<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 39 week periods Commission file number 1-777
ended October 28, 2000
J. C. PENNEY COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-5583779
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 431-1000
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_______________
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.
262,347,498 shares of Common Stock of 50 cents par value, as of October 28,
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)
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
-------------------- ---------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Retail sales $ 7,455 $ 7,552 $ 22,027 $ 21,844
Direct Marketing revenue 288 282 869 832
-------- -------- -------- --------
Total revenue 7,743 7,834 22,896 22,676
-------- -------- -------- --------
Costs and expenses
Cost of goods sold, occupancy, buying,
and warehousing costs 5,633 5,495 16,563 16,065
Selling, general, and administrative
expenses 1,804 1,808 5,228 5,181
Costs and expenses of Direct Marketing
operations 223 218 678 651
Corporate and other unallocated 3 (7) 19 (27)
Net interest expense and credit
operations /(1)/ 112 83 329 180
Acquisition amortization 19 18 79 80
Restructuring and other charges, net (3) -- 204 --
-------- -------- -------- --------
Total costs and expenses 7,791 7,615 23,100 22,130
-------- -------- -------- --------
Income/(loss) before income taxes (48) 219 (204) 546
Income tax/(benefit) (18) 77 (79) 198
-------- -------- -------- --------
Net income/(loss) $ (30) $ 142 $ (125) $ 348
======== ======== ======== ========
Earnings/(loss) per common share:
Net income/(loss) $ (30) $ 142 $ (125) $ 348
Less: preferred stock dividends (8) (9) (25) (27)
-------- -------- -------- --------
Earnings/(loss) for basic EPS (38) 133 (150) 321
Dilutive convertible preferred stock -- 9 -- --
-------- -------- -------- --------
Earnings/(loss) for diluted EPS $ (38) $ 142 $ (150) $ 321
Shares
Average shares outstanding (used
for basic EPS) 262 260 262 259
Dilutive common stock equivalents -- 16 -- --
-------- -------- -------- --------
Average diluted shares outstanding 262 276 262 259
Earnings/(loss) per share
Basic $ (0.15) $ 0.51 $ (0.57) $ 1.24
Diluted (0.15) 0.51 (0.57) 1.24
</TABLE>
(1) Net interest expense and credit operations for the 39 weeks ended October
30, 1999 includes a $5 million pre-tax gain, or 1 cent per share after tax, on
the early extinguishment of Eckerd Corporation's 9.25 percent Notes due 2004.
<PAGE>
-2-
Balance Sheets
(Amounts in millions)
<TABLE>
<CAPTION>
Oct. 28, Oct. 30, Jan. 29,
2000 1999 2000
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments
of $177, $392, and $1,233 $ 183 $ 392 $ 1,233
Retained interest in JCP Master
Credit Card Trust -- 461 --
Receivables, net 1,151 4,308 1,138
Merchandise inventories 6,842 6,999 5,947
Prepaid expenses 143 152 154
------- ------- -------
Total current assets 8,319 12,312 8,472
Properties, net of accumulated
depreciation of $3,211, $3,152,
and $2,883 5,153 5,434 5,312
Investments, principally held by
Direct Marketing 1,583 1,812 1,827
Deferred policy acquisition costs 992 904 929
Goodwill and other intangible assets
net of accumulated amortization
of $416, $305, and $340 2,967 3,181 3,056
Other assets 1,399 1,339 1,292
------- ------- -------
$20,413 $24,982 $20,888
======= ======= =======
</TABLE>
<PAGE>
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Balance Sheets
(Amounts in millions)
<TABLE>
<CAPTION>
Oct. 28, Oct. 30, Jan. 29,
2000 1999 2000
-------- -------- --------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,840 $ 3,762 $ 3,351
Short-term debt 357 3,223 330
Current maturities of long-term debt 250 625 625
Deferred taxes 166 119 159
-------- -------- --------
Total current liabilities 4,613 7,729 4,465
Long-term debt 5,423 6,504 5,844
Deferred taxes 1,472 1,540 1,461
Insurance policy and claims reserves 1,063 992 1,017
Other liabilities 968 917 873
-------- -------- --------
Total liabilities 13,539 17,682 13,660
Stockholders' equity
Capital stock
Preferred stock, without par value: Authorized, 25 million shares -
issued and outstanding, 0.7, 0.8, and 0.7 million shares of Series
B ESOP convertible preferred 407 457 446
