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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 October 29, 2016
or
¨
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
 jcpenneylogo2a04.jpg
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. 308,299,673 shares of Common Stock of 50 cents par value, as of November 25, 2016.


J. C. PENNEY COMPANY, INC.
FORM 10-Q
For the Quarterly Period Ended October 29, 2016
INDEX

 
 
 
Page
 
 
 
 

1
Table of Contents

Part I. Financial Information
Item 1. Unaudited Interim Consolidated Financial Statements

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share data)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
 
 
 
As Adjusted
 
 
 
As Adjusted
Total net sales
$
2,857

 
$
2,897

 
$
8,586

 
$
8,629

Cost of goods sold
1,795

 
1,815

 
5,422

 
5,441

Gross margin
1,062

 
1,082

 
3,164

 
3,188

Operating expenses/(income):
 
 
 
 
 
 
 
Selling, general and administrative (SG&A)
888

 
947

 
2,613

 
2,813

Pension
1

 
(17
)
 
5

 
(52
)
Depreciation and amortization
149

 
152

 
456

 
459

Real estate and other, net
(1
)
 
2

 
(48
)
 
(14
)
Restructuring and management transition
2

 
14

 
17

 
53

Total operating expenses
1,039

 
1,098

 
3,043

 
3,259

Operating income/(loss)
23

 
(16
)
 
121

 
(71
)
(Gain)/loss on extinguishment of debt
—

 
—

 
30

 
—

Net interest expense
87

 
102

 
275

 
303

Income/(loss) before income taxes
(64
)
 
(118
)
 
(184
)
 
(374
)
Income tax expense/(benefit)
3

 
(3
)
 
7

 
8

Net income/(loss)
$
(67
)
 
$
(115
)
 
$
(191
)
 
$
(382
)
Earnings/(loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.22
)
 
$
(0.38
)
 
$
(0.62
)
 
$
(1.25
)
Diluted
$
(0.22
)
 
$
(0.38
)
 
$
(0.62
)
 
$
(1.25
)
Weighted average shares – basic
308.3

 
306.0

 
307.8

 
305.8

Weighted average shares – diluted
308.3

 
306.0

 
307.8

 
305.8

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



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Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
 
 
 
As Adjusted
 
 
 
As Adjusted
Net income/(loss)
$
(67
)
 
$
(115
)
 
$
(191
)
 
$
(382
)
Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Retirement benefit plans
 
 
 
 
 
 
 
Prior service credit/(cost) arising during the period (1)
—

 
—

 
5

 
—

Reclassification for net actuarial (gain)/loss (2)
(3
)
 
—

 
(5
)
 
—

Reclassification for amortization of prior service (credit)/cost (3)
—

 
—

 
—

 
—

Cash flow hedges
 
 
 
 
 
 
 
Gain/(loss) on interest rate swaps (4)
2

 
(7
)
 
(7
)
 
(14
)
Reclassification for periodic settlements (5)
2

 
1

 
6

 
2

Deferred tax valuation allowance
1

 
(4
)
 
—

 
(7
)
Total other comprehensive income/(loss), net of tax
2

 
(10
)
 
(1
)
 
(19
)
Total comprehensive income/(loss), net of tax
$
(65
)
 
$
(125
)
 
$
(192
)
 
$
(401
)
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

(1)
Net of $(3) million in tax in the nine months ended October 29, 2016.                    
(2)
Net of $1 million and $3 million in tax in the three and nine months ended October 29, 2016, respectively. Pre-tax amounts of $(4) million and $(8) million in the three and nine months ended October 29, 2016, respectively, were recognized in SG&A in the Consolidated Statements of Operations.
(3)
Pre-tax amounts of $2 million and $6 million in the three and nine months ended October 29, 2016, respectively, were recognized in Pension in the Consolidated Statements of Operations. Pre-tax amounts of $(2) million and $(6) million in the three and nine months ended October 29, 2016, respectively, were recognized in SG&A in the Consolidated Statements of Operations.
(4)
Net of $(1) million and $3 million of tax in the three and nine months ended October 29, 2016, respectively. Net of $5 million and $9 million of tax in the three and nine months ended October 31, 2015, respectively.
(5)
Net of $(1) million and $(3) million of tax in the three and nine months ended October 29, 2016, respectively, and $3 million and $9 million in pre-tax amounts for the three and nine months ended October 29, 2016, respectively, were recognized in Net interest expense in the Consolidated Statements of Operations. Net of $(1) million and $(2) million of tax in the three and nine months ended October 31, 2015, respectively, and $2 million and $4 million in pre-tax amounts for the three and nine months ended October 31, 2015, respectively, were recognized in Net interest expense in the Consolidated Statements of Operations.

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Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
 
October 29,
2016
 
October 31,
2015
 
January 30,
2016
(In millions, except per share data)
(Unaudited)
 
(Unaudited)
 
 
 
 
 
As Adjusted
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash in banks and in transit
$
172

 
$
152

 
$
119

Cash short-term investments
11

 
486

 
781

Cash and cash equivalents
183

 
638

 
900

Merchandise inventory
3,691

 
3,669

 
2,721

Deferred taxes
208

 
208

 
231

Prepaid expenses and other
254

 
218

 
166

Total current assets
4,336

 
4,733

 
4,018

Property and equipment (net of accumulated depreciation of $3,802, $3,686 and $3,757)
4,651

 
4,905

 
4,816

Prepaid pension
—

 
289

 
—

Other assets
608

 
623

 
608

Total Assets
$
9,595

 
$
10,550

 
$
9,442

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Merchandise accounts payable
$
1,493

