Edgar Filing: J C PENNEY CO INC

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 1, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-15274

J. C. PENNEY COMPANY, INC.

(Exact name of registrant as specified in its charter)



Delaware		26-0037077
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6501 Legacy Drive, Plano, Texas		75024 - 3698
(Address of principal executive offices)		(Zip Code)

(972) 431-1000

(Registrant’s telephone number, including area code)

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 305,491,291 shares of Common Stock of 50 cents par value, as of September 4, 2015.

J. C. PENNEY COMPANY, INC.

FORM 10-Q

For the Quarterly Period Ended August 1, 2015

INDEX




	Page
Part I. Financial Information
Item 1. Unaudited Interim Consolidated Financial Statements
Consolidated Statements of Operations	2
Consolidated Statements of Comprehensive Income/(Loss)	3
Consolidated Balance Sheets	4
Consolidated Statements of Cash Flows	5
Notes to Unaudited Interim Consolidated Financial Statements
1. Basis of Presentation and Consolidation	6
2. Effect of New Accounting Standards	7
3. Earnings/(Loss) per Share	7
4. Credit Facility	7
5. Long-term Debt	8
6. Derivative Financial Instruments	8
7. Fair Value Disclosures	9
8. Stockholders’ Equity	10
9. Stock-based Compensation	12
10. Retirement Benefit Plans	13
11. Restructuring and Management Transition	14
12. Real Estate and Other, Net	15
13. Income Taxes	16
14. Litigation, Other Contingencies and Guarantees	16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	33
Part II. Other Information
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 6. Exhibits	44
SIGNATURES	45

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Part I. Financial Information

Item 1. Unaudited Interim Consolidated Financial Statements

J. C. PENNEY COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended						Six Months Ended
(In millions, except per share data)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Total net sales	$	2,875		$	2,799		$	5,732		$	5,600
Cost of goods sold	1,810			1,791			3,626			3,666
Gross margin	1,065			1,008			2,106			1,934
Operating expenses/(income):
Selling, general and administrative (SG&A)	901			964			1,866			1,973
Pension	13			2			23			3
Depreciation and amortization	153			160			307			318
Real estate and other, net	19			(53		)	(16		)	(70		)
Restructuring and management transition	17			5			39			27
Total operating expenses	1,103			1,078			2,219			2,251
Operating income/(loss)	(38		)	(70		)	(113		)	(317		)
Net interest expense	103			106			201			203
Income/(loss) before income taxes	(141		)	(176		)	(314		)	(520		)
Income tax expense/(benefit)	(3		)	(4		)	(9		)	4
Net income/(loss)	$	(138	)	$	(172	)	$	(305	)	$	(524	)
Earnings/(loss) per share:
Basic	$	(0.45	)	$	(0.56	)	$	(1.00	)	$	(1.72	)
Diluted	$	(0.45	)	$	(0.56	)	$	(1.00	)	$	(1.72	)
Weighted average shares – basic	305.9			305.2			305.7			305.1
Weighted average shares – diluted	305.9			305.2			305.7			305.1

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

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J. C. PENNEY COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Unaudited)



	Three Months Ended						Six Months Ended
($ in millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Net income/(loss)	$	(138	)	$	(172	)	$	(305	)	$	(524	)
Other comprehensive income/(loss), net of tax:
Retirement benefit plans
Reclassification for amortization of net actuarial (gain)/loss	18			9			35			20
Reclassification for amortization of prior service (credit)/cost	—			1			—			—
Cash flow hedges
Net gain/(loss) on interest rate swaps	(6		)	—			(6		)	—
Total other comprehensive income/(loss), net of tax	12			10			29			20
Total comprehensive income/(loss), net of tax	$	(126	)	$	(162	)	$	(276	)	$	(504	)

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

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J. C. PENNEY COMPANY, INC.

CONSOLIDATED BALANCE SHEETS



	August 1, 2015			August 2, 2014			January 31, 2015
(In millions, except per share data)	(Unaudited)			(Unaudited)
Assets
Current assets:
Cash in banks and in transit	$	178		$	189		$	119
Cash short-term investments	795			847			1,199
Cash and cash equivalents	973			1,036			1,318
Merchandise inventory	3,005			2,848			2,652
Deferred taxes	184			182			172
Prepaid expenses and other	200			207			189
Total current assets	4,362			4,273			4,331
Property and equipment (net of accumulated depreciation of $3,586, $3,485 and $3,617)	4,989			5,415			5,148
Prepaid pension	266			701			220
Other assets	615			627			610
Total Assets	$	10,232		$	11,016		$	10,309
Liabilities and Stockholders’ Equity
Current liabilities:
Merchandise accounts payable	$	1,122		$	984		$	997
Other accounts payable and accrued expenses	1,170			1,094			1,103
Current portion of capital leases and note payable	27			30			28
Current maturities of long-term debt	28			28			28
Total current liabilities	2,347			2,136			2,156
Long-term capital leases and note payable	18			44			38
Long-term debt	5,225			5,227			5,227
Deferred taxes	378			364			363
Other liabilities	604			645			611
Total Liabilities	8,572			8,416			8,395
Stockholders’ Equity
Common stock⁽¹⁾	153			152			152
Additional paid-in capital	4,627			4,588			4,606
Reinvested earnings/(accumulated deficit)	(2,084		)	(1,532		)	(1,779		)
Accumulated other comprehensive income/(loss)	(1,036		)	(608		)	(1,065		)
Total Stockholders’ Equity	1,660			2,600			1,914
Total Liabilities and Stockholders’ Equity	$	10,232		$	11,016		$	10,309


(1)	1,250 million shares of common stock are authorized with a par value of $0.50 per share. The total shares issued and outstanding were 305.5 million, 304.8 million and 304.9 million as of August 1, 2015, August 2, 2014 and January 31, 2015, respectively.

