<PAGE>
(CONFORMED COPY)
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
_______________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________
For the 13 and 26 week periods Commission file number 1-777
ended July 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.
262,066,853 shares of Common Stock of 50c par value, as of September 1,
2000.
<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 29, 2000.
Statements of Income
(Amounts in millions except per share data)
13 weeks ended 26 weeks ended
____________________ ____________________
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
________ _________ _________ _________
Retail sales $ 7,132 $ 7,034 $ 14,572 $ 14,292
Direct Marketing revenue 293 276 581 550
_________ _________ _________ ________
Total revenue 7,425 7,310 15,153 14,842
_________ _________ _________ ________
Costs and expenses
Cost of goods sold,
occupancy, buying,
and warehousing costs 5,381 5,278 10,930 10,570
Selling, general, and
administrative
expenses 1,670 1,681 3,424 3,373
Costs and expenses of
Direct Marketing
operations 227 214 455 433
Corporate and other
unallocated 10 (11) 16 (20)
Net interest expense and credit
operations (1) 103 63 217 97
Acquisition amortization 23 25 60 62
Other charges and
credits, net (25) -- 207 --
_________ ________ _________ _________
Total costs and expenses 7,389 7,250 15,309 14,515
_________ _________ _________ _________
Income/(loss) before
income taxes 36 60 (156) 327
Income taxes 13 21 (61) 121
_________ _________ _________ _________
Net income/(loss) $ 23 $ 39 $ (95) $ 206
========= ========= ========= =========
Earnings/(loss) per common share:
Net income/(loss) $ 23 $ 39 $ (95) $ 206
Less: preferred stock
dividends (8) (9) (16) (18)
_________ _________ _________ _________
Earnings/(loss) for
basic EPS 15 30 (111) 188
Dilutive stock options
and convertible
preferred stock -- -- -- --
_________ _________ ________ ________
Earnings/(loss) for
diluted EPS $ 15 $ 30 $ (111) $ 188
Shares
Average shares outstanding
(used for basic EPS) 262 260 261 258
Dilutive common
stock equivalents -- -- -- --
_________ _________ _________ _________
Average diluted
shares outstanding 262 260 261 258
Earnings/(loss) per share
Basic $ 0.06 $ 0.12 $ (0.42) $ 0.73
Diluted 0.06 0.12 (0.42) 0.73
(1) Net interest expense and credit operations for the 26 weeks ended July
31, 1999 includes a $5 million pre-tax gain, or 1 cent per share after tax,
on the early extinguishment of Eckerd Corporation 9.25 percent Notes due
2004.
<PAGE>
-2-
Balance Sheets
(Amounts in millions)
July 29, July 31, Jan. 29,
2000 1999 2000
________ ________ ________
ASSETS
Current assets
Cash and
short-term
investments of
$585, $377, and $1,233 $ 641 $ 377 $ 1,233
Retained interest in JCP Master
Credit Card Trust -- 325 --
Receivables, net 1,162 4,039 1,138
Merchandise inventories 6,041 6,308 5,947
Prepaid expenses 167 139 154
________ ________ ________
Total current assets 8,011 11,188 8,472
Properties, net of accumulated
depreciation of $3,096, $3,013,
and $2,883 5,136 5,459 5,312
Investments, principally held by
Direct Marketing 1,630 1,880 1,827
Deferred policy acquisition costs 975 894 929
Goodwill and other intangible assets
net of accumulated amortization
of $397, $165, and $340 2,987 3,219 3,056
Other assets 1,341 1,290 1,292
________ ________ ________
$ 20,080 $ 23,930 $ 20,888
======== ======== ========
<PAGE>
-3-
Balance Sheets
(Amounts in millions)
July 29, July 31, Jan. 29,
2000 1999 2000
________ ________ ________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,481 $ 3,345 $ 3,351
Short-term debt 103 2,533 330
Current maturities of long-term debt 550 325 625
Deferred taxes 149 120 159
________ ________ ________
Total current liabilities 4,283 6,323 4,465
Long-term debt 5,411 6,817 5,844
Deferred taxes 1,406 1,546 1,461
Insurance policy and claims reserves 1,052 973 1,017
Other liabilities 975 930 873
________ ________ ________
Total liabilities 13,127 16,589 13,660
Stockholders' equity
Capital stock
Preferred stock, without par value:
Authorized, 25 million shares -
issued and outstanding, 0.7 million
shares of Series B ESOP convertible
preferred 420 457 446
Common stock, par value 50c:
Authorized, 1,250 million shares -
issued and outstanding, 261, 260, and
261 million shares 3,284 3,232 3,266
________ ________ ________
Total capital stock 3,704 3,689 3,712
________ ________ ________
Reinvested earnings
At beginning of year 3,590 3,791 3,791
Net income/(loss) (95) 206 336
Common stock dividends declared (151) (284) (500)
Preferred stock dividends
declared, net of tax (16) (18) (37)
________ ________ ________
Reinvested earnings at end of
period 3,328 3,695 3,590
Accumulated other comprehensive
income/(loss) (79) (43) (74)
________ ________ ________
Total stockholders' equity 6,953 7,341 7,228
________ ________ ________
$20,080 $23,930 $20,888
======== ======== ========
The accumulated balances for net unrealized changes in debt and equity
securities were ($11), $25, and ($11), and for currency translation
adjustments were ($68), ($68), and ($63) as of the respective dates shown.