 
$
1,453

 
$
925

Other accounts payable and accrued expenses
1,170

 
1,246

 
1,360

Current portion of capital leases and note payable
15

 
26

 
26

Current maturities of long-term debt
263

 
106

 
101

Total current liabilities
2,941

 
2,831

 
2,412

Long-term capital leases and note payable
9

 
14

 
10

Long-term debt
4,509

 
5,147

 
4,668

Deferred taxes
406

 
395

 
425

Other liabilities
590

 
616

 
618

Total Liabilities
8,455

 
9,003

 
8,133

Stockholders’ Equity
 
 
 
 
 
Common stock(1)
154

 
153

 
153

Additional paid-in capital
4,676

 
4,639

 
4,654

Reinvested earnings/(accumulated deficit)
(3,198
)
 
(2,876
)
 
(3,007
)
Accumulated other comprehensive income/(loss)
(492
)
 
(369
)
 
(491
)
Total Stockholders’ Equity
1,140

 
1,547

 
1,309

Total Liabilities and Stockholders’ Equity
$
9,595

 
$
10,550

 
$
9,442


(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 307.8 million, 305.5 million and 306.1 million as of October 29, 2016, October 31, 2015 and January 30, 2016, respectively.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


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Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
 
 
 
As Adjusted
 
 
 
As Adjusted
Cash flows from operating activities
 
 
 
 
 
 
 
Net income/(loss)
$
(67
)
 
$
(115
)
 
$
(191
)
 
$
(382
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
 
 
 
 
 
 
 
Restructuring and management transition
—

 
(1
)
 
(1
)
 
3

Asset impairments and other charges
—

 
4

 
2

 
6

Net gain on sale of non-operating assets
—

 
(1
)
 
(5
)
 
(9
)
Net gain on sale of operating assets
—

 
(1
)
 
(10
)
 
(9
)
(Gain)/loss on extinguishment of debt
—

 
—

 
30

 
—

Depreciation and amortization
149

 
152

 
456

 
459

Benefit plans
(14
)
 
(25
)
 
(41
)
 
(73
)
Stock-based compensation
7

 
12

 
27

 
33

Deferred taxes
3

 
(8
)
 
3

 
(5
)
Change in cash from:
 
 
 
 
 
 
 
Inventory
(710
)
 
(664
)
 
(970
)
 
(1,017
)
Prepaid expenses and other
(19
)
 
(22
)
 
(87
)
 
(33
)
Merchandise accounts payable
399

 
331

 
568

 
456

Current income taxes
(1
)
 
4

 
(5
)
 
10

Accrued expenses and other
60

 
102

 
(177
)
 
145

Net cash provided by/(used in) operating activities
(193
)
 
(232
)
 
(401
)
 
(416
)
Cash flows from investing activities
 
 
 
 
 
 
 
Capital expenditures
(122
)
 
(93
)
 
(282
)
 
(234
)
Net proceeds from sale of non-operating assets
—

 
—

 
2

 
13

Net proceeds from sale of operating assets
—

 
1

 
16

 
6

Joint venture return of investment
—

 
—

 
15

 
—

Net cash provided by/(used in) investing activities
(122
)
 
(92
)
 
(249
)
 
(215
)
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt
—

 
—

 
2,188

 
—

Proceeds from borrowings under the credit facility
259

 
—

 
259

 
—

Payments of borrowings under the credit facility
(97
)
 
—

 
(97
)
 
—

Payments of capital leases and note payable
(5
)
 
(4
)
 
(24
)
 
(27
)
Payments of long-term debt
(89
)
 
(7
)
 
(2,339
)
 
(20
)
Financing costs
—

 
—

 
(49
)
 
—

Proceeds from stock options exercised
1

 
—

 
2

 
—

Tax withholding payments for vested restricted stock
—

 
—

 
(7
)
 
(2
)
Net cash provided by/(used in) financing activities
69

 
(11
)
 
(67
)
 
(49
)
Net increase/(decrease) in cash and cash equivalents
(246
)
 
(335
)
 
(717
)
 
(680
)
Cash and cash equivalents at beginning of period
429

 
973

 
900

 
1,318

Cash and cash equivalents at end of period
$
183

 
$
638

 
$
183

 
$
638

 
 
 
 
 
 
 
 
Supplemental cash flow information
 
 
 
 
 
 
 
Income taxes received/(paid), net
$
(1
)
 
$
—

 
$
(9
)
 
$
(2
)
Interest received/(paid), net
(103
)
 
(128
)
 
(287
)
 
(312
)
Supplemental non-cash investing and financing activity
 
 
 
 
 
 
 
Increase/(decrease) in other accounts payable related to purchases of property and equipment and software
1

 
(19
)
 
33

 
10


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

5
Table of Contents

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 30, 2016 (2015 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 2015 Form 10-K. The January 30, 2016 financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2015 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 October 29, 2016” and “three months ended October 31, 2015” refer to the 13-week periods ended October 29, 2016 and October 31, 2015, respectively. “Nine months ended October 29, 2016” and “nine months ended October 31, 2015” refer to the 39-week periods ended October 29, 2016 and October 31, 2015, respectively. Fiscal years 2016 and 2015 contain 52 weeks.
Basis of Consolidation
All significant inter-company transactions and balances have been eliminated in consolidation.

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Table of Contents

2.  Change in Accounting for Retirement-Related Benefits
In 2015, the Company elected to change its method of recognizing pension expense. Previously, for the primary and supplemental pension plans, net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) were recognized over the remaining service period of plan participants (eight years for the primary pension plan). Under the Company’s new accounting method, the Company recognizes changes in net actuarial gains or losses in excess of the corridor annually in the fourth quarter each year (Mark-to-market Adjustment). The remaining components of pension expense, primarily service and interest costs and assumed return on plan assets, will be recorded on a quarterly basis. While the historical policy of recognizing pension expense was considered acceptable, the Company believes that the new policy is preferable as it eliminates the delay in recognition of actuarial gains and losses outside the corridor.