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

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J. C. PENNEY COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended						Six Months Ended
($ in millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Cash flows from operating activities
Net income/(loss)	$	(138	)	$	(172	)	$	(305	)	$	(524	)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Restructuring and management transition	1			1			4			3
Asset impairments and other charges	1			2			2			4
Net gain on sale of non-operating assets	(6		)	(9		)	(8		)	(21		)
Net gain on sale of operating assets	—			—			(8		)	(1		)
Depreciation and amortization	153			160			307			318
Benefit plans	6			(4		)	10			(13		)
Stock-based compensation	11			9			21			16
Deferred taxes	(6		)	(14		)	(17		)	(19		)
Change in cash from:
Inventory	(194		)	(13		)	(353		)	87
Prepaid expenses and other assets	26			8			(11		)	(19		)
Merchandise accounts payable	59			143			125			36
Current income taxes	2			(6		)	6			4
Accrued expenses and other	127			32			43			(5		)
Net cash provided by/(used in) operating activities	42			137			(184		)	(134		)
Cash flows from investing activities
Capital expenditures	(95		)	(61		)	(141		)	(141		)
Net proceeds from sale of non-operating assets	7			11			13			26
Net proceeds from sale of operating assets	—			—			5			2
Joint venture return of investment	—			8			—			8
Net cash provided by/(used in) investing activities	(88		)	(42		)	(123		)	(105		)
Cash flows from financing activities
Payments on short-term borrowings	—			(650		)	—			(650		)
Net proceeds from issuance of long-term debt	—			500			—			500
Payments of capital leases and note payable	(18		)	(13		)	(23		)	(18		)
Payments of long-term debt	(7		)	(6		)	(13		)	(11		)
Financing costs	—			(60		)	—			(60		)
Tax withholding payments for vested restricted stock	—			—			(2		)	(1		)
Net cash provided by/(used in) financing activities	(25		)	(229		)	(38		)	(240		)
Net increase/(decrease) in cash and cash equivalents	(71		)	(134		)	(345		)	(479		)
Cash and cash equivalents at beginning of period	1,044			1,170			1,318			1,515
Cash and cash equivalents at end of period	$	973		$	1,036		$	973		$	1,036

Supplemental cash flow information
Income taxes received/(paid), net	$	(2	)	$	(16	)	$	(2	)	$	(19	)
Interest received/(paid), net	(58		)	(57		)	(184		)	(183		)
Supplemental non-cash investing and financing activity
Property contributed to joint venture	—			—			—			30
Increase/(decrease) in other accounts payable related to purchases of property and equipment	18			(6		)	29			(5		)

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

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J. C. PENNEY COMPANY, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Consolidation

Basis of Presentation

J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations, and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.

J. C. Penney Company, Inc. is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by J. C. Penney Company, Inc. is full and unconditional.

These unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The accompanying unaudited Interim Consolidated Financial Statements, in our opinion, include all material adjustments necessary for a fair presentation and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (2014 Form 10-K). We follow substantially the same accounting policies to prepare quarterly financial statements as are followed in preparing annual financial statements. A description of such significant accounting policies is included in the 2014 Form 10-K. The January 31, 2015 financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2014 Form 10-K. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

Fiscal Year

Our fiscal year ends on the Saturday closest to January 31. As used herein, “three months ended August 1, 2015” and “three months ended August 2, 2014” refer to the 13-week periods ended August 1, 2015 and August 2, 2014, respectively. "Six months ended August 1, 2015" or "2015 first half," and "six months ended August 2, 2014," or "2014 first half," refer to the 26-week periods ended August 1, 2015 and August 2, 2014, respectively. Fiscal years 2015 and 2014 contain 52 weeks.

Basis of Consolidation

All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected our net income/(loss) in any period.

Use of Estimates and Assumptions

The preparation of unaudited Interim Consolidated Financial Statements, in conformity with GAAP, requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to: inventory valuation under the retail method, specifically permanent reductions to retail prices (markdowns), permanent devaluation of inventory (markdown accruals) and adjustments for shortages (shrinkage); valuation of long-lived assets and indefinite-lived intangible assets for impairments; fair value of interest rate swaps; reserves for closed stores, workers’ compensation and general liability (insurance), environmental contingencies, income taxes and litigation; and pension and other postretirement benefits accounting. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.

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2. Effect of New Accounting Standards

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. The amendments in this ASU are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The Company early adopted ASU 2015-03 retrospectively in its second quarter ended August 1, 2015. As a result of the retrospective adoption, the Company reclassified unamortized debt issuance costs of $95 million and $96 million as of January 31, 2015 and August 2, 2014, respectively, from Other assets to a reduction in Long-term debt on the unaudited Interim Consolidated Balance Sheets. Adoption of this standard did not impact results of operations, retained earnings, or cash flows in the current or previous interim and annual reporting periods.

3. Earnings/(Loss) per Share

Net income/(loss) and shares used to compute basic and diluted earnings/(loss) per share (EPS) are reconciled below:



	Three Months Ended						Six Months Ended
(in millions, except per share data)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Earnings/(loss)
Net income/(loss)	$	(138	)	$	(172	)	$	(305	)	$	(524	)
Shares
Weighted average common shares outstanding (basic shares)	305.9			305.2			305.7			305.1
Adjustment for assumed dilution:
Stock options, restricted stock awards and warrant	—			—			—			—
Weighted average shares assuming dilution (diluted shares)	305.9			305.2			305.7			305.1
EPS
Basic	$	(0.45	)	$	(0.56	)	$	(1.00	)	$	(1.72	)
Diluted	$	(0.45	)	$	(0.56	)	$	(1.00	)	$	(1.72	)

The following average potential shares of common stock were excluded from the diluted EPS calculation because their effect would have been anti-dilutive:



	Three Months Ended		Six Months Ended
(Shares in millions)	August 1, 2015	August 2, 2014	August 1, 2015	August 2, 2014
Stock options, restricted stock awards and warrant	34.6	26.7	33.2	25.4

4. Credit Facility

On June 20, 2014, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation entered into a $2,350 million asset-based senior credit facility (2014 Credit Facility), comprised of a $1,850 million revolving line of credit (Revolving Facility) and a $500 million term loan (2014 Term Loan). As of the end of the second quarter of 2015, we had $495 million outstanding on the 2014 Term Loan and no borrowings outstanding under the Revolving Facility. In addition, as of the end of the second quarter of 2015, based on our borrowing base, we had $1,635 million available for borrowing, of which $310 million was reserved for outstanding standby and import letters of credit, none of which have been drawn on, leaving $1,325 million for future borrowings. The applicable rate for standby and import letters of credit was 2.50% and 1.25%, respectively, while the commitment fee was 0.375% for the unused portion of the Revolving Facility.

