-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AR/2K2FnbAl6l/CcQzKx+7erBC9JS4fSpmiSH5Vy+QGpP/i+TABdA357XYJlrV2p ipbdSS2nKUlnXX5TKwC8Pg== /in/edgar/work/20000613/0000077182-00-000003/0000077182-00-000003.txt : 20000919 0000077182-00-000003.hdr.sgml : 20000919 ACCESSION NUMBER: 0000077182-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000429 FILED AS OF DATE: 20000613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNEY J C CO INC CENTRAL INDEX KEY: 0000077182 STANDARD INDUSTRIAL CLASSIFICATION: [5311 ] IRS NUMBER: 135583779 STATE OF INCORPORATION: DE FISCAL YEAR END: 0126 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00777 FILM NUMBER: 654201 BUSINESS ADDRESS: STREET 1: 6501 LEGACY DR CITY: PLANO STATE: TX ZIP: 75024-3698 BUSINESS PHONE: 9724311000 10-Q 1 0001.txt FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _______________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 _______________ For the 13 week period Commission file number 1-777 ended April 29, 2000 J. C. PENNEY COMPANY, INC. ___________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 13-5583779 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6501 Legacy Drive, Plano, Texas 75024 - 3698 ___________________________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (972) 431-1000 ________________________ ___________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . _______ _______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 261,558,513 shares of Common Stock of 50c par value, as of May 30, 2000. -1- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS. The following interim financial information is unaudited but, in the opinion of the Company, includes all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. Certain prior year amounts have been reclassified to conform with the current year presentation. The financial information should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the 52 weeks ended January 29, 2000. Statements of Income (Amounts in millions except per share data) 13 weeks ended _______________________ Apr. 29, May 1, 2000 1999 _________ ___________ Retail sales, net $ 7,440 $ 7,258 Direct Marketing revenue 288 274 _________ _________ Total revenue 7,728 7,532 _________ _________ Costs and expenses Cost of goods sold, occupancy, buying, and warehousing costs 5,549 5,292 Selling, general, and administrative expenses 1,754 1,692 Costs and expenses of Direct Marketing 228 219 Corporate and other unallocated 6 (9) Net interest expense and credit operations (1) 114 34 Acquisition amortization 37 37 Other charges and credits, net 232 -- _________ _________ Total costs and expenses 7,920 7,265 _________ _________ Income/(loss) before income taxes (192) 267 Income taxes (74) 100 _________ _________ Net income/(loss) $ (118) $ 167 ========= ========= Earnings/(loss) per common share: Net income/(loss) $ (118) $ 167 Less: preferred stock dividends (8) (9) _________ ________ Earnings/(loss) for Basic EPS (126) 158 Stock options and convertible preferred stock 8 9 __________ ________ Earnings/(loss) for Diluted EPS $ (118) $ 167 Shares Average shares outstanding (used for Basic EPS) 261 256 Common stock equivalents 15 16 _________ ________ Average Diluted shares outstanding 276 272 Earnings/(loss) per share: Basic $ (0.48) $ 0.62 Diluted (0.48)(2) 0.61 (1) 1999 includes a $5 million pre-tax gain, or one cent per share after tax, on the early extinguishment of Eckerd Corporation's 9.25 percent Notes. (2) Calculation excludes the effects of the assumed conversion of outstanding preferred shares, and related dividends, because their inclusion would have an anti-dilutive effect on EPS. -2- Balance Sheets (Amounts in millions) Apr. 29, May 1, Jan. 29, 2000 1999 2000 ________ __________ ________ ASSETS Current assets Cash and short-term investments of $588, $168, and $1,233 $ 628 $ 168 $ 1,233 Retained interest in JCP Master Credit Card Trust -- 250 -- Receivables, net 1,072 4,165 1,138 Merchandise inventories 5,896 6,078 5,947 Prepaid expenses and other 415 180 154 ________ ________ _________ Total current assets 8,011 10,841 8,472 Properties, net of accumulated depreciation of $3,012, $2,889, and $2,883 5,155 5,462 5,312 Investments, principally held by Direct Marketing 1,599 2,010 1,827 Deferred policy acquisition costs 950 871 929 Goodwill and other intangible assets net of accumulated amortization of $374, $258, and $340 3,012 3,237 3,056 Other assets 1,272 1,237 1,292 ________ ________ ________ $ 19,999 $ 23,658 $ 20,888 ======== ========= ========= -3- Balance Sheets (Amounts in millions) Apr. 29, May 1, Jan. 29, 2000 1999 2000 ________ __________ ________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 3,235 $ 3,259 $ 3,351 Short-term debt 18 1,995 330 Current maturities of long-term debt 550 550 625 Deferred taxes 167 120 159 ________ ________ ________ Total current liabilities 3,970 5,924 4,465 Long-term debt 5,593 6,821 5,844 Deferred taxes 1,378 1,552 1,461 Insurance policy and claims reserves 1,036 967 1,017 Other liabilities 988 912 873 ________ ________ ________ Total liabilities 12,965 16,176 13,660 Stockholders' equity Capital stock Preferred stock, without par value: Authorized, 25 million shares - issued and outstanding, 0.7, 0.8, 0.7 million shares of Series B ESOP convertible preferred 430 464 446 Common stock, par value 50c: Authorized, 1,250 million shares - issued, 261, 260, and 261 million shares 3,275 3,219 3,266 ________ ________ ________ Total capital stock 3,705 3,683 3,712 ________ ________ ________ Reinvested earnings At beginning of year 3,590 3,791 3,791 Net income (118) 167 336 Common stock dividends declared (75) (143) (500) Preferred stock dividends declared, net of tax -- -- (37) ________ _______ ________ Reinvested earnings at end of period 3,397 3,815 3,590 Accumulated other comprehensive loss (68) (16) (74) ________ ________ ________ Total stockholders' equity 7,034 7,482 7,228 ________ ________ ________ $ 19,999 $ 23,658 $ 20,888 ======== ========= ========= The accumulated balances for net unrealized changes in debt and equity securities were ($10), $51, and ($11), and for currency translation adjustments were ($58), ($67), and ($63) as of the respective dates shown. Net unrealized changes in investment securities are shown net of deferred taxes of ($4), $29, and ($5), respectively. A deferred tax asset has not been established for currency translation adjustments. -4- Statements of Cash Flows (Amounts in millions) 13 weeks ended _______________________ Apr. 29, May 1, 2000 1999 _________ ___________ Operating activities Net income/(loss) $ (118) $ 167 Other charges and credits, net 232 -- Depreciation and