This change has been reported through retrospective application of the new policy to all periods presented. The impacts of all adjustments made to the financial statements are summarized below:

Consolidated Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
October 31, 2015
 
October 31, 2015
($ in millions, except per share data)
Previously Reported
 
As Adjusted
 
Effect of Change
 
Previously Reported
 
As Adjusted
 
Effect of Change
Pension
$
12

 
$
(17
)
 
$
(29
)
 
$
35

 
$
(52
)
 
$
(87
)
Income/(loss) before income taxes
(147
)
 
(118
)
 
29

 
(461
)
 
(374
)
 
87

Income tax expense/(benefit)
(10
)
 
(3
)
 
7

 
(19
)
 
8

 
27

Net income/(loss)
$
(137
)
 
(115
)
 
$
22

 
$
(442
)
 
(382
)
 
$
60

Basic earnings/(loss) per common share
$
(0.45
)
 
$
(0.38
)
 
$
0.07

 
$
(1.45
)
 
$
(1.25
)
 
$
0.20

Diluted earnings/(loss) per common share
$
(0.45
)
 
$
(0.38
)
 
$
0.07

 
$
(1.45
)
 
$
(1.25
)
 
$
0.20


Consolidated Statements of Comprehensive Income/(Loss)
 
Three Months Ended
 
Nine Months Ended
 
October 31, 2015
 
October 31, 2015
($ in millions)
Previously Reported
 
As Adjusted
 
Effect of Change
 
Previously Reported
 
As Adjusted
 
Effect of Change
Net income/(loss)
$
(137
)
 
$
(115
)
 
$
22

 
$
(442
)
 
$
(382
)
 
$
60

Reclassifications for amortization of net actuarial (gain)/loss
18

 
—

 
(18
)
 
53

 
—

 
(53
)
Deferred tax valuation allowance
—

 
(4
)
 
(4
)
 
—

 
(7
)
 
(7
)
Total other comprehensive income/(loss), net of tax
12

 
(10
)
 
(22
)
 
41

 
(19
)
 
(60
)
Total comprehensive income/(loss), net of tax
$
(125
)
 
$
(125
)
 
$
—

 
$
(401
)
 
$
(401
)
 
$
—

Consolidated Balance Sheets
 
October 31, 2015
($ in millions)
Previously Reported
 
As Adjusted
 
Effect of Change
Reinvested earnings/(accumulated deficit)
$
(2,221
)
 
$
(2,876
)
 
$
(655
)
Accumulated other comprehensive income/(loss)
(1,024
)
 
(369
)
 
655


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Table of Contents

Consolidated Statements of Cash Flows
 
Three Months Ended
 
Nine Months Ended
 
October 31, 2015
 
October 31, 2015
($ in millions)
Previously Reported
 
As Adjusted
 
Effect of Change
 
Previously Reported
 
As Adjusted
 
Effect of Change
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss)
$
(137
)
 
$
(115
)
 
$
22

 
$
(442
)
 
$
(382
)
 
$
60

Benefit plans
4

 
(25
)
 
(29
)
 
14

 
(73
)
 
(87
)
Deferred taxes
$
(15
)
 
$
(8
)
 
$
7

 
$
(32
)
 
$
(5
)
 
$
27


3. Effect of New Accounting Standards
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled (i.e., additional paid-in capital or APIC pools will be eliminated). The guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing. The ASU also provides a practical expedient for public companies that will allow the use of a simplified method to estimate the expected term for certain awards. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect that adopting this new accounting guidance will have on our financial condition, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-05). Under the ASU, the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. Entities may apply the guidance prospectively or on a modified retrospective basis. We are currently evaluating the effect that adopting this new accounting guidance will have on our financial condition, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. Entities should apply the guidance retrospectively, but if it is impracticable to do so for an issue, the amendments related to that issue may be applied prospectively. We are currently evaluating the effect that adopting this new accounting guidance will have on our financial condition, results of operations or cash flows.

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Table of Contents

4. 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
 
Nine Months Ended
(in millions, except per share data)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
Earnings/(loss)
 
 
 
 
 
 
 
Net income/(loss)
$
(67
)
 
$
(115
)
 
$
(191
)
 
$
(382
)
Shares
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic shares)
308.3


306.0

 
307.8

 
305.8

Adjustment for assumed dilution:
 
 
 
 
 
 
 
Stock options, restricted stock awards and warrant
—

 
—

 
—

 
—

Weighted average shares assuming dilution (diluted shares)
308.3

 
306.0

 
307.8

 
305.8

EPS
 
 
 
 
 
 
 
Basic
$
(0.22
)
 
$
(0.38
)
 
$
(0.62
)
 
$
(1.25
)
Diluted
$
(0.22
)
 
$
(0.38
)
 
$
(0.62
)
 
$
(1.25
)
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
 
Nine Months Ended
(Shares in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
Stock options, restricted stock awards and warrant
32.9

 
32.0

 
33.7

 
31.8


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5. Long-Term Debt
($ in millions)
 
October 29, 2016
 
October 31, 2015
 
January 30, 2016
Issue:
 
 
 
 
 
 
5.65% Senior Notes Due 2020 (1)
 
$
400

 
$
400

 
$
400

5.75% Senior Notes Due 2018 (1)
 
265

 
300

 
300

5.875% Senior Secured Notes Due 2023 (1)
 
500

 
—

 
—

6.375% Senior Notes Due 2036 (1)
 
388

 
400

 
400

6.9% Notes Due 2026
 
2

 
2

 
2

7.125% Debentures Due 2023
 
10

 
10

 
10

7.4% Debentures Due 2037
 
313

 
326

 
326

7.625% Notes Due 2097
 
500

 
500

 
500

7.65% Debentures Due 2016
 
—

 
78

 
78

7.95% Debentures Due 2017
 
220

 
220

 
220

8.125% Senior Notes Due 2019
 
400

 
400

 
400

2014 Credit Facility
 
162

 
—

 
—

2016 Term Loan Facility
 
1,677

 
—

 
—

2013 Term Loan Facility
 
—

 
2,199

 
2,194

2014 Term Loan
 
—

 
494

 
—

Total debt, excluding unamortized debt issuance costs, capital leases and note payable
 
4,837

 
5,329

 
4,830

Unamortized debt issuance costs
 
(65
)
 
(76
)
 
(61
)
Total debt, excluding capital leases and note payable
 
4,772

 
5,253

 
4,769

Less: current maturities
 
263

 
106

 
101

Total long-term debt, excluding capital leases and note payable
 
$
4,509

 
$
5,147

 
$
4,668


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

During the first quarter of 2016, we repurchased and retired $60 million aggregate principal amount of our outstanding debt resulting in a gain on extinguishment of debt of $4 million.

