Edgar Filing: J C PENNEY CO INC

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended January 28, 2012

¨	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 001-15274

LOGO

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)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock of 50 cents par value		New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 ¨

(Do not check if a smaller reporting company)

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (July 30, 2011). $4,623,250,578

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

218,299,029 shares of Common Stock of 50 cents par value, as of March 19, 2012.

DOCUMENTS INCORPORATED BY REFERENCE


Documents from which portions are incorporated by reference		Parts of the Form 10-K into which incorporated
J. C. Penney Company, Inc. 2012 Proxy Statement		Part III

INDEX


		Page

Part I

Item 1.	Business		1

Item 1A.	Risk Factors		5

Item 1B.	Unresolved Staff Comments		10

Item 2.	Properties		11

Item 3.	Legal Proceedings		13

Item 4.	Mine Safety Disclosures		13

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14

Item 6.	Selected Financial Data		16

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		44

Item 8.	Financial Statements and Supplementary Data		45

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		45

Item 9A.	Controls and Procedures		45

Item 9B.	Other Information		48

Part III

Item 10.	Directors, Executive Officers and Corporate Governance		48

Item 11.	Executive Compensation		48

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		49

Item 13.	Certain Relationships and Related Transactions, and Director Independence		49

Item 14.	Principal Accounting Fees and Services		49

Part IV

Item 15.	Exhibits, Financial Statement Schedules		50

	Signatures		51

	Index to Consolidated Financial Statements		F-1

	Exhibit Index		E-1

PART I

Item 1. Business.

Business Overview

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 new holding company assumed the name J. C. Penney Company, Inc. (Company). The holding company has no independent assets or operations, and no direct subsidiaries other than JCP. Common stock of the Company is publicly traded under the symbol “JCP” on the New York Stock Exchange. The Company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee by the Company of certain of JCP’s outstanding debt securities is full and unconditional. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this Annual Report on Form 10-K as “we,” “us,” “our,” “ourselves,” “Company” or “jcpenney.”

Since our founding by James Cash Penney in 1902, we have grown to be a major retailer, operating 1,102 department stores in 49 states and Puerto Rico as of January 28, 2012. Our fiscal year ends on the Saturday closest to January 31. Unless otherwise stated, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal year 2011 ended on January 28, 2012; fiscal year 2010 ended on January 29, 2011; and fiscal year 2009 ended on January 30, 2010. Each consisted of 52 weeks.

Our business consists of selling merchandise and services to consumers through our department stores and through our Internet website at jcp.com. Department stores and Internet generally serve the same type of customers and provide virtually the same mix of merchandise, and department stores accept returns from sales made in stores and via the Internet. We sell family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside jcpenney and home furnishings. In addition, our department stores provide our customers with services such as styling salon, optical, portrait photography and custom decorating.

Our merchandise mix of total net sales over the last three years was as follows:


	2011			2010			2009
Women’s apparel		25	%		24	%		24	%
Men’s apparel and accessories		20	%		20	%		19	%
Home		15	%		18	%		19	%
Women’s accessories, including Sephora		12	%		12	%		11	%
Children’s apparel		12	%		11	%		11	%
Family footwear		7	%		7	%		7	%
Fine jewelry		4	%		4	%		4	%
Services and other		5	%		4	%		5	%

		100	%		100	%		100	%

Business Strategy

On January 25-26, 2012, we announced our plans to become America’s favorite store. As of February 1, 2012, we introduced a new pricing and promotional strategy as well as a new personality for jcpenney and we began implementation of the remaining three pillars of our strategy. Our transformational strategy is based on 6 P’s of retail – price, promotion, personality, product, presentation and place – as outlined below:

•

Price. Our new pricing strategy is called Fair and Square^TM and includes three types of prices: (1) everyday, (2) month-long and (3) best or our lowest prices.

•

Promotion. Our new brand marketing campaign showcases our products, highlights our new pricing strategy and focuses on 12 promotional events each year corresponding and themed to each calendar month.

•

Personality. We are revitalizing our brand to honor our century-old legacy and introduced a new logo that is evocative of everything we stand for: Fair and Square.

•

Product. We are making substantial changes in our merchandise and plan to add more global brands into our merchandise assortment.

•

Presentation and Place. We plan to re-organize our department stores into separately curated stores, shops and boutiques known as The Shops^TM that will align a pathway through our stores known as The Street^TM, which will surround The Square^TM, a re-imagined center core experience offering attractions and services.

Competition and Seasonality

The business of marketing merchandise and services is highly competitive. We are one of the largest department store and e-commerce retailers in the United States, and we have numerous competitors, as further described in Item 1A, Risk Factors. Many factors enter into the competition for the consumer’s patronage, including price, quality, style, service, product mix, convenience and credit availability. Our annual earnings depend to a great extent on the results of operations for the last quarter of the fiscal year, which includes the holiday season, when a significant portion of our sales and profits are recorded.

Trademarks

The jcpenney^®, Fair and Square, Liz Claiborne^®, Okie Dokie^®, Worthington^®, east5th^®, a.n.a^®, St. John’s Bay^®, The Original Arizona Jean Company^®, Ambrielle^®, Decree^®, Linden Street™, Article 365^®, Uproar^®, Stafford^®, J. Ferrar^®, jcpenney Home Collection^® and Studio by jcpenney Home Collection^® trademarks, as well as certain other trademarks, have been registered, or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. We consider our marks and the accompanying name recognition to be valuable to our business.

Website Availability

We maintain Internet websites at www.jcpenney.com and www.jcpenney.net and make available free of charge through these websites our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all related amendments to those reports, as soon as reasonably practicable after the materials are electronically filed with or furnished to the Securities and Exchange

Commission. In addition, our websites also provide press releases, access to webcasts of management presentations and other materials useful in evaluating our Company.

Suppliers

We have a diversified supplier base, both domestic and foreign, and are not dependent to any significant degree on any single supplier. We purchase our merchandise from over 2,500 domestic and foreign suppliers, many of which have done business with us for many years. In addition to our Plano, Texas home office, we, through our international purchasing subsidiary, maintained buying and quality assurance inspection offices in 15 foreign countries as of January 28, 2012.

Employment

The Company and its consolidated subsidiaries employed approximately 159,000 full-time and part-time associates as of January 28, 2012.

Environmental Matters

Environmental protection requirements did not have a material effect upon our operations during 2011. It is possible that compliance with such requirements (including any new requirements) would lengthen lead time in expansion or renovation plans and increase construction costs, and therefore operating costs, due in part to the expense and time required to conduct environmental and ecological studies and any required remediation.

As of January 28, 2012, we estimated our total potential environmental liabilities to range from $21 million to $27 million and recorded our best estimate of $21 million in other liabilities in the 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 effect on our financial condition, results of operations or liquidity.

Executive Officers of the Registrant

The following is a list, as of March 1, 2012, of the names and ages of the executive officers of J. C. Penney Company, Inc. and of the offices and other positions held by each such person with the Company. These officers hold identical positions with JCP. References to Company positions held during fiscal years 2001 and earlier (prior to the creation of the holding company) are for JCP. There is no family relationship between any of the named persons.


Name	Offices and Other Positions Held With the Company	Age

Ronald B. Johnson	Chief Executive Officer		53

Michael R. Francis	President		49

Michael W. Kramer	Chief Operating Officer		47

Daniel E. Walker	Chief Talent Officer		61

Michael P. Dastugue	Executive Vice President and Chief Financial Officer		47

Janet Dhillon	Executive Vice President, General Counsel and Secretary		49

Dennis P. Miller	Senior Vice President and Controller		59

Mr. Johnson has served as Chief Executive Officer of the Company since November 2011. He previously served as Senior Vice President, Retail of Apple, Inc. Prior to joining Apple in 2000, he held a variety of positions with Target Corporation, including Senior Vice President of Merchandising. During his tenure at Target, Mr. Johnson had responsibility for such categories as Men’s Apparel, Women’s Apparel and Accessories, Children’s and Home. He has served as a director of the Company and as a director of JCP since 2011.

Mr. Francis has served as President of the Company since October 2011. Prior to joining the Company, he was Executive Vice President and Chief Marketing Officer for Target Corporation. Mr. Francis began his 25-year merchandising and marketing career in 1985 as an executive trainee with Marshall Field’s in Chicago, which was acquired by Target in 1990. He held a series of positions of increasing responsibility at Target including Media Manager, Advertising Director, Marketing Vice President and Executive Vice President, Marketing before being named Chief Marketing Officer in 2008.

