<PAGE>
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 and 26 week periods Commission file number 1-777
ended July 27, 1996
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 (214) 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.
225,547,040 shares of Common Stock of 50c par value, as of August 14, 1996.
<PAGE>
-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 amounts have been
reclassified to conform with the current period 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 27, 1996.
Statements of Income
(Amounts in millions except per share data)
<TABLE>
<CAPTION>
13 weeks ended 26 weeks ended
--------------------- --------------------
Jul. 27, Jul. 29, Jul. 27, Jul. 29,
1996 1995 1996 1995
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Retail sales $4,507 $4,435 $8,959 $8,802
Revenue of insurance and bank operations 246 208 486 405
------ ------ ------ ------
Total revenue 4,753 4,643 9,445 9,207
------ ------ ------ ------
Costs and expenses
Cost of goods sold, occupancy, buying,
and warehousing costs 3,195 3,143 6,292 6,140
Selling, general, and administrative
expenses 1,150 1,107 2,304 2,255
Costs and expenses of insurance and
bank operations 196 159 387 308
Net interest expense and credit
operations 62 48 85 65
------ ------ ------ ------
Total costs and expenses 4,603 4,457 9,068 8,768
------ ------ ------ ------
Income before income taxes 150 186 377 439
Income taxes 57 70 142 167
------ ------ ------ ------
Net income $ 93 $ 116 $ 235 $ 272
====== ====== ====== ======
Net income per common share
Primary $ .37 $ .46 $ .95 $ 1.09
====== ====== ====== ======
Fully diluted $ .37 $ .46 $ .94 $ 1.07
====== ====== ====== ======
Weighted average common shares outstanding
Primary 227.8 230.2 227.6 231.2
====== ====== ====== ======
Fully diluted 247.6 251.4 247.3 252.6
====== ====== ====== ======
</TABLE>
<PAGE>
-2-
Balance Sheets
(Amounts in millions)
<TABLE>
<CAPTION>
Jul. 27, Jul. 29, Jan. 27,
1996 1995 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short term investments
of $212, $156, and $173 $ 239 $ 260 $ 173
Receivables, net 4,563 4,426 5,207
Merchandise inventories 4,637 4,398 3,935
Prepaid expenses 95 88 94
-------- ------- -------
Total current assets 9,534 9,172 9,409
Properties, net of accumulated
depreciation of $2,127, $2,009,
and $2,127 4,317 3,993 4,281
Investments, primarily insurance operations 1,626 1,548 1,651
Deferred insurance policy acquisition costs 624 539 582
Other assets 1,322 1,215 1,179
------- ------- -------
$17,423 $16,467 $17,102
======= ======= =======
</TABLE>
<PAGE>
-3-
Balance Sheets
(Amounts in millions)
<TABLE>
<CAPTION>
Jul. 27, Jul. 29, Jan. 27,
1996 1995 1996
--------- --------- --------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,271 $ 2,038 $ 2,404
Short term debt 1,948 2,181 1,509
Deferred taxes 106 113 107
--------- --------- --------
Total current liabilities 4,325 4,332 4,020
Long term debt 4,032 3,526 4,080
Deferred taxes 1,234 1,129 1,188
Bank deposits 748 762 767
Insurance policy and claims reserves 728 605 691
Other liabilities 471 459 472
------- --------- --------
Total liabilities 11,538 10,813 11,218
Stockholders' equity
Preferred stock, without par value:
Authorized, 25 million shares -
issued, 1 million shares of
Series B ESOP convertible preferred 581 616 603
Guaranteed ESOP obligation (186) (268) (228)
Common stock, par value 50c:
Authorized, 1,250 million shares -
issued, 225, 226, and 224 million
shares 1,154 1,121 1,112
------- ------- -------
Total capital stock 1,549 1,469 1,487
------- ------- -------
Reinvested earnings at beginning
of year 4,397 4,262 4,262
Net income 235 272 838
Net unrealized change in debt and
equity securities, and currency
translation adjustments (42) 58 72
Retirement of common stock --- (169) (301)
Common stock dividends declared (234) (217) (434)
Preferred stock dividends
