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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
_______________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________
For the 13 week period Commission file number 1-777
ended April 29, 2000
J. C. PENNEY COMPANY, INC.
___________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 13-5583779
___________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6501 Legacy Drive, Plano, Texas 75024 - 3698
___________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 431-1000
________________________
___________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
_______ _______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
261,558,513 shares of Common Stock of 50c par value, as of May 30, 2000.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
The following interim financial information is unaudited but, in the
opinion of the Company, includes all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation. Certain prior year
amounts have been reclassified to conform with the current year
presentation. The financial information should be read in conjunction with
the audited consolidated financial statements included in the Company's
Annual Report on Form 10-K for the 52 weeks ended January 29, 2000.
Statements of Income
(Amounts in millions except per share data)
13 weeks ended
_______________________
Apr. 29, May 1,
2000 1999
_________ ___________
Retail sales, net $ 7,440 $ 7,258
Direct Marketing revenue 288 274
_________ _________
Total revenue 7,728 7,532
_________ _________
Costs and expenses
Cost of goods sold, occupancy, buying,
and warehousing costs 5,549 5,292
Selling, general, and administrative
expenses 1,754 1,692
Costs and expenses of Direct Marketing 228 219
Corporate and other unallocated 6 (9)
Net interest expense and credit
operations (1) 114 34
Acquisition amortization 37 37
Other charges and credits, net 232 --
_________ _________
Total costs and expenses 7,920 7,265
_________ _________
Income/(loss) before income taxes (192) 267
Income taxes (74) 100
_________ _________
Net income/(loss) $ (118) $ 167
========= =========
Earnings/(loss) per common share:
Net income/(loss) $ (118) $ 167
Less: preferred stock dividends (8) (9)
_________ ________
Earnings/(loss) for Basic EPS (126) 158
Stock options and convertible
preferred stock 8 9
__________ ________
Earnings/(loss) for Diluted EPS $ (118) $ 167
Shares
Average shares outstanding
(used for Basic EPS) 261 256
Common stock equivalents 15 16
_________ ________
Average Diluted shares outstanding 276 272
Earnings/(loss) per share:
Basic $ (0.48) $ 0.62
Diluted (0.48)(2) 0.61
(1) 1999 includes a $5 million pre-tax gain, or one cent per share after
tax, on the early extinguishment of Eckerd Corporation's 9.25 percent
Notes.
(2) Calculation excludes the effects of the assumed conversion of
outstanding preferred shares, and related dividends, because their
inclusion would have an anti-dilutive effect on EPS.
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Balance Sheets
(Amounts in millions)
Apr. 29, May 1, Jan. 29,
2000 1999 2000
________ __________ ________
ASSETS
Current assets
Cash and short-term investments
of $588, $168, and $1,233 $ 628 $ 168 $ 1,233
Retained interest in JCP Master
Credit Card Trust -- 250 --
Receivables, net 1,072 4,165 1,138
Merchandise inventories 5,896 6,078 5,947
Prepaid expenses and other 415 180 154
________ ________ _________
Total current assets 8,011 10,841 8,472
Properties, net of accumulated
depreciation of $3,012, $2,889,
and $2,883 5,155 5,462 5,312
Investments, principally held by
Direct Marketing 1,599 2,010 1,827
Deferred policy acquisition costs 950 871 929
Goodwill and other intangible assets
net of accumulated amortization
of $374, $258, and $340 3,012 3,237 3,056
Other assets 1,272 1,237 1,292
________ ________ ________
$ 19,999 $ 23,658 $ 20,888
======== ========= =========
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Balance Sheets
(Amounts in millions)
Apr. 29, May 1, Jan. 29,
2000 1999 2000
________ __________ ________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,235 $ 3,259 $ 3,351
Short-term debt 18 1,995 330
Current maturities of long-term debt 550 550 625
Deferred taxes 167 120 159
________ ________ ________
Total current liabilities 3,970 5,924 4,465
Long-term debt 5,593 6,821 5,844
Deferred taxes 1,378 1,552 1,461
Insurance policy and claims reserves 1,036 967 1,017
Other liabilities 988 912 873
________ ________ ________
Total liabilities 12,965 16,176 13,660
Stockholders' equity
Capital stock
Preferred stock, without par value:
Authorized, 25 million shares -
issued and outstanding, 0.7, 0.8,
0.7 million shares of Series B
ESOP convertible preferred 430 464 446
Common stock, par value 50c:
Authorized, 1,250 million shares -
issued, 261, 260, and 261 million
shares 3,275 3,219 3,266
________ ________ ________
Total capital stock 3,705 3,683 3,712
________ ________ ________
Reinvested earnings
At beginning of year 3,590 3,791 3,791
Net income (118) 167 336
Common stock dividends declared (75) (143) (500)
Preferred stock dividends
declared, net of tax -- -- (37)
________ _______ ________
Reinvested earnings at end of
period 3,397 3,815 3,590
Accumulated other comprehensive loss (68) (16) (74)
________ ________ ________
Total stockholders' equity 7,034 7,482 7,228
________ ________ ________
$ 19,999 $ 23,658 $ 20,888
======== ========= =========
The accumulated balances for net unrealized changes in debt and equity
securities were ($10), $51, and ($11), and for currency translation
adjustments were ($58), ($67), and ($63) as of the respective dates shown.