Mr. Kramer has served as Chief Operating Officer of the Company since December 2011. Prior to joining the Company, he was President and Chief Executive Officer of Kellwood Company. From 2005 to 2008, Mr. Kramer was Executive Vice President and Chief Financial Officer at Abercrombie & Fitch. From 2000 to 2005, he was at Apple, Inc., where he served as Chief Financial Officer of Apple retail. Mr. Kramer previously held key financial leadership roles with The Limited, Pizza Hut and Einstein Noah Bagel Corporation.

Mr. Walker has served as Chief Talent Officer of the Company since November 2011. He served as Chief Talent Officer for Apple, Inc. from 2000 to 2004 and as Vice President of Human Resources at Gap from 1986 to 1992. Mr. Walker founded and led The Human Revolution Studios prior to joining the Company, and Daniel Walker and Associates, an executive search and consulting firm, prior to joining Apple. Prior to joining Gap, he was Director of Human Resources for the Specialty Retail Group at General Mills and worked for Lazarus Department Stores, a division of Federated Department Stores.

Mr. Dastugue has served as Executive Vice President and Chief Financial Officer of the Company since January 2011 and served as Senior Vice President, Finance, from 2010 to 2011. Since 1991, he has held a series of positions of increasing responsibility with the Company, including Vice President and Treasurer from 2000 to 2004, Senior Vice President, Director of Corporate Finance in 2005 and Senior Vice President, Director of Property Development from 2005 to 2010. He has served as a director of JCP since January 2011.

Ms. Dhillon has served as Executive Vice President, General Counsel and Secretary of the Company since 2009. Prior to joining the Company, she served as Senior Vice President and General Counsel and Chief Compliance Officer of US Airways Group, Inc. and US Airways, Inc. from 2006 to 2009. Ms. Dhillon joined US Airways, Inc. in 2004 as Managing Director and Associate General Counsel and served as Vice President and Deputy General Counsel of US Airways Group, Inc. and US Airways, Inc. from 2005 to 2006. Ms. Dhillon was with the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1991 to 2004. She has served as a director of JCP since July 2009.

Mr. Miller has served as Senior Vice President and Controller of the Company since 2008. He served as Vice President, Director of Procurement and Strategic Sourcing of JCP from 2004 to 2008. From 2001 to 2004, he served as Senior Vice President and Chief Financial Officer of Eckerd Corporation, a former subsidiary of the Company.

Item 1A. Risk Factors.

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.

Our Company’s growth and profitability depend on the level of consumer confidence and spending.

Our results of operations are sensitive to changes in overall economic and political conditions that impact consumer spending, including discretionary spending. Many economic factors outside of our control, including the housing market, interest rates, recession, inflation and deflation, energy costs and availability, consumer credit availability and terms, consumer debt levels, tax rates and policy, and unemployment trends influence consumer confidence and spending. The domestic and international political situation and actions also affect consumer confidence and spending. Additional events that could impact our performance include pandemics, terrorist threats and activities, worldwide military and domestic disturbances and conflicts, political instability and civil unrest. Declines in the level of consumer spending could adversely affect our growth and profitability.

The retail industry is highly competitive, which could adversely impact our sales and profitability.

The retail industry is highly competitive, with few barriers to entry. We compete with many other local, regional and national retailers for customers, associates, locations, merchandise, services and other important aspects of our business. Those competitors include other department stores, discounters, home furnishing stores, specialty retailers, wholesale clubs, direct-to-consumer businesses, including the Internet, and other forms of retail commerce. Some competitors are larger

than jcpenney, have greater financial resources available to them, and, as a result, may be able to devote greater resources to sourcing, promoting and selling their products. Competition is characterized by many factors, including merchandise assortment, advertising, price, quality, service, location, reputation and credit availability. The performance of competitors as well as changes in their pricing and promotional policies, marketing activities, new store openings, launches of Internet websites, brand launches and other merchandise and operational strategies could cause us to have lower sales, lower gross margin and/or higher operating expenses such as marketing costs and other selling, general and administrative expenses, which in turn could have an adverse impact on our profitability.

Our sales and operating results depend on customer preferences and fashion trends.

Our sales and operating results depend in part on our ability to predict and respond to changes in fashion trends and customer preferences in a timely manner by consistently offering stylish quality merchandise assortments at competitive prices. We continuously assess emerging styles and trends and focus on developing a merchandise assortment to meet customer preferences. Even with these efforts, we cannot be certain that we will be able to successfully meet constantly changing customer demands. To the extent our predictions differ from our customers’ preferences, we may be faced with excess inventories for some products and/or missed opportunities for others. Excess inventories can result in lower gross margins due to greater than anticipated discounts and markdowns that might be necessary to reduce inventory levels. Low inventory levels can adversely affect the fulfillment of customer demand and diminish sales and brand loyalty. Consequently, any sustained failure to identify and respond to emerging trends in lifestyle and customer preferences and buying trends could have an adverse impact on our business and any significant misjudgments regarding inventory levels could adversely impact our results of operations.

We face uncertainties in connection with the implementation of our strategies to transform our business.

In 2011, we recruited a new executive team and announced plans to transform our business, including changes in our pricing strategy, marketing cadence, store layout and merchandise assortments. The success of our transformation is subject to both the risks affecting our business generally and the inherent difficulties associated with implementing our new strategies and is largely dependent on the skills, experience, and efforts of our management and other associates. The loss of the services of one or more key operations executives or of numerous associates with essential skills could have an adverse impact on our business. Our transformational plan involves the re-imagining of some of our business practices and may result in a restructuring of our traditional vendor arrangements, including the sharing of certain costs and expenses. There is no assurance that we will be able to successfully implement these strategic initiatives, which may result in an adverse impact on our business and financial results. In addition, the changes to our pricing strategies announced in January 2012 could result in a prolonged decline in sales. There can be no assurance that our new pricing, marketing and merchandising strategies, or any future modifications of our strategies, will be successful or result in improved operating results or productivity.

Our profitability depends on our ability to source merchandise and deliver it to our customers in a timely and cost-effective manner.

Our merchandise is sourced from a wide variety of suppliers, and our business depends on being able to find qualified suppliers and access products in a timely and efficient manner. A substantial portion

of our merchandise is sourced outside of the United States. All of our suppliers must comply with our supplier legal compliance program and applicable laws, including consumer and product safety laws. Although we diversify our sourcing and production by country, the failure of a supplier to produce and deliver our goods on time, to meet our quality standards and adhere to our product safety requirements or to meet the requirements of our supplier compliance program or applicable laws, or our inability to flow merchandise to our stores or through the Internet channel in the right quantities at the right time could adversely affect our profitability and could result in damage to our reputation. Inflationary pressures on commodity prices and other input costs could increase our cost of goods, and an inability to pass such cost increases on to our customers or a change in our merchandise mix as a result of such cost increases could have an adverse impact on our profitability. Additionally, the impact of current and future economic conditions on our suppliers cannot be predicted and may cause our suppliers to be unable to access financing or become insolvent and thus become unable to supply us with products. Similarly, political or financial instability, changes in U.S. and foreign laws and regulations affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws and regulations, as well as currency exchange rates, transport capacity and costs and other factors relating to foreign trade and the inability to access suitable merchandise on acceptable terms could adversely impact our results of operations.

Our business is seasonal, which impacts our results of operations.

Our annual earnings and cash flows depend to a great extent on the results of operations for the last quarter of our fiscal year, which includes the holiday season. Our fiscal fourth-quarter results may fluctuate significantly, based on many factors, including holiday spending patterns and weather conditions. This seasonality causes our operating results to vary considerably from quarter to quarter.

Our profitability may be impacted by weather conditions.

Our merchandise assortments reflect assumptions regarding expected weather patterns and our profitability depends on our ability to timely deliver seasonally appropriate inventory. Unseasonable or unexpected weather conditions such as warm temperatures during the winter season or prolonged or extreme periods of warm or cold temperatures could render a portion of our inventory incompatible with consumer needs. Extreme weather or natural disasters could also severely hinder our ability to timely deliver seasonally appropriate merchandise. A reduction in the demand for or supply of our seasonal merchandise could have an adverse effect on our inventory levels, gross margins and results of operations.

The moderation of our new store growth strategy as a result of current economic conditions could adversely impact our future growth and profitability.