During the second quarter of 2016, we completed the refinancing of our $2.25 billion five-year senior secured term loan facility entered into in 2013 (2013 Term Loan Facility) with an amended and restated $1.688 billion seven-year senior secured term loan credit facility (2016 Term Loan Facility) and the issuance of $500 million of 5.875% Senior Secured Notes due 2023 (Senior Secured Notes), resulting in a loss on extinguishment of debt of $34 million.

The 2016 Term Loan Facility bears interest at a rate of LIBOR (subject to a 1% floor) plus 4.25% and matures on June 23, 2023. We are required to make quarterly repayments in a principal amount equal to $10.55 million during the seven-year term, subject to certain reductions for mandatory and optional prepayments. Proceeds from the 2016 Term Loan Facility and the Senior Secured Notes were used to repay the entire outstanding principal balance of the 2013 Term Loan Facility. The 2016 Term Loan facility and the Senior Secured Notes are guaranteed by the Company and certain subsidiaries of JCP and are secured by mortgages on certain real estate of JCP and the guarantors.
6. Derivative Financial Instruments

We use derivative financial instruments for hedging and non-trading purposes to manage our exposure to changes in interest rates. Use of derivative financial instruments in hedging programs subjects us to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of our derivative financial instruments is used to measure interest to be paid or received and does not

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represent our exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate.

When we use derivative financial instruments for the purpose of hedging our exposure to interest rates, the contract terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is a hedge, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive income/(loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which we have not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change.

We have 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.

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 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
 
October 29, 2016
 
October 31, 2015
 
January 30, 2016
 
Balance Sheet Location
 
October 29, 2016
 
October 31, 2015
 
January 30, 2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
N/A
 
$
—

 
$
—

 
$
—

 
Other accounts payable and accrued expenses
 
$
2

 
$
2

 
$
2

Interest rate swaps
N/A
 
—

 
—

 
—

 
Other liabilities
 
29

 
19

 
28

Total derivatives designated as hedging instruments
 
 
$
—

 
$
—

 
$
—

 
 
 
$
31

 
$
21

 
$
30


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7. Fair Value Disclosures
In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:

•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
Cash Flow Hedges Measured on a Recurring Basis
The $31 million, $21 million and $30 million fair value of our cash flow hedges as of October 29, 2016, October 31, 2015 and January 30, 2016, respectively, 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.

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:
 
 
October 29, 2016
 
October 31, 2015
 
January 30, 2016
($ in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt, excluding unamortized debt issuance costs, capital leases and note payable
$
4,837

 
$
4,759

 
$
5,329

 
$
4,947

 
$
4,830

 
$
4,248

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 October 29, 2016, October 31, 2015 and January 30, 2016, the fair values of cash and cash equivalents and accounts payable 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 nine months ended October 29, 2016:
 
(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 30, 2016
306.1

 
$
153

 
$
4,654

 
$
(3,007
)
 
$
(491
)
 
$
1,309

Net income/(loss)
—

 
—

 
—

 
(191
)
 
—

 
(191
)
Other comprehensive income/(loss)
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Stock-based compensation and other
1.7

 
1

 
22

 
—

 
—

 
23

October 29, 2016
307.8

 
$
154

 
$
4,676

 
$
(3,198
)
 
$
(492
)
 
$
1,140





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Accumulated Other Comprehensive Income/(Loss)
The following table shows the changes in accumulated other comprehensive income/(loss) balances for the nine months ended October 29, 2016:
($ 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 30, 2016
$
(423
)
 
$
(38
)
 
$
(2
)
 
$
(28
)
 
$
(491
)
Other comprehensive income/(loss) before reclassifications
—

 
8

 
—

 
(10
)
 
(2
)
Amounts reclassified from accumulated other comprehensive income
(8
)
 
—

 
—

 
9

 
1

October 29, 2016
$
(431
)
 
$
(30
)
 
$
(2
)
 
$
(29
)
 
$
(492
)

9. Retirement Benefit Plans
The components of net periodic benefit expense/(income) for our non-contributory qualified defined benefit pension plan (Primary Pension Plan) and non-contributory supplemental pension plans were as follows:
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
Primary Pension Plan
 
 
 
 
 
 
 
Service cost
$
14

 
$
17

 
$
41

 
$
52

Interest cost
38

 
49

 
114

 
147

Other cost
—

 
2

 
—

 
5

Expected return on plan assets
(54
)
 
(89
)
 
(161
)
 
(267
)
Amortization of prior service cost/(credit)
2

 
2

 
6

 
6

Net periodic benefit expense/(income)
$
—

 
$
(19
)
 
$
—

 
$
(57
)
 
 
 
 
 
 
 
 
Supplemental Pension Plans
 
 
 
 
 
 
 
Interest cost
1

 
2

 
5

 
5

Net periodic benefit expense/(income)
$
1

 
$
2

 
$
5

 
$
5

 
 
 
 
 
 
 
 
Primary and Supplemental Pension Plans Total
 
 
 
 
 
 
 