declared, net of taxes (20) (21) (40)
------- ------- -------
Reinvested earnings at end of
period 4,336 4,185 4,397
------- ------- -------
Total stockholders' equity 5,885 5,654 5,884
------- ------- -------
$17,423 $16,467 $17,102
======= ======= =======
</TABLE>
<PAGE>
-4-
Statements of Cash Flows
(Amounts in millions)
<TABLE>
<CAPTION>
26 weeks ended
------------------------
Jul. 27, Jul. 29,
1996 1995
-------- --------
<S> <C> <C>
Operating activities
Net income $ 235 $ 272
Depreciation and amortization 173 163
Deferred taxes 46 89
Change in cash from:
Customer receivables 693 804
Inventories, net of trade payables (565) (485)
Other assets and liabilities, net (357) (428)
----- -----
225 415
----- -----
Investing activities
Capital expenditures (295) (235)
Purchases of investment securities (235) (335)
Proceeds from sales of investment securities 197 236
Acquisition of Kerr Drug -- (74)
----- -----
(333) (408)
----- -----
Financing activities
Increase in short term debt 439 89
Net proceeds from the issuance
of long term debt -- 400
Payments of long term debt (42) (165)
Common stock issued, net 42 95
Common stock purchased and retired -- (189)
Preferred stock retired (22) (14)
Dividends paid, preferred and common (243) (224)
----- -----
174 (8)
----- -----
Net increase (decrease) in cash and short term
investments 66 (1)
Cash and short term investments at beginning
of year 173 261
----- -----
Cash and short term investments at end of
second quarter $ 239 $ 260
===== =====
</TABLE>
<PAGE>
-5-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Financial Condition
- -------------------
The Company's financial condition remains strong. Merchandise inventories, on a
FIFO basis, were $4,863 million at the end of the second quarter, an increase of
4.7 per cent from the level in the prior year. Merchandise inventories are
balanced and reflect new private brands and new looks in national brands. The
current cost of inventories exceeded the LIFO basis amount carried on the
balance sheet by approximately $226 million at both July 27, 1996 and January
27, 1996, and $247 million at July 29, 1995.
On July 27, 1996, the Company opened seven stores, representing an aggregate of
1.3 million square feet of space, in the Washington, D. C. area. These stores
were acquired from Woodward & Lothrop in 1995. In addition, the Company is
continuing with its modernization program for existing store facilities. During
the course of fiscal 1996, the Company plans to modernize 134 stores, which will
add .8 million square feet of selling space to such stores.
Total debt, both on and off the balance sheet, was $6.9 billion at July 27,
1996, up $318 million compared with the July 29, 1995 level. The increase is
principally due to capital investment in new and remodeled stores and the
Company's stock purchase program. On June 26, 1996, the Company filed a shelf
registration statement for the future issuance of up to $1.5 billion of its debt
securities. On August 14, 1996, the Company issued $600 million of debt
securities, consisting of the following issues: $200 million aggregate principal
amount of 7.375 per cent Notes due 2008, $200 million aggregate principal amount
of 7.65 per cent Debentures due 2016, and $200 million aggregate principal
amount of 6.90 per cent Debentures due 2026 (with an investor option to elect
repayment of these Debentures on August 15, 2003). Proceeds from these debt
issues will be used for general corporate purposes.
As of July 27, 1996, the Company had purchased approximately 7.5 million shares
of its common stock at a cost of $335 million under its 1995 stock purchase
program. No shares have been purchased during 1996. Since March 1994, the
Company has purchased approximately 17.5 million shares at a cost of $810
million. All shares have been retired and returned to the status of authorized
but unissued shares of common stock.