amortization, including intangible assets 185 177 Deferred taxes (76) 49 Change in cash from: Customer receivables -- 413 Other receivables 66 (123) Inventories, net of trade payables 179 1 Current taxes payable (5) 38 Other assets and liabilities, net (199) (120) _________ _________ 264 602 _________ _________ Investing activities Capital expenditures (131) (146) Purchases of investment securities (161) (307) Proceeds from sales of investment securities 143 229 Proceeds from the sale of bank receivables -- 22 _________ _________ (149) (202) _________ _________ Financing activities Change in short-term debt (312) 15 Payments of long-term debt (327) (210) Common stock issued, net (7) 3 Dividends paid, preferred and common (74) (136) _________ _________ (720) (328) _________ _________ Net increase/(decrease) in cash and short-term investments (605) 72 Cash and short-term investments at beginning of year 1,233 96 _________ _________ Cash and short-term investments at end of first quarter $ 628 $ 168 ========= ========= Non-cash transactions: On March 1, 1999, the Company issued 9.6 million shares of common stock to complete the acquisition of Genovese Drug Stores, Inc. The total value of the transaction, including debt assumed and conversion of options for Genovese common stock to options for JCPenney common stock, was $414 million. -5- Notes to Interim Financial Information 1) Other Charges and Credits, net During the first quarter of 2000, the Company recorded a pre-tax charge of $232 million related to restructuring programs, principally the closing of underperforming JCPenney and Eckerd stores. The charge consisted of $115 million related to the closing of approximately 45 JCPenney stores, $106 million related to the closing of 289 Eckerd drugstores, and $11 million related to workforce reductions. JCPenney Store Closings - The Company reviewed its portfolio of department _______________________ stores and support facilities and, in the first quarter, finalized a plan to close approximately 45 underperforming stores. These stores generated sales of approximately $450 million and incurred operating losses of approximately $20 million in fiscal 1999. The charge was comprised of asset write-downs ($60 million) and an accrual for the present value of future lease obligations ($45 million), and severance and outplacement ($10 million). Reserves for future lease obligations are calculated net of assumed sublease income. Three of the targeted stores were closed and sold in transactions that were completed by the end of the first quarter. An asset impairment charge of $33 million was recorded for the three sold locations in the fourth quarter of 1999 in accordance with the provisions of FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for __________________________________________________________ Long-Lived Assets to be Disposed Of. The sales generated cash proceeds of ___________________________________ $36 million, which approximated the Company's carrying value of the fixed assets at the sales date. The majority of the remaining stores are scheduled to close by the end of June, and all stores are scheduled to close in fiscal 2000. Store closing plans anticipated that approximately 1,800 store employees would be impacted by the store closings. During the quarter, 144 store employees were terminated, resulting in payments of $0.2 million for severance and outplacement benefits. Eckerd Drugstore Closings - In the first quarter, the Company finalized a _________________________ plan to close 289 underperforming drugstores. These stores, which lacked strategic fit within the drugstore segment, were generally smaller, low- volume stores that were former independent stores or parts of chains acquired over the last several years. These stores generated sales and operating losses of approximately $650 million and $30 million, respectively, in fiscal 1999. The first quarter charge of $106 million consisted of an accrual for the present value of future lease obligations ($90 million), severance and outplacement ($4 million), and other exit costs ($16 million), offset by a $4 million net gain on the disposal of fixed/intangible assets. An asset impairment charge of $110 million was recorded for these locations in the fourth quarter of 1999 in accordance with FAS No. 121. As of the end of the first quarter, 257 of the stores had been closed, with the majority of the remaining stores scheduled for closing in the second quarter. All stores are scheduled to close by the end of the first quarter of fiscal 2001. During the first quarter, 475 store employees were terminated and paid $1.1 million in severance and outplacement benefits as a result of the store closings. Store closing plans anticipated that approximately 1,200 store employees would be impacted by the store closings. In addition to the store closing costs recorded in other charges and credits, net, Eckerd segment operating results include $78 million in other exit related activities. This amount consists of $66 million related to inventory liquidation losses and shrinkage and $12 million for incremental store operating costs incurred during the closing process. -6- Other Workforce Reductions - During the first quarter, the Company __________________________ finalized a plan to eliminate approximately 430 positions company-wide and recorded a charge of $11 million for severance and outplacement benefits. All affected employees were notified by the end of the first quarter. Approximately $2 million in benefits were paid in the first quarter. The majority of the terminations will occur in the second quarter. 2) Restructuring Reserves Year 2000 Charges: __________________ As described in Note 1, the Company established reserves in the first quarter of 2000 related to the present value of future lease obligations, severance and outplacement benefits, and other exit costs related to the closing of JCPenney stores and Eckerd drugstores. The status of the reserves at the end of the first quarter are shown in the table below: 1st Qtr 2000 Cash Other Reserve ($ in millions) Expense Outlays Changes Balance _________________________________________ Department stores and catalog _____________________________ FAS 121 asset impairments $ 60 $ -- $ (60) $ -- Future lease obligations 45 -- -- 45 Severance and outplacement 10 -- -- 10 Eckerd drugstores _________________ Future lease obligations 90 -- -- 90 Severance and outplacement 4 (1) -- 3 Other exit costs 16 (1) -- 15 Net gain on the disposal of assets (4) -- 4 -- Workforce Reduction Program ___________________________ Severance and outplacement 11 (2) -- 9 _______ ______ _______ ______ Total $ 232 $ (4) $ (56) $ 172 _______ ______ _______ _____ Prior Year Charges: ___________________ During 1996 and 1997, the Company recorded charges principally related to drugstore integration activities, department store closings and FAS 121 impairments, and early retirement and reduction in force programs. The following table provides a roll forward of reserves that were established for certain of these charges. The schedules, and the accompanying discussion, provide the status of the reserves as of April 29, 2000. 