Net unrealized changes in investment securities are shown net of deferred
taxes of ($4), $29, and ($5), respectively. A deferred tax asset has not
been established for currency translation adjustments.
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Statements of Cash Flows
(Amounts in millions)
13 weeks ended
_______________________
Apr. 29, May 1,
2000 1999
_________ ___________
Operating activities
Net income/(loss) $ (118) $ 167
Other charges and credits, net 232 --
Depreciation and amortization, including
intangible assets 185 177
Deferred taxes (76) 49
Change in cash from:
Customer receivables -- 413
Other receivables 66 (123)
Inventories, net of trade payables 179 1
Current taxes payable (5) 38
Other assets and liabilities, net (199) (120)
_________ _________
264 602
_________ _________
Investing activities
Capital expenditures (131) (146)
Purchases of investment securities (161) (307)
Proceeds from sales of investment securities 143 229
Proceeds from the sale of bank receivables -- 22
_________ _________
(149) (202)
_________ _________
Financing activities
Change in short-term debt (312) 15
Payments of long-term debt (327) (210)
Common stock issued, net (7) 3
Dividends paid, preferred and common (74) (136)
_________ _________
(720) (328)
_________ _________
Net increase/(decrease) in cash and short-term
investments (605) 72
Cash and short-term investments at beginning
of year 1,233 96
_________ _________
Cash and short-term investments at end of
first quarter $ 628 $ 168
========= =========
Non-cash transactions: On March 1, 1999, the Company issued 9.6 million
shares of common stock to complete the acquisition of Genovese Drug Stores,
Inc. The total value of the transaction, including debt assumed and
conversion of options for Genovese common stock to options for JCPenney
common stock, was $414 million.
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Notes to Interim Financial Information
1) Other Charges and Credits, net
During the first quarter of 2000, the Company recorded a pre-tax charge of
$232 million related to restructuring programs, principally the closing of
underperforming JCPenney and Eckerd stores. The charge consisted of $115
million related to the closing of approximately 45 JCPenney stores, $106
million related to the closing of 289 Eckerd drugstores, and $11 million
related to workforce reductions.
JCPenney Store Closings - The Company reviewed its portfolio of department
_______________________
stores and support facilities and, in the first quarter, finalized a plan
to close approximately 45 underperforming stores. These stores generated
sales of approximately $450 million and incurred operating losses of
approximately $20 million in fiscal 1999. The charge was comprised of asset
write-downs ($60 million) and an accrual for the present value of future
lease obligations ($45 million), and severance and outplacement ($10
million). Reserves for future lease obligations are calculated net of
assumed sublease income. Three of the targeted stores were closed and sold
in transactions that were completed by the end of the first quarter. An
asset impairment charge of $33 million was recorded for the three sold
locations in the fourth quarter of 1999 in accordance with the provisions
of FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
__________________________________________________________
Long-Lived Assets to be Disposed Of. The sales generated cash proceeds of
___________________________________
$36 million, which approximated the Company's carrying value of the fixed
assets at the sales date. The majority of the remaining stores are
scheduled to close by the end of June, and all stores are scheduled to
close in fiscal 2000. Store closing plans anticipated that approximately
1,800 store employees would be impacted by the store closings. During the
quarter, 144 store employees were terminated, resulting in payments of $0.2
million for severance and outplacement benefits.