Our future growth and profitability depend in part on our ability to add new stores. Current and projected future economic conditions have caused us to moderate the number of new stores that we plan to open in the near term and have made it difficult for third-party developers to obtain financing for new sites. These factors could negatively impact our future anticipated store openings. Furthermore, although we have conducted strategic market research, including reviewing demographic and regional economic trends, prior to making a decision to enter into a particular market, we cannot be certain that our entry into a particular market will prove successful. The failure to expand by successfully opening new stores, or the failure of a significant number of these stores to perform as planned, could have an adverse impact on our future growth, profitability and cash flows.

The failure to retain, attract and motivate our associates, including associates in key positions, could have an adverse impact on our results of operations.

Our results depend on the contributions of our associates, including our senior management team and other key associates. Our performance depends to a great extent on our ability to retain, attract and motivate talented associates throughout the organization, many of whom, particularly in the department stores, are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment levels, prevailing wage rates and minimum wage legislation. If we are unable to retain, attract and motivate talented associates at all levels, our results of operations could be adversely impacted.

Changes in federal, state or local laws and regulations could increase our expenses and adversely affect our results of operations.

Our business is subject to a wide array of laws and regulations. While our management believes that our associate relations are good, significant legislative changes that impact our relationship with our associates could increase our expenses and adversely affect our results of operations. Examples of possible legislative changes impacting our relationship with our associates include changes to an employer’s obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, if we fail to comply with applicable laws and regulations we could be subject to legal risk, including government enforcement action and class action civil litigation that could increase our cost of doing business. Changes in the regulatory environment regarding other topics such as privacy and information security, product safety or environmental protection, including regulations in response to concerns regarding climate change, among others, could also cause our expenses to increase and adversely affect our results of operations.

Our operations are dependent on information technology systems; disruptions in those systems could have an adverse impact on our results of operations.

Our operations are dependent upon the integrity, security and consistent operation of various systems and data centers, including the point-of-sale systems in the stores, our Internet website, data centers that process transactions, communication systems and various software applications used throughout our Company to track inventory flow, process transactions and generate performance and financial reports. We could encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such difficulties could lead to significant expenses or to losses due to disruption in business operations. We are pursuing complex initiatives to transform our information technology systems and the risk of system disruption is increased in periods where such complex and significant systems changes are undertaken. There can be no assurances that we will successfully launch these systems as planned or that they will occur without disruptions to our operations. In addition, despite our considerable efforts and technology to secure our computer network, security could be compromised, confidential information could be misappropriated or system disruptions could occur. This could lead to loss of sales or profits, cause our customers to lose confidence in our ability to protect their personal information which could lead to lost future sales or cause us to incur significant costs to reimburse third parties for damages, any of which could have an adverse impact on our results of operations. In addition, the continued realization of the benefits of our centralized buying and allocation processes and systems and our Internet platform are key elements of our ability to meet our long-term customer and financial goals. The effectiveness of these technology systems is an important component of our ability to have the right inventory at the right place, time and price.

Legal and regulatory proceedings could have an adverse impact on our results of operations.

Our Company is subject to various legal and regulatory proceedings relating to our business, certain of which may involve jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. We are impacted by trends in litigation, including class action litigation brought under various consumer protection, employment, and privacy and information security laws. In addition, litigation risks related to claims that technologies we use infringe intellectual property rights of third parties have been amplified by the increase in third parties whose primary business is to assert such claims. Reserves are established based on our best estimates of our potential liability. However, we cannot accurately predict the ultimate outcome of any such proceedings due to the inherent uncertainties of litigation. Regardless of the outcome or whether the claims are meritorious, legal and regulatory proceedings may require that we devote substantial time and expense to defend our Company. Unfavorable rulings could result in a material adverse impact on our business, financial condition or results of operations.

Significant changes in discount rates, actual investment return on pension assets, and other factors could affect our earnings, equity, and pension contributions in future periods.

Our earnings may be positively or negatively impacted by the amount of income or expense recorded for our qualified pension plan. Generally accepted accounting principles in the United States of America (GAAP) require that income or expense for the plan be calculated at the annual measurement date using actuarial assumptions and calculations. The most significant assumptions relate to the capital markets, interest rates and other economic conditions. Changes in key economic indicators can change the assumptions. Two critical assumptions used to estimate pension income or expense for the year are the expected long-term rate of return on plan assets and the discount rate. In addition, at the measurement date, we must also reflect the funded status of the plan (assets and liabilities) on the balance sheet, which may result in a significant change to equity through a reduction or increase to other comprehensive income. Although GAAP expense and pension contributions are not directly related, the key economic factors that affect GAAP expense would also likely affect the amount of cash we could be required to contribute to the pension plan. Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve a plan’s funded status.

As a result of their ownership stakes in the Company, our largest stockholders have the ability to materially influence actions to be taken or approved by our stockholders. These stockholders are represented on our Board of Directors and, therefore, also have the ability to materially influence actions to be taken or approved by our Board.

As of March 1, 2012, Pershing Square Capital Management L.P., PS Management GP, LLC and Pershing Square GP, LLC (together “Pershing Square”) beneficially owned approximately 18.0% of the outstanding shares of our common stock. Pershing Square has additional economic exposure to approximately 7.6% of the outstanding shares of our common stock under cash-settled total return swaps, bringing their total aggregate economic exposure to approximately 25.6% of the outstanding shares of our common stock. William A. Ackman, Chief Executive Officer of Pershing Square Capital Management, is one of our directors.

As of March 1, 2012, Vornado Realty Trust, Vornado Realty L.P., VNO Fashion LLC and VSPS I L.L.C. (together “Vornado”) beneficially owned approximately 10.8% of the outstanding shares of our common stock. Steven Roth, Chairman of the Board of Trustees of Vornado Realty Trust, is one of our directors.

Together, Pershing Square and Vornado owned approximately 28.8% of our outstanding shares as of March 1, 2012 and had aggregate economic exposure to approximately 36.4% of our outstanding shares. Pershing Square and Vornado have each stated that they intend to consult with each other in connection with their respective investments in our common stock. Pershing Square and Vornado have the ability to materially influence actions to be taken or approved by our stockholders, including the election of directors and any transactions involving a change of control. Pershing Square and Vornado also have the ability to materially influence actions to be taken or approved by our Board.

On August 19, 2011, we entered into a stockholder agreement with Pershing Square that, among other things, prohibits Pershing Square from purchasing shares of our common stock and derivative securities whose value is derived from the value of our common stock in excess of 26.1% of the shares of our common stock outstanding and permits Pershing Square to designate one member of our Board of Directors. Pursuant to the August stockholder agreement, Pershing Square is able to direct the vote of 15% of the shares of our common stock outstanding and is required to vote the number of any excess shares of our common stock that they beneficially own to be present and voted at stockholder meetings either as recommended by our Board of Directors or in direct proportion to how all other stockholders vote.

On September 16, 2011, we entered into a stockholder agreement with Vornado that, among other things, prohibits Vornado from purchasing shares of our common stock and derivative securities whose value is derived from the value of our common stock in excess of 15.4% of the shares of our common stock outstanding and permits Vornado to designate one member of our Board of Directors. Pursuant to the September stockholder agreement, Vornado is able to direct the vote of 9.9% of the shares of our common stock outstanding and is required to vote the number of any excess shares of our common stock that they beneficially own to be present and voted at stockholder meetings either as recommended by our Board of Directors or in direct proportion to how all other stockholders vote.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

At January 28, 2012, we operated 1,102 department stores throughout the continental United States, Alaska and Puerto Rico, of which 426 were owned, including 121 stores located on ground leases. The following table lists the number of stores operating by state as of January 28, 2012:


Alabama	22		Maine	6	Oklahoma	19
Alaska	1		Maryland	18	Oregon	14
Arizona	22		Massachusetts	13	Pennsylvania	41
Arkansas	16		Michigan	43	Rhode Island	3
California	81		Minnesota	26	South Carolina	18
Colorado	22		Mississippi	18	South Dakota	8
Connecticut	10		Missouri	26	Tennessee	26
Delaware	3		Montana	9	Texas	94
Florida	60		Nebraska	12	Utah	9
Georgia	30		Nevada	7	Vermont	6
Idaho	9		New Hampshire	9	Virginia	27
Illinois	41		New Jersey	17	Washington	23
Indiana	30		New Mexico	10	West Virginia	9
Iowa	19		New York	43	Wisconsin	23
Kansas	19		North Carolina	35	Wyoming	5
Kentucky	22		North Dakota	8	Puerto Rico	7
Louisiana	16		Ohio	47