Common stock, par value 50 cents:
Authorized, 1,250 million shares -
issued and outstanding, 262, 260, and
261 million shares 3,288 3,236 3,266
-------- -------- --------
Total capital stock 3,695 3,693 3,712
-------- -------- --------
Reinvested earnings
At beginning of year 3,590 3,791 3,791
Net income/(loss) (125) 348 336
Common stock dividends declared (184) (427) (500)
Preferred stock dividends
declared, net of tax (16) (18) (37)
-------- -------- --------
Reinvested earnings at end of
period 3,265 3,694 3,590
Accumulated other comprehensive income/(loss) (86) (87) (74)
-------- -------- --------
Total stockholders' equity 6,874 7,300 7,228
-------- -------- --------
$ 20,413 $ 24,982 $ 20,888
======== ======== ========
</TABLE>
The accumulated balances for net unrealized changes in debt and equity
securities were ($10), ($6), and ($11), and for currency translation adjustments
were ($76), ($81), and ($63) as of the respective dates shown. Net unrealized
changes in investment securities are shown net of deferred taxes of ($5), ($3),
and ($5), respectively. A deferred tax asset has not been established for
currency translation adjustments. Total comprehensive income/(loss) was ($39)
and $98 for the 13 weeks ended October 28, 2000 and October 30, 1999,
respectively and ($137) and $275 for the 39 weeks ended October 28, 2000 and
October 30, 1999, respectively.
<PAGE>
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Statements of Cash Flows
(Amounts in millions)
39 weeks ended
----------------------------
Oct. 28, Oct. 30,
2000 1999
--------- ----------
Operating activities
Net income/(loss) $ (125) $ 348
Restructuring and other charges, net 204 --
Depreciation and amortization, including
intangible assets 510 513
Deferred taxes 17 36
Change in cash from:
Customer receivables -- 215
Other receivables (13) (301)
Inventories, net of trade payables (28) (517)
Current taxes payable (117) (51)
Other assets and liabilities, net (289) 107
------- -------
159 350
------- -------
Investing activities
Capital expenditures/(1)/ (464) (472)
Purchases of investment securities (441) (649)
Proceeds from the sale of assets 30 22
Proceeds from sales of investment securities 693 681
------- -------
(182) (418)
------- -------
Financing activities
Change in short-term debt 27 1,243
Change in long-term debt (793) (451)
Common stock issued, net (16) 13
Dividends paid, preferred and common (245) (441)
------- -------
(1,027) 364
------- -------
Net increase/(decrease) in cash and short-term
investments (1,050) 296
Cash and short-term investments at beginning
of year 1,233 96
------- -------
Cash and short-term investments at end of
third quarter $ 183 $ 392
======== =======
/(1)/ Includes capitalized software costs of $62 million and $43 million
previously classified as Other Assets.
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.
(Genovese). The total value of the transaction, including debt assumed and
conversion of options for Genovese common stock to options for the Company's
common stock, was $414 million.
<PAGE>
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Notes to Interim Financial Information
1) Restructuring and Other Charges, net
During the third quarter of 2000, the Company recorded a pre-tax net credit of
$3 million related to restructuring charges and previously established
restructuring reserves. The $3 million was comprised of reductions to reserves
for future lease obligations of units closed in the current ($3 million) and
prior ($1 million) years, reductions to the severance reserve for closed units
($2 million), additional expense for asset write-offs related to closed units
($2 million), and the interest component of lease payments ($1 million) which
are charged to expense with a corresponding increase in the reserve. The reserve
reductions resulted from favorable actual experience. These adjustments had the
effect of reducing first quarter 2000 reserves by $4 million and prior year
reserves by $1 million. In the first quarter of 2000, the Company recorded pre-
tax charges of $232 million associated with the closing of underperforming
department stores ($115 million) and Eckerd drugstores ($106 million), and
workforce adjustments ($11 million).