Net unrealized changes in investment securities are shown net of deferred
taxes of ($5), $15, and ($5), respectively. A deferred tax asset has not
been established for currency translation adjustments. Total comprehensive
income/(loss) was $12 for the 13 weeks ended July 29, 2000 and July 31,
1999, and ($100) and $177 for the 26 weeks ended July 29, 2000 and July 31,
1999, respectively.
<PAGE>
-4-
Statements of Cash Flows
(Amounts in millions)
26 weeks ended
____________________________
July 29, July 31,
2000 1999
_________ _________
Operating activities
Net income/(loss) $ (95) $ 206
Other charges and credits, net 207 --
Depreciation and amortization, including
intangible assets 355 351
Deferred taxes (66) 43
Change in cash from:
Customer receivables -- 446
Other receivables (24) (127)
Inventories, net of trade payables 263 (176)
Current taxes payable (9) (71)
Other assets and liabilities, net (278) 40
_________ _________
353 712
_________ _________
Investing activities
Capital expenditures (256) (290)
Purchases of investment securities (302) (539)
Proceeds from sales of investment securities 498 554
Proceeds from the sale of assets 30 22
_________ _________
(30) (253)
_________ _________
Financing activities
Change in short-term debt (227) 553
Payments of long-term debt (510) (440)
Common stock issued, net (8) 9
Dividends paid, preferred and common (170) (300)
_________ _________
(915) (178)
_________ _________
Net increase/(decrease) in cash and short-term
investments (592) 281
Cash and short-term investments at beginning
of year 1,233 96
_________ _________
Cash and short-term investments at end of
second quarter $ 641 $ 377
========= =========
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.
<PAGE>
-5-
Notes to Interim Financial Information
1) Other Charges and Credits, net
During the second quarter of 2000, the Company recorded pre-tax credits of
$25 million related to the reversal of reserves established in the first
quarter and in prior years for Eckerd drugstore closings and restructuring
programs. The adjustments reduced first quarter 2000 reserves by $9 million
and prior year reserves by $16 million, and were related to reserves for
bad debts, lease obligations, and other store exit costs. In the first
quarter of 2000, the Company recorded pre-tax charges 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 JCPenney stores, $106 million related to
the closing of Eckerd drugstores, and $11 million related to workforce
reductions, as follows:
Department stores and catalog - The Company reviewed its portfolio of
_____________________________
department stores and support facilities and, in the first quarter,
finalized a plan to close 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), 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. Store closing plans anticipated that approximately 1,800
store employees would be impacted by the store closings.
Eckerd drugstores - In the first quarter, the Company finalized a plan to
_________________
close 289 underperforming drugstores. The number of stores to be closed was
lowered to 279 during the second quarter as a result of restrictive lease
terms. These stores 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. Store closing plans
anticipated that approximately 1,200 store employees would be impacted by
the store closings. During the second quarter of 2000, these reserves were
reviewed for adequacy, and due to more favorable experience for certain
exit costs than previously estimated, $9 million was reversed. These
reversals are shown in the table in Note 2.