Total square feet	111.2	million

At January 28, 2012, our supply chain network operated 27 facilities at 18 locations, of which nine were owned, with multiple types of distribution activities housed in certain owned locations. Our network includes 13 store merchandise distribution centers, five regional warehouses, four jcp.com fulfillment centers and five furniture distribution centers as indicated in the following table:


Facility / Location	Leased/Owned		Square Footage (in thousands)
Store Merchandise Distribution Centers
Breinigsville, Pennsylvania⁽¹⁾		Leased		504
Forest Park, Georgia		Owned		530
Buena Park, California		Owned		543
Cedar Hill, Texas		Leased		433
Columbus, Ohio		Owned		386
Plainfield, Indiana		Leased		436
Lakeland, Florida		Leased		360
Lenexa, Kansas		Owned		322
Manchester, Connecticut		Owned		898
Wauwatosa, Wisconsin		Owned		507
Spanish Fork, Utah		Leased		400
Statesville, North Carolina		Owned		313
Sumner, Washington		Leased		350

Total store merchandise distribution centers				5,982


Regional Warehouses
Haslet, Texas		Owned		1,063
Forest Park, Georgia		Owned		427
Buena Park, California		Owned		146
Lathrop, California		Leased		436
Statesville, North Carolina		Owned		131

Total regional warehouses				2,203


jcp.com Fulfillment Centers
Columbus, Ohio		Owned		1,516
Lenexa, Kansas		Owned		1,622
Manchester, Connecticut⁽²⁾		Owned		888
Reno, Nevada		Owned		1,660

Total jcp.com fulfillment centers				5,686


Furniture Distribution Centers
Forest Park, Georgia		Owned		343
Chino, California		Leased		325
Langhorne, Pennsylvania		Leased		228
Manchester, Connecticut		Owned		291
Wauwatosa, Wisconsin		Owned		592

Total furniture distribution centers				1,779

Total supply chain network				15,650

(1) As of January 28, 2012, we were in the process of winding down the operations at this facility.

(2) As of January 28, 2012, this portion of the facility was not operating.

We also own our home office facility in Plano, Texas, and approximately 240 acres of property adjacent to the facility.

Item 3. Legal Proceedings.

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 former executives. The Company is a nominal defendant in the suit. The lawsuit alleges 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 seeks 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 have filed an Answer and Special Exceptions to the lawsuit, arguing primarily that the plaintiff cannot proceed with his suit because he has failed to make demand on the Company’s Board of Directors, and that because demand on the Board would not be futile, demand is not excused. The Company anticipates that the court will hear arguments on the demand futility issue and other special exceptions in early summer 2012. While no assurance can be given as to the ultimate outcome of this matter, we currently 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.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Registrant’s Common Equity

Our common stock is traded principally on the New York Stock Exchange (NYSE) under the symbol “JCP.” The number of stockholders of record at March 19, 2012, was 30,458. In addition to common stock, we have authorized 25 million shares of preferred stock, of which no shares were issued and outstanding at January 28, 2012.

The table below sets forth the quoted high and low market prices of our common stock on the NYSE for each quarterly period indicated, the quarter-end closing market price of our common stock, as well as the quarterly cash dividends declared per share of common stock:


Fiscal Year 2011	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Per share: Dividend	$	0.20	$	0.20	$	0.20	$	0.20

Market price:
High	$	39.24	$	41.00	$	34.50	$	41.86
Low	$	30.71	$	29.82	$	23.44	$	29.55
Close	$	38.45	$	30.76	$	33.08	$	41.42


Fiscal Year 2010	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Per share: Dividend	$	0.20	$	0.20	$	0.20	$	0.20

Market price:
High	$	33.75	$	30.15	$	34.50	$	35.12
Low	$	23.92	$	20.32	$	19.42	$	28.71
Close	$	29.17	$	24.63	$	31.18	$	32.29

Our Board of Directors (Board) periodically reviews the dividend policy and rate, taking into consideration the overall financial and strategic outlook for our earnings, liquidity and cash flow projections, as well as competitive factors. On March 22, 2012, the Board declared a quarterly dividend of $0.20 per share to be paid on May 1, 2012.

Additional information relating to the common stock and preferred stock is included in this Annual Report on Form 10-K in the Consolidated Statements of Stockholders’ Equity and in Note 13 to the consolidated financial statements.

Issuer Purchases of Securities

No repurchases of common stock were made during the fourth quarter of 2011 and no amounts remained authorized for share repurchases as of January 28, 2012.

Five-Year Total Stockholder Return Comparison

The following presentation compares our cumulative stockholder returns for the past five fiscal years with the returns of the S&P 500 Stock Index and the S&P 500 Retail Index for Department Stores over the same period. A list of these companies follows the graph below. The graph assumes $100 invested at the closing price of our common stock on the NYSE and each index as of the last trading day of our fiscal year 2006 and assumes that all dividends were reinvested on the date paid. The points on the graph represent fiscal year-end amounts based on the last trading day of each fiscal year. The following graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

LOGO

		00000		00000		00000		00000		00000		00000
	2006		2007		2008		2009		2010		2011
jcpenney	$	100	$	59	$	21	$	32	$	43	$	56
S&P 500		100		98		60		79		96		101
S&P Department Stores		100		64		30		50		58		65

The stockholder returns shown are neither determinative nor indicative of future performance.

Item 6. Selected Financial Data.

FIVE-YEAR FINANCIAL SUMMARY


($ in millions, except per share data)	2011			2010			2009			2008			2007
Results for the year
Total net sales	$	17,260		$	17,759		$	17,556		$	18,486		$	19,860
Sales percent (decrease)/increase:
Total net sales		(2.8	)%		1.2	%		(5.0	)%		(6.9	)%		(0.2	)%⁽¹⁾
Comparable store sales⁽²⁾		0.2	%		2.5	%		(6.3	)%		(8.5	)%		0.0	%
Operating (loss)/income		(2	)		832			663			1,135			1,888
As a percent of sales		(0.0	)%		4.7	%		3.8	%		6.1	%		9.5	%
Adjusted operating income (non-GAAP)⁽³⁾		536			1,085			961			1,002			1,791
As a percent of sales (non-GAAP)⁽³⁾		3.1	%		6.1	%		5.5	%		5.4	%		9.0	%
(Loss)/income from continuing operations		(152	)		378			249			567			1,105
Adjusted income from continuing operations (non-GAAP)⁽³⁾		207			533			433			484			1,043

Per common share
(Loss)/income from continuing operations, diluted	$	(0.70	)	$	1.59		$	1.07		$	2.54		$	4.90
Adjusted income from continuing operations, diluted (non-GAAP)⁽³⁾		0.94			2.24			1.86			2.17			4.63
Dividends declared		0.80			0.80			0.80			0.80			0.80

Financial position and cash flow
Total assets	$	11,424		$	13,068		$	12,609		$	12,039		$	14,331
Cash and cash equivalents		1,507			2,622			3,011			2,352			2,532
Long-term debt, including current maturities		3,102			3,099			3,392			3,505			3,708
Free cash flow (non-GAAP)⁽³⁾		23			158			677			22			(269	)

(1) Includes the effect of the 53rd week in 2006. Excluding sales of $254 million for the 53rd week in 2006, total net sales increased 1.1% in 2007.

(2) Comparable store sales are presented on a 52-week basis and include sales from new and relocated stores that have been opened 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 closures remain in the calculations. Our definition and calculation of comparable store sales may differ from other companies in the retail industry.

(3) See Non-GAAP Financial Measures beginning on the following page for additional information and reconciliation to the most directly comparable GAAP financial measure.

FIVE-YEAR OPERATIONS SUMMARY


	2011			2010			2009			2008			2007
Number of department stores:

Beginning of year		1,106			1,108			1,093			1,067			1,033
Openings		3			2			17			35			50
Closings⁽¹⁾		(7	)		(4	)		(2	)		(9	)		(16	)

End of year		1,102			1,106			1,108			1,093			1,067

Gross selling space (square feet in millions)		111.2			111.6			111.7			109.9			106.6
Sales per gross square foot⁽²⁾	$	154		$	153		$	149		$	160		$	177
Sales per net selling square foot⁽²⁾	$	212		$	210		$	206		$	223		$	248

Number of The Foundry Big and Tall Supply Co. stores ⁽³⁾		10			-			-			-			-

(1) Includes relocations of -, -, 1, 7, and 15, respectively.