Department stores and catalog - In the first quarter of 2000, the Company
-----------------------------
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. During the third quarter, these
reserves were reduced by $4 million as noted above, and are shown in the table
in Note 2.
Eckerd drugstores - In the first quarter of 2000, 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
on certain stores. The stores identified for closing 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), partially 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 were
expected to impact approximately 600 store employees. Through the end of the
third quarter of 2000, these reserves had been reduced by $9 million, and are
shown in the table in Note 2.
In addition to the store closing costs recorded as restructuring and other
charges, net, Eckerd's segment operating results include non-comparable costs of
$73 million for the nine months ended October 28, 2000 for other exit related
activities. These amounts consist of $61 million of non-comparable costs related
to inventory liquidation losses and shrinkage and $12 million of non-comparable
costs for incremental store operating costs incurred during the closing process.
<PAGE>
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Other workforce reductions - During the first quarter of 2000, the Company
--------------------------
finalized a plan to eliminate approximately 430 positions company-wide and
recorded a charge of $11 million for severance and outplacement benefits. All
affected employees were notified by the end of the first quarter.
2) Restructuring Reserves
As described in Note 1, the Company has established reserves for the closing of
underperforming department stores and drugstores, related exit costs, and
workforce adjustment programs over the past few years. The majority of the
remaining reserves represent the present value of future lease obligations for
closed stores that will be paid out over time. The status of the reserves at the
end of the third quarter are shown in the table below:
<TABLE>
<CAPTION>
1999 1/st/ Qtr 3/rd/ Qtr 2000 YTD
----------------------------
Year End 2000 Cash Other Ending
($ in millions) Reserve Expense Outlays Changes Balance
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRIOR YEAR RESERVES
-------------------
Department stores and catalog
-----------------------------
Future lease obligations $ 8 $ -- $ (2) $ (1) $ 5
Eckerd drugstores
-----------------
Future lease obligations 78 -- (6) (3) 69
Allowance for notes receivable 25 -- -- (25) --
CURRENT YEAR RESERVES
---------------------
Department stores and catalog
-----------------------------
Future lease obligations -- 45 (5) (1) 39
Severance and outplacement -- 10 (7) (2) 1
Eckerd drugstores
-----------------
Future lease obligations -- 90 (14) (3) 73
Severance and outplacement -- 4 (3) (1) --
Other exit costs -- 16 (6) (5) 5
Workforce Reduction Program
---------------------------
Severance and outplacement -- 11 (11) -- --
------ ------- ----- ------ --------
Total $ 111 $ 176 $ (54) $ (41) $ 192
------- ------- ----- ------ --------
</TABLE>
Department stores and catalog - During the first nine months of fiscal 2000, the
-----------------------------
Company closed 41 of the underperforming stores identified for closing.
Approximately 1,875 store employees had been terminated as a result of the store
closings as of October 28, 2000. The remaining stores are scheduled to close by
the end of fiscal 2000. Through the end of the third quarter, the reserve for
future department store lease obligations had been reduced by $6 million as a
result of cash payments ($5 million) and reserve adjustments ($1 million), and
the reserve for severance and outplacement benefits had been reduced by
$9 million for actual benefits paid ($7 million) and reserve adjustments
($2 million).
<PAGE>
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Eckerd drugstores - During the first nine months of fiscal 2000, Eckerd had
-----------------
closed 274 of the underperforming drugstores identified for closing. As of
October 28, 2000, approximately 600 employees had been terminated as a result of
the store closings. The remaining stores are scheduled to close by the end of
the first quarter of fiscal 2001.
Through the end of the third quarter, drugstore reserves had been reduced by $29
million as a result of cash payments for lease obligations ($20 million),
severance and outplacement benefits ($3 million), and other incremental exit
costs ($6 million). Reserves have also been reduced by an additional $12 million
($6 million for lease obligations, $1 million for severance and outplacement,
and $5 million for other exit costs) as a result of the assessment of actual
versus expected experience and the elimination of 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 third quarter, the Company
--------------------------
had terminated approximately 300 employees and paid $11 million in severance and
outplacement benefits.