In addition to the store closing costs recorded in other charges and
credits, net, Eckerd's 2000 segment operating results include a credit of
$5 million for the second quarter and a charge of $73 million for the first
half in other exit related activities. These amounts consist of a $5
million credit and a $61 million charge related to inventory liquidation
losses and shrinkage in the second quarter and first half, respectively,
and a $12 million charge 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 $11 million for severance and outplacement benefits.
All affected employees were notified by the end of the first quarter.
<PAGE>
-6-
2) Restructuring Reserves
As described in Note 1, the Company has established reserves for the
closing of underperforming department stores and drugstores, related exit
costs, and a workforce adjustment program over the past few years. The
majority of the reserves represent the present value of future lease
obligations for closed stores that will be paid out over time. The status
of the reserves at the end of the second quarter is shown in the table
below:
1999 1st Qtr 2nd Qtr 2000 YTD
___________________________
Year End 2000 Cash Other Ending
($ in millions) Balance Additions Outlays Changes Balance
___________________________________________________
1996/1997 Reserves
__________________
Department stores and catalog
_____________________________
Future lease
obligations $ 8 $ -- $ (2) $ -- $ 6
Eckerd drugstores
_________________
Future lease
obligations 78 -- (3) (3) 72
Allowance for
notes receivable 25 -- -- (25) --
Current Year Reserves
_____________________
Department stores and catalog
_____________________________
Future lease
obligations -- 45 (1) -- 44
Severance and
outplacement -- 10 (5) -- 5
Eckerd drugstores
_________________
Future lease
obligations -- 90 (8) (4) 78
Severance and
outplacement -- 4 (3) (1) --
Other exit costs -- 16 (3) (4) 9
Workforce Reduction Program
___________________________
Severance and
outplacement -- 11 (8) -- 3
________ _______ ______ _______ ______
Total $ 111 $ 176 $ (33) $ (37) $ 217
________ _______ ______ _______ ______
Department stores and catalog - During the first six months of fiscal 2000,
_____________________________
the Company closed 36 of the underperforming stores identified in the first
quarter for closing. Approximately 1,525 store employees had been
terminated as a result of the store closings as of July 29, 2000. The
remaining nine stores are scheduled to close by the end of fiscal 2000.
Through the end of the second quarter, the reserves for future lease
obligations had been reduced by $3 million in cash payments and the reserve
for severance and outplacement benefits reduced by $5 million for actual
benefits paid.
Eckerd drugstores - During the first six months of fiscal 2000, Eckerd had
_________________
closed 270 of the underperforming drugstores identified in the first
quarter for closing. As of July 29, 2000, 560 employees had been terminated
as a result of the store closings. The remaining nine stores are scheduled
to close by the end of the first quarter of fiscal 2001.
Through the end of the second quarter, the reserves had been reduced by $17
million as a result of cash payments for lease obligations ($11 million),
severance and outplacement benefits ($3 million), and other exit costs ($3
<PAGE>
-7-
million). In the second quarter, the Company reversed reserves totaling $12
million ($7 million for lease obligations, $1 million for severance and
outplacement, and $4 million for other exit costs) as a result of
eliminating certain stores from the closing list. Also during the second
quarter, the Company sold a note receivable that was associated with the
sale of certain divested drugstore locations. The sale of the note
generated cash proceeds of $16 million; the note had a net book value of $3
million, resulting in a gain of $13 million.
Other Workforce Reductions - Through the end of the second quarter, the
__________________________
Company had terminated approximately 150 employees and paid $8 million in
severance and outplacement benefits.
3) Earnings Per Share
The Company had 700 and 743 thousand shares of preferred stock, convertible
into 14.0 and 14.9 million common shares, that were issued and outstanding
at July 29, 2000 and July 31, 1999, respectively. These potential common
shares, and the related dividend, were excluded from the calculation of
diluted earnings per share for the 13 and 26 weeks ended July 29, 2000 and
July 31, 1999 because their inclusion would have had an anti-dilutive
effect on the calculation.
In addition, during the periods ended July 29, 2000 and July 31, 1999,
certain employee stock options to purchase common stock were excluded
from the computation of diluted earnings per share because the option
exercise price was greater than the average market price for both periods.
For the 13 weeks ended July 29, 2000, the exercise price of 11 million
option shares was greater than the average market price. The effect of
stock options for the 26 weeks ended July 29, 2000 was anti-dilutive. For
the 13 and 26 weeks ended July 31, 1999,the exercise prices of 4 million
and 5 million option shares, respectively, were greater than the average
market price.