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5. Long-term Debt



	Outstanding Principal						Unamortized Debt Issuance Costs						Net Carrying Amount
($ in millions)	August 1, 2015		August 2, 2014		January 31, 2015		August 1, 2015		August 2, 2014		January 31, 2015		August 1, 2015		August 2, 2014		January 31, 2015
5.65% Senior Notes Due 2020⁽¹⁾	$	400	$	400	$	400	$	4	$	5	$	5	$	396	$	395	$	395
5.75% Senior Notes Due 2018⁽¹⁾	300		300		300		1		2		1		299		298		299
6.375% Senior Notes Due 2036⁽¹⁾	400		400		400		6		7		7		394		393		393
6.875% Medium-Term Notes Due 2015	—		200		—		—		—		—		—		200		—
6.9% Notes Due 2026	2		2		2		—		—		—		2		2		2
7.125% Debentures Due 2023	10		10		10		—		—		—		10		10		10
7.4% Debentures Due 2037	326		326		326		1		1		1		325		325		325
7.625% Notes Due 2097	500		500		500		—		—		—		500		500		500
7.65% Debentures Due 2016	78		200		78		—		—		—		78		200		78
7.95% Debentures Due 2017	220		285		220		—		—		—		220		285		220
8.125% Senior Notes Due 2019	400		—		400		9		—		10		391		—		390
2013 Term Loan Facility	2,205		2,228		2,216		50		67		58		2,155		2,161		2,158
2014 Term Loan	495		500		498		12		14		13		483		486		485
Total debt, excluding capital leases and note payable	$	5,336	$	5,351	$	5,350	$	83	$	96	$	95	$	5,253	$	5,255	$	5,255
Less: current maturities													28		28		28
Total long-term debt, excluding capital leases and note payable													$	5,225	$	5,227	$	5,227

(1) These debt issuances contain change of control provisions that would obligate us, at the holders’ option, to repurchase the debt at a price equal to 101% of the principal amount of the debt.

6. Derivative Financial Instruments

Effective May 7, 2015, we entered into interest rate swap agreements with notional amounts totaling $1,250 million to fix a portion of our variable LIBOR-based interest payments. The interest rate swap agreements have a weighted-average fixed rate of 2.04%, mature on May 7, 2020 and have been designated as cash flow hedges.

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The fair value of our interest rate swaps are recorded on the unaudited Interim Consolidated Balance Sheets as an asset or a liability (see Note 7). The effective portion of the interest rate swaps' changes in fair values is reported in Accumulated other comprehensive income/(loss) (see Note 8), and the ineffective portion is reported in Net income/(loss). Amounts in Accumulated other comprehensive income/(loss) are reclassified into net income/(loss) when the related interest payments affect earnings. For the periods presented, all of the interest rate swaps were 100% effective.

Information regarding the pre-tax changes in the fair value of our interest rate swaps is as follows:



	Three Months Ended					Six Months Ended					Line Item in the Unaudited Interim Financial Statements
($ in millions)	August 1, 2015			August 2, 2014		August 1, 2015			August 2, 2014		Line Item in the Unaudited Interim Financial Statements
Gain/(loss) recognized in other comprehensive income/(loss)	$	(9	)	$	—	$	(9	)	$	—	Accumulated other comprehensive income
Gain/(loss) recognized in net income/(loss)	(2		)	—		(2		)	—		Interest expense

Information regarding the gross amounts of our derivative instruments in the unaudited Interim Consolidated Balance Sheets is as follows:



	Asset Derivatives at Fair Value							Liability Derivatives at Fair Value
($ in millions)	Balance Sheet Location	August 1, 2015		August 2, 2014		January 31, 2015		Balance Sheet Location	August 1, 2015		August 2, 2014		January 31, 2015
Derivatives designated as hedging instruments:
Interest rate swaps	N/A	$	—	$	—	$	—	Other accounts payable and accrued expenses	$	2	$	—	$	—
Interest rate swaps	N/A	—		—		—		Other liabilities	9		—		—
Total derivatives designated as hedging instruments		$	—	$	—	$	—		$	11	$	—	$	—

7. Fair Value Disclosures

Cash Flow Hedges Measured on a Recurring Basis

Our cash flow hedges are valued in the market using discounted cash flow techniques which use quoted market interest rates in discounted cash flow calculations which consider the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps are observable in the active markets and are classified as Level 2 in the fair value measurement hierarchy.

Our cash flow hedges measured at fair value are as follows:



	Cash Flow Hedges at Fair Value
($ in millions)	Quoted Prices in Active Markets of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
August 1, 2015	$	—	$	(11	)	$	—
August 2, 2014	—		—			—
January 31, 2015	—		—			—

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Other Financial Instruments

Carrying values and fair values of financial instruments that are not carried at fair value in the unaudited Interim Consolidated Balance Sheets are as follows:



	August 1, 2015				August 2, 2014				January 31, 2015
($ in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, excluding unamortized debt issuance costs, including current maturities	$	5,336	$	5,002	$	5,351	$	5,072	$	5,350	$	4,834

The fair value of long-term debt was estimated by obtaining quotes from brokers or was based on current rates offered for similar debt. As of August 1, 2015, August 2, 2014 and January 31, 2015, the fair values of cash and cash equivalents, accounts payable and short-term borrowings approximated their carrying values due to the short-term nature of these instruments. In addition, the fair values of capital lease commitments and the note payable approximated their carrying values. These items have been excluded from the table above.

Concentrations of Credit Risk

We have no significant concentrations of credit risk.

8. Stockholders’ Equity

The following table shows the change in the components of stockholders’ equity for the six months ended August 1, 2015:



(in millions)	Number of Common Shares	Common Stock		Additional Paid-in Capital		Reinvested Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income/(Loss)			Total Stockholders’ Equity
January 31, 2015	304.9	$	152	$	4,606	$	(1,779	)	$	(1,065	)	$	1,914
Net income/(loss)	—	—		—		(305		)	—			(305		)
Other comprehensive income/(loss)	—	—		—		—			29			29
Stock-based compensation	0.6	1		21		—			—			22
August 1, 2015	305.5	$	153	$	4,627	$	(2,084	)	$	(1,036	)	$	1,660

Comprehensive Income

The tax effects allocated to each component of other comprehensive income/(loss) are as follows:



	Three Months Ended
	August 1, 2015									August 2, 2014
($ in millions)	Gross Amount			Income Tax (Expense)/ Benefit			Net Amount			Gross Amount		Income Tax (Expense)/ Benefit			Net Amount
Retirement benefit plans
Reclassification for amortization of net actuarial (gain)/loss	$	29		$	(11	)	$	18		$	16	$	(7	)	$	9
Reclassification for amortization of prior service (credit)/cost	—			—			—			1		—			1
Cash flow hedges
Net gain/(loss) on interest rate swaps	(9		)	3			(6		)	—		—			—
Total	$	20		$	(8	)	$	12		$	17	$	(7	)	$	10

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	Six Months Ended
	August 1, 2015									August 2, 2014
($ in millions)	Gross Amount			Income Tax (Expense)/ Benefit			Net Amount			Gross Amount		Income Tax (Expense)/ Benefit			Net Amount
Retirement benefit plans
Reclassification for amortization of net actuarial (gain)/loss	$	58		$	(23	)	$	35		$	33	$	(13	)	$	20
Cash flow hedges
Net gain/(loss) on interest rate swaps	(9		)	3			(6		)	—		—			—
Total	$	49		$	(20	)	$	29		$	33	$	(13	)	$	20