3) Earnings Per Share
The Company had 679 and 762 thousand shares of preferred stock, which were
convertible into 13.6 and 15.2 million common shares, that were issued and
outstanding at October 28, 2000 and October 30, 1999, respectively. These
potential common shares, and the related dividend, were excluded from the
calculation of diluted earnings per share for the 13 and 39 weeks ended October
28, 2000 and the 39 weeks ended October 30, 1999 because their inclusion would
have had an anti-dilutive effect on the calculation.
In addition, 11 million and 5 million option shares were excluded from the
computation of diluted earnings per share for the 13 and 39 weeks ended October
28, 2000 and October 30, 1999, respectively, because the exercise price was
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 related to changes made to the Company's
accounting policies, and the related financial statement effects, in
consideration of guidance provided by SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements".
<PAGE>
-8-
5) Segment Reporting
The Company operates in three business segments: department stores and catalog,
Eckerd drugstores, and Direct Marketing. The results of department stores and
catalog are combined because they generally serve the same customer, have
virtually the same mix of merchandise, and the majority of catalog sales are
completed in department stores. Other items are shown in the table below for
purposes of reconciling to total Company amounts.
3rd Quarter 3rd Quarter YTD
--------------- -------------------
Operating Operating
$ in millions Year Revenue Profit Revenue Profit
------------------------------------------------------------------------------
Department Stores
and Catalog 2000 $ 4,319 $ 81 $ 12,425 $ 322
1999 4,541 226 12,810 489
Eckerd Drugstores 2000 3,136 (63) 9,602 (86)
1999 3,011 23 9,034 109
Direct Marketing 2000 288 65 869 191
1999 282 64 832 181
Total segments 2000 7,743 83 22,896 427
1999 7,834 313 22,676 779
Net interest and
credit operations 2000 -- (112) -- (329)
1999 -- (83) -- (180)
Corporate and other
unallocated, and
acquisition
amortization 2000 -- (22) -- (98)
1999 -- (11) -- (53)
Restructuring and
other charges, net 2000 -- 3 -- (204)
1999 -- -- -- --
Total Company 2000 7,743 (48) 22,896 (204)
1999 7,834 219 22,676 546
<PAGE>
-9-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Financial Condition
-------------------
Merchandise inventories on a FIFO basis totaled $7,150 million at the end of the
third quarter compared with $7,262 million last year. Inventories for department
stores and catalog totaled $4,667 million at October 28, 2000 as compared with
$4,899 million at the end of last year's third quarter. On a comparable store
basis, inventories declined by approximately 7% 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 coupled with store closings. Eckerd drugstore
inventories totaled $2,483 million compared with $2,363 million last year. The
current cost of inventories exceeded the LIFO basis amount carried on the
balance sheet by approximately $308 million at October 28, 2000, $270 million at
January 29, 2000, and $263 million at October 30, 1999.
Properties, net of accumulated depreciation, totaled $5,153 million at October
28, 2000 compared with $5,434 million at the end of last year's third quarter.
Balances reflect $60 million in asset impairment charges related to the closing
of underperforming JCPenney stores, and $110 million to the closing of
underperforming Eckerd drugstores, recorded in the first quarter of 2000 and the
fourth quarter of 1999, respectively.
Goodwill and other intangible assets, net, totaled $2,967 million this year
compared with $3,181 million at the end of 1999's third quarter.
At October 28, 2000 the consolidated balance sheet included reserves related to
restructuring activities totaling $192 million, including $118 million related
to current year activities. 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 $95 million
through the third quarter of 2000 as a result of lease and other payments ($54
million) and reserve adjustments ($41 million). See the discussion under the
caption Restructuring and Other Charges, net, in Results of Operations and Note
1 to the interim financial statements for additional discussion about the
charges recorded in 2000.
As previously announced, the Company has initiated an evaluation of all areas of
its operations and currently expects to record charges in the fourth quarter of
2000 related to items such as, but not limited to, the closing of
underperforming JCPenney stores, asset impairments, and higher levels of
markdowns resulting from the migration to a centralized environment associated
with its merchandising process redesign.