Eckerd Drugstore Closings - In the first quarter, the Company finalized a
_________________________
plan to close 289 underperforming drugstores. These stores, which lacked
strategic fit within the drugstore segment, were generally smaller, low-
volume stores that were former independent stores or parts of chains
acquired over the last several years. These stores generated sales and
operating losses of approximately $650 million and $30 million,
respectively, in fiscal 1999. The first quarter charge of $106 million
consisted of an accrual for the present value of future lease obligations
($90 million), severance and outplacement ($4 million), and other exit
costs ($16 million), offset by a $4 million net gain on the disposal of
fixed/intangible assets. An asset impairment charge of $110 million was
recorded for these locations in the fourth quarter of 1999 in accordance
with FAS No. 121. As of the end of the first quarter, 257 of the stores had
been closed, with the majority of the remaining stores scheduled for
closing in the second quarter. All stores are scheduled to close by the end
of the first quarter of fiscal 2001. During the first quarter, 475 store
employees were terminated and paid $1.1 million in severance and
outplacement benefits as a result of the store closings. Store closing
plans anticipated that approximately 1,200 store employees would be
impacted by the store closings.
In addition to the store closing costs recorded in other charges and
credits, net, Eckerd segment operating results include $78 million in other
exit related activities. This amount consists of $66 million related to
inventory liquidation losses and shrinkage and $12 million for incremental
store operating costs incurred during the closing process.
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Other Workforce Reductions - During the first quarter, the Company
__________________________
finalized a plan to eliminate approximately 430 positions company-wide and
recorded a charge of $11 million for severance and outplacement benefits.
All affected employees were notified by the end of the first quarter.
Approximately $2 million in benefits were paid in the first quarter. The
majority of the terminations will occur in the second quarter.
2) Restructuring Reserves
Year 2000 Charges:
__________________
As described in Note 1, the Company established reserves in the first
quarter of 2000 related to the present value of future lease obligations,
severance and outplacement benefits, and other exit costs related to the
closing of JCPenney stores and Eckerd drugstores. The status of the
reserves at the end of the first quarter are shown in the table below:
1st Qtr 2000
Cash Other Reserve
($ in millions) Expense Outlays Changes Balance
_________________________________________
Department stores and catalog
_____________________________
FAS 121 asset impairments $ 60 $ -- $ (60) $ --
Future lease obligations 45 -- -- 45
Severance and outplacement 10 -- -- 10
Eckerd drugstores
_________________
Future lease obligations 90 -- -- 90
Severance and outplacement 4 (1) -- 3
Other exit costs 16 (1) -- 15
Net gain on the disposal of assets (4) -- 4 --
Workforce Reduction Program
___________________________
Severance and outplacement 11 (2) -- 9
_______ ______ _______ ______
Total $ 232 $ (4) $ (56) $ 172
_______ ______ _______ _____
Prior Year Charges:
___________________
During 1996 and 1997, the Company recorded charges principally related to
drugstore integration activities, department store closings and FAS 121
impairments, and early retirement and reduction in force programs. The
following table provides a roll forward of reserves that were established
for certain of these charges. The schedules, and the accompanying
discussion, provide the status of the reserves as of April 29, 2000.
1999 1st Qtr 2000
Year End Cash Ending
($ in millions) Reserve Outlays Balance
______________________________________
Department stores and catalog
_____________________________
Future lease obligations $ 8 $ (1) $ 7
Eckerd drugstores
_________________
Future obligations, primarily leases 78 (2) 76
Allowance for notes receivable 25 -- 25
________ _______ ______
Total $ 111 $ (3) $ 108
======== ======= ======
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Reserve balances are reflected on the consolidated balance sheets as a
component of accounts payable and accrued expenses except for the allowance
for notes receivable, which is included as a reduction of other assets.