The following table shows the changes in accumulated other comprehensive income/(loss) balances for the six months ended August 1, 2015:



($ in millions)	Net Actuarial Gain/(Loss)			Prior Service Credit/(Cost)			Foreign Currency Translation			Gain/(Loss) on Cash Flow Hedges			Accumulated Other Comprehensive Income/(Loss)
January 31, 2015	$	(1,023	)	$	(40	)	$	(2	)	$	—		$	(1,065	)
Other comprehensive income/(loss) before reclassifications	—			—			—			(7		)	(7		)
Amounts reclassified from accumulated other comprehensive income	35			—			—			1			36
August 1, 2015	$	(988	)	$	(40	)	$	(2	)	$	(6	)	$	(1,036	)

Reclassifications out of accumulated other comprehensive income/(loss) are as follows:



	Amount Reclassified from Accumulated Other Comprehensive Income/(Loss)												Line Item in the Unaudited Interim Consolidated Statements of Operations
	Three Months Ended						Six Months Ended
($ in millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Amortization of retirement benefit plans
Actuarial loss/(gain)⁽¹⁾	$	29		$	16		$	58		$	33		Pension
Prior service cost/(credit)⁽¹⁾	2			3			4			4			Pension
Prior service cost/(credit)⁽¹⁾	(2		)	(2		)	(4		)	(4		)	SG&A
Cash flow hedges
Realized loss/(gain)	2			—			2			—			Net interest expense
Tax (expense)/benefit	(12		)	(7		)	(24		)	(13		)	Income tax expense/(benefit)
Total, net of tax	19			10			36			20
Total reclassifications	$	19		$	10		$	36		$	20


(1)	These accumulated other comprehensive income/(loss) components are included in the computation of net periodic benefit expense/(income). See Note 10 for additional details.

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9. Stock-based Compensation

We grant stock-based compensation awards to employees and non-employee directors under the J. C. Penney Company, Inc. 2014 Long-Term Incentive Plan (2014 Plan). As of August 1, 2015, a maximum of 11.6 million shares of stock were available for future grant under the 2014 Plan.

Stock-based compensation expense for the three months ended August 1, 2015 and August 2, 2014 was $15 million and $11 million, respectively. Stock-based compensation expense for the six months ended August 1, 2015 and August 2, 2014 was $30 million and $21 million, respectively. Through the first six months of 2015, the Company granted the following stock-based compensation awards:



	Restricted Stock Units (RSU)		Stock Options			Weighted Average Grant Date Fair Value
Grant Date	Time-based	Performance-based	Time-based	Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
March 3, 2015	28,554	—	—	$	—	$	7.88
March 19, 2015	2,135,177	1,534,754	4,294,885	$	7.77	$	5.36
May 18, 2015	11,696	—	—	$	—	$	8.55
May 20, 2015	15,878	31,755	38,624	$	8.66	$	6.38
June 4, 2015	49,190	98,380	123,188	$	8.64	$	6.28
June 11, 2015⁽¹⁾	31,437	—	78,358	$	8.35	$	4.78
Total	2,271,932	1,664,889	4,535,055	$	7.81	$	5.40

(1) RSUs and options were granted under an equity inducement plan.

Performance-based awards that ultimately vest are dependent on market performance targets measured by the achievement of internal profitability targets for 2015 through 2017 (performance condition).

In addition to the grants above, on March 19, 2015, we granted approximately 2.5 million phantom units as part of our management incentive compensation plan, which are similar to RSUs in that the number of units granted was based on the price of our stock, but the units will be settled in cash based on the value of our stock on the vesting date, up to a maximum of $15.54 per phantom unit. The fair value of the awards is remeasured at each reporting period and was $8.24 per share as of August 1, 2015. Compensation expense, which is variable, is recognized over the vesting period with a corresponding liability, which is recorded in Other liabilities in our unaudited Interim Consolidated Balance Sheets. We also granted approximately 154,000 fully vested RSUs to directors during the second quarter of 2015 with a fair value of $8.64 per RSU award.

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10. Retirement Benefit Plans

The components of net periodic benefit expense/(income) for our non-contributory qualified defined benefit pension plan (Primary Pension Plan), non-contributory supplemental pension plans and contributory postretirement health and welfare plan were as follows:



	Three Months Ended						Six Months Ended
($ in millions)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Primary Pension Plan
Service cost	$	18		$	16		$	35		$	31
Interest cost	49			52			98			105
Other cost	3			—			3			—
Expected return on plan assets	(89		)	(87		)	(178		)	(174		)
Amortization of actuarial loss/(gain)	25			12			51			25
Amortization of prior service cost/(credit)	2			3			4			4
Net periodic benefit expense/(income)	$	8		$	(4	)	$	13		$	(9	)

Supplemental Pension Plans
Service cost	$	—		$	—		$	—		$	—
Interest cost	1			2			3			4
Amortization of actuarial loss/(gain)	4			4			7			8
Amortization of prior service cost/(credit)	—			—			—			—
Net periodic benefit expense/(income)	$	5		$	6		$	10		$	12

Primary and Supplemental Pension Plans Total
Service cost	$	18		$	16		$	35		$	31
Interest cost	50			54			101			109
Other cost	3			—			3			—
Expected return on plan assets	(89		)	(87		)	(178		)	(174		)
Amortization of actuarial loss/(gain)	29			16			58			33
Amortization of prior service cost/(credit)	2			3			4			4
Net periodic benefit expense/(income)	$	13		$	2		$	23		$	3

Postretirement Health and Welfare Plan
Service cost	$	—		$	—		$	—		$	—
Interest cost	—			—			—			—
Amortization of actuarial loss/(gain)	—			—			—			—
Amortization of prior service cost/(credit)	(2		)	(2		)	(4		)	(4		)
Net periodic benefit expense/(income)	$	(2	)	$	(2	)	$	(4	)	$	(4	)

Retirement Benefit Plans Total
Service cost	$	18		$	16		$	35		$	31
Interest cost	50			54			101			109
Other cost	3			—			3			—
Expected return on plan assets	(89		)	(87		)	(178		)	(174		)
Amortization of actuarial loss/(gain)	29			16			58			33
Amortization of prior service cost/(credit)	—			1			—			—
Net periodic benefit expense/(income)	$	11		$	—		$	19		$	(1	)

Net periodic benefit expense/(income) for our noncontributory postretirement health and welfare plan was predominantly included in SG&A expense in the unaudited Interim Consolidated Statements of Operations.