During the third quarter, the Company redeemed $300 million principal amount of
6.375 percent notes, due September 2000, at par. Through the end of the third
quarter of 2000, the Company had retired $805 million of long-term debt.
<PAGE>
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Long-term debt is currently rated Baa3 by Moody's Investors Service and BBB- by
Standard and Poor's Corporation as of the end of the third quarter, and the
Company's commercial paper was rated P3 and A3 by the respective rating
agencies.
In the third quarter the Company reduced its quarterly dividend on common stock
from 28.75 cents to 12.5 cents per share, and paid such quarterly dividend on
November 1, 2000, to stockholders of record on October 10, 2000.
Results of Operations
---------------------
Consolidated operating results
($ in millions)
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
-------------------- -----------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Operating profit/(loss) by segment
Department stores and catalog $ 81 $ 226 $ 322 $ 489
Eckerd drugstores (63) 23 (86) 109
Direct Marketing 65 64 191 181
-------- -------- --------- ---------
Total segments 83 313 427 779
Corporate and other unallocated (3) 7 (19) 27
Net interest and credit operations (112) (83) (329) (180)
Acquisition amortization (19) (18) (79) (80)
Restructuring and other charges, net 3 -- (204) --
-------- -------- --------- ---------
Income/(loss) before income taxes (48) 219 (204) 546
Income taxes 18 (77) 79 (198)
-------- -------- --------- ---------
Net income/(loss) $ (30) $ 142 $ (125) $ 348
======== ======== ========= =========
</TABLE>
Segment profit totaled $83 million in the third quarter compared with $313
million in last year's period. Current period results were principally impacted
by the softness in department store and catalog sales, leading to a more
promotional environment, and sales declines for drugstore general merchandise
categories 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 process and
organizational changes under the 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
process and organizational restructuring throughout the Company's corporate
structure. 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 $55 million from last year; however,
proprietary credit generated $84 million of income in last year's third quarter.
The Company had a net loss for the quarter of $30 million, or $0.15 per share,
in this year's third quarter compared with income of $142 million, or $0.51 per
share, in last year's period. Before the effects of non-comparable ACT-related
items, the Company had a loss per share of $0.12 for the third quarter. On a
year to date basis, the Company had a net loss of $125 million, or $0.57 per
share, compared with net income of $348 million, or $1.24 per share, last year.
While it is too early to accurately predict results for the balance of the
fiscal year, management believes that fourth quarter earnings per share may be
adversely affected if the current slowdown in the department store sector
continues and it leads to a more promotional holiday season.
<PAGE>
-11-
Segment Operating Results
Department Stores and Catalog
-----------------------------
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
-------------------- ---------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
($ in millions)
Retail sales, net $ 4,319 $ 4,541 $ 12,425 $ 12,810
Cost of goods sold (3,042) (3,065) (8,643) (8,783)
SG&A expenses (1,196) (1,250) (3,460) (3,538)
-------- -------- --------- ---------
Operating profit /(1)/ $ 81 $ 226 $ 322 $ 489
Sales percent increase/(decrease):
Total department stores (4.5) (2.7) (3.3) (1.3)
Comparable stores (3.7) (3.0) (2.9) (0.9)
Catalog (6.1) 0.1 (2.0) 3.1
Ratios as a percent of sales:
Gross margin 29.6 32.5 30.4 31.4
SG&A expenses 27.7 27.5 27.8 27.6
Operating profit 1.9 5.0 2.6 3.8
EBITDA /(2)/ 3.8 8.9 4.8 8.4
</TABLE>
(1) Operating profit represents pre-tax income before net interest expense,
corporate and other unallocated, acquisition amortization, and restructuring and
other charges, 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 $81 million in the third
quarter compared with $226 million last year. Sales in department stores
declined by 3.7% 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 7% on a comparable store basis from last
year. Catalog sales decreased by 6.1% in this year's third quarter. E-commerce
sales, which are included as a component of catalog sales, grew substantially
from last year's levels, totaling $73 million this year compared with $20
million last year.