Service cost
$
14

 
$
17

 
$
41

 
$
52

Interest cost
39

 
51

 
119

 
152

Other cost
—

 
2

 
—

 
5

Expected return on plan assets
(54
)
 
(89
)
 
(161
)
 
(267
)
Amortization of prior service cost/(credit)
2

 
2

 
6

 
6

Net periodic benefit expense/(income)
$
1

 
$
(17
)
 
$
5

 
$
(52
)
Additionally, the Company had net periodic postretirement income of $6 million and $2 million, respectively, in the three months ended October 29, 2016 and October 31, 2015 and net periodic postretirement income of $14 million and $6 million, respectively, in the nine months ended October 29, 2016 and October 31, 2015. These amounts are related to the Company's noncontributory postretirement health and welfare plan and are included in SG&A expense in the unaudited Interim Consolidated Statements of Operations. The Company communicated to plan participants that the postretirement health and welfare plan will terminate by December 2016 and this resulted in a reduction of the accumulated plan benefit obligation from $8 million at January 30, 2016 to $1 million at October 29, 2016.


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10. Restructuring and Management Transition
The components of Restructuring and management transition include:
•
Home office and stores -- charges for actions to reduce our store and home office expenses including employee termination benefits, store lease termination and impairment charges;
•
Management transition -- charges related to implementing changes within our management leadership team for both incoming and outgoing members of management; and
•
Other -- charges related primarily to contract termination costs and other costs associated with our previous shops strategy and costs related to the closure of certain supply chain locations.
The composition of restructuring and management transition charges was as follows: 
 
Three Months Ended
 
Nine Months Ended
 
Cumulative
Amount From Program Inception Through
October 29, 2016
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
 
Home office and stores
$
2

 
$
9

 
$
6

 
$
38

 
$
295

Management transition
—

 
3

 
3

 
10

 
255

Other
—

 
2

 
8

 
5

 
171

Total
$
2

 
$
14

 
$
17

 
$
53

 
$
721


 Activity for the restructuring and management transition liability for the nine months ended October 29, 2016 was as follows:
($ in millions)
Home Office
and Stores
 
Management
Transition
 
Other
 
Total
January 30, 2016
$
18

 
$
10

 
$
23

 
$
51

Charges
6

 
3

 
8

 
17

Cash payments
(20
)
 
(13
)
 
(10
)
 
(43
)
Non-cash
1

 
—

 
—

 
1

October 29, 2016
$
5

 
$
—

 
$
21

 
$
26

Non-cash amounts represent charges that do not result in cash outflows.
11. Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries. Real estate and other also includes 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.


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The composition of Real estate and other, net was as follows:
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
Net gain from sale of non-operating assets
$
—

 
$
(1
)
 
$
(5
)
 
$
(9
)
Investment income from Home Office Land Joint Venture
—

 
(19
)
 
(29
)
 
(41
)
Net gain from sale of operating assets
—

 
(1
)
 
(10
)
 
(9
)
Other
(1
)
 
23

 
(4
)
 
45

Total expense/(income)
$
(1
)
 
$
2

 
$
(48
)
 
$
(14
)

Investment Income from Joint Ventures
During the first nine months of 2016, the Company had $29 million in income related to its proportional share of the net income in the Home Office Land Joint Venture and received an aggregate cash distribution of $44 million. During the third quarter and first nine months of 2015, the Company had $19 million and $41 million, respectively, in income related to its proportional share of the net income in the Home Office Land Joint Venture and, during the first nine months of 2015, received an aggregate cash distribution of $22 million.

Other
During the third quarter of 2015, the Company accrued an additional $20 million under the settlement related to the pricing class action litigation. Pursuant to the settlement, class members will have the option of selecting a cash payment or store credit. The amount of the payment or credit will depend on the total amount of certain merchandise purchased by each class member during the class period.
12. Income Taxes
The net tax expense of $3 million for the three months ended October 29, 2016 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 a $2 million net tax benefit to adjust the valuation allowance.
The net tax expense of $7 million for the nine months ended October 29, 2016 consisted of state and foreign tax expenses of $10 million and $5 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, offset by net tax benefits of $6 million to adjust the valuation allowance and $2 million for state audit settlements.
As of October 29, 2016, we have approximately $2.6 billion of net operating losses (NOLs) available for U.S. federal income tax purposes, which expire in 2032 through 2034 and $60 million of tax credit carryforwards that expire at various dates through 2035. For these NOL and tax credit carryforwards a net deferred tax asset of $86 million has been recorded, net of a valuation allowance of $845 million. A valuation allowance of $242 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2034. 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 periodic assessment, our estimate of the realization of deferred tax assets is solely based 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 NOL and tax credit carryforwards. Accordingly, in the third quarter and first nine months of 2016, the valuation allowance was increased by $30 million and $62 million, respectively, to offset the net deferred tax assets created in those periods relating primarily to the increase in NOL carryforwards.
13. Litigation and Other Contingencies
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

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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. On June 17, 2015, Macy’s appealed the court’s order that the Judicial Hearing Officer proceed with the damages phase of the proceedings on the tortious interference claim. On November 24, 2015, the Judicial Hearing Officer issued a recommendation on the amount of damages to be awarded to Macy’s. On June 6, 2016, the court adopted the Judicial Hearing Officer's recommendation on the amount of damages to be awarded to Macy's. Both parties have filed a notice of appeal. On November 10, 2016, the appellate court issued a ruling affirming the court's order, finding Macy’s challenge to the measure of damages to be untimely. 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.
 
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 filed a motion to dismiss the consolidated complaint which was denied by the court on September 29, 2015. Defendants filed an answer to the consolidated complaint on November 12, 2015. Plaintiff filed a motion for class certification on January 25, 2016, and defendants submitted a response to the motion on April 15, 2016. On August 29, 2016, a magistrate judge issued a report and recommendation that the motion for class certification be granted. Defendants have filed objections to the report and recommendation.