Department stores and catalog - In 1997 the Company identified a number of
_____________________________
department stores that did not meet profit objectives, as well as certain
support facilities that were no longer needed. All such locations were
closed by the end of fiscal 1998. The closing plan anticipated that the
Company would remain liable for future lease obligations, and accordingly a
reserve was established for the present value of those obligations. During
the first quarter of 2000, this reserve was reduced by $0.6 million as a
result of lease payments.
Eckerd drugstores - In 1996 and 1997, the Company identified a number of
_________________
drugstore locations that would be closed or divested as a result of
acquisition activities. These stores generally represented overlapping and
underperforming locations. Accordingly, reserves were established for the
present value of future lease obligations, as well as pending litigation
and other miscellaneous charges, each individually insignificant. During
the first quarter of 2000, these reserves were reduced by $2 million as a
result of lease payments.
In addition, Eckerd financed a portion of the sale of certain divested
drugstore locations through a note receivable for $33 million. A reserve
for 75 percent of the note was established due to significant constraints
on the Company's ability to collect on the note. No adjustments have been
made to the allowance since it was established.
3) Earnings Per Share
At April 29, 2000, 716 thousand shares of preferred stock, which are
convertible into 14.3 million common shares, were issued and outstanding.
These potential common shares, and the related dividend, were excluded from
the calculation of diluted earnings per share for the 13 weeks ended April
29, 2000 because their inclusion would have had an anti-dilutive effect on
the calculation.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Financial Condition
___________________
Merchandise inventories on a FIFO basis totaled $6,178 million at the end
of the first quarter compared with $6,318 million at the end of last year's
first quarter. Inventories for department stores and catalog were down
approximately six percent for comparable stores from the prior year and
totaled $3,896 million at April 29, 2000 as compared with $4,016 million at
the end of last year's first quarter. The decline in stores and catalog
inventory levels is the result of continued emphasis on reducing the number
of weeks of inventory on hand, thus improving inventory productivity.
Eckerd drugstore inventories totaled $2,282 million compared with $2,302
million last year. The decrease in drugstore inventory levels is
principally related to the closing of 257 underperforming drugstores. The
current cost of inventories exceeded the LIFO basis amount carried on the
balance sheet by approximately $282 million at April 29, 2000, $270 million
at January 29, 2000, and $239 million at May 1, 1999.
Properties, net of accumulated depreciation, totaled $5,155 million at
April 29, 2000 compared with $5,462 million at the end of last year's first
quarter. First quarter 2000 balances reflect an asset impairment charge of
$60 million related to the closing of underperforming JCPenney stores and
Eckerd drugstores.
Goodwill and other intangible assets, net, totaled $3,012 million compared
with $3,237 million as of May 1, 1999. Approximately $303 million in
intangible assets and goodwill associated with the Genovese acquisition was
recorded in the first quarter of 1999.
At April 29, 2000 the consolidated balance sheet included reserves related
to restructuring activities totaling $280 million, including $172 million
related to current year activities. Of this amount, $255 million is
included as a component of accounts payable and accrued expenses and $25
million is reflected as a reduction to other assets. These reserves were
established in connection with store closing programs and other
restructuring activities recorded in the first quarter of 2000 as well as
in 1997 and 1996. The reserves are related primarily to future lease
obligations, severance and outplacement benefits, and other exit costs
associated with store closings, and to a note receivable entered into in
connection with the divestiture of certain drugstores, respectively. Prior
year reserves were reduced by $3 million in the first quarter of 2000 as a
result of lease payments. See the discussion under the caption other
charges and credits, net, and Note 1 to the interim financial statements
for additional discussion about the charges recorded in the first quarter
of 2000.