1999 1st Qtr 2000 Year End Cash Ending ($ in millions) Reserve Outlays Balance ______________________________________ Department stores and catalog _____________________________ Future lease obligations $ 8 $ (1) $ 7 Eckerd drugstores _________________ Future obligations, primarily leases 78 (2) 76 Allowance for notes receivable 25 -- 25 ________ _______ ______ Total $ 111 $ (3) $ 108 ======== ======= ====== -7- Reserve balances are reflected on the consolidated balance sheets as a component of accounts payable and accrued expenses except for the allowance for notes receivable, which is included as a reduction of other assets. Department stores and catalog - In 1997 the Company identified a number of _____________________________ department stores that did not meet profit objectives, as well as certain support facilities that were no longer needed. All such locations were closed by the end of fiscal 1998. The closing plan anticipated that the Company would remain liable for future lease obligations, and accordingly a reserve was established for the present value of those obligations. During the first quarter of 2000, this reserve was reduced by $0.6 million as a result of lease payments. Eckerd drugstores - In 1996 and 1997, the Company identified a number of _________________ drugstore locations that would be closed or divested as a result of acquisition activities. These stores generally represented overlapping and underperforming locations. Accordingly, reserves were established for the present value of future lease obligations, as well as pending litigation and other miscellaneous charges, each individually insignificant. During the first quarter of 2000, these reserves were reduced by $2 million as a result of lease payments. In addition, Eckerd financed a portion of the sale of certain divested drugstore locations through a note receivable for $33 million. A reserve for 75 percent of the note was established due to significant constraints on the Company's ability to collect on the note. No adjustments have been made to the allowance since it was established. 3) Earnings Per Share At April 29, 2000, 716 thousand shares of preferred stock, which are convertible into 14.3 million common shares, were issued and outstanding. These potential common shares, and the related dividend, were excluded from the calculation of diluted earnings per share for the 13 weeks ended April 29, 2000 because their inclusion would have had an anti-dilutive effect on the calculation. -8- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Financial Condition ___________________ Merchandise inventories on a FIFO basis totaled $6,178 million at the end of the first quarter compared with $6,318 million at the end of last year's first quarter. Inventories for department stores and catalog were down approximately six percent for comparable stores from the prior year and totaled $3,896 million at April 29, 2000 as compared with $4,016 million at the end of last year's first quarter. The decline in stores and catalog inventory levels is the result of continued emphasis on reducing the number of weeks of inventory on hand, thus improving inventory productivity. Eckerd drugstore inventories totaled $2,282 million compared with $2,302 million last year. The decrease in drugstore inventory levels is principally related to the closing of 257 underperforming drugstores. The current cost of inventories exceeded the LIFO basis amount carried on the balance sheet by approximately $282 million at April 29, 2000, $270 million at January 29, 2000, and $239 million at May 1, 1999. Properties, net of accumulated depreciation, totaled $5,155 million at April 29, 2000 compared with $5,462 million at the end of last year's first quarter. First quarter 2000 balances reflect an asset impairment charge of $60 million related to the closing of underperforming JCPenney stores and Eckerd drugstores. Goodwill and other intangible assets, net, totaled $3,012 million compared with $3,237 million as of May 1, 1999. Approximately $303 million in intangible assets and goodwill associated with the Genovese acquisition was recorded in the first quarter of 1999. At April 29, 2000 the consolidated balance sheet included reserves related to restructuring activities totaling $280 million, including $172 million related to current year activities. Of this amount, $255 million is included as a component of accounts payable and accrued expenses and $25 million is reflected as a reduction to other assets. These reserves were established in connection with store closing programs and other restructuring activities recorded in the first quarter of 2000 as well as in 1997 and 1996. The reserves are related primarily to future lease obligations, severance and outplacement benefits, and other exit costs associated with store closings, and to a note receivable entered into in connection with the divestiture of certain drugstores, respectively. Prior year reserves were reduced by $3 million in the first quarter of 2000 as a result of lease payments. See the discussion under the caption other charges and credits, net, and Note 1 to the interim financial statements for additional discussion about the charges recorded in the first quarter of 2000. During the first quarter of 2000, the Company redeemed approximately $325 million principal amount of 6.95 percent notes at the normal maturity date and reduced its outstanding commercial paper balances by an additional $300 million. Funding for these redemptions was provided by the proceeds from the sale of the Company's proprietary credit card portfolio to General Electric Capital Corporation (GE Capital) in December 1999. Short-term investments, including approximately $249 million in asset-backed securities that will mature in June 2000, shown as a component of prepaid assets and other, totaled $837 million at the end of the quarter and will generally be used to pay down long-term debt as it matures. In recent weeks, the Company's long-term debt ratings have been adjusted downward while commercial paper ratings were -9- reaffirmed. Long-term debt is rated Baa2 by Moody's Investors Service