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.

Also, in March 2016, plaintiff Frank Lipsius filed a purported shareholder derivative action against certain present and former members of the Company's Board of Directors and executives in the District Court of Collin County in the State of Texas. The Company is named as a nominal defendant in the suit. The suit generally mirrors the allegations contained in the Weitzman and Zauderer suits discussed above, and seeks similar relief.


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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.

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 which was granted in part and denied in part by the court on September 29, 2015. The parties have reached a settlement agreement, subject to court approval, pursuant to which JCP would make available $4.5 million to settle class members’ claims. 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’ motion for class certification. Pursuant to a motion by the Company, the California court decertified the class on December 9, 2015. On March 30, 2016, the California court granted JCP’s motion for summary judgment. On April 26, 2016, the California plaintiffs filed a notice of appeal. On May 4, 2016, the California court entered judgment for JCP on all plaintiffs’ claims. 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 Illinois court granted on March 8, 2016. The parties have reached a settlement agreement, subject to court approval, to resolve the California and Illinois actions for a combined total of $6.75 million. 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. The parties reached a settlement agreement, and in accordance with the terms of the settlement, we have established a $50 million reserve to settle class members' claims. The court granted final approval of the settlement on September 30, 2016.

Other Legal Proceedings
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 certain matters discussed above, all of which we believe aggregate to an amount that is not material to the Consolidated Financial Statements. These estimates were developed in consultation with in-house and outside counsel. While no assurance

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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 October 29, 2016, we estimated our total potential environmental liabilities to range from $20 million to $26 million and recorded our best estimate of $24 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.

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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 30, 2016, 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 30, 2016 (2015 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.

Strategic Framework

Our strategic framework is built upon the three pillars of private brands, omnichannel and revenue per customer.

Product differentiation, affordable style and quality and enhanced profitability are critical to the success of our private brands. With our team of designers and our proprietary designs, we believe we can differentiate our private and exclusive brands from our competitors and the overall marketplace. Through our private brand selection, we believe we can provide value to our customers by offering products with style and quality at an attractive price point. Lastly, with our global sourcing infrastructure, we believe we are uniquely positioned to enhance our merchandise margins by managing product development costs and maintaining flexibility with our price offerings. During the third quarters of both 2016 and 2015, private brand merchandise comprised 44% of total merchandise sales. For the first nine months of 2016, private brand merchandise comprised 45% of total merchandise sales as compared to 44% in the corresponding prior year period. During the third quarters of 2016 and 2015, exclusive brand merchandise comprised 8% and 9%, respectively, of total merchandise sales. For the first nine months of 2016 and 2015, exclusive brand merchandise comprised 8% and 10%, respectively, of total merchandise sales.

Our second strategic area of focus is omnichannel. With our heritage of being a catalog retailer, we believe we have the right foundation in place to enhance our omnichannel capabilities. Today’s customer wants to decide when and how she wants to shop, whether in store or online using multiple personal devices. Improving the omnichannel experience for our customers involves further development of our mobile apps, providing more fulfillment choices to the customer and expanding our merchandise assortment.

Our final strategic priority is revenue per customer. For 2016, we are focused on the following initiatives to increase the frequency of customer visits and the amount they spend on every transaction. First, we plan to accelerate our growth of Sephora inside JCPenney locations. During the first nine months of 2016, we opened 60 additional Sephora locations, bringing our total number of locations to 578, and we launched several new brands in our Sephora shops. Second, we continue to enhance our salon environment through our rebranding initiative in partnership with InStyle magazine. Third, we have redesigned the center core area, which includes fashion and fine jewelry, handbags, footwear, sunglasses, and accessories, in approximately 350 of our stores this year. Fourth is our new home initiative. With the current trend of consumer investment in new and existing homes, we believe there is an opportunity for us to add to our offerings a compelling assortment within major appliances, window treatments, furniture and flooring. We have expanded our major appliance initiatives to over 500 stores and online at jcpenney.com this year, and continue to enhance our window coverings presentation and test new initiatives with Ashley Furniture and Empire Today.

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Third Quarter Highlights
 
▪
Sales were $2,857 million with a comparable store sales decrease of 0.8%.

▪
Gross margin as a percentage of sales decreased to 37.2% compared to 37.3% in the same period last year.

▪
Selling, general and administrative (SG&A) expenses decreased $59 million, or 6.2%, for the third quarter of 2016 as compared to the same period last year. These savings were primarily driven by lower corporate overhead, incentive compensation and store controllable costs.

▪
Our net loss was $67 million, or $0.22 per share, compared to a net loss of $115 million, or $0.38 per share, for the corresponding prior year quarter. Results for this quarter included $2 million, or $0.01 per share, of restructuring and management transition charges which are not directly related to our ongoing core business operations.

▪
Earnings before interest expense, income tax (benefit)/expense and depreciation and amortization (EBITDA) (non-GAAP) was $172 million, a $36 million improvement from the same period last year.

▪
Moody's Investors Service upgraded our corporate credit rating in September 2016 to B1 from B3.

▪
We completed our roll out of over 500 new appliance showrooms.