Gross margin for the segment totaled $1,277 million in the third quarter
compared with $1,476 million last year. Margin in this year's quarter was
negatively impacted by sales declines coupled with higher levels of clearance
and promotional markdowns. As a percent of sales, margins declined by 290 basis
points. SG&A expenses declined on a dollar basis for the quarter despite higher
levels of spending on the expansion of the Company's e-commerce business. SG&A
expenses were not leveraged as a percent of sales.
Operating profit for the nine months ended October 28, 2000 was $322 million
versus $489 million in last year's comparable period. Sales for comparable
department stores declined by 2.9 percent and catalog sales declined by 2.0
percent compared with last year's levels. Gross margin for the nine months
declined by 100 basis points as a percent of sales, primarily as a result of
<PAGE>
-12-
higher levels of markdowns. SG&A expenses decreased from last year but were not
leveraged as a percent of sales.
Eckerd Drugstores
-----------------
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
-------------------- ---------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
($ in millions)
Retail sales, net $ 3,136 $ 3,011 $ 9,602 $ 9,034
Cost of goods sold (2,591) (2,430) (7,920) (7,282)
SG&A expenses (608) (558) (1,768) (1,643)
-------- -------- --------- --------
Operating profit/(loss) /(1)/ $ (63) $ 23 $ (86) $ 109
Sales percent increase:
Total 4.2 20.9 6.3 20.4
Comparable stores 9.1 9.6 8.6 10.8
Ratios as a percent of sales:
FIFO gross margin 17.8 19.7 17.9 19.8
LIFO gross margin 17.4 19.3 17.5 19.4
SG&A expenses 19.4 18.5 18.4 18.2
Operating profit/(loss) (2.0) 0.8 (0.9) 1.2
EBITDA /(2)/ (0.4) 2.4 0.7 2.7
Ratios as a percent of sales, before
the effects of non-comparable items: /(3)/
FIFO gross margin 17.8 19.7 18.5 20.6
LIFO gross margin 17.4 19.3 18.2 20.2
SG&A expenses 19.4 18.5 18.3 17.7
Operating profit/(loss) (2.0) 0.8 (0.1) 2.5
EBITDA /(2)/ (0.4) 2.4 1.5 4.1
</TABLE>
(1) Operating profit/(loss) represents pre-tax income/(loss) before net interest
expense, corporate and other unallocated, acquisition amortization, and
restructuring and other charges, 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.
(3) Non-comparable items consist pricipally of 2000 store closing activities and
1999 inventory adjustments.
Eckerd had an operating loss of $63 million in the third quarter compared with
operating profit of $23 million in last year's period. Sales for the quarter
increased by 9.1 percent for comparable stores. The increase was comprised of a
14.8 percent increase in pharmacy sales and a 1.0 percent decline in general
merchandise sales.
Gross margin declined by 190 basis points as a percent of sales. The decline was
principally related to a reduced level of higher-margin general merchandise
sales, coupled with a higher proportion of lower-margin managed care pharmacy
sales. Managed care pharmacy sales now account for approximately 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 third quarter of 2000 and 1999, respectively. SG&A expenses increased by
90 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.
<PAGE>
-13-
Eckerd had an operating loss of $86 million for the nine months ended October
28, 2000 versus an operating profit of $109 million in last year's comparable
period. Sales increased by 8.6 percent on a comparable store basis, led by a
13.8 percent increase in comparable store pharmacy sales. 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 primarily related to a higher proportion of managed care pharmacy
sales and higher shrinkage run rates in this year's period. SG&A expenses
increased by 60 basis points as a percent of sales. Eckerd recorded LIFO charges
of $38 million this year compared with $36 million last year.
Direct Marketing
----------------
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
-------------------- --------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
($ in millions)
Revenue $ 288 $ 282 $ 869 $ 832
Costs and expenses /(1)/ (223) (218) (678) (651)
-------- -------- -------- --------
Operating profit /(2)/ $ 65 $ 64 $ 191 $ 181
Revenue, percent increase 2.1 11.9 4.4 11.1
Operating profit as a percent
of revenue 22.6 22.7 22.0 21.8
</TABLE>
(1) Includes amortization of deferred acquisition costs of $68 million and $58
million for the third quarter and $189 million and $165 million for the first
nine months of 2000 and 1999, respectively.