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Primary Pension Plan Lump-Sum Payment Offer

In August 2015, as a result of a plan amendment, we offered approximately 31,000 retirees and beneficiaries in the Primary Pension Plan who commenced their benefit between January 1, 2000 and August 31, 2012 the option to receive a lump-sum settlement payment. In addition, we also offered approximately 8,000 participants in the Primary Pension Plan who separated from service and had a deferred vested benefit as of August 31, 2012 the option to receive a lump-sum settlement payment. These participants have until September 18, 2015 to elect to receive the lump-sum settlement payment with the payments to be made by the Company beginning on November 2, 2015 using assets from the Primary Pension Plan. Accordingly, the settlement expense related to the lump sum payments will be recognized in the fourth quarter of 2015.

Defined Contribution Plans

Our defined contribution plans include a qualified Savings, Profit-Sharing and Stock Ownership Plan (401(k) plan), which includes a non-contributory retirement account, and a non-qualified contributory unfunded mirror savings plan offered to certain members of management. Total expense for our defined contribution plans for each of the second quarters of 2015 and 2014 was $14 million and $13 million, respectively, and was predominantly included in SG&A expenses in the unaudited Interim Consolidated Statements of Operations. Total expense for the first six months of 2015 and 2014 was $27 million and $26 million, respectively.

11. Restructuring and Management Transition

The composition of restructuring and management transition charges was as follows:



	Three Months Ended				Six Months Ended				Cumulative Amount From Program Inception Through August 1, 2015
($ in millions)	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
Home office and stores	$	15	$	—	$	29	$	12	$	276
Management transition	1		1		7		8		231
Other	1		4		3		7		152
Total	$	17	$	5	$	39	$	27	$	659

Home Office and Stores

During the six months ended August 1, 2015 and August 2, 2014, we recorded $29 million and $12 million, respectively, of charges for actions taken to reduce our home office and store expenses. In January 2015 and during the second quarter of 2015, we approved the closing of 41 department stores with closing dates all to occur during fiscal 2015. As a result of these approved closures, during the first half of 2015, we incurred charges of $29 million related to employee termination benefits and lease termination costs associated with the closure of 39 of the 41 stores.

Last year we also closed stores as part of our turnaround efforts. During the first half of 2014, we incurred charges of $12 million for employee termination benefits and lease termination costs associated with the closure of 32 of the 33 stores that closed during 2014.

Management Transition

During the six months ended August 1, 2015 and August 2, 2014, we implemented changes within our management leadership team that resulted in management transition costs of $7 million and $8 million, respectively, for both incoming and outgoing members of management.

Other

During the six months ended August 1, 2015 and August 2, 2014, we recorded $3 million and $7 million, respectively, of miscellaneous restructuring charges. The 2015 charges were related to costs associated with the closure of our Sumner, Washington store merchandise distribution center and contract termination costs associated with our previous shops strategy. The 2014 charges were primarily related to contract termination costs associated with our previous shops strategy.

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Activity for the restructuring and management transition liability for the six months ended August 1, 2015 was as follows:



($ in millions)	Home Office and Stores			Management Transition			Other			Total
January 31, 2015	$	9		$	—		$	17		$	26
Charges	29			7			3			39
Cash payments	(16		)	(5		)	(5		)	(26		)
Non-cash	—			(2		)	(2		)	(4		)
August 1, 2015	$	22		$	—		$	13		$	35

The non-cash amounts represent charges primarily for stock-based compensation expense in conjunction with accelerated vesting related to terminations and for the write-off of store merchandise distribution center fixtures.

12. Real Estate and Other, Net

Real estate and other consists of ongoing operating income from our real estate subsidiaries, net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments, accruals for certain litigation and other non-operating charges and credits. In addition, during the first quarter of 2014, we entered into a joint venture in which we contributed approximately 220 acres of excess property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture). The joint venture was formed to develop the contributed property and our proportional share of the joint venture's activities is recorded in Real estate and other, net. For the three months ended August 1, 2015 and August 2, 2014, Real estate and other, net was expense of $19 million and income of $53 million, respectively. For the six months ended August 1, 2015 and August 2, 2014, Real estate and other, net was income of $16 million and $70 million, respectively.

Sale of Non-Operating Assets

During the first quarter of 2015, we sold two properties used in our former auto center operations and two former outlet store locations for net proceeds of $6 million, resulting in net gains totaling $2 million. During the second quarter of 2015, we sold two additional properties used in our former auto center operations for net proceeds of $7 million, resulting in net gains totaling $6 million.

During the first quarter of 2014, we sold four properties used in our former auto center operations and excess property adjacent to our home office facility not contributed to the Home Office Land Joint Venture for net proceeds of $15 million, resulting in net gains totaling $12 million. During the second quarter of 2014, we sold four additional properties used in our former auto center operations for net proceeds of $11 million, resulting in net gains totaling $9 million.

Sale of Operating Assets

During the first quarter of 2015, we recognized a net gain of $8 million for the sale of a former furniture store location and for payments received from landlords to terminate two existing leases prior to the original expiration date.

During the first quarter of 2014, we sold a former department store location with a net book value of $1 million for net proceeds of $2 million, realizing a gain of $1 million.

Investment Income from Joint Ventures

During the first quarter of 2015, the Company recorded $22 million for our proportional share of net income from the Home Office Land Joint Venture and received an aggregate cash distribution of $22 million.

During the second quarter of 2014, the Company recorded $43 million for our proportional share of net income from the Home Office Land Joint Venture and received an aggregate cash distribution of $51 million.

Other

During the second quarter of 2015, we recognized a net gain of $3 million on a payment received from a landlord to terminate an existing lease prior to its original expiration date.

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13. Income Taxes

Income taxes for the three months ended August 1, 2015 was a benefit of $3 million compared to a benefit of $4 million for the three months ended August 2, 2014. The effective tax rate for the three months ended August 1, 2015 was (2.1)% as compared to (2.3)% for the three months ended August 2, 2014. Income taxes for the six months ended August 1, 2015 was a benefit of $9 million compared to an expense of $4 million for the six months ended August 2, 2014. The effective tax rate for the six months ended August 1, 2015 was (2.9)% as compared to 0.8% for the six months ended August 2, 2014. Our effective tax rate for the three and six months ended August 1, 2015 was impacted by a net increase to the tax valuation allowance for deferred tax assets of $46 million and $90 million, respectively.