(2) Calculation includes the sales and square footage of jcpenney department stores that were open for the full fiscal year and sales for jcp.com.

(3) All stores opened during 2011. Gross selling space was 51 thousand square feet as of January 28, 2012.

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 and ratios 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 and ratios is useful in order to better understand our financial performance, as well as facilitate the comparison of our results to the results of our peer companies. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures and ratios prepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measures presented.

Non-GAAP Measures Excluding Restructuring and Management Transition Charges and Non-Cash Primary Pension Plan Expense/(Income)

The following non-GAAP financial measures are adjusted to exclude restructuring and management transition charges as well as the non-cash impact of our qualified funded defined benefit pension plan (primary plan) expense. Unlike other operating expenses, restructuring and management transition charges are unrelated to our ongoing core business operations. Additionally, primary plan expense 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. We believe it is useful for investors to understand the impact of restructuring and management transition charges as well as the impact of the non-cash primary plan expense on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted operating income; (2) adjusted income from continuing operations; and (3) adjusted earnings per share (EPS) from continuing operations–diluted.

Adjusted Operating Income. The following table reconciles operating (loss)/income, the most directly comparable GAAP financial measure, to adjusted operating income, a non-GAAP financial measure:


($ in millions)	2011			2010			2009			2008			2007
Operating (loss)/income (GAAP)	$	(2	)	$	832		$	663		$	1,135		$	1,888
As a percent of sales		(0.0	)%		4.7	%		3.8	%		6.1	%		9.5	%

Add: restructuring and management transition charges		451			32			-			-			-
Add/(deduct): primary pension plan expense/(income)		87			221			298			(133	)		(97	)

Adjusted operating income (non-GAAP)	$	536		$	1,085		$	961		$	1,002		$	1,791

As a percent of sales		3.1	%		6.1	%		5.5	%		5.4	%		9.0	%

Adjusted Income and Diluted EPS from Continuing Operations. The following table reconciles (loss)/income and diluted EPS from continuing operations, the most directly comparable GAAP financial measures, to adjusted income and diluted EPS from continuing operations, non-GAAP financial measures:


($ in millions, except per share data)	2011			2010		2009		2008		2007
(Loss)/income from continuing operations (GAAP)	$	(152	)	$	378	$	249	$	567	$	1,105
Diluted EPS from continuing operations (GAAP)	$	(0.70	)	$	1.59	$	1.07	$	2.54	$	4.90
Add: restructuring and management transition charges, net of tax of $145, $12, $-, $- and $-		306			20		-		-		-
Add/(deduct): primary pension plan expense/(income), net of tax of $34, $86, $114, $(50), and $(35)		53			135		184		(83)		(62)

Adjusted income from continuing operations (non-GAAP)	$	207		$	533	$	433	$	484	$	1,043

Adjusted diluted EPS from continuing operations (non-GAAP)	$	0.94	⁽¹⁾	$	2.24	$	1.86	$	2.17	$	4.63

(1) Weighted average shares–diluted of 220.7 million was used for this calculation as adjusted income from continuing operations was positive. 3.3 million shares were added to weighted average shares–basic of 217.4 million for assumed dilution for stock options, restricted stock awards and stock warrant.

Free Cash Flow

Free cash flow is a key financial measure of our ability to generate additional cash from operating our business and in evaluating our financial performance. We define free cash flow as net cash provided by operating activities excluding discretionary cash contributions to our primary pension plan and any associated cash tax impacts, less capital expenditures and dividends paid, plus proceeds from the sale of assets. Adjustments to exclude discretionary pension plan contributions are more indicative of our ability to generate cash flows from operating activities. We believe discretionary contributions to our pension plan are more reflective of financing transactions to reduce off-balance sheet debt relating to the pension liability. We believe that free cash flow is a relevant indicator of our ability to repay maturing debt, revise our dividend policy or fund other uses of capital that we believe will enhance stockholder value. Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt maturities, pay-down of off-balance sheet pension debt and other obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow in addition to, rather than as a substitute for, our entire statement of cash flows and those measures prepared in accordance with GAAP.

The following table reconciles net cash provided by operating activities, the most directly comparable GAAP measure, to free cash flow, a non-GAAP financial measure.


($ in millions)	2011			2010			2009			2008			2007
Net cash provided by operating activities (GAAP)	$	820		$	592		$	1,573		$	1,156		$	1,232
Less:
Capital expenditures		(634	)		(499	)		(600	)		(969	)		(1,243	)
Dividends paid, common stock		(178	)		(189	)		(183	)		(178	)		(174	)
Tax benefit from pension contribution		-			(152	)		(126	)⁽¹⁾		-			(110	)⁽²⁾
Plus:
Discretionary cash pension contribution		-			392			-			-			-
Proceeds from sale of assets		15			14			13			13			26

Free cash flow (non-GAAP)	$	23		$	158		$	677		$	22		$	(269	)

(1) Related to the discretionary contribution of $340 million of Company common stock in 2009.

(2) Related to the $300 million discretionary cash contribution in 2006.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion, which presents our results, should be read in conjunction with the accompanying consolidated financial statements and notes thereto, along with the Five-Year Financial and Operations Summaries, the risk factors and the cautionary statement regarding forward-looking information. Unless otherwise indicated, this Management’s Discussion and Analysis (MD&A) relates only to results from continuing operations, all references to (loss)/earnings per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.

Financial Reporting

For this Annual Report on Form 10-K, we modified our financial reporting disclosures as follows:

•

We early adopted Accounting Standards Update 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” by providing a separate Consolidated Statement of Comprehensive Income.

•

We updated our non-GAAP measures for adjusted operating income and adjusted income and adjusted diluted EPS from continuing operations to exclude restructuring and management transition charges. Unlike normal recurring operating expenses, restructuring and management transition charges are unrelated to our ongoing core business operations.

•

We relocated our merchandise mix of total net sales to Item 1, Business.

•

Shares for weighted average shares outstanding for both basic and diluted EPS have been included directly on the face of the Consolidated Statements of Operations.

Executive Overview

Our comparable store sales were essentially flat at 0.2% for the year. Total sales decreased 2.8%, reflecting our exit from the catalog and catalog outlet businesses. The gross margin rate as a percent of sales decreased to 36.0%, compared to last year’s 39.2%, due to the softer than expected selling environment and the resulting increased promotional activity and the costs associated with implementing our new pricing strategy. From an expense standpoint, selling, general and administrative (SG&A) expenses were leveraged against sales despite the total sales decline. Including restructuring and management transition charges, our loss from continuing operations was $152 million, or $0.70 per share, for 2011 compared to income from continuing operations of $378 million, or $1.59 per share, last year. Restructuring and management transition charges were $451 million, or $1.41 per share. Other key information for 2011 was as follows:

•

In May 2011, we completed our share buyback program which was authorized by the Board of Directors in February 2011. Through open market transactions we repurchased approximately 24.4 million shares.

•

In November 2011, we completed our acquisition of the worldwide rights for the Liz Claiborne family of trademarks and related intellectual property, as well as the U.S. and Puerto Rico rights for the Monet trademarks and related intellectual property.

•

In December 2011, we purchased 11 million newly issued shares of Class A common stock and one share of Series A preferred stock of Martha Stewart Living Omnimedia, Inc. (MSLO) and entered into a strategic alliance with MSLO to create an in-store and online retail experience featuring Martha Stewart products.

•

We opened 77 Sephora inside jcpenney beauty boutiques to bring our total to 308 locations, 423 MNG by Mango^® shops to bring our total to 500 locations and 502 Call it Spring^® shops to bring our total to 505 locations.

•

We had the following recent management transitions:

•

Ronald B. Johnson was elected Chief Executive Officer effective November 1, 2011.

•

Myron E. Ullman, III, former Chief Executive Officer, retired from the Company effective January 27, 2012.

•

Michael R. Francis was elected President effective October 4, 2011.

•

Michael W. Kramer was elected Chief Operating Officer effective December 5, 2011.

•

Daniel E. Walker was elected Chief Talent Officer effective November 16, 2011.

•

Thomas M. Nealon, former Group Executive Vice President, left the Company effective December 1, 2011.