During the first quarter of 2000, the Company redeemed approximately $325
million principal amount of 6.95 percent notes at the normal maturity date
and reduced its outstanding commercial paper balances by an additional $300
million. Funding for these redemptions was provided by the proceeds from
the sale of the Company's proprietary credit card portfolio to General
Electric Capital Corporation (GE Capital) in December 1999. Short-term
investments, including approximately $249 million in asset-backed
securities that will mature in June 2000, shown as a component of prepaid
assets and other, totaled $837 million at the end of the quarter and will
generally be used to pay down long-term debt as it matures. In recent
weeks, the Company's long-term debt ratings have been adjusted downward
while commercial paper ratings were
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reaffirmed. Long-term debt is rated Baa2 by Moody's Investors Service and
BBB by both Standard and Poor's Corporation and Fitch Investors Service.
The Company's commercial paper is rated P2, A2 and F2 by the three rating
agencies, respectively.
A quarterly dividend of 28 3/4 cents per share on the Company's
outstanding common stock was paid on May 1, 2000, to stockholders of record
on April 10, 2000.
Results of Operations
_____________________
Consolidated operating results
($ in millions)
13 weeks ended
___________________
Apr. 29, May 1,
2000 1999
________ _________
Operating profit/(loss) by segment
Department stores and catalog $ 167 $ 145
Eckerd drugstores (30) 129
Direct marketing 60 55
_________ ________
Total segments 197 329
Corporate and other unallocated (6) 9
Net interest and credit operations (114) (34)
Acquisition amortization (37) (37)
Other charges and credits, net (232) --
________ _________
Income/(loss) before income taxes (192) 267
Income taxes 74 (100)
________ ________
Net income/(loss) $ (118) $ 167
======== ========
The Company experienced a net loss of $118 million, or 48 cents per share,
in the first quarter compared to net income of $167 million, or 61 cents
per share in last years period. Current year results include the effect of
non-comparable items totaling $324 million, or 76 cents per share, related
to the Company's previously announced restructuring initiatives,
principally the closing of underperforming JCPenney stores and Eckerd
drugstores, as well as the restructuring of the Company's merchandising
processes and organization the Company's ACT initiative. The following
table provides a reconciliation between net income and income before the
effects of non-comparable items for this year's first quarter:
1st quarter 2000
___________________________________
($ in millions, except EPS) Pre-tax After-tax EPS
_________ ___________ _________
Net loss $ (192) $ (118) $ (0.48)
Other charges and credits, net 232 142 0.54
Closing activities in
Eckerd segment results 78 49 0.19
ACT expenses in corporate and
other unallocated 14 9 0.03
_______ ________ ________
Earnings before the effects
of non-comparable items $ 132 $ 82 $ 0.28
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Earnings before the effects of non-comparable items declined from the prior
year principally as a result of erosion in drugstore operating profits,
primarily due to declines in gross margin, and to the effects of the sale
of the Company's proprietary credit card portfolio to GE Capital in
December of 1999. The sale of the credit card portfolio had the effect of
shifting earnings from the first half of the year to the second half due
primarily to the unusually strong credit results in 1999. In addition, the
sale shifted the earnings stream on the Company's proprietary credit card
to follow sales volumes rather than account balances. The effect of the
credit sale was a reduction of approximately 13 cents per share in this
year's first quarter.
Segment Operating Results
Department Stores and Catalog
______________________________
13 weeks ended
_______________________
Apr. 29, May 1,
2000 1999
_________ ___________
($ in millions)
Retail sales, net $ 4,108 $ 4,211
Cost of goods sold (2,775) (2,886)
SG&A expenses (1,166) (1,180)
________ ________
Operating profit (1) $ 167 $ 145
Sales percent increase/(decrease)
Total department stores (3.1) (1.5)
Comparable stores (3.1) (0.5)
Catalog (0.5) 8.1
Ratios as a percent of sales:
Gross margin 32.5 31.5
SG&A expenses 28.4 28.0
Operating profit 4.1 3.5
EBITDA (2) 6.4 8.6
1) Operating profit represents pre-tax income before net interest expense,
corporate and other unallocated, acquisition amortization, and other
charges and credits, net. Operating profit in 1999 is shown before the
effects of credit revenue net of related operating costs.
2) Earnings before interest, income taxes, depreciation and amortization.
1999's EBITDA includes finance revenue, net of related operating costs.
EBITDA is provided as an alternative assessment of operating performance
and is not intended to be a substitute for GAAP measurements; calculations
may be different for other companies.