In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our assessment, we concluded that, beginning in the second quarter of 2013, our estimate of the realization of deferred tax assets would be based solely on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring carryforwards. Accordingly, in the second quarter of 2015, the valuation allowance was increased to offset the net deferred tax assets created in the quarter relating primarily to the increase in net operating loss (NOL) carryforwards. A valuation allowance of $874 million has been recorded against our deferred tax assets as of August 1, 2015, which resulted in an increase to the valuation allowance during the six months ended August 1, 2015 of $90 million.

The net tax benefit of $3 million for the three months ended August 1, 2015 consisted of state and foreign tax expenses of $3 million and $2 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, offset by an $8 million benefit relating to other comprehensive income. In accordance with GAAP, we are required to allocate a portion of our tax provision between operating losses and accumulated other comprehensive income. Application of this guidance required the recognition of an income tax benefit of $8 million in operating results, offset by an $8 million charge to other comprehensive income for the quarter.

The net tax benefit of $9 million for the six months ended August 1, 2015 consisted of state and foreign tax expenses of $7 million and $4 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, offset by a $20 million benefit relating to other comprehensive income. In accordance with GAAP, we are required to allocate a portion of our tax provision between operating losses and accumulated other comprehensive income. Application of this guidance required the recognition of an income tax benefit of $20 million in operating results, offset by a $20 million charge to other comprehensive income for the quarter.

As of August 1, 2015, we have approximately $2.7 billion of net operating losses available for U.S. federal income tax purposes, which expire in 2032 through 2035 and $53 million of tax credit carryforwards that expire at various dates through 2034. For these NOL and tax credit carryforwards a net deferred tax asset of $300 million has been recorded, net of a valuation allowance of $659 million. A valuation allowance of $215 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2035.

14. Litigation, Other Contingencies and Guarantees

Litigation

Macy’s Litigation

On August 16, 2012, Macy’s, Inc. and Macy’s Merchandising Group, Inc. (together the Plaintiffs) filed suit against JCP in the Supreme Court of the State of New York, County of New York, alleging that the Company tortiously interfered with, and engaged in unfair competition relating to, a 2006 agreement between Macy’s and Martha Stewart Living Omnimedia, Inc. (MSLO) by entering into a partnership agreement with MSLO in December 2011. The Plaintiffs sought primarily to prevent the Company from implementing our partnership agreement with MSLO as it related to products in the bedding, bath, kitchen and cookware categories. The suit was consolidated with an already-existing breach of contract lawsuit by the Plaintiffs against MSLO, and a bench trial commenced on February 20, 2013. On October 21, 2013, the Company and MSLO entered into an amendment of the partnership agreement, providing in part that the Company will not sell MSLO-designed merchandise in the bedding, bath, kitchen and cookware categories. On January 2, 2014, MSLO and Macy's announced that they had settled the case as to each other, and MSLO was subsequently dismissed as a defendant. On June 16, 2014, the Court issued a ruling against the Company on the remaining claim of intentional interference, and held that Macy’s is not entitled to punitive damages. The Court referred other issues related to damages to a Judicial Hearing Officer. On June 30, 2014, the Company appealed the Court’s decision, and Macy’s cross-appealed a portion of the decision. On February 26, 2015, the appellate court affirmed the trial court's rulings concerning the claim of intentional interference and lack of punitive damages, and reinstated Macy's claims for intentional interference and unfair competition that had been dismissed during trial. While no assurance can

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be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Ozenne Derivative Lawsuit

On January 19, 2012, a purported shareholder of the Company, Everett Ozenne, filed a shareholder derivative lawsuit in the 193^rd District Court of Dallas County, Texas, against certain of the Company’s Board of Directors and executives. The Company is a nominal defendant in the suit. The lawsuit alleged breaches of fiduciary duties, corporate waste and unjust enrichment involving decisions regarding executive compensation, specifically that compensation paid to certain executive officers from 2008 to 2011 was too high in light of the Company’s financial performance. The suit sought damages including unspecified compensatory damages, disgorgement by the former officers of allegedly excessive compensation, and equitable relief to reform the Company’s compensation practices. The Company and the named individuals filed an Answer and Special Exceptions to the lawsuit, arguing primarily that the plaintiff could not proceed with his suit because he failed to make demand on the Company’s Board of Directors, and that because demand on the Board would not be futile, demand was not excused. The trial court heard arguments on the Special Exceptions on June 25, 2012 and denied them. The Company and named individuals filed a mandamus proceeding in the Fifth District Court of Appeals challenging the trial court’s decision. The parties then settled the litigation and the appellate court stayed the appeal so that the trial court could review the proposed settlement. The trial court approved the settlement at a hearing on October 28, 2013 and, despite objection, awarded the plaintiff $3.1 million in attorneys’ fees and costs. Following the Company's appeal of the award of attorneys' fees and costs, the Fifth District Court of Appeals affirmed the award on December 19, 2014. The Company has filed a Petition for Review with the Texas Supreme Court. We believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Class Action Securities Litigation

The Company, Myron E. Ullman, III and Kenneth H. Hannah are parties to the Marcus consolidated purported class action lawsuit in the U.S. District Court, Eastern District of Texas, Tyler Division. The Marcus consolidated complaint is purportedly brought on behalf of persons who acquired our common stock during the period from August 20, 2013 through September 26, 2013, and alleges claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiff claims that the defendants made false and misleading statements and/or omissions regarding the Company’s financial condition and business prospects that caused our common stock to trade at artificially inflated prices. The consolidated complaint seeks class certification, unspecified compensatory damages, including interest, reasonable costs and expenses, and other relief as the court may deem just and proper. Defendants have filed a motion to dismiss the consolidated complaint. Briefing on the motion to dismiss was completed in November, 2014.

Also, on August 26, 2014, plaintiff Nathan Johnson filed a purported class action lawsuit against the Company, Myron E. Ullman, III and Kenneth H. Hannah in the U.S. District Court, Eastern District of Texas, Tyler Division. The suit is purportedly brought on behalf of persons who acquired our securities other than common stock during the period from August 20, 2013 through September 26, 2013, generally mirrors the allegations contained in the Marcus lawsuit discussed above, and seeks similar relief. On June 8, 2015, plaintiff in the Marcus lawsuit amended the consolidated complaint to include the members of the purported class in the Johnson lawsuit, and on June 10, 2015, the Johnson lawsuit was consolidated into the Marcus lawsuit.