The regular quarterly dividend of 52 cents per share on the Company's
outstanding common stock was paid on May 1, 1996, to stockholders of record on
April 10, 1996.
On August 5, 1996 the Company entered into a definitive agreement to acquire
Fay's Incorporated, a 272-store drug store chain headquartered in Liverpool, New
York ("Fay's"). Under the terms of the agreement, each outstanding share of
Fay's common stock will be converted into the right to receive a fractional
share of the Company's common stock valued at $12.75, subject to a minimum per
share exchange of .2253397 of a share of the Company's common stock and a
maximum per share exchange of .2754151 of a share of the Company's common stock.
The aggregate consideration paid to Fay's stockholders will be approximately
$285 million on a tax-free basis. The transaction is subject to the approval of
Fay's stockholders and necessary regulatory clearances.
<PAGE>
-6-
Results of Operations
- ---------------------
Ratios useful in analyzing the results of operations are as follows:
<TABLE>
<CAPTION>
13 weeks ended 26 weeks ended
----------------- -----------------
Jul. 27, Jul. 29, Jul. 27, Jul. 29,
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Retail sales, per cent increase 1.6 4.6 1.8 2.5
JCPenney stores sales, per cent
increase 1.6 3.1 1.1 1.3
Gross margin, per cent of retail
sales
FIFO 29.1 29.1 29.8 30.3
LIFO 29.1 29.1 29.8 30.3
Selling, general, and
administrative expenses, per
cent of retail sales 25.5 25.0 25.7 25.6
Effective income tax rate 37.5 37.6 37.6 38.0
</TABLE>
For the 13 weeks ended July 27, 1996, fully diluted net income per share
decreased 19.6 per cent to $0.37, compared with $0.46 per share in the same
period last year. Net income totaled $93 million, a 19.8 per cent decline from
$116 million in the 1995 second quarter. For the six months ended July 27,
1996, net income totaled $235 million, or $0.94 per share, as compared with $272
million, or $1.07 per share, in the comparable 1995 period.
Second quarter total retail sales increased 1.6 per cent to $4,507 million from
$4,435 million in last year's comparable period. Sales from JCPenney stores
increased 1.6 per cent, and comparable store sales, those stores open at least a
year, increased 0.4 per cent, as compared to the second quarter of 1995.
Catalog sales decreased 4.7 per cent from the comparable 1995 period. Sales
from the Company's Thrift Drug subsidiary during the 1996 second quarter
increased 13.4 per cent, and comparable store sales increased 7.9 per cent, over
1995's second quarter. For the six months ended July 27, 1996, total retail
sales for the Company increased 1.8 per cent to $8,959 million from $8,802
million in the comparable 1995 period.
Gross margin, as a per cent of retail sales, was 29.1 per cent in both the 1996
and 1995 second quarters. For the six months ended July 27, 1996, gross margin,
as a per cent of retail sales, declined 50 basis points to 29.8 per cent
compared with 30.3 per cent in the comparable 1995 period.
Selling, general, and administrative ("SG&A") expenses increased 3.9 per cent in
the second quarter compared to 1995, and were not leveraged as a percent of
sales. Increases were primarily related to advertising, which was impacted by
higher paper and postage costs for catalog books, selling salaries, and
depreciation expense. For the six months ended July 27, 1996, SG&A expenses
increased 2.2 per cent, and as a per cent of retail sales, was 25.7 per cent,
compared with 25.6 per cent in the comparable 1995 period.
<PAGE>
-7-
Net interest expense and credit operations for the second quarter was $62
million compared with $48 million in the comparable period last year. Net
interest expense was $76 million, down $3 million compared with last year's
second quarter as a result of lower interest rates. Finance charge revenue of
$149 million in the second quarter of 1996 decreased slightly from 1995 levels.