4) Revenue Recognition
Refer to Note 1 in the Company's Annual Report on Form 10-K for the 52
weeks ended January 29, 2000 for information on the changes to the
Company's accounting policies and the related financial statement effects
for guidance provided by SEC Staff Accounting Bulletin No. 101, "Revenue
_______
Recognition in Financial Statements".
___________________________________
<PAGE>
-8-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Financial Condition
___________________
Merchandise inventories on a FIFO basis totaled $6,336 million at the end
of the second quarter compared with $6,559 million last year. Inventories
for department stores and catalog totaled $4,015 million at July 29, 2000
as compared with $4,322 million at the end of last year's second quarter.
On a comparable store basis, inventories declined by approximately nine
percent from last year levels. The overall decline in stores and catalog
inventory levels is the result of continued emphasis on reducing the number
of weeks of inventory on hand and improving inventory productivity. Eckerd
drugstore inventories totaled $2,321 million compared with $2,237 million
last year. The current cost of inventories exceeded the LIFO basis amount
carried on the balance sheet by approximately $295 million at July 29,
2000, $270 million at January 29, 2000, and $251 million at July 31, 1999.
Properties, net of accumulated depreciation, totaled $5,136 million at July
29, 2000 compared with $5,459 million at the end of last year's second
quarter. Balances reflect asset impairment charges of $60 million related
to the closing of underperforming JCPenney stores, and $110 million for
Eckerd drugstores, recorded in the first quarter of 2000 and the fourth
quarter of 1999, respectively.
Goodwill and other intangible assets, net, totaled $2,987 million this year
compared with $3,219 million at the end of 1999's second quarter.
At July 29, 2000 the consolidated balance sheet included reserves related
to restructuring activities totaling $217 million, including $139 million
of reserves related to current year activities. The total amount is
included as a component of accounts payable and accrued expenses. 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. Reserves were reduced by $70 million
through the second quarter of 2000 as a result of lease and other payments
($33 million) and reserve adjustments ($37 million). See the discussion
under the caption other charges and credits, net, in results of operations
and Note 1 to the interim financial statements for additional discussion
about the charges recorded in 2000.
The Company had cash and short-term investments totaling $641 million at
the end of the second quarter. These funds will generally be used to pay
down long-term debt as it matures and to fund working capital needs. During
the second quarter of 2000, the Company redeemed approximately $180 million
principal amount of 9.45 percent notes having a normal maturity date of
July 2002 that were called earlier in the year. The notes were redeemed at
par. In addition, approximately $249 million in asset-backed securities
matured in the second quarter of 2000, along with a related interest rate
swap.
<PAGE>
-9-
Long-term debt was rated Baa2 by Moody's Investors Service and BBB by both
Standard and Poor's Corporation and Fitch Investors Service as of the end
of the second quarter, and the Company's commercial paper was rated P2, A2
and F2 by the three rating agencies, respectively. On August 23, 2000,
Moody's Investors Service placed the Company's short- and long-term debt
ratings under review.
A quarterly dividend of 28.75 cents per share on the Company's outstanding
common stock was paid on August 1, 2000, to stockholders of record on July
10, 2000.
Results of Operations
_____________________
Consolidated operating results
($ in millions)
13 weeks ended 26 weeks ended
___________________ ___________________
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
________ ________ ________ ________
Operating profit/(loss) by segment
Department stores
and catalog $ 74 $ 118 $ 241 $ 263
Eckerd drugstores 7 (43) (23) 86
Direct Marketing 66 62 126 117
_______ _______ ________ ________
Total segments 147 137 344 466
Corporate and
other unallocated (10) 11 (16) 20
Net interest and
credit operations (103) (63) (217) (97)
Acquisition amortization (23) (25) (60) (62)
Other charges and
credits, net 25 -- (207) --
_______ _______ ________ ________
Income/(loss) before
income taxes 36 60 (156) 327
Income taxes (13) (21) 61 (121)
________ ________ ________ ________
Net income/(loss) $ 23 $ 39 $ (95) $ 206
======== ======== ======== ========
Segment profit totaled $147 million in the second quarter compared with
$137 million in last year's period. Both periods include the effects of
drugstore liquidation and inventory adjustment activities that are reported
within segment results. Eckerd results for this year's quarter include a
credit of $5 million and last year's period includes charges of $119
million. Current quarter results were impacted by continued softness in
department stores, leading to a more promotional sales environment, and
declining margins in drugstores caused by higher levels of promotions for
non-pharmacy merchandise coupled with a higher proportion of lower-margin
managed care pharmacy sales.