•

Michael T. Theilmann, former Group Executive Vice President, left the Company effective January 27, 2012.

Current Developments

•

On January 25, 2012, we revealed our plans to become America’s favorite store. On February 1, 2012, we began the process to transform the jcpenney shopping experience by officially launching our Fair and Square pricing strategy. On February 1, 2012, we also launched our new marketing campaign which includes 12 promotional events that will follow the monthly calendar. See Part I, Item 1, Business, for a discussion of our recently announced business strategy.

•

On January 27, 2012, we converted our existing credit facility into an asset-based revolving credit facility and to further enhance our liquidity, on February 10, 2012, we increased the size of our revolving credit facility to $1,500 million.

•

On March 22, 2012, our Board declared a quarterly dividend of $0.20 per share to be paid to stockholders on May 1, 2012.

Results of Operations

Three-Year Comparison of Operating Performance


(in millions, except EPS)	2011			2010			2009
Total net sales	$	17,260		$	17,759		$	17,556
Percent (decrease)/increase from prior year		(2.8	)%		1.2	%		(5.0	)%
Comparable store sales increase/(decrease)⁽¹⁾		0.2	%		2.5	%		(6.3	)%

Gross margin		6,218			6,960			6,910
Operating expenses/(income):
Selling, general and administrative⁽²⁾		5,109			5,358			5,410
Pension		121			255			337
Depreciation and amortization		518			511			495
Real estate and other, net		21			(28	)		5
Restructuring and management transition⁽³⁾		451			32			-

Total operating expenses		6,220			6,128			6,247

Operating (loss)/income		(2	)		832			663
As a percent of sales		(0.0	)%		4.7	%		3.8	%
Adjusted operating income (non-GAAP)⁽⁴⁾		536			1,085			961
As a percent of sales		3.1	%		6.1	%		5.5	%
Net interest expense		227			231			260
Bond premiums and unamortized costs		-			20			-

(Loss)/income from continuing operations before income taxes		(229	)		581			403
Income tax (benefit)/expense		(77	)		203			154

(Loss)/income from continuing operations	$	(152	)	$	378		$	249
Adjusted income from continuing operations (non-GAAP)⁽⁴⁾	$	207		$	533		$	433
Diluted EPS from continuing operations	$	(0.70	)	$	1.59		$	1.07
Adjusted diluted EPS from continuing operations (non-GAAP)⁽⁴⁾	$	0.94	⁽⁵⁾	$	2.24		$	1.86
Weighted average shares used for diluted EPS		217.4			238.0			233.1

(1) Comparable store sales are presented on a 52-week basis and include sales from new and relocated stores that have been opened 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 closures remain in the calculations. Our definition and calculation of comparable store sales may differ from other companies in the retail industry.

(2) Beginning in 2011, pre-opening expenses, previously reported as a separate operating expense line, are included in SG&A expense due to the immaterial nature of such expense in recent years.

(3) Beginning in 2011, restructuring and management transition charges were reported as a separate operating expense line. Previously, 2010 charges were included in real estate and other.

(4) See Item 6, Selected Financial Data, for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure.

(5) Weighted average shares–diluted of 220.7 million was used for this calculation as adjusted income from continuing operations was positive. 3.3 million shares were added to weighted average shares–basic of 217.4 million for assumed dilution for stock options, restricted stock awards and stock warrant.

We reported a loss from continuing operations of $152 million, or $0.70 per share, in 2011 compared to income of $378 million, or $1.59 per share, in 2010 and income of $249 million, or $1.07 per share, in 2009. Results for 2011 included restructuring and management transition charges of $451 million, or $1.41 per share, which included costs related to activities to streamline our supply chain operations,

exit our catalog and catalog outlet businesses, cost savings initiatives to reduce store and home office expenses, the Voluntary Early Retirement Program (VERP), management transition charges related to the hiring and departure of certain members of management and other miscellaneous restructuring costs. Gross margin declined both in dollars and as a percentage of sales due to the highly promotional selling environment and the actions taken to convert to our new pricing strategy in the fourth quarter of 2011. SG&A expense was leveraged against lower sales and declined 60 basis points to 29.6% of sales. Total operating expenses benefited from lower primary pension plan expense by $134 million, or $0.38 per share.

Results for 2010 reflected improved profitability achieved by delivering top line sales growth and leveraging operating expenses. Included in results were charges of $32 million, or $0.08 per share, for initial restructuring charges related primarily to the wind down of our catalog and catalog outlet operations and the streamlining of our call center operations and custom decorating business. Total operating expenses benefited from lower primary pension plan expense by $77 million, or approximately $0.22 per share. Earnings for 2010 were favorably impacted by the decrease of our effective income tax rate due to favorable resolution of certain state income tax audits and an increase in our federal wage tax credit. Earnings for 2009 reflected the economic downturn as well as the significant increase in the non-cash primary pension plan expense. Notwithstanding these impacts, results benefited significantly from gross margin improvement that reflected the success of our strategy to sell a greater portion of merchandise at regular promotional prices and less at clearance prices.

Excluding restructuring and management transition charges and the non-cash impact of our primary pension plan expense, adjusted income from continuing operations (non-GAAP) was $207 million, or $0.94 per share, in 2011 compared with $533 million, or $2.24 per share, in 2010 and $433 million, or $1.86 per share, in 2009.

2011 Compared to 2010

Total Net Sales

Our year-to-year change in total net sales is comprised of (a) sales from new stores net of closings and relocations including catalog print media and outlet store sales, referred to as non-comparable store sales and (b) sales of stores opened in both years as well as Internet sales, referred to as comparable store sales. We consider comparable store sales to be a key indicator of our current performance measuring the growth in sales and sales productivity of existing stores. Positive comparable store sales contribute to greater leveraging of operating costs, particularly payroll and occupancy costs, while negative comparable store sales contribute to de-leveraging of costs. Comparable store sales also have a direct impact on our total net sales and the level of cash flow.


	2011			2010
Total net sales (in millions)	$	17,260		$	17,759

Sales percent (decrease)/increase
Total net sales		(2.8	)%		1.2	%
Comparable store sales		0.2	%		2.5	%
Sales per gross square foot⁽¹⁾	$	154		$	153

(1) Calculation includes the sales and square footage of department stores that were open for the full fiscal year, as well as Internet sales.

Total net sales decreased $499 million in 2011 compared to 2010. The following table provides the components of the net sales decrease:


($ in millions)	2011
Comparable store sales, including Internet	$	33
Sales of new (non-comparable) stores, net		11
Sales decline through catalog print media and outlet stores		(543	)

2011 total net sales decrease	$	(499	)

In 2011, comparable store sales were essentially flat at 0.2%, or $33 million higher, as we experienced a softer than expected selling environment. Sales of non-comparable stores opened in 2011 and 2010, net of closings, added $11 million. In 2011, we opened three new department stores and closed seven, while in 2010 we opened two new department stores and closed four. As expected, catalog print media and outlet store sales declined during the year due to the exit from the catalog and outlet store businesses. Internet sales, which are included in comparable store sales, remained essentially flat at $1.5 billion for 2011 and 2010. All components combined, total net sales decreased $499 million or 2.8% in the year.

During 2011, off-mall traffic increased compared to last year, while mall traffic declined. In addition, our conversion rates for both mall and off-mall stores were above 2010 levels. Our average unit retail in jcpenney department stores increased slightly compared to the prior year. The number of store transactions increased during the year, while the number of units sold and units per transaction declined. Sales in all geographic regions remained relatively flat in 2011. Based on comparable store sales, our best sales performance was in the southwest region, with the weakest performance coming from the northwest and central regions. Also based on comparable store sales, our best performing categories were women’s apparel and women’s accessories, including Sephora. Home and family footwear experienced the weakest performance for the year. Private and exclusive brands found only at jcpenney were 55% of total merchandise sales in 2011 and 2010.