Segment profit for department stores and catalog was $167 million in this
year's first quarter compared with $145 million last year. The improvement
was principally related to better gross margins as a result of planned
reductions in clearance and promotional markdowns. Sales in department
stores declined by 3.1 percent for comparable stores (those stores open at
least 12 months) while catalog sales declined 0.5 percent from a year ago.
Internet sales, which are reported as a component of catalog sales,
performed very well, increasing to approximately $47 million in this year's
quarter compared with $6 million last year. Sales continue to be led by
private brand merchandise, in particular The Original Arizona Jean Co.
(registered trademark) which generated strong double digit sales gains in
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the quarter. Gross margin as a percent of sales improved by 100 basis
points compared with last year, primarily as a result of lower markdowns.
SG&A expenses declined in the first quarter despite additional spending in
this year's first quarter on internet infrastructure. Due to the decline in
sales volumes, however, SG&A expenses increased as a percent of sales.
Eckerd Drugstores
_________________
13 weeks ended
______________________
Apr. 29, May 1,
2000 1999
_________ __________
($ in millions)
Retail sales, net $ 3,332 $ 3,047
Cost of goods sold (2,774) (2,406)
SG&A expenses (588) (512)
________ ________
Operating profit/(loss) (1) $ (30) $ 129
Sales percent increase
Total 9.4 18.8
Comparable stores 6.9 12.3
Ratios as a percent of sales:
FIFO gross margin 17.1 21.4
LIFO gross margin 16.7 21.0
SG&A expenses 17.6 16.8
Operating profit (0.9) 4.2
EBITDA (2) 0.7 5.6
Ratios as percent of sales, excluding the
effects of store closing activities:
FIFO gross margin 19.1 21.4
LIFO gross margin 18.7 21.0
SG&A expenses 17.3 16.8
Operating profit 1.4 4.2
EBITDA (2) 3.0 5.6
1) Operating profit represents pre-tax income before net interest expense,
corporate and other unallocated, acquisition amortization, and other
charges and credits, net.
2) Earnings before interest, income taxes, depreciation and amortization.
EBITDA is provided as an alternative assessment of operating performance
and is not intended to be a substitute for GAAP measurements; calculations
may be different for other companies.
Eckerd experienced a segment loss of $30 million in the first quarter
compared with segment income of $129 million in last year's first quarter.
This year's results were negatively impacted by the effects of $78 million
in costs related to the closing of underperforming drugstores. This amount
consists of $66 million for the liquidation of merchandise, including
shrinkage, which is reported as a component of cost of goods sold, and $12
million for incremental closing costs that are reported as a component of
SG&A expenses. Sales for the quarter increased by 9.4 percent. Comparable
store sales increased 6.9 percent
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in the first quarter, with pharmacy sales increasing by 11.5 percent;
front-end sales were essentially flat. Excluding the effects of liquidation
activities, gross margin declined by 230 basis points as a percent of
sales. The decline in gross margin is related primarily to three factors:
1) an increase in the shrinkage run rate, 2), the continued shift in
pharmacy sales to managed care programs which carry lower margins and 3)
declines in both pharmacy and front-end gross margins as a result of a
milder flu and cold season that resulted in fewer purchases of over-the-
counter cold medicines and other convenience items that carry higher
margins. Managed care represents about 88 percent of pharmacy sales, up
from 86 percent in last year's first quarter. Gross margin includes a $12
million LIFO charge in both years. Excluding incremental store closing
costs, SG&A expenses increased by 50 basis points as a percent of sales.
The increase was principally related to higher expenses associated with the
opening of 42 new and relocated stores in the first quarter.
Direct Marketing
________________
13 weeks ended
______________________
Apr. 29, May 1,
2000 1999
_________ __________
($ in millions)
Insurance premiums $ 238 $ 231
Membership fees 25 21
Investment income 25 22
________ ________
Total revenue 288 274
Claims and benefits (99) (98)
Deferred acquisition costs (59) (53)
Other operating expenses (70) (68)
________ ________
Operating profit (1) $ 60 $ 55
Revenue, percent increase 5.1 11.4
Operating profit as a percent
of revenue 20.8 20.1
1) Operating profit represents pre-tax income before net interest expense,
corporate and other unallocated, acquisition amortization, and other
charges and credits, net.