We believe these lawsuits are without merit and we intend to vigorously defend them. While no assurance can be given as to the ultimate outcome of these matters, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Shareholder Derivative Litigation

In October, 2013, two purported shareholder derivative actions were filed against certain present and former members of the Company’s Board of Directors and executives by the following parties in the U.S. District Court, Eastern District of Texas, Sherman Division: Weitzman (filed October 2, 2013) and Zauderer (filed October 3, 2013). The Company is named as a nominal defendant in both suits. The lawsuits assert claims for breaches of fiduciary duties and unjust enrichment based upon alleged false and misleading statements and/or omissions regarding the Company’s financial condition. The lawsuits seek unspecified compensatory damages, restitution, disgorgement by the defendants of all profits, benefits and other compensation, equitable relief to reform the Company’s corporate governance and internal procedures, reasonable costs and expenses, and other relief as the court may deem just and proper. On October 28, 2013, the Court consolidated the two cases into the Weitzman lawsuit. On January 15, 2014, the Court entered an order staying the derivative suits pending certain events in the class action securities litigation described above. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

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ERISA Class Action Litigation

JCP and certain present and former members of JCP's Board of Directors have been sued in a purported class action complaint by plaintiffs Roberto Ramirez and Thomas Ihle, individually and on behalf of all others similarly situated, which was filed on July 8, 2014 in the U.S. District Court, Eastern District of Texas, Tyler Division. The suit alleges that the defendants violated Section 502 of the Employee Retirement Income Security Act (ERISA) by breaching fiduciary duties relating to the J. C. Penney Corporation, Inc. Savings, Profit-Sharing and Stock Ownership Plan (the Plan). The class period is alleged to be between November 1, 2011 and September 27, 2013. Plaintiffs allege that they and others who invested in or held Company stock in the Plan during this period were injured because defendants allegedly made false and misleading statements and/or omissions regarding the Company’s financial condition and business prospects that caused the Company’s common stock to trade at artificially inflated prices. The complaint seeks class certification, declaratory relief, a constructive trust, reimbursement of alleged losses to the Plan, actual damages, attorneys’ fees and costs, and other relief. Defendants filed a motion to dismiss the complaint on November 7, 2014, and this motion has been fully briefed. We believe the lawsuit is without merit and we intend to vigorously defend it. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Employment Class Action Litigation

JCP is a defendant in a class action proceeding entitled Tschudy v. JCPenney Corporation filed on April 15, 2011 in the U.S. District Court, Southern District of California. The lawsuit alleges that JCP violated the California Labor Code in connection with the alleged forfeiture of accrued and vested vacation time under its “My Time Off” policy. The class consists of all JCP employees who worked in California from April 5, 2007 to the present. Plaintiffs amended the complaint to assert additional claims under the Illinois Wage Payment and Collection Act on behalf of all JCP employees who worked in Illinois from January 1, 2004 to the present. After the court granted JCP’s motion to transfer the Illinois claims, those claims are now pending in a separate action in the U.S. District Court, Northern District of Illinois, entitled Garcia v. JCPenney Corporation. The lawsuits seek compensatory damages, penalties, interest, disgorgement, declaratory and injunctive relief, and attorney’s fees and costs. Plaintiffs in both lawsuits filed motions, which the Company opposed, to certify these actions on behalf of all employees in California and Illinois based on the specific claims at issue. On December 17, 2014, the California court granted plaintiffs’ request for class certification. The Illinois court denied without prejudice plaintiffs' motion for class certification pending the filing of an amended complaint. Plaintiffs filed their amended complaint in the Illinois lawsuit on April 14, 2015 and the Company has answered. On July 2, 2015, the Illinois plaintiffs renewed their motion for class certification, which the Company has opposed. We believe these lawsuits are without merit and we intend to continue to vigorously defend these lawsuits. While no assurance can be given as to the ultimate outcome of these matters, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Pricing Class Action Litigation

JCP is a defendant in a class action proceeding entitled Spann v. J. C. Penney Corporation, Inc. filed on February 8, 2012 in the U.S. District Court, Central District of California. The lawsuit alleges that JCP violated California’s Unfair Competition Law and related state statutes in connection with its advertising of sale prices for private label apparel and accessories. The lawsuit seeks restitution, damages, injunctive relief, and attorney’s fees and costs. On May 18, 2015, the court granted plaintiff's request for certification of a class consisting of all people who, between November 5, 2010 and January 31, 2012, made purchases in California of JCP private or exclusive label apparel or accessories advertised at a discount of at least 30% off the stated original or regular price (excluding those who only received such discount by using coupon(s)), and who have not received a refund or credit for their purchases. We believe this lawsuit is without merit and we intend to continue to vigorously defend this lawsuit. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Other Legal Proceedings

On January 3, 2014, the Company received a demand for production of the Company's books and records pursuant to Section 220 of the Delaware General Corporation Law from the law firm Wolf Haldenstein Adler Freeman & Herz LLP on behalf of Bruce Murphy as Trustee of the Bruce G. Murphy Trust. The alleged purpose of the demand is to investigate potential mismanagement and breaches of fiduciary duties by the Company's senior officers and directors in connection with their oversight of the Company's operations and business prospects, including the Company's liquidity profile and capital requirements. The Company has exchanged correspondence with the law firm concerning the demand.

We are subject to various other legal and governmental proceedings involving routine litigation incidental to our business. Accruals have been established based on our best estimates of our potential liability in certain of these matters, including

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certain matters discussed above, all of which we believe aggregate to an amount that is not material to the unaudited Interim Consolidated Financial Statements. These estimates were developed in consultation with in-house and outside counsel. While no assurance can be given as to the ultimate outcome of these matters, we currently believe that the final resolution of these actions, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Contingencies

As of August 1, 2015, we estimated our total potential environmental liabilities to range from $19 million to $25 million and recorded our best estimate of $22 million in Other accounts payable and accrued expenses and Other liabilities in the unaudited Interim Consolidated Balance Sheet as of that date. This estimate covered potential liabilities primarily related to underground storage tanks, remediation of environmental conditions involving our former drugstore locations and asbestos removal in connection with approved plans to renovate or dispose of our facilities. We continue to assess required remediation and the adequacy of environmental reserves as new information becomes available and known conditions are further delineated. If we were to incur losses at the upper end of the estimated range, we do not believe that such losses would have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Guarantees

In connection with the sale of the operations of our outlet stores, we assigned leases on certain outlet store locations to the purchaser. In the event that the purchaser fails to make the required lease payments, we continue for a period of time to be liable for lease payments to the landlords of several of the leased stores. The purchaser's obligations under the lease are guaranteed to us by certain principals and affiliates of the purchaser. However, the purchaser has elected to exit the outlet business and has successfully negotiated termination of all but two of the leases with the landlords. As of August 1, 2015, our maximum liability in connection with the assigned leases was $3 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.

The holding company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by the holding company is full and unconditional.