Total customer receivables, at $4.0 billion, were $42 million higher than last
year's level. Credit costs were $135 million in second quarter 1996 compared
with $120 million in second quarter 1995. The increase was the result of higher
bad debt losses and increases in reserves for future write-offs of customer
receivables, both of which were caused by increases in delinquencies and
personal bankruptcies. For the six months ended July 27, 1996, net interest
expense and credit operations was $85 million compared with $65 million in last
year's period.
The Company's life and health insurance business continued its strong growth in
premiums and earnings in the second quarter and for the six months ended July
27, 1996. Total insurance revenues for the second quarter were $206 million, an
increase of $38 million, or nearly 23 per cent, over 1995's comparable period.
Pretax income was $49 million, an increase of $8 million, or 21.0 per cent, over
last year. For the six months ended July 27, 1996, revenue from the insurance
operation increased 24 per cent to $406 million, and pretax income was $95
million compared with $80 million for the same period last year.
The Company's consumer banking operation generated pretax income of $1 million
in the second quarter, a decrease of $7 million from 1995's level. The decline
is primarily attributable to increased bad debt losses. For the six months
ended July 27, 1996, consumer banking generated pretax income of $4 million
compared to $17 million in 1995.
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 and 26 weeks
ended July 27, 1996 are not necessarily indicative of the results for the entire
year.
New Accounting Rule
- -------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" in June 1996. The Company
has not completed evaluating the provisions of this standard, but it is not
expected that it will have a material impact on the Company.
<PAGE>
-8-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
The Company has no material legal proceedings pending against it.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on May 17, 1996,
at which the five matters described below were submitted to a vote of
stockholders with the voting results as indicated.
(1) Election of directors for a three-year term expiring at the 1999 Annual
Meeting of the Company's stockholders:
NOMINEE FOR AUTHORITY WITHHELD
------- --- ------------------
W. R. Howell 213,739,405 5,382,074
George Nigh 213,487,863 5,633,616
Ann W. Richards 212,620,415 6,501,064
Joseph D. Williams 213,700,701 5,420,778
(2) The Board of Directors' proposal concerning the employment of KPMG Peat
Marwick LLP as auditors for the fiscal year ending January 25, 1997:
FOR AGAINST ABSTAIN
--- ------- -------
216,568,857 1,731,047 821,575
(3) A stockholder resolution concerning doing business with foreign suppliers
(which proposal was supported by the Company's management):
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
183,376,115 27,304,491 8,440,873 -0-
(4) A stockholder resolution concerning the elimination of the classification
of the Board of Directors:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
74,109,580 128,148,205 2,789,389 14,074,305
(5) A stockholder resolution concerning the submission to a stockholder vote
of the Company's stockholder rights plan:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
82,025,047 119,824,157 3,197,970 14,074,305
<PAGE>
-9-
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
The following documents are filed as exhibits to this report:
11 Computation of net income per common share.
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 Financial Data Schedule for the six months ended July 27, 1996.
(b) Reports on Form 8-K
-------------------
None.
<PAGE>
-10-
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: September 6, 1996
<PAGE>
EXHIBIT 11
J. C. PENNEY COMPANY, INC.
and Consolidated Subsidiaries
Computation of Net Income Per Common Share
-------------------------------------------
(Amounts in millions except per common share data)
<TABLE>
<CAPTION>
26 Weeks Ended
------------------------------------------
Jul. 27, 1996 Jul. 29, 1995
------------------- ------------------
Shares Income Shares Income
------ -------- ------- -------
<S> <C> <C> <C> <C>
Primary:
- -------
Net income $ 235 $ 272
Dividend on Series B ESOP convertible
preferred stock (after-tax) (20) (21)
------ ------
Adjusted net income 215 251
Weighted average number of shares
outstanding 224.9 228.6
Common stock equivalents:
Stock options and other dilutive
effects 2.7 2.6
------ ------ ------ ------
227.6 $ 215 231.2 $ 251
====== ====== ====== ======
Net income per common share $ 0.95 $ 1.09
====== ======
Fully diluted:
- -------------
Net income $ 235 $ 272
Tax benefit differential on ESOP dividend
assuming stock is fully converted (1) (1)
Assumed additional contribution to ESOP
if preferred stock is fully converted (1) (2)
------ ------
Adjusted net income 233 269
Weighted average number of shares
outstanding (primary) 227.6 231.2
Maximum dilution 0.1 0.6
Convertible preferred stock 19.6 20.8
------ ------ ------ -----
247.3 $ 233 252.6 $ 269
====== ====== ====== =====
Net income per common share $ 0.94 $1.07
====== =====
</TABLE>
<PAGE>
Exhibit 12(a)
