in the normal course of business due to
changes in interest rates. The Company's market risks related to interest rates
at October 29, 2005 are similar to those disclosed in the Company's 2004 10-K.
Previously, the Company had limited exposure to market risk associated with
currency exchange rates due to the foreign operations of Renner. However, with
the sale of the Company's controlling interest in Renner in the second quarter
of 2005, the Company recognized the cumulative loss on foreign currency
translation that previously had been reflected as a component of accumulated
other comprehensive (loss).
Item 4 - Controls and Procedures
Based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934) as of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company's principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective
for the purpose of ensuring that material information required to be in this
Quarterly Report is made known to them by others on a timely basis. There were
no changes in the Company's internal control over financial reporting during the
Company's third quarter ended October 29, 2005, that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which reflect the Company's
current view of future events and financial performance. The words expect, plan,
anticipate, believe, intent, should, will and similar expressions identify
forward-looking statements. Any such forward-looking statements are subject to
risks and uncertainties that may cause the Company's actual results to be
materially different from planned or expected results. Those risks and
uncertainties include, but are not limited to, competition, consumer demand,
seasonality, economic conditions, including the price and availability of oil
and natural gas, changes in management, retail industry consolidations, acts of
terrorism or war and government activity. Please refer to the Company's 2004
Annual Report on Form 10-K and subsequent filings for a further discussion of
risks and uncertainties. The Company intends the forward-looking statements in
this Report on Form 10-Q to speak only at the time of its release and does not
undertake to update or revise these forward-looking statements as more
information becomes available.
-34-
PART II - OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Securities
The table below sets forth the information with respect to purchases made
by or on behalf of the Company of the Company's common stock during the
quarter ended October 29, 2005:
<table>
<c> <c> <c> <c> <c>
Total Number
of Shares Maximum
Purchased as Approximate
Total Part of Dollar Value of
Number of Publicly Shares that May
Shares Average Announced Yet Be Purchased
Purchased Price Plans or Under the Plans
During Paid Per Programs or Programs (in
Period Period Share(1) (2)(3)(4) millions)(1)
----------------------------- -------------- ------------- ----------------- ---------------------
July 31, 2005 through
September 3, 2005 4,646,600 $ 50.00 4,646,600 $ 941(3)(4)
September 4, 2005 through
October 1, 2005 10,242,400 $ 48.16 10,242,400 $ 448(3)(4)
October 2, 2005 through
October 29, 2005 8,883,200 $ 49.03 8,883,200 $ 12(4)
-------------- -----------------
Total 23,772,200 23,772,200
============== =================
</table>
(1) Reflects principal only (excludes commissions of $0.03 per share
purchased).
(2) In 2004, the Company's Board of Directors approved a program for up to
$3.0 billion of common stock repurchases (not to exceed 133 million
shares), including up to $650 million that had been contingent upon the
conversion of the Company's 5.0% Convertible Subordinated Notes Due 2008,
which occurred from October 26, 2004 through November 16, 2004. This
repurchase program, which the Company announced on August 2, 2004, had no
expiration date, but was completed during the third quarter of 2005.
(3) In March 2005, the Board of Directors approved an additional common
stock repurchase program of up to $750 million. This program, which the
Company announced on March 18, 2005, had no expiration date, but was
completed during the third quarter of 2005.
(4) In July 2005, the Board of Directors approved an additional common
stock repurchase program of up to $400 million. This program, which the
Company announced on July 15, 2005, had no expiration date, but was
completed early in the fourth quarter of 2005.
-35-
Item 6 - Exhibits
Exhibit Nos.
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
-36-
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 7, 2005
-37-
Exhibit 31.1
CERTIFICATION
- --------------
I, Myron E. Ullman, III, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
-38-
<page>
(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 7, 2005.
/s/ Myron E. Ullman, III
---------------------------
Myron E. Ullman, III
Chairman and Chief Executive Officer
J. C. Penney Company, Inc.
-39-
Exhibit 31.2
CERTIFICATION
I, Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. C. Penney Company,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
-40-
<page>
(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 7, 2005.
/s/ Robert B. Cavanaugh
---------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
J. C. Penney Company, Inc.
-41-
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 29, 2005 (the "Report"),
I, Myron E. Ullman, III, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATED this 7th day of December 2005.
/s/ Myron E. Ullman, III
-----------------------------
Myron E. Ullman, III
Chairman and Chief Executive Officer
-42-
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 29, 2005 (the "Report"),
I, Robert B. Cavanaugh, Executive Vice President and Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATED this 7th day of December 2005.
/s/ Robert B. Cavanaugh
-----------------------------
Robert B. Cavanaugh
Executive Vice President and
Chief Financial Officer
-43-