(2) Operating profit represents pre-tax income before net interest expense,
corporate and other unallocated, acquisition amortization, and restructuring and
other charges, net.
Operating profit totaled $65 million for the quarter and $191 million year to
date, increases of 1.6 percent and 5.5 percent from last year's comparable
periods. Revenue totaled $288 million in the third quarter, an increase of 2.1
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 nine months,
revenue totaled $869 million, an increase of 4.4 percent versus last year.
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. Third quarter 2000
results include $15 million in pre-tax incremental expenses related to the
Company's ACT initiative.
<PAGE>
-14-
Net Interest Expense and Credit Operations
------------------------------------------
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
-------------------- ---------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
($ in millions)
Credit revenue, net of
operating expenses $ -- $ 84 $ -- $ 294
Interest expense, net (112) (167) (329) (474)
-------- -------- -------- ---------
Total $ (112) $ (83) $ (329) $ (180)
</TABLE>
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
revenues and expenses for its proprietary credit operation. Accordingly, this
category represents interest expense in the current and all future periods.
Interest charges for the third quarter and for the year have decreased
substantially, declining by $55 million for the quarter and $145 million for the
year, as a result of the decline in outstanding debt balances. The proceeds from
the sale of credit card receivables were used to repay short- and long-term
debt.
Restructuring and Other Charges, net
------------------------------------
During the third quarter of 2000, the Company recorded a pre-tax net credit of
$3 million related to restructuring charges and previously established
restructuring reserves.
Income Taxes
------------
The Company's effective income tax rate, excluding the effects of non-comparable
items, was 32.7 percent through the third quarter compared with 36.8 percent
last year.
New Accounting Rules
--------------------
The Financial Accounting Standards Board (FASB) 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 reviewed areas impacted by these rules,
principally long-term debt, purchase commitments, and real estate leases, and
has determined that current instruments do not contain terms or conditions that
would be of a derivative nature. Accordingly, the Company does not expect the
adoption of these new rules to have a material impact on results of operations
or financial condition.
The FASB also issued FAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", which is effective for
years beginning after December 15, 2000. The Company has not completed its
review of these new rules but does not believe that it is a party to any
<PAGE>
-15-
transactions that would be impacted by these rules. The Company does, however,
evaluate various financing alternatives and may be impacted in the future.
In addition, the Emerging Issues Task Force has reached a consensus on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs", which is effective
for the Company's fourth quarter of 2000. The Company has not completed
assessing the impact of these new rules, which relate primarily to its Catalog
operations. These new rules will not change net income, but will impact
classification of revenues and expenses associated with shipping and handling
activities. Prior period amounts will be reclassified to conform with the
presentation adopted in the fourth quarter.
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 and 39 weeks
ended October 28, 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 release 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 2 - Changes in Securities and Use of Proceeds.
(c) On September 13, 2000 the Company sold 39,618 shares of Common Stock,
50 cents par value, to Allen I. Questrom for an aggregate purchase
price of $589,317.75. The issuance of such shares was exempt from
registration under the Securities Act of 1933, as amended ("the
Securities Act"), pursuant to Rule 506 of Regulation D of the
Securities Act as an offering to a limited number of individuals.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
The following documents are filed as exhibits to this report:
10(a) J. C. Penney Company, Inc. 2000 New Associate Equity Plan.
10(b) Employment Agreement dated as of September 25, 2000.
10(c) Agreement dated as of September 30, 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 nine months ended October 28,
2000.
27(b) Restated Financial Data Schedule for the nine months ended
October 30, 1999.
(b) Reports on Form 8-K
-------------------
The Company filed the following report on Form 8-K during the period
covered by this report:
Current Report on Form 8-K dated July 21, 2000 (Item 5 - Other
Events).
<PAGE>
-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: December 11, 2000