J. C. Penney Company, Inc.
(the Company and all subsidiaries)
Computation of Ratios of Available Income to Combined Fixed Charges
and Preferred Stock Dividend Requirement
<TABLE>
<CAPTION>
52 weeks 52 weeks
ended ended
-------- --------
Jul. 27, Jul. 29,
1996 1995
-------- --------
($ Millions)
<S> <C> <C>
Income from continuing operations
(before income taxes,
before capitalized interest,
but after preferred stock dividend) $1,218 $1,508
------ ------
Fixed charges
Interest (including capitalized
interest)
On operating leases 102 95
On short term debt 110 120
On long term debt 281 236
On capital leases 6 6
Other, net 2 0
------ ------
Total fixed charges 501 457
Preferred stock dividend, before taxes 47 49
------ ------
Combined fixed charges and preferred stock
dividend requirement 548 506
------ ------
Total available income $1,766 $2,014
====== ======
Ratio of available income to combined
fixed charges and preferred stock
dividend requirement 3.2 4.0
====== ======
</TABLE>
The interest cost of the LESOP notes guaranteed by the Company is not included
in fixed charges above.
The Company believes that, due to the seasonal nature of its business, ratios
for a period other than a 52 week period are inappropriate.
<PAGE>
Exhibit 12(b)
J. C. Penney Company, Inc.
(the Company and all subsidiaries)
Computation of Ratios of Available Income to Fixed Charges
<TABLE>
<CAPTION>
52 weeks 52 weeks
ended ended
-------- --------
Jul. 27, Jul. 29,
1996 1995
-------- --------
($ Millions)
<S> <C> <C>
Income from continuing operations
(before income taxes and
before capitalized interest) $1,265 $1,557
------ ------
Fixed charges
Interest (including capitalized
interest)
On operating leases 102 95
On short term debt 110 120
On long term debt 281 236
On capital leases 6 6
Other, net 2 0
------ ------
Total fixed charges 501 457
------ ------
Total available income $1,766 $2,014
====== ======
Ratio of available income to fixed charges 3.5 4.4
====== ======
</TABLE>
The interest cost of the LESOP notes guaranteed by the Company is not included
in fixed charges above.
The Company believes that, due to the seasonal nature of its business, ratios
for a period other than a 52 week period are inappropriate.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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 JULY 27, 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-END> JUL-27-1996
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 4,640
<ALLOWANCES> 77
<INVENTORY> 4,637
<CURRENT-ASSETS> 9,534
<PP&E> 6,444
<DEPRECIATION> 2,127
<TOTAL-ASSETS> 17,423
<CURRENT-LIABILITIES> 4,325
<BONDS> 4,032
0
581
<COMMON> 1,154
<OTHER-SE> 4,150
<TOTAL-LIABILITY-AND-EQUITY> 17,423
<SALES> 8,959
<TOTAL-REVENUES> 9,445
<CGS> 6,292
<TOTAL-COSTS> 8,596
<OTHER-EXPENSES> 204
<LOSS-PROVISION> 117
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> 377
<INCOME-TAX> 142
<INCOME-CONTINUING> 235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235
<EPS-PRIMARY> .95
<EPS-DILUTED> .94
</TABLE>