and BBB by both Standard and Poor's Corporation and Fitch Investors Service. The Company's commercial paper is rated P2, A2 and F2 by the three rating agencies, respectively. A quarterly dividend of 28 3/4 cents per share on the Company's outstanding common stock was paid on May 1, 2000, to stockholders of record on April 10, 2000. Results of Operations _____________________ Consolidated operating results ($ in millions) 13 weeks ended ___________________ Apr. 29, May 1, 2000 1999 ________ _________ Operating profit/(loss) by segment Department stores and catalog $ 167 $ 145 Eckerd drugstores (30) 129 Direct marketing 60 55 _________ ________ Total segments 197 329 Corporate and other unallocated (6) 9 Net interest and credit operations (114) (34) Acquisition amortization (37) (37) Other charges and credits, net (232) -- ________ _________ Income/(loss) before income taxes (192) 267 Income taxes 74 (100) ________ ________ Net income/(loss) $ (118) $ 167 ======== ======== The Company experienced a net loss of $118 million, or 48 cents per share, in the first quarter compared to net income of $167 million, or 61 cents per share in last years period. Current year results include the effect of non-comparable items totaling $324 million, or 76 cents per share, related to the Company's previously announced restructuring initiatives, principally the closing of underperforming JCPenney stores and Eckerd drugstores, as well as the restructuring of the Company's merchandising processes and organization the Company's ACT initiative. The following table provides a reconciliation between net income and income before the effects of non-comparable items for this year's first quarter: 1st quarter 2000 ___________________________________ ($ in millions, except EPS) Pre-tax After-tax EPS _________ ___________ _________ Net loss $ (192) $ (118) $ (0.48) Other charges and credits, net 232 142 0.54 Closing activities in Eckerd segment results 78 49 0.19 ACT expenses in corporate and other unallocated 14 9 0.03 _______ ________ ________ Earnings before the effects of non-comparable items $ 132 $ 82 $ 0.28 -10- Earnings before the effects of non-comparable items declined from the prior year principally as a result of erosion in drugstore operating profits, primarily due to declines in gross margin, and to the effects of the sale of the Company's proprietary credit card portfolio to GE Capital in December of 1999. The sale of the credit card portfolio had the effect of shifting earnings from the first half of the year to the second half due primarily to the unusually strong credit results in 1999. In addition, the sale shifted the earnings stream on the Company's proprietary credit card to follow sales volumes rather than account balances. The effect of the credit sale was a reduction of approximately 13 cents per share in this year's first quarter. Segment Operating Results Department Stores and Catalog ______________________________ 13 weeks ended _______________________ Apr. 29, May 1, 2000 1999 _________ ___________ ($ in millions) Retail sales, net $ 4,108 $ 4,211 Cost of goods sold (2,775) (2,886) SG&A expenses (1,166) (1,180) ________ ________ Operating profit (1) $ 167 $ 145 Sales percent increase/(decrease) Total department stores (3.1) (1.5) Comparable stores (3.1) (0.5) Catalog (0.5) 8.1 Ratios as a percent of sales: Gross margin 32.5 31.5 SG&A expenses 28.4 28.0 Operating profit 4.1 3.5 EBITDA (2) 6.4 8.6 1) Operating profit represents pre-tax income before net interest expense, corporate and other unallocated, acquisition amortization, and other charges and credits, net. Operating profit in 1999 is shown before the effects of credit revenue net of related operating costs. 2) Earnings before interest, income taxes, depreciation and amortization. 1999's EBITDA includes finance revenue, net of related operating costs. EBITDA is provided as an alternative assessment of operating performance and is not intended to be a substitute for GAAP measurements; calculations may be different for other companies. Segment profit for department stores and catalog was $167 million in this year's first quarter compared with $145 million last year. The improvement was principally related to better gross margins as a result of planned reductions in clearance and promotional markdowns. Sales in department stores declined by 3.1 percent for comparable stores (those stores open at least 12 months) while catalog sales declined 0.5 percent from a year ago. Internet sales, which are reported as a component of catalog sales, performed very well, increasing to approximately $47 million in this year's quarter compared with $6 million last year. Sales continue to be led by private brand merchandise, in particular The Original Arizona Jean Co. (registered trademark) which generated strong double digit sales gains in -11- the quarter. Gross margin as a percent of sales improved by 100 basis points compared with last year, primarily as a result of lower markdowns. SG&A expenses declined in the first quarter despite additional spending in this year's first quarter on internet infrastructure. Due to the decline in sales volumes, however, SG&A expenses increased as a percent of sales. Eckerd Drugstores _________________ 13 weeks ended ______________________ Apr. 29, May 1, 2000 1999 _________ __________ ($ in millions) Retail sales, net $ 3,332 $ 3,047 Cost of goods sold (2,774) (2,406) SG&A expenses (588) (512) ________ ________ Operating profit/(loss) (1) $ (30) $ 129 Sales percent increase Total 9.4 18.8 Comparable stores 6.9 12.3 Ratios as a percent of sales: FIFO gross margin 17.1 21.4 LIFO gross margin 16.7 21.0 SG&A expenses 17.6 16.8 Operating profit (0.9) 4.2 EBITDA (2) 0.7 5.6 Ratios as percent of sales, excluding the effects of store closing activities: FIFO gross margin 19.1 21.4 LIFO gross margin 18.7 21.0 SG&A expenses 17.3 16.8 Operating profit 1.4 4.2 EBITDA (2) 3.0 5.6 1) Operating profit represents pre-tax income before net interest expense, corporate and other unallocated, acquisition amortization, and other charges and credits, net. 2) Earnings before interest, income taxes, depreciation and amortization. EBITDA is provided as an alternative assessment of operating performance and is not intended to be a substitute for GAAP measurements; calculations may be different for other companies. Eckerd experienced a segment loss of $30 million in the first quarter compared with segment income of $129 million in last year's first quarter. This year's results were negatively impacted by the effects of $78 million in costs related to the closing of underperforming drugstores. This amount consists of $66 million for