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Results of Operations
 
Three Months Ended
 
Nine Months Ended
 
($ in millions, except EPS)
October 29,
2016
 
October 31,
2015
(1) 
October 29,
2016
 
October 31,
2015
(1) 
Total net sales
$
2,857

 
$
2,897

 
$
8,586

 
$
8,629

 
Percent increase/(decrease) from prior year
(1.4
)%
 
4.8
 %
 
(0.5
)%
 
3.2
 %
 
Comparable store sales increase/(decrease)(2)
(0.8
)%
 
6.4
 %
 
0.3
 %
 
4.6
 %
 
Gross margin
1,062

 
1,082

 
3,164

 
3,188

 
Operating expenses/(income):
 
 
 
 
 
 
 
 
Selling, general and administrative
888

 
947

 
2,613

 
2,813

 
Primary pension plan
—

 
(19
)
 
—

 
(57
)
 
Supplemental pension plans
1

 
2

 
5

 
5

 
Total pension
1

 
(17
)
 
5

 
(52
)
 
Depreciation and amortization
149

 
152

 
456

 
459

 
Real estate and other, net
(1
)
 
2

 
(48
)
 
(14
)
 
Restructuring and management transition
2

 
14

 
17

 
53

 
Total operating expenses
1,039

 
1,098

 
3,043

 
3,259

 
Operating income/(loss)
23

 
(16
)
 
121

 
(71
)
 
(Gain)/loss on extinguishment of debt
—

 
—

 
30

 
—

 
Net interest expense
87

 
102

 
275

 
303

 
Income/(loss) before income taxes
(64
)
 
(118
)
 
(184
)
 
(374
)
 
Income tax expense/(benefit)
3

 
(3
)
 
7

 
8

 
Net income/(loss)
$
(67
)
 
$
(115
)
 
$
(191
)
 
$
(382
)
 
EBITDA (non-GAAP) (3)
$
172

 
$
136

 
$
577

 
$
388

 
Adjusted EBITDA (non-GAAP) (3)
$
174

 
$
111

 
$
560

 
$
334

 
Adjusted net income/(loss) (non-GAAP) (3)
$
(65
)
 
$
(140
)
 
$
(178
)
 
$
(436
)
 
Diluted EPS
$
(0.22
)
 
$
(0.38
)
 
$
(0.62
)
 
$
(1.25
)
 
Adjusted diluted EPS (non-GAAP) (3)
$
(0.21
)
 
$
(0.46
)
 
$
(0.58
)
 
$
(1.43
)
 
Ratios as a percent of sales:
 
 
 
 
 
 
 
 
Gross margin
37.2
 %
 
37.3
 %
 
36.9
 %
 
36.9
 %
 
SG&A
31.1
 %
 
32.7
 %
 
30.4
 %
 
32.6
 %
 
Total operating expenses
36.4
 %
 
37.9
 %
 
35.4
 %
 
37.8
 %
 
Operating income/(loss)
0.8
 %
 
(0.6
)%
 
1.4
 %
 
(0.8
)%
 

(1)
Reflects the retrospective application of the change in our method of recognizing pension expense. See Note 2 of Notes to unaudited Interim Consolidated Financial Statements for a discussion of the change and related impacts.
(2)
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. 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. Our definition and calculation of comparable store sales may differ from other companies in the retail industry.
(3)
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.





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Total Net Sales
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29, 2016
 
October 31, 2015
 
October 29,
2016
 
October 31,
2015
Total net sales
$
2,857

 
$
2,897

 
$
8,586

 
$
8,629

Sales percent increase/(decrease):
 
 
 
 
 
 
 
Total net sales
(1.4
)%
 
4.8
%
 
(0.5
)%
 
3.2
%
Comparable store sales
(0.8
)%
 
6.4
%
 
0.3
 %
 
4.6
%

Total net sales decreased $40 million in the third quarter of 2016 compared to the third quarter of 2015. For the first nine months of 2016, total net sales decreased $43 million from the same period last year.

The following table provides the components of the net sales increase/(decrease): 
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29, 2016
 
October 29, 2016
Comparable store sales increase/(decrease)
$
(23
)
 
$
29

Closed stores, net
(13
)
 
(67
)
Other revenues and sales adjustments
(4
)
 
(5
)
Total net sales increase/(decrease)
$
(40
)
 
$
(43
)
As our omnichannel strategy continues to mature, it is increasingly difficult to distinguish between a store sale and an Internet sale. Because we no longer have a clear distinction between store sales and Internet sales, we do not separately report Internet sales. Below is a list of some of our omnichannel activities:
•
Stores increase Internet sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online.
•
Our website increases store sales as in-store customers have often pre-shopped online before shopping in the store, including verification of which stores have online merchandise in stock.
•
Most Internet purchases are easily returned in our stores.
•
JCP Rewards can be earned and redeemed online or in stores.
•
In-store customers can order from our website with the assistance of associates in our stores or they can shop our website from the JCPenney app while inside the store.
•
Customers who utilize our mobile application can receive mobile coupons to use when they check out both online or in our stores.
•
Internet orders can be shipped from a dedicated jcpenney.com fulfillment center, a store, a store merchandise distribution center, a regional warehouse, directly from vendors or any combination of the above.
•
Certain categories of store inventory can be accessed and purchased by jcpenney.com customers and shipped directly to the customer's home from the store.
•
Internet orders can be shipped to stores for customer pick up.
•
"Buy online and pick up in store same day" is now available in all of our stores.

For the three months ended October 29, 2016, comparable store sales decreased 0.8%, while total net sales decreased 1.4% to $2,857 million compared with $2,897 million for the three months ended October 31, 2015. For the nine months ended October 29, 2016, comparable store sales increased 0.3%, while total net sales decreased 0.5% to $8,586 million compared with $8,629 million for the nine months ended October 31, 2015.

For the third quarter of 2016, average unit retail increased while conversion rate, units per transaction and transaction counts all decreased as compared to the prior year. For the first nine months of 2016, conversion rate and units per transaction increased while transaction counts and average unit retail decreased as compared to the prior year.