Operating profit totaled $60 million for the quarter, an increase of 9.1
percent from last year. Segment profit for this year's first quarter was
positively impacted by favorable claims experience. Revenue totaled $288
million in the first quarter, an increase of 5.1 percent compared with a
year ago, with the increase principally related to health insurance
premiums, which account for approximately 73 percent of total insurance
premiums and 61 percent of total revenues. Revenue generated from
membership services increased by 22 percent compared with last year's first
quarter. These products account for nearly nine percent of total revenues.
Corporate and Other Unallocated
_______________________________
Corporate and other unallocated consists of real estate activities,
investment transactions, and other items that are related to corporate
initiatives or activities, which are not allocated to an operating segment.
First quarter 2000 results include $14 million in pre-tax incremental
expenses related to the Company's ACT initiative. ACT, which represents a
fundamental rebuilding
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of the department store and catalog merchandising process and organization,
creating a centralized buying organization, will require process and
organizational restructuring throughout the Company's corporate structure.
The ACT initiative is expected to continue over the next several years,
with approximately half of the costs incurred in fiscal 2000. Total
expenditures associated with this initiative are currently expected to be
approximately $150 million, including approximately $40 million that will
be capitalized.
Net Interest Expense and Credit Operations
__________________________________________
13 weeks ended
______________________
Apr. 29, May 1,
2000 1999
_________ __________
($ in millions)
Credit revenue net of operating expenses $ -- $ 117
Interest expense, net (114) (151)
________ ________
Total $ (114) $ (34)
As a result of the sale of its proprietary credit card portfolio to GE
Capital in December 1999, the Company no longer generates and reports
proprietary credit results. Accordingly, this category represents interest
expense in the current and all future periods.
Interest charges in this year's first quarter declined by $37 million, or
about 25 percent, from last year's period as a result of the decline in
outstanding debt balances. The majority of the proceeds from the sale of
credit card receivables were used to repay short- and long-term debt. The
balance of the proceeds have been invested in short-term securities and are
expected to be used to redeem debt as it matures and for the early
extinguishment of certain debt issues where such action is economically
advantageous to the Company.
Other Charges and Credits, net
______________________________
During the first quarter of 2000, the Company recorded a pre-tax charge of
$232 million related to restructuring programs, principally the closing of
underperforming JCPenney and Eckerd stores. The charge consisted of $115
million related to the closing of approximately 45 JCPenney stores, $106
million related to the closing of 289 Eckerd drugstores, and $11 million
related to workforce reductions.
JCPenney Store Closings The Company reviewed its portfolio of department
stores and support facilities and, in the first quarter, finalized a plan
to close approximately 45 underperforming stores. These stores generated
sales of approximately $450 million and incurred operating losses of
approximately $20 million in fiscal 1999. The charge was comprised of asset
write-downs ($60 million) and an accrual for the present value of future
lease obligations ($45 million), and severance and outplacement ($10
million). Reserves for future lease obligations are calculated net of
assumed sublease income. Three of the targeted stores were closed and sold
in transactions that were completed by the end of the first quarter. An
asset impairment charge of $33 million was recorded for the three sold
locations in the fourth quarter of 1999 in accordance with the provisions
of FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
__________________________________________________________
Long-Lived Assets to be Disposed Of. The sales generated cash proceeds of
___________________________________
$36 million, which approximated the Company's carrying value of the fixed
assets at the sales date. The majority of the
<PAGE>
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remaining stores are scheduled to close by the end of June, and all stores
are scheduled to close in fiscal 2000. Store closing plans anticipated that
approximately 1,800 store employees would be impacted by the store
closings. During the quarter, 144 store employees were terminated,
resulting in payments of $0.2 million for severance and outplacement
benefits.