the liquidation of merchandise, including shrinkage, which is reported as a component of cost of goods sold, and $12 million for incremental closing costs that are reported as a component of SG&A expenses. Sales for the quarter increased by 9.4 percent. Comparable store sales increased 6.9 percent -12- in the first quarter, with pharmacy sales increasing by 11.5 percent; front-end sales were essentially flat. Excluding the effects of liquidation activities, gross margin declined by 230 basis points as a percent of sales. The decline in gross margin is related primarily to three factors: 1) an increase in the shrinkage run rate, 2), the continued shift in pharmacy sales to managed care programs which carry lower margins and 3) declines in both pharmacy and front-end gross margins as a result of a milder flu and cold season that resulted in fewer purchases of over-the- counter cold medicines and other convenience items that carry higher margins. Managed care represents about 88 percent of pharmacy sales, up from 86 percent in last year's first quarter. Gross margin includes a $12 million LIFO charge in both years. Excluding incremental store closing costs, SG&A expenses increased by 50 basis points as a percent of sales. The increase was principally related to higher expenses associated with the opening of 42 new and relocated stores in the first quarter. Direct Marketing ________________ 13 weeks ended ______________________ Apr. 29, May 1, 2000 1999 _________ __________ ($ in millions) Insurance premiums $ 238 $ 231 Membership fees 25 21 Investment income 25 22 ________ ________ Total revenue 288 274 Claims and benefits (99) (98) Deferred acquisition costs (59) (53) Other operating expenses (70) (68) ________ ________ Operating profit (1) $ 60 $ 55 Revenue, percent increase 5.1 11.4 Operating profit as a percent of revenue 20.8 20.1 1) Operating profit represents pre-tax income before net interest expense, corporate and other unallocated, acquisition amortization, and other charges and credits, net. Operating profit totaled $60 million for the quarter, an increase of 9.1 percent from last year. Segment profit for this year's first quarter was positively impacted by favorable claims experience. Revenue totaled $288 million in the first quarter, an increase of 5.1 percent compared with a year ago, with the increase principally related to health insurance premiums, which account for approximately 73 percent of total insurance premiums and 61 percent of total revenues. Revenue generated from membership services increased by 22 percent compared with last year's first quarter. These products account for nearly nine percent of total revenues. Corporate and Other Unallocated _______________________________ Corporate and other unallocated consists of real estate activities, investment transactions, and other items that are related to corporate initiatives or activities, which are not allocated to an operating segment. First quarter 2000 results include $14 million in pre-tax incremental expenses related to the Company's ACT initiative. ACT, which represents a fundamental rebuilding -13- of the department store and catalog merchandising process and organization, creating a centralized buying organization, will require process and organizational restructuring throughout the Company's corporate structure. The ACT initiative is expected to continue over the next several years, with approximately half of the costs incurred in fiscal 2000. Total expenditures associated with this initiative are currently expected to be approximately $150 million, including approximately $40 million that will be capitalized. Net Interest Expense and Credit Operations __________________________________________ 13 weeks ended ______________________ Apr. 29, May 1, 2000 1999 _________ __________ ($ in millions) Credit revenue net of operating expenses $ -- $ 117 Interest expense, net (114) (151) ________ ________ Total $ (114) $ (34) As a result of the sale of its proprietary credit card portfolio to GE Capital in December 1999, the Company no longer generates and reports proprietary credit results. Accordingly, this category represents interest expense in the current and all future periods. Interest charges in this year's first quarter declined by $37 million, or about 25 percent, from last year's period as a result of the decline in outstanding debt balances. The majority of the proceeds from the sale of credit card receivables were used to repay short- and long-term debt. The balance of the proceeds have been invested in short-term securities and are expected to be used to redeem debt as it matures and for the early extinguishment of certain debt issues where such action is economically advantageous to the Company. Other Charges and Credits, net ______________________________ During the first quarter of 2000, the Company recorded a pre-tax charge of $232 million related to restructuring programs, principally the closing of underperforming JCPenney and Eckerd stores. The charge consisted of $115 million related to the closing of approximately 45 JCPenney stores, $106 million related to the closing of 289 Eckerd drugstores, and $11 million related to workforce reductions. JCPenney Store Closings The Company reviewed its portfolio of department stores and support facilities and, in the first quarter, finalized a plan to close approximately 45 underperforming stores. These stores generated sales of approximately $450 million and incurred operating losses of approximately $20 million in fiscal 1999. The charge was comprised of asset write-downs ($60 million) and an accrual for the present value of future lease obligations ($45 million), and severance and outplacement ($10 million). Reserves for future lease obligations are calculated net of assumed sublease income. Three of the targeted stores were closed and sold in transactions that were completed by the end of the first quarter. An asset impairment charge of $33 million was recorded for the three sold locations in the fourth quarter of 1999 in accordance with the provisions of FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for __________________________________________________________ Long-Lived Assets to be Disposed Of. The sales generated cash proceeds of ___________________________________ $36 million, which approximated the Company's carrying value of the fixed assets at the sales date. The majority of the -14- remaining stores are scheduled to close by the end of June, and all stores are scheduled to close in fiscal 2000. Store closing plans anticipated that approximately 1,800 store employees would be impacted by the store closings. During the