Gross Margin

Gross margin is a measure of profitability of a retail company at the most fundamental level of buying and selling merchandise and measures a company’s ability to effectively manage the total costs of sourcing and allocating merchandise against the corresponding retail pricing. Gross margins not only cover marketing, selling and other operating expenses, but also must include a profit element to reinvest back into the business. Gross margin is the difference between total net sales and cost of the merchandise sold and is typically expressed as a percentage of total net sales. The cost of merchandise sold includes all direct costs of bringing merchandise to its final selling destination. These costs include:

• cost of the merchandise (net of discounts or allowances earned)

• freight

• warehousing

• sourcing and procurement

• buying and brand development costs including buyers’ salaries and related expenses

• merchandise examination

• inspection and testing

• merchandise distribution center expenses

• shipping and handling costs incurred related to sales to customers


($ in millions)	2011			2010
Gross margin	$	6,218		$	6,960

As a percent of sales		36.0	%		39.2	%

Gross margin decreased to 36.0% of sales, or 320 basis points compared to 2010. On a dollar basis, gross margin decreased $742 million, or 10.7%, to $6,218 million in 2011 compared to $6,960 million in the prior year. The gross margin rate decreased approximately 100 basis points due to higher markdowns as a result of increased promotional activity; approximately 80 basis points due to lower vendor support, higher royalty payments and increased year-over-year shrinkage; and approximately 20 basis points for certain non-comparable free shipping offers for jcp.com combined with higher delivery costs. The gross margin rate was most significantly impacted by the costs associated with implementing our new pricing strategy in the fourth quarter of 2011, decreasing our gross margin rate by 120 basis points. Costs associated with implementing our new pricing strategy included $55 million of labor costs, $12 million of ticket and other miscellaneous costs and $140 million of markdowns of merchandise.

The implementation of our new pricing strategy will likely cause quarterly fluctuations in gross margin during 2012 when compared to 2011 as a result of the application of the Retail Inventory Method (RIM). RIM requires adjustments to margin to occur over the selling cycle of inventory to reflect permanent markdowns. Under our new pricing strategy, retail prices are initially set at our every day value; therefore, reductions in the cost of merchandise inventory to reflect permanent markdowns will be smaller throughout the year thereby affecting gross margin. In addition, timing of merchandise markdowns may be impacted as a result of the new marketing promotional calendar. Due to the numerous factors that impact actual gross margin on a quarterly basis, such as the mix of merchandise, merchandising and promotional cadence, volume and price discounts, we are not able to quantify quarterly margin trend results as compared to prior years.

Selling, General and Administrative (SG&A) Expenses

The following costs are included in SG&A expenses, except if related to merchandise buying, sourcing, warehousing or distribution activities:

• salaries

• marketing

• occupancy and rent

• utilities and maintenance

• information technology

• administrative costs related to our home
office, district and regional operations

• credit/debit card fees

• real property, personal property and
other taxes (excluding income
taxes)


($ in millions)	2011			2010
SG&A	$	5,109		$	5,358

As a percent of sales		29.6	%		30.2	%

SG&A expenses declined $249 million to $5,109 million in 2011 compared to $5,358 million in 2010. As a percent of sales, SG&A expenses were leveraged and decreased 60 basis points to 29.6% compared to 30.2% in 2010. The reduction was mainly driven by benefits from the jcpenney private label credit card, lower marketing expenses due to the elimination of catalog print media, lower incentive compensation accruals and expense savings realized from cost reduction initiatives. SG&A

expense reductions were partially offset by our continuing roll-out of Sephora inside jcpenney and investment in our Growth Brand Division, including The Foundry Big & Tall Supply Co. (Foundry stores).

Pension Expense


($ in millions)	2011		2010
Primary pension plan expense	$	87	$	221
Supplemental pension plans expense		34		34

Total pension expense	$	121	$	255

Total pension expense was $121 million in 2011 compared to $255 million in 2010 and consisted mainly of the primary pension plan expense of $87 million in 2011 versus $221 million for 2010. The 2011 primary pension plan expense declined mainly as a result of the increase in the value of pension plan assets as of the 2010 year-end measurement date due to positive market returns in 2010 and our discretionary cash contribution of $392 million in May 2010, partially offset by a 90 basis point decline in our expected return on plan assets. The decline of the expected rate of return is due to our new target allocation strategy to mitigate volatility risk by decreasing the plan’s asset allocation to equities and shifting to less volatile fixed income investments.

Based on our 2011 year-end measurement of primary pension plan assets and benefit obligations, we expect our 2012 non-cash primary pension plan expense to increase to $194 million compared to $87 million in 2011. The increase is primarily the result of an approximately 80 basis point decrease in our discount rate, an increase in the pension liability resulting from the VERP and a decrease in the value of plan assets due to unfavorable capital market returns in 2011. For more information, see Note 16 to our consolidated financial statements.

Depreciation and Amortization Expenses

Depreciation and amortization expenses in 2011 increased $7 million to $518 million, or approximately 1.4%, compared to $511 million in 2010 primarily as a result of our store renewals and updates over the past two years. This includes our investment in our in-store shops MNG by Mango, Call it Spring and Sephora inside jcpenney. During the year we also opened three new department stores and ten Foundry stores.

Real Estate and Other, Net


($ in millions)	2011			2010
Real estate activities	$	(38	)	$	(34	)
Net gains from sale of real estate		(6	)		(8	)
Impairments		58			3
Other		7			11

Total expense/(income)	$	21		$	(28	)

Real estate and other, net 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 our operations, other non-operating corporate charges and credits, as well as asset impairment charges.

Real estate and other expenses totaled $21 million in 2011 compared to income of $28 million in 2010. Operating income from our real estate activities increased to $38 million from $34 million in the prior year. In 2011 and 2010, we received dividend income from our REITs totaling $10 million and $8 million, respectively. In 2011 and 2010, we recorded investment income for our proportional share of earnings from our joint ventures totaling $13 million and $15 million, respectively.

In 2011, store impairments totaled $58 million and related to eight underperforming department stores of which seven continue to operate. In 2010, impairments totaled $3 million and related primarily to one underperforming department store that continues to operate. In 2011 and 2010, other expenses of $7 million and $11 million, respectively, included legal and other advisory costs related to the Company’s evaluation of capital restructuring alternatives.

Restructuring and Management Transition Charges

In 2011 and 2010, we incurred $451 million and $32 million, respectively, of restructuring and management transition charges. Restructuring and management transition charges include costs related to activities to streamline our supply chain operations, exit our catalog and catalog outlet businesses, cost savings initiatives to reduce store and home office expenses, the VERP, management transition charges related to the hiring and departure of certain members of management and other miscellaneous restructuring costs including the exit of our two specialty websites, CLAD^TM and Gifting Grace^TM.


($ in millions)	2011		2010
Supply chain	$	41	$	-
Catalog and catalog outlet stores		34		21
Employment termination benefits		41		4
VERP		179		-
Management transition		130		-
Other		26		7

Total	$	451	$	32

Supply chain

As a result of consolidating and streamlining our supply chain organization as part of a restructuring program during 2011, we recorded $28 million of increased depreciation, $8 million of costs to close and consolidate facilities and $5 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. We are expecting to incur a total of approximately $55 million in expense related to this restructuring activity, with $41 million incurred in 2011 and the remainder to be incurred in 2012.

Catalog and catalog outlet stores

In the fourth quarter of 2010, we announced our plan to exit the catalog outlet stores and wind down our catalog business. As a result, in 2010 we recorded $17 million of increased depreciation and $4 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets associated with our catalog and catalog outlet stores. On October 16, 2011, we completed an asset purchase agreement to sell the assets related to the operations of our catalog outlet stores. We sold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted in a loss of $24 million. In 2011, we also recorded an additional $10 million of severance and other costs related to the sale of our catalog outlet stores. In total for 2011 and 2010, we recorded $55 million related to the exit of our catalog and catalog outlet stores. We do not expect to incur any additional costs related to this program, as the catalog outlet stores were sold during 2011 and the catalog operations were discontinued at the end of 2010.

Employment termination benefits

In 2011 and 2010, we recorded $41 million and $4 million, respectively, of employee termination benefits for actions to reduce our store and home office expenses. We expect to incur additional charges in 2012 related to this restructuring activity.

VERP

As a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August of 2011 we announced a VERP which was offered to approximately 8,000 eligible associates. In the third quarter of 2011, we recorded a total charge of $179 million related to the VERP. Charges included $176 million related to enhanced retirement benefits for the approximately 4,000 associates who accepted the VERP, $1 million related to curtailment charges for our Supplemental Retirement Program and Benefit Restoration Plan as a result of the reduction in the expected years of future service related to these plans, and an additional $2 million of costs associated with administering the VERP. This program was completed in 2011 and we do not expect to incur any additional costs related to the enhanced benefits associated with the VERP.