The year over year change in corporate and other unallocated, which
consists of real estate and investment gains and losses as well as other
corporate items, is primarily related to charges in 2000 for the
significant restructurings and process and organizational changes under the
ACT initiative. The increase in net interest and credit operations this
year is related to the sale of the Company's proprietary credit card
portfolio in December 1999. Interest expense declined $53 million from last
year; however; proprietary credit generated $93 million of income in last
year's second quarter.
Net income for the quarter totaled $23 million, or $0.06 per share, in this
year's second quarter compared with $39 million, or $0.12 per share, in
last
<PAGE>
-10-
year's period. Before the effects of non-comparable items, second quarter
earnings per share was $0.01 this year compared with $0.40 last year. On a
year to date basis, the Company had a net loss of $95 million, or $0.42 per
share, compared with net income of $206 million, or $0.73 cents per share,
last year. For the six months, before the effects of non-comparable items,
the Company had net income of $94 million, or $0.29 per share this year,
compared with $279 million, or $1.01 per share, last year. While it is too
early to accurately predict results for the balance of the fiscal year,
management believes that third and fourth quarter earnings per share
could be adversely affected if the current slowdown in the department store
sector continues and it leads to a more promotional second half.
Segment Operating Results
Department Stores and Catalog
_____________________________
13 weeks ended 26 weeks ended
___________________ ___________________
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
________ ________ ________ ________
($ in millions)
Retail sales, net $ 3,998 $ 4,058 $ 8,106 $ 8,269
Cost of goods sold (2,826) (2,832) (5,601) (5,718)
SG&A expenses (1,098) (1,108) (2,264) (2,288)
________ ________ ________ ________
Operating profit (1) $ 74 $ 118 $ 241 $ 263
Sales percent increase/(decrease):
Total department stores (2.2) 0.4 (2.6) (0.5)
Comparable stores (1.5) 1.0 (2.5) 0.3
Catalog 1.5 1.5 0.3 4.9
Ratios as a percent of sales:
Gross margin 29.3 30.2 30.9 30.9
SG&A expenses 27.5 27.3 27.9 27.7
Operating profit 1.8 2.9 3.0 3.2
EBITDA (2) 4.2 7.7 5.3 8.1
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 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 credit 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.
Operating profit for department stores and catalog was $74 million in the
second quarter compared with $118 million last year. The decline was
principally related to department store sales declines and higher
markdowns. Sales in department stores declined by 1.5% for comparable
stores, those stores open at least twelve months. Sales were strongest in
women's apparel, but most other merchandise lines were soft. Despite
disappointing sales, merchandise inventories were controlled, declining
approximately nine percent on a comparable store basis from last year.
Catalog sales increased by 1.5% in this year's second quarter as a result
of strong internet sales, which totaled $47 million this year compared with
$10 million last year, and a positive initial response to the Fall and
Winter catalog. International sales generated a 21% sales gain in the
second quarter, with double-digit growth in both Brazil and Mexico.
<PAGE>
-11-
Gross margin for the segment totaled $1,172 million in the second quarter
compared with $1,226 million last year. Margin in this year's quarter was
negatively impacted by sales declines in department stores coupled with
higher levels of clearance and promotional markdowns in both stores and
catalog. As a percent of sales, margin declined by 90 basis points.
Liquidation markdowns for stores that were closed during the quarter
totaled approximately $10 million and accounted for approximately 25 basis
points of the decline. SG&A expenses declined on a dollar basis for the
quarter despite higher levels of spending on the expansion of the Company's
internet business, but were not leveraged as a percent of sales.
Operating profit for the six months ended July 29, 2000 was $241 million
versus $263 million in last year's comparable period. Sales for comparable
department stores declined by 2.5 percent this year, while catalog sales
were up slightly, primarily as a result of internet sales growth. Gross
margin for the period was flat compared with last year at 30.9 percent of
sales. SG&A expenses decreased from last year but were not leveraged as a
percent of sales.