quarter, 144 store employees were terminated, resulting in payments of $0.2 million for severance and outplacement benefits. Eckerd Drugstore Closings - In the first quarter, the Company finalized a plan to close 289 underperforming drugstores. These stores, which lacked strategic fit within the drugstore segment, were generally smaller, low- volume stores that were former independent stores or parts of chains acquired over the last several years. These stores generated sales and operating losses of approximately $650 million and $30 million, respectively, in fiscal 1999. The first quarter charge of $106 million consisted of an accrual for the present value of future lease obligations ($90 million), severance and outplacement ($4 million), and other exit costs ($16 million), offset by a $4 million net gain on the disposal of fixed/intangible assets. An asset impairment charge of $110 million was recorded for these locations in the fourth quarter of 1999 in accordance with FAS No. 121. As of the end of the first quarter, 257 of the stores had been closed, with the majority of the remaining stores scheduled for closing in the second quarter. All stores are scheduled to close by the end of the first quarter of fiscal 2001. During the first quarter, 475 store employees were terminated and paid $1.1 million in severance and outplacement benefits as a result of the store closings. Store closing plans anticipated that approximately 1,200 store employees would be impacted by the store closings. In addition to the store closing costs recorded in other charges and credits, net, Eckerd segment operating results include $78 million in other exit related activities. This amount consists of $66 million related to inventory liquidation losses and shrinkage and $12 million for incremental store operating costs incurred during the closing process. Other Workforce Reductions - During the first quarter, the Company finalized a plan to eliminate approximately 430 positions company-wide and recorded a charge of $11 million for severance and outplacement benefits. All affected employees were notified by the end of the first quarter. Approximately $2 million in benefits were paid in the first quarter. The majority of the terminations will occur in the second quarter. Income Taxes ____________ The Company's effective income tax rate was 38.5 percent in the first quarter compared with 37.5 percent last year. Excluding the effects of non- comparable items in this year's first quarter, the rate was 37.4 percent. New Accounting Rules ____________________ The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and _________________________________________ Hedging Activities, which is effective for all fiscal quarters for fiscal __________________ years beginning after June 15, 2000. The Company has a limited exposure to derivative products and does not expect these new rules to have a material impact on results of operations or financial condition. -15- Subsequent Event ________________ On May 2, 2000, the Company announced that it was exploring strategic alternatives related to its J. C. Penney Direct Marketing Services, Inc. (DMS) subsidiary, including, but not limited to, a sale or joint venture of the business. It is currently expected that the DMS transaction will be completed by the end of fiscal 2000, and that proceeds will be used to pay down debt and repurchase common stock. Seasonality ___________ The Company's business depends to a great extent on the last quarter of the year. Historically, sales for that period have averaged approximately one third of annual sales. Accordingly, the results of operations for the 13 weeks ended April 29, 2000 are not necessarily indicative of the results for the entire year. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company holds an interest rate swap with a notional principal amount of $375 million entered into in connection with the issuance of asset-backed certificates in 1990. This swap, which matures June 15, 2000, presents no material risk to the Company's results of operations. This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which reflect the Company's current views of future events and financial performance, involve known and unknown risks and uncertainties that may cause the Company's actual results to be materially different from planned or expected results. Those risks and uncertainties include but are not limited to competition, consumer demand, seasonality, economic conditions, and government activity. Investors should take such risks and uncertainties into account when making investment decisions. -16- PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS. The Company has no material legal proceedings pending against it. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits ________ The following documents are filed as exhibits to this report: 10(a) March 7, 2000 Amendment to Supplemental Retirement Program for Management Profit-Sharing Associates of J. C. Penney Company, Inc. 12(a) Computation of ratios of available income to combined fixed charges and preferred stock dividend requirement. 12(b) Computation of ratios of available income to fixed charges. 27(a) Financial Data Schedule for the three months ended April 29, 2000. 27(b) Restated Financial Data Schedule for the three months ended May 1, 1999. (b) Reports on Form 8-K ___________________ None. -17- 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 Vice President and Controller (Principal Accounting Officer) Date: June 12, 2000 EX-10.A 2 0002.txt SUPPLEMENTAL RETIREMENT PROGRAM AMENDMENTS EXHIBIT 10(a) EXHIBIT A SUPPLEMENTAL RETIREMENT PROGRAM AMENDMENTS 1. The definitions entitled Company Accounts, Deferred Compensation Plan, ________________ __________________________ Matched Deposits, Participating Employer, and Savings and Profit- ________________ ______________________ ___________________ Sharing Retirement Plan in Article II (Definitions) are amended _______________________ effective January 1, 1999, and the definitions entitled Compensation ____________ and Performance Unit Plan are amended effective February 1, 1998 to _____________________ read as follows: Company Account(s): The account(s) of that name and any successor __________________ account(s) and/or fund(s) established and maintained pursuant to the Savings and Profit-Sharing Retirement Plan prior to January 1, 1999, the Savings, Profit-Sharing and Stock Ownership Plan, and the Mirror Savings Plans in which are reflected all Company contributions allocated to an Eligible Management Associate together with all assets attributable thereto. Compensation: The total cash remuneration (including Profit