This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as of January 31, 2015, and for the year then ended, and related Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Annual Report on Form 10-K for the fiscal year ended January 31, 2015 (2014 Form 10-K). Unless otherwise indicated, all references to earnings/(loss) per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.

Second Quarter Summary and Key Developments


▪	Sales were $2,875 million with a comparable store sales increase of 4.1%.


▪	Gross margin as a percentage of sales increased to 37.0% compared to 36.0% in the same period last year, driven by improvements in our clearance and promotional selling margins.


▪	Selling, general and administrative (SG&A) expenses decreased $63 million, or 6.5%, for the second quarter of 2015 as compared to the corresponding quarter in 2014. These savings were primarily driven by lower store controllable costs, advertising and improved credit card revenue.


▪	Earnings before interest expense, income tax (benefit)/expense and depreciation and amortization (EBITDA) (non-GAAP) was $115 million, a $25 million improvement from the same period last year.


▪	Our net loss was $138 million, or $0.45 per share, compared to a net loss of $172 million, or $0.56 per share, for the corresponding prior year quarter. Results for this quarter included the following amounts that are not directly related to our ongoing core business operations:


▪	$17 million, or $0.05 per share, of restructuring and management transition charges;


▪	$8 million, or $0.03 per share, of expense from our qualified defined benefit pension plan (Primary Pension Plan);


▪	$6 million, or $0.02 per share, for the net gain on the sale of non-operating assets;


▪	$7 million, or $0.02 per share, of tax benefit that resulted from our other comprehensive income allocation between our Operating loss and Accumulated other comprehensive income for the amortization of net actuarial losses and prior service credits related to the Primary Pension Plan and the tax effect for the loss on our interest rate swaps.

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Results of Operations



	Three Months Ended						Six Months Ended
($ in millions, except EPS)	August 1, 2015			August 2, 2014			August 1, 2015			August 2, 2014
Total net sales	$	2,875		$	2,799		$	5,732		$	5,600
Percent increase/(decrease) from prior year	2.7		%	5.1		%	2.4		%	5.7		%
Comparable store sales increase/(decrease)⁽¹⁾	4.1		%	6.0		%	3.7		%	6.6		%
Gross margin	1,065			1,008			2,106			1,934
Operating expenses/(income):
Selling, general and administrative	901			964			1,866			1,973
Primary pension plan	8			(4		)	13			(9		)
Supplemental pension plans	5			6			10			12
Total pension	13			2			23			3
Depreciation and amortization	153			160			307			318
Real estate and other, net	19			(53		)	(16		)	(70		)
Restructuring and management transition	17			5			39			27
Total operating expenses	1,103			1,078			2,219			2,251
Operating income/(loss)	(38		)	(70		)	(113		)	(317		)
Net interest expense	103			106			201			203
Income/(loss) before income taxes	(141		)	(176		)	(314		)	(520		)
Income tax expense/(benefit)	(3		)	(4		)	(9		)	4
Net income/(loss)	$	(138	)	$	(172	)	$	(305	)	$	(524	)
EBITDA (non-GAAP)⁽²⁾	$	115		$	90		$	194		$	1
Adjusted EBITDA (non-GAAP)⁽²⁾	$	134		$	39		$	216		$	(45	)
Adjusted net income/(loss) (non-GAAP)⁽²⁾	$	(126	)	$	(228	)	$	(301	)	$	(581	)
Diluted EPS	$	(0.45	)	$	(0.56	)	$	(1.00	)	$	(1.72	)
Adjusted diluted EPS (non-GAAP)⁽²⁾	$	(0.41	)	$	(0.75	)	$	(0.98	)	$	(1.90	)
Ratios as a percent of sales:
Gross margin	37.0		%	36.0		%	36.7		%	34.5		%
SG&A	31.3		%	34.4		%	32.6		%	35.2		%
Total operating expenses	38.4		%	38.5		%	38.7		%	40.2		%
Operating income/(loss)	(1.3		)%	(2.5		)%	(2.0		)%	(5.7		)%

(1)

Comparable store sales include sales from all stores, including sales from services and commissions earned from our in-store licensed departments, that have been open for 12 consecutive full fiscal months and Internet sales through jcp.com. Stores closed for an extended period are not included in comparable store sales calculations, while stores remodeled and minor expansions not requiring store closure remain in the calculations. Certain items, such as sales return estimates and store liquidation sales, are excluded from the Company’s calculation.


(2)	See “Non-GAAP Financial Measures” below for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations.

Non-GAAP Financial Measures

We report our financial information in accordance with generally accepted accounting principles in the United States (GAAP). However, we present certain financial measures identified as non-GAAP under the rules of the Securities and Exchange Commission (SEC) to assess our results. We believe the presentation of these non-GAAP financial measures is useful in order to better understand our financial performance as well as to facilitate the comparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures to assess the results of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measures presented.

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The following non-GAAP financial measures are adjusted to exclude restructuring and management transition charges, the impact of our Primary Pension Plan, the net gain on the sale of non-operating assets, the proportional share of net income from our joint venture formed to develop the excess property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture) and the tax impact for the allocation of income taxes to other comprehensive income items related to our Primary Pension Plan and interest rate swaps. Unlike other operating expenses, restructuring and management transition charges, the net gain on the sale of non-operating assets, the proportional share of net income from our Home Office Land Joint Venture and the tax impact for the allocation of income taxes to other comprehensive income items related to our Primary Pension Plan and interest rate swaps are not directly related to our ongoing core business operations. Primary Pension Plan expense/(income) is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond our control, such as market volatility. Accordingly, we eliminate our Primary Pension Plan expense/(income) in its entirety as we view all components of net periodic benefit expense/(income) as a single, net amount, consistent with its presentation in our Consolidated Financial Statements. We believe it is useful for investors to understand the impact of restructuring and management transition charges, Primary Pension Plan expense/(income), the net gain on the sale of non-operating assets, the proportional share of net income from the Home Office Land Joint Venture and the tax impact for the allocation of income taxes to other comprehensive income items related to our Primary Pension Plan and interest rate swaps on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted EBITDA; (2) adjusted net income/(loss); and (3) adjusted earnings/(loss) per share-diluted.

In addition, we believe that EBITDA is a useful measure in assessing our operating performance and are therefore presenting this non-GAAP financial measure in addition to the non-GAAP financial measures listed above.

EBITDA and Adjusted EBITDA. The following table reconciles net income/(loss), the most directly comparable GAAP measure, to EBITDA and adjusted EBITDA, which are non-GAAP financial measures:



	Three Months Ended						Six Months Ended
($ in millions)	August 1, 2015			August 2, 2014			August 1, 2015	August 2, 2014
Net income/(loss)	$	(138	)	$	(172	)