Eckerd Drugstores
_________________
13 weeks ended 26 weeks ended
___________________ ___________________
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
________ ________ ________ ________
($ in millions)
Retail sales, net $ 3,134 $ 2,976 $ 6,466 $ 6,023
Cost of goods sold (2,555) (2,446) (5,329) (4,852)
SG&A expenses (572) (573) (1,160) (1,085)
________ ________ ________ ________
Operating profit/(loss) (1) $ 7 $ (43) $ (23) $ 86
Sales percent increase:
Total 5.3 21.5 7.4 20.1
Comparable stores 9.7 10.5 8.3 11.4
Ratios as a percent of sales:
FIFO gross margin 18.9 18.2 18.0 19.8
LIFO gross margin 18.5 17.8 17.6 19.4
SG&A expenses 18.2 19.2 17.9 18.0
Operating profit/(loss) 0.3 (1.4) (0.3) 1.4
EBITDA (2) 1.8 0.2 1.2 2.9
Ratios as a percent of sales,
before the effects of charges:
FIFO gross margin 18.7 20.7 18.9 21.1
LIFO gross margin 18.3 20.3 18.5 20.7
SG&A expenses 18.2 17.7 17.7 17.3
Operating profit 0.1 2.6 0.8 3.4
EBITDA (2) 1.7 4.2 2.4 4.9
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.
Operating profit was $7 million for the second quarter compared with a loss
of $43 million in last year's period. Current year results include a $5
million credit related to the reversal of reserves that were established
for closed store liquidation markdowns (gross margin) as well as a $4
million gain on the exchange of certain assets (SG&A expenses). Results for
second quarter 1999
<PAGE>
-12-
include the effects of $119 million in charges related primarily to
inventory adjustments and systems upgrades that reduced gross margin by $74
million and increased SG&A expenses by $45 million. Sales for the quarter
increased by 9.7 percent for comparable stores. The increase was comprised
of a 15.0 percent increase in pharmacy sales and a 1.0 percent increase in
non-pharmacy merchandise.
Gross margin on a comparable basis, before the effects of 2000 store
closing activities and 1999 inventory adjustments, declined by 200 basis
points as a percent of sales. The decline was principally related to a
higher level of promotional markdowns for non-pharmacy merchandise and a
higher proportion of lower-margin managed care pharmacy sales. Managed care
pharmacy sales now account for 89 percent of total pharmacy sales, an
increase of approximately 200 basis points from last year's period. Gross
margin includes LIFO charges of $13 million and $12 million for the second
quarter of 2000 and 1999, respectively. SG&A expenses on a comparable basis
increased by 50 basis points as a percent of sales and were negatively
impacted by the effects of new and relocated stores. These free-standing
locations generate higher sales volumes but carry higher expense ratios
until they mature.
Eckerd had an operating loss of $23 million for the six months ended July
29, 2000 versus operating profit of $86 million in last year's comparable
period. Sales increased by 8.3 percent on a comparable store basis, led by
a 13.2 percent increase in comparable store pharmacy sales. Gross margin
declined by 220 basis points as a percent of sales, before the effects of
non-comparable items reported in both 2000 and 1999, primarily as a result
of a higher proportion of managed care pharmacy sales and higher shrinkage
run rates in this year's period. SG&A expenses increased by 40 basis points
as a percent of sales. Eckerd recorded LIFO charges of $25 million this
year compared with $24 million last year.
Direct Marketing
________________
13 weeks ended 26 weeks ended
___________________ ___________________
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
________ ________ ________ ________
($ in millions)
Revenue $ 293 $ 276 $ 581 $ 550
Costs and expenses (1) (227) (214) (455) (433)
_________ ________ ________ ________
Operating profit (2) $ 66 $ 62 $ 126 $ 117
Revenue, percent increase 6.2 10.0 5.6 10.7
Operating profit as a percent
of revenue 22.5 22.5 21.7 21.3
1) Includes amortization of deferred acquisition costs of $62 million and
$54 million for the second quarter and $121 million and $107 million for
the first half of 2000 and 1999, respectively.
2) 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 $66 million for the quarter and $126 million year
to date, increases of 6.5 percent and 7.7 percent from last year's
comparable periods. Revenue totaled $293 million in the second quarter, an
increase of 6.2 percent compared with a year ago, with the increase
principally related to health insurance premiums, which account for
approximately 74 percent of total insurance premiums and 61 percent of
total revenues. For the first six months, revenue totaled $581 million, an
increase of 5.6 percent versus last year.