Incentive ____________ Compensation, and whether received or deferred (i) Performance Unit Plan payments and (ii) EVA Performance Plan payments) paid to an Associate by the Company or a Participating Employer, or, for the purpose of determining Average Final Compensation only, by a Controlled Group Member, that qualifies as wages as defined in Code Section 3401(a), determined without regard to any reduction for workers' compensation and state disability insurance reimbursements, and all other compensation payments for which the Company or a Participating Employer or other Controlled Group Member is required to furnish the Associate a written statement under Code Sections 6041(d), 6051(a)(3) and 6052, reduced by the following items: (a) all expatriate and foreign service allowances, including without limitation cost-of-living adjustments; (b) tax gross-up payments; (c) noncash prizes; (d) income attributable to employer-provided group term life insurance; (e) income recognized with respect to stock options and stock awards; (f) tax equalizations payments; (g) taxable and nontaxable relocation payments; (h) payments of deferred amounts under the EVA Performance Plan or any other nonqualified plan of deferred compensation; (i) special payments made to an Associate under the Performance Unit Plan or the EVA Performance Plan in the year of retirement or disability; (j) severance pay, outplacement pay, and/or critical pay; (k) third-party disability payments (State of New York); (l) home sale bonus payments; (m) mortgage interest assistance payments; (n) senior management perquisites, tax preparation fees, and allowances for travel from Alaska and Hawaii; (o) legal settlements constituting back pay or other wage payments; (p) non-associate travel reimbursements; (q) clothing allowance payments; and (r) payments made pursuant to a non-compete agreement. In addition, Compensation includes any contributions made by a Participating Employer or other Controlled Group Member on behalf of an Associate pursuant to a deferral election under any employee benefit plan containing a cash or deferred arrangement under Code Section 401(k), and any amounts that would have been received as cash but for an election to receive benefits under a cafeteria plan meeting the requirements of Code Section 125, and amounts deferred by an Associate under the Deferred Compensation Plan and the Mirror Savings Plans. Each annual payment to an Associate (i) from the Performance Unit Plan, (ii) from the EVA Performance Plan, and (iii) of Profit Incentive Compensation shall be deemed to have been made in the calendar year immediately preceding the year in which payment was actually made. For all purposes under the plan, the Benefits Administration Committee, in its discretion, may exclude additional items from "Compensation" under the Plan. An Associate who is in the service of the Armed Forces of the United States during any period in which his reemployment rights are guaranteed by law will be considered to have received the same rate of Compensation during his absence he was receiving immediately prior to his absence, provided he returns to employment with a Controlled Group Member within the time such rights are guaranteed. 2 Deferred Compensation Plan: J. C. Penney Company, Inc. 1995 Deferred __________________________ Compensation Plan, as amended from time to time, as in existence prior to January 1, 1999 before being merged into the J. C. Penney Company, Inc. Mirror Savings Plan II effective January 1, 1999. Matched Deposits: An Eligible Management Associate's deposits, not in ________________ excess of 6% of his compensation (as defined in the Savings and Profit-Sharing Retirement Plan, the Savings, Profit-Sharing and Stock Ownership Plan and the Mirror Savings Plans), made pursuant to the Savings and Profit-Sharing Retirement Plan, the Savings, Profit- Sharing and Stock Ownership Plan, and the Mirror Savings Plans. Participating Employer: The Company and any other Controlled Group ______________________ Member or organizational unit of the Company or of a Controlled Group Member which is designated as a Participating Employer under the Plan by the Human Resources Committee; provided, however, that if such designation would substantially increase the cost of the Plan to the Company, such designation shall be subject to the sole discretion of the Board of Directors. Performance Unit Plan: J. C. Penney Company, Inc. 1984 Performance ___ _________________ Unit Plan, as amended from time to time, as in existence prior to February 1, 1998 when terminated effective January 31, 1998. Savings and Profit-Sharing Retirement Plan: J. C. Penney Company, __________________________________________ Inc. Savings and Profit-Sharing Retirement Plan, as amended from time to time, as in existence prior to January 1, 1999 before being merged into the Savings, Profit-Sharing and Stock Ownership Plan effective January 1, 1999. 2. The definition entitled Personnel Committee in Article II ___________________ (Definitions) is deleted effective January 1, 1999, the definition EVA ___ Performance Plan is added effective February 1, 1998, and the ________________ definitions entitled Human Resources Committee and Mirror Savings _________________________ ______________ Plans are added effective January 1, 1999 to read as follows: _____ EVA Performance Plan: The J. C. Penney Company, Inc. 1998 EVA ____________________ Performance Plan, as amended from time to time. Human Resources Committee: The Human Resources Committee of the _________________________ Management Committee of the Company. Mirror Savings Plans: The J. C. Penney Company, Inc. Mirror Savings ____________________ Plan I, the J. C. Penney Company, Inc. Mirror Savings Plan II, and the J. C. Penney Company, Inc. Mirror Savings Plan III. 3. Item (ii) of subparagraph (1) (b) of Article IV (Benefits) is amended effective January 1, 1999 to read as follows: 3 (i) the single-life, no-death-benefit annuity equivalent, as of the Valuation Date which is the next trading date of the New York Stock Exchange following the Eligible Management Associate's Separation from Service, of (a) the value of all assets allocated to the Eligible Management Associate in the Company Account(s) under the Savings, Profit-Sharing and Stock Ownership Plan, including such assets allocated to him under the Savings and Profit-Sharing Retirement Plan prior to January 1, 1999; and (b) the value of any additional assets which would have been allocated to the Eligible Management Associate's Company Account(s) under the Savings and Profit-Sharing Retirement Plan, the Savings, Profit-Sharing and Stock Ownership