Eckerd Drugstore Closings - In the first quarter, the Company finalized a
plan to close 289 underperforming drugstores. These stores, which lacked
strategic fit within the drugstore segment, were generally smaller, low-
volume stores that were former independent stores or parts of chains
acquired over the last several years. These stores generated sales and
operating losses of approximately $650 million and $30 million,
respectively, in fiscal 1999. The first quarter charge of $106 million
consisted of an accrual for the present value of future lease obligations
($90 million), severance and outplacement ($4 million), and other exit
costs ($16 million), offset by a $4 million net gain on the disposal of
fixed/intangible assets. An asset impairment charge of $110 million was
recorded for these locations in the fourth quarter of 1999 in accordance
with FAS No. 121. As of the end of the first quarter, 257 of the stores had
been closed, with the majority of the remaining stores scheduled for
closing in the second quarter. All stores are scheduled to close by the end
of the first quarter of fiscal 2001. During the first quarter, 475 store
employees were terminated and paid $1.1 million in severance and
outplacement benefits as a result of the store closings. Store closing
plans anticipated that approximately 1,200 store employees would be
impacted by the store closings.
In addition to the store closing costs recorded in other charges and
credits, net, Eckerd segment operating results include $78 million in other
exit related activities. This amount consists of $66 million related to
inventory liquidation losses and shrinkage and $12 million for incremental
store operating costs incurred during the closing process.
Other Workforce Reductions - During the first quarter, the Company
finalized a plan to eliminate approximately 430 positions company-wide and
recorded a charge of $11 million for severance and outplacement benefits.
All affected employees were notified by the end of the first quarter.
Approximately $2 million in benefits were paid in the first quarter. The
majority of the terminations will occur in the second quarter.
Income Taxes
____________
The Company's effective income tax rate was 38.5 percent in the first
quarter compared with 37.5 percent last year. Excluding the effects of non-
comparable items in this year's first quarter, the rate was 37.4 percent.
New Accounting Rules
____________________
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
_________________________________________
Hedging Activities, which is effective for all fiscal quarters for fiscal
__________________
years beginning after June 15, 2000. The Company has a limited exposure to
derivative products and does not expect these new rules to have a material
impact on results of operations or financial condition.
<PAGE>
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Subsequent Event
________________
On May 2, 2000, the Company announced that it was exploring strategic
alternatives related to its J. C. Penney Direct Marketing Services, Inc.
(DMS) subsidiary, including, but not limited to, a sale or joint venture of
the business. It is currently expected that the DMS transaction will be
completed by the end of fiscal 2000, and that proceeds will be used to pay
down debt and repurchase common stock.
Seasonality
___________
The Company's business depends to a great extent on the last quarter of the
year. Historically, sales for that period have averaged approximately one
third of annual sales. Accordingly, the results of operations for the 13
weeks ended April 29, 2000 are not necessarily indicative of the results
for the entire year.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company holds an interest rate swap with a notional principal amount of
$375 million entered into in connection with the issuance of asset-backed
certificates in 1990. This swap, which matures June 15, 2000, presents no
material risk to the Company's results of operations.
This report may contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which reflect the Company's current views of future events and
financial performance, involve known and unknown risks and uncertainties
that may cause the Company's actual results to be materially different from
planned or expected results. Those risks and uncertainties include but are
not limited to competition, consumer demand, seasonality, economic
conditions, and government activity. Investors should take such risks and
uncertainties into account when making investment decisions.
<PAGE>
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
The Company has no material legal proceedings pending against it.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
________
The following documents are filed as exhibits to this report:
10(a) March 7, 2000 Amendment to Supplemental Retirement Program
for Management Profit-Sharing Associates of J. C. Penney
Company, Inc.
12(a) Computation of ratios of available income to combined
fixed charges and preferred stock dividend requirement.
12(b) Computation of ratios of available income to fixed
charges.
27(a) Financial Data Schedule for the three months ended
April 29, 2000.
27(b) Restated Financial Data Schedule for the three months
ended May 1, 1999.
(b) Reports on Form 8-K
___________________
None.
<PAGE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J. C. PENNEY COMPANY, INC.
By /S/W. J. Alcorn
_______________________________
W. J. Alcorn
Vice President and Controller
(Principal Accounting Officer)
Date: June 12, 2000