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For the third quarter of 2016, Sephora, Home and Fine Jewelry were our top-performing merchandise divisions all experiencing sales gains on a comparable store basis. For the first nine months of 2016, our top-performing merchandise divisions were Sephora, Home, Footwear and Handbags and Men's. Geographically, the Pacific and Northwest were the best performing regions of the country during the third quarter of 2016. The Pacific, Northeast and Northwest regions performed the best during the first nine months of 2016.
Store Count
The following table compares the number of stores for the three and nine months ended October 29, 2016 and October 31, 2015: 
 
Three Months Ended
 
Nine Months Ended
 
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
JCPenney department stores
 
 
 
 
 
 
 
Beginning of period
1,014

 
1,023

 
1,021

 
1,062

Stores opened
1

 
—

 
1

 
—

Closed stores
(1
)
 
(2
)
 
(8
)
 
(41
)
End of period(1)
1,014

 
1,021

 
1,014

 
1,021

(1)
Gross selling space, including selling space allocated to services and licensed departments, was 104 million square feet as of October 29, 2016 and 105 million square feet as of October 31, 2015.

Gross Margin
Gross margin for the three months ended October 29, 2016 was $1,062 million, a decrease of $20 million compared to $1,082 million for the three months ended October 31, 2015. Gross margin as a percentage of sales for the three months ended October 29, 2016 was 37.2% compared to 37.3% for the three months ended October 31, 2015. The slight decline in the gross margin rate was primarily due to lower Internet and major appliance selling margins and higher clearance markdowns.

Gross margin for the nine months ended October 29, 2016 was $3,164 million, a decrease of $24 million compared to $3,188 million for the nine months ended October 31, 2015. Gross margin as a percentage of sales was 36.9% for both the nine months ended October 29, 2016 and October 31, 2015.

SG&A Expenses
For the three months ended October 29, 2016, SG&A expenses were $59 million lower than the corresponding period of 2015. As a percent of sales, SG&A expenses decreased to 31.1% compared to 32.7% in the third quarter of 2015. Through the first nine months of 2016, SG&A expenses were $200 million lower than the corresponding period of 2015. Through the first nine months of 2016, as a percent of sales, SG&A expenses decreased to 30.4% compared to 32.6% in the corresponding period of 2015, reflecting effective management of SG&A expenses. The net decrease in SG&A expenses for the third quarter and first nine months of 2016 as compared to the corresponding prior year periods was primarily driven by lower store controllable costs and corporate overhead, reduced incentive compensation, more efficient advertising spend and improved private label credit card income.

Our private label credit card and co-branded MasterCard® programs are owned and serviced by Synchrony Financial (Synchrony).  Under our agreement with Synchrony, we receive cash payments from Synchrony based upon the performance of the credit card portfolio.  We participate in the programs by providing marketing promotions designed to increase the use of each card, including enhanced marketing offers for cardholders. Additionally, we accept payments in our stores from cardholders who prefer to pay in person when they are shopping in our locations. The income we earn under our agreement with Synchrony is included as an offset to SG&A expenses. For the third quarters of 2016 and 2015, we recognized income of $81 million and $75 million, respectively, pursuant to our private label credit card program. Through the first nine months of 2016 and 2015, we recognized income of $235 million and $216 million, respectively.








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Pension Expense
Pension expense/(income) provided below reflects the retrospective application of the change in our method of recognizing pension expense. See Note 2 of Notes to unaudited Interim Consolidated Financial Statements for a discussion of this change and related impacts.
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
Primary Pension Plan
$
—

 
$
(19
)
 
$
—

 
$
(57
)
Supplemental pension plans
1

 
2

 
5

 
5

Total pension expense
$
1

 
$
(17
)
 
$
5

 
$
(52
)
Total pension expense, which consists of expense/(income) from our Primary Pension Plan and our supplemental pension plans, is based on our 2015 year-end measurement of pension plan assets and benefit obligations. For the third quarter of 2016, our Primary Pension Plan had income of $0 million compared to income of $19 million in the third quarter of 2015. For the first nine months of 2016, our Primary Pension Plan had income of $0 million compared to income of $57 million in the prior year corresponding period. The year-over-year decrease in income for our Primary Pension Plan was primarily driven by the lower expected return on assets estimated to cover the pension costs to be incurred.
Depreciation and Amortization Expense
Depreciation and amortization expense was $149 million and $152 million for the three months ended October 29, 2016 and October 31, 2015, respectively, and $456 million and $459 million for the nine months ended October 29, 2016 and October 31, 2015, respectively.
Restructuring and Management Transition
The composition of restructuring and management transition charges was as follows: 
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
Home office and stores
$
2

 
$
9

 
$
6

 
$
38

Management transition
—

 
3

 
3

 
10

Other
—

 
2

 
8

 
5

Total
$
2

 
$
14

 
$
17

 
$
53


During the nine months ended October 29, 2016 and October 31, 2015, we recorded $6 million and $38 million, respectively, of costs to reduce our store and home office expenses. Costs during the first nine months of 2016 primarily include employee termination benefits in connection with the elimination of positions in our home office. During the first nine months of 2015, we incurred charges of $24 million related to employee termination benefits and lease termination costs associated with the closure of 41 stores. Additionally, during the first nine months of 2015, we incurred $14 million related to employee termination benefits in connection with the elimination of approximately 300 positions in our home office.

We also implemented changes within our management leadership team during the nine months ended October 29, 2016 and October 31, 2015 that resulted in management transition costs of $3 million and $10 million, respectively, for both incoming and outgoing members of management.

Other miscellaneous restructuring charges of $8 million and $5 million, primarily related to contract termination and other costs associated with our previous shops strategy and costs related to the closure of certain supply chain locations, were recorded during the nine months ended October 29, 2016 and October 31, 2015, respectively.

Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries. Real estate and other also includes 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 (the 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.

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Table of Contents

The composition of Real estate and other, net was as follows:  
 
Three Months Ended
 
Nine Months Ended
($ in millions)
October 29,
2016
 
October 31,
2015
 
October 29,
2016
 
October 31,
2015
Net gain from sale of non-operating assets
$
—

 
$
(1
)
 
$
(5
)
 
$
(9
)
Investment income from Home Office Land Joint Venture
—