Plan, and the Mirror Savings Plans, had such Eligible Management Associate made all further permissible Matched Deposits up to 6% of his compensation (as such term is defined in each said plan) under each said plan and had he not made any withdrawals of taxed Matched Deposits from the plans prior to January 1, 1989; and (c) the value of dividends attributable to units in his Company Account (within the meaning of the Savings, Profit-Sharing and Stock Ownership Plan) and distributed to the Eligible Management Associate pursuant to Section 9.04 of the Savings, Profit-Sharing and Stock Ownership Plan; and (d) the value of any amounts payable pursuant to the terms of a domestic relations order qualified under Code Section 414(p) out of such Eligible Management Associate's Company Account(s) from the Savings and Profit-Sharing Retirement Plan and the Savings, Profit-Sharing and Stock Ownership Plan; and (e) the value of benefits payable to the Eligible Management Associate (or another person on behalf of the Eligible Management Associate) from (A) his annual benefit limit make-up account pursuant to Paragraph (2) of Article IV of the Benefit Restoration Plan prior to January 1, 1999, and (B) his Company Accounts under the Mirror Savings Plans; plus 4. The first sentence of the first paragraph following item (iv) of subparagraph (1)(b) of Article IV (Benefits) is amended effective January 1, 1999 to add the words "and the Mirror Savings Plans" after the words "Stock Ownership Plan". 5. Subparagraph (g) of Paragraph (7) (Special Rules for VERP Plan Participants) of Article IV (Benefits) is amended effective January 1, 1999 to read as follows: (g) The benefits payable to or on behalf of an Eligible Management Associate under the Plan shall not duplicate benefits payable from the Pension Plan, the VERP Plan, the Benefit Restoration Plan, the Mirror Savings Plans, or any separation pay program of the Company or a Participating Employer or a 4 Controlled Group Member. To the extent that any benefits otherwise payable under the Plan are paid from one or more of the plans or programs described in the prior sentence, such benefits under the Plan shall be cancelled. 6. The headings in the chart in Paragraph (1) (Additional Credited Service) of Article VIII (Miscellaneous) are revised effective January 1, 1996 to delete the words "and/or Service" after the words "Years of Service" in the heading on the left and to add the words "and/or Service" after the words "Deemed Additional Months of Age" in the heading on the right, and effective January 1, 1999 to delete in item (b) the words "Director of Personnel" and to substitute the words "Director of Human Resources" therefor. 7. Paragraph (5) (Liability) of Article VIII (Miscellaneous) is amended effective January 1, 1999 to delete the words "Personnel Committee" and to substitute the words "Human Resources Committee" therefor. 8. Article IX (Claims Procedures) is amended effective July 1, 1998 to delete the words "Benefits Administration Manager" and substitute the words "Benefits Director" therefor in each place it appears. 5 APPENDIX I Participating Employers _______________________ J. C. Penney Company, Inc. JCPenney National Bank (from and after August 1, 1994 until December 17, 1997) JCP Internet Commerce Solutions, Inc. (from and after February 1, 1999) JCP Logistics L. P. (from and after February 1, 1999) JCP Media L. P. (from and after February 1, 1999) JCP Overseas Services, Inc. (from and after July 1, 1996) JCP Portfolio, Inc. (dissolved July 18, 1995) J. C. Penney Private Brands, Inc. (from and after January 1, 2000) JCP Procurement L. P. (from and after February 1, 1999) JCP Publications Corp. (formerly JCP Media Corporation) (from and after April 3, 1996) JCPenney Puerto Rico, Inc. JCP Receivables, Inc. StepInside, Inc. (from and after January 1, 2000) 6 EX-12.A 3 0003.txt COMP.RATIOS - AVAIL. INC. TO FI & PREF.STCK.DIV. Exhibit 12 (a) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Combined Fixed Charges and Preferred Stock Dividend Requirement 52 weeks 52 weeks ended ended Apr. 29, May 1, ($ Millions) 2000 1999 _________ _________ Income from continuing operations $ 33 $ 900 (before income taxes, before capitalized interest, but after preferred stock dividend) Fixed charges Interest (including capitalized interest) on: Operating leases 272 225 Short term debt 109 115 Long term debt 522 558 Capital leases 1 4 Other, net 3 (5) __________ __________ Total fixed charges 907 897 Preferred stock dividend, before taxes 35 34 Combined fixed charges and preferred __________ __________ stock dividend requirement 942 931 Total available income $ 975 $ 1,831 ========== ========== Ratio of available income to combined fixed charges and preferred stock dividend requirement 1.0 2.0 ========== ========== The Company believes that, due to the seasonal nature of its business, ratios for a period of time other than a 52 week period are inappropriate. EX-12.B 4 0004.txt COMP. RATIO OF AVAIL. INCOME TO FIXED CHARGES Exhibit 12 (b) J. C. Penney Company, Inc. and Consolidated Subsidiaries Computation of Ratios of Available Income to Fixed Charges 52 weeks 52 weeks ended ended Apr. 29, May 1, ($ Millions) 2000 1999 _________ _________ Income from continuing operations $ 68 $ 934 (before income taxes and capitalized interest) Fixed charges Interest (including capitalized interest) on: Operating leases 272 225 Short term debt 109 115 Long term debt 522 558 Capital leases 1 4 Other, net 3 (5) __________ __________ Total fixed charges 907 897 __________ __________ Total available income $ 975 $ 1,831 ========== ========== Ratio of available income to fixed charges 1.1 2.0 ========== ========== The Company believes that, due to the seasonal nature of its business, ratios for a period of time other than a 52 week period are inappropriate. EX-27.A 5 0005.txt FINANCIAL DATA SCHEDULE - 04/29/2000
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF APRIL 29, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS JAN-27-2001 APR-29-2000 628 0 1,078 6 5,896 8,011 8,167 3,012 19,999 3,970 5,593 0 430 3,275 3,329 19,999 7,440 7,728 5,549 7,303 503 0 114 (192) (74) (118) 0 0 0 (118) (0.48) (0.48)
EX-27.B 6 0006.txt RESTATED FINANCIAL DATA SCHEDULE - 05/01/1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENT OF INCOME OF J. C. PENNEY COMPANY, INC. AND SUBSIDIARIES AS OF MAY 1, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS JAN-29-2000 MAY-01-1999 168 250 4,268 103 6,078 10,841 8,351 2,889 23,658 5,924 6,821 0 464 3,219 3,799 23,658 7,258 7,532 5,292 6,984 117 13 151 267 100 167 0 0 0 167 0.62 0.61
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