<PAGE>
-13-
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.
Second quarter 2000 results include $5 million in expenses related to the
previously announced tracking stock initiative. The Eckerd tracking stock
transaction will not occur this year. When results improve, the Company
will make an appropriate announcement taking into account market and other
conditions. Second quarter 2000 results also include $11 million in pre-tax
incremental expenses related to the Company's ACT initiative. ACT, which
represents a fundamental rebuilding of the department store and catalog
merchandising process and organization, creating a centralized buying
organization, will require significant process and organizational
restructurings.
Net Interest Expense and Credit Operations
__________________________________________
13 weeks ended 26 weeks ended
___________________ ___________________
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
________ ________ ________ ________
($ in millions)
Credit revenue, net of
operating expenses $ -- $ 93 $ -- $ 210
Interest expense, net (103) (156) (217) (307)
________ ________ ________ ________
Total $ (103) $ (63) $ (217) $ (97)
As a result of the sale of its proprietary credit card portfolio to General
Electric Capital Corporation 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 for the second quarter and for the year have decreased
substantially, declining by $53 million for the quarter and $90 million for
the year, 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 second quarter of 2000, the Company recognized $25 million in
income from the reversal of certain reserves that had been established in
prior periods related to drugstore closing activities. Of this total, $13
million was associated with the sale of notes receivable that had been
issued in connection with the divestiture of certain drugstores. Sale of
the notes generated cash proceeds of $16 million compared to a net book
value of $3 million. The remaining reversals were related to reserves
established for lease obligations, severance and outplacement, and other
exit costs.
<PAGE> -14-
Income Taxes
____________
The Company's effective income tax rate, excluding the effects of non-
comparable items, was 36.7 percent through the second quarter compared with
37.5 percent last year.
New Accounting Rules
____________________
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (FAS) No. 133, "Accounting for Derivative Instruments
______________________________________
and Hedging Activities". As amended by FAS No. 137, "Accounting for
_______________________ _______________
Derivative Instruments and Hedging Activities - Deferral of the Effective
_________________________________________________________________________
Date of FASB Statement No. 133", and FAS No. 138, "Accounting for Certain
_______________________________ ______________________
Derivative Instruments and Hedging Activities, an amendment of FASB
___________________________________________________________________
Statement No. 133", FAS No. 133 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.
<PAGE>
-15-
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 29, 2000 are not necessarily indicative of the
results for the entire year.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using financial
derivative instruments and believes that its exposure to market risk
associated with other financial instruments, such as investments and
borrowings, and interest rate fluctuations is not material.
This report may contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties
that may cause the Company's actual results to be materially different from
planned or expected results. Those risks and uncertainties include but are
not limited to competition, consumer demand, seasonality, economic
conditions, and government activity. Investors should take such risks into
account when making investment decisions.
<PAGE>
-16-
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 19,
2000, at which the four 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
Year 2003 Annual Meeting of the Company's stockholders:
NOMINEE FOR AUTHORITY WITHHELD
_______ ___ __________________
V. E. Jordan, Jr. 170,614,307 61,863,227
J. C. Pfeiffer 176,876,107 55,601,427
R. G. Turner 177,296,034 55,181,500
(2) The Board of Directors' proposal regarding employment of KPMG
LLP as auditors for the fiscal year ending January 27, 2001:
FOR AGAINST ABSTAIN
___ _______ _______
213,156,062 15,897,649 3,425,021
(3) A stockholder resolution regarding classification of the
Board of Directors:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
___ _______ _______ _________
120,152,599 74,324,076 3,467,262 77,771,756
(4) A stockholder resolution regarding amendment of Company Bylaws
to reorganize the Board into one class of directors:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
___ _______ _______ _________
135,559,383 59,245,807 3,141,205 77,769,298
<PAGE>
-17-
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
________
The following documents are filed as exhibits to this report:
10(a) Form of Succession Severance Agreement dated May 19,
2000, as amended June 1, 2000 and June 14, 2000.
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 six months ended July 29,
2000.
27(b) Restated Financial Data Schedule for the six months ended
July 31, 1999.
(b) Reports on Form 8-K
___________________
None.
<PAGE>
-18-
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 12, 2000