Management transition

During 2011, we announced and implemented several changes within our management leadership team which resulted in management transition costs of $130 million during the year. Ronald B. Johnson became Chief Executive Officer on November 1, 2011, succeeding Myron E. Ullman, III. Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, at which time he retired from the Company. During 2011, we incurred transition charges of $53 million and $29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointed President and as part of his employment package, he was awarded a one-time sign-on bonus of $12 million. In November 2011, Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and Chief Talent Officer, respectively, and as part of their respective employment packages, they were awarded one-time sign-on bonuses of $4 million and $8 million, respectively. We also recorded $24 million of management transition charges primarily related to other members of management in 2011.

Other

In 2011, we recorded $26 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations and the exit of our specialty websites CLAD and Gifting Grace. In 2010, we recorded $7 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations. In 2011 and 2010, we recorded $4 million and $3 million, respectively, of charges primarily related to increased depreciation as a result of closing and consolidating facilities related to our custom decorating operations. In the fourth quarter of 2011, we recorded $8 million related to the exit of our specialty websites primarily related to employment termination benefits and contract termination costs. In 2011 and 2010, we incurred $14 million and $4 million, respectively, of additional miscellaneous restructuring costs. We expect to incur an additional $2 million of costs associated with the exit of our specialty websites in 2012 related to lease termination costs. We do not expect to incur any additional costs associated with any of the other miscellaneous restructuring programs that were initiated in 2010 and 2011.

Future Restructuring

In January 2012, we announced a targeted expense reduction of $900 million, primarily SG&A expense, over a two-year period beginning in 2012. We expect to achieve savings by reducing costs in our store operations, marketing and in our home office. Efforts to achieve our SG&A expense reductions include the restructuring activities that have occurred and a continuation of some of the restructuring activities outlined above, along with other cost savings initiatives. We expect to incur additional restructuring charges in 2012 related to activities focused on achieving this targeted expense reduction.

Operating (Loss)/Income

Operating income decreased 470 basis points to (0.0)% of sales in 2011 compared to 4.7% last year. Excluding restructuring and management transition charges and the non-cash impact of the primary pension plan expense, adjusted operating income (non-GAAP) decreased 300 basis points to 3.1% of sales compared to 6.1% in 2010.

Net Interest Expense

Net interest expense consists principally of interest expense on long-term debt, net of interest income earned on cash and cash equivalents. Net interest expense was $227 million, a decrease of $4 million, or 1.7%, from $231 million in 2010. The decrease was primarily due to lower overall debt outstanding during 2011 as compared to 2010 combined with lower interest rate levels resulting from long-term debt transactions completed during 2010.

Bond Premiums and Unamortized Costs

In 2010, we incurred $20 million of additional financing costs, consisting primarily of bond premiums paid in connection with the debt tender offer completed in May 2010. There were no comparable costs in 2011.

Income Taxes

The effective income tax rate for continuing operations for 2011 was (33.6)% compared with 34.9% for 2010. The rate was positively impacted by federal wage tax credits and negatively impacted by non-deductible management transition costs.

(Loss)/Income from Continuing Operations

In 2011, we reported a loss from continuing operations of $152 million, or $0.70 per share, compared with income from continuing operations of $378 million, or $1.59 per share, last year. Excluding restructuring and management transition charges and the non-cash impact of the primary pension plan expense, adjusted income from continuing operations (non-GAAP) decreased $326 million to $207 million, or $0.94 per share, compared to $533 million, or $2.24 per share, for 2010.

2010 Compared to 2009

Total Net Sales


	2010			2009
Total net sales (in millions)	$	17,759		$	17,556

Sales percent increase/(decrease)
Total net sales		1.2	%		(5.0	)%
Comparable store sales		2.5	%		(6.3	)%
Sales per gross square foot⁽¹⁾	$	153		$	149

(1) Calculation includes the sales and square footage of department stores that were open for the full fiscal year, as well as Internet sales.

Total net sales increased $203 million in 2010 compared to 2009. The following table provides the components of the net sales increase:


($ in millions)	2010
Comparable store sales, including Internet	$	406
Sales of new (non-comparable) stores, net		77
Sales decline through catalog print media and outlet stores		(280	)

2010 total net sales increase	$	203

In 2010, comparable store sales increased 2.5% mainly as customers responded to our new merchandise initiatives and the value offered through our private brands. Sales of non-comparable stores opened in 2010 and 2009, net of closings, added $77 million. In 2010, we opened two new stores and closed four, while in 2009 we opened 17 new stores and closed or relocated two stores. Catalog print media and outlet store sales declined in 2010 due to the wind down of the catalog business. Internet sales, which are included in comparable store sales, increased 4.4% to slightly more than $1.5 billion for the year. All components combined, total net sales increased $203 million or 1.2% in 2010.

During 2010, the percent increase in our off-mall store traffic exceeded the increase in our mall traffic, which was also above 2009 levels. In addition, our conversion rates for both mall and off-mall stores were above 2009 levels. Our average unit retail was down in 2010 compared to 2009, primarily as a result of a greater portion of promotional sales and a higher proportion of sales in the “good” and “better” merchandise categories at lower price points than sales of merchandise in the “best” category at higher price points. For 2010, our unit sales, number of transactions and units per transaction were higher than 2009. Sales in all geographic regions increased in 2010, with the best performance in the southeast and southwest regions with the weakest in the northwest and northeast regions. Our best performing categories were men’s apparel and women’s accessories, including Sephora. Home and women’s apparel experienced the weakest performance for the year. As a percent of total merchandise sales, private and exclusive brands found only at jcpenney were 55% in 2010 versus 54% in 2009.

Gross Margin


($ in millions)	2010			2009
Gross margin	$	6,960		$	6,910

As a percent of sales		39.2	%		39.4	%

Gross margin decreased slightly to 39.2% of sales, or 20 basis points, in 2010 compared to 2009’s historic high annual gross margin rate of 39.4%. On a dollar basis, gross margin increased $50 million, or 0.7%, to $6,960 million compared to $6,910 million last year. The gross margin rate decreased due to higher markdowns from increased promotional activity that were somewhat offset by increased vendor support and lower year-over-year shrinkage, as a result of our shrinkage reduction initiatives. The gross margin level was also negatively impacted by the elimination of catalog print media.

Selling, General and Administrative (SG&A) Expenses


($ in millions)	2010			2009
SG&A	$	5,358		$	5,410

As a percent of sales		30.2	%		30.8	%

SG&A expenses declined $52 million to $5,358 million in 2010 compared to $5,410 million in 2009. As a percent of sales, SG&A expenses were leveraged and decreased 60 basis points to 30.2% compared to 30.8% in 2009. A lower incentive compensation accrual for 2010 offset higher store salary costs that were impacted by the minimum wage increase and the resumption of merit increases, as well as the higher salaries associated with the additional Sephora inside jcpenney locations, which are more labor intensive than other departments in the store. The lower incentive compensation accrual was primarily the result of not achieving our sales plan as the discontinuation of the catalog business had a greater impact on sales than expected. In addition, the 2009 accrual included a special one-time recognition bonus program for mostly store-based hourly associates. Risk insurance expense, as well as health and welfare plan costs were also lower in 2010. Risk insurance expense declined as a result of our workers’ compensation initiatives and favorable industry trends and health and welfare costs were lower as a result of a decline in participation levels. While our year-over-year marketing expense was relatively flat with 2009, spending was reallocated from catalog and print media to local and national advertising and online media.

Pension Expense


($ in millions)	2010		2009
Primary pension plan expense	$	221	$	298
Supplemental pension plans expense		34		39

Total pension expense	$	255	$	337

Total pension expense was $255 million in 2010 compared to $337 million in 2009 and consisted mainly of the primary pension plan expense of $221 million in 2010 versus $298 million for 2009. The 2010 primary pension plan expense declined mainly as a result of an increase in the value of pension plan assets as of the 2009 year-end measurement date due to positive market returns in 2009 combined with our May 2009 discretionary contribution of common stock to the plan.

Depreciation and Amortization Expenses

Depreciation and amortization expenses in 2010 increased $16 million to $511 million, or approximately 3.2%, compared to $495 million in 2009 primarily as a result of our continued investment in store renewals and updates.

Real Estate and Other, Net


($ in millions)	2010		2009
Real estate activities	$	(34)	$	(34)
Net gains from sale of real estate		(8)		(2)
Impairments		3		42
Other		11		(1)

Total (income)/expense	$	(28)	$	5

Real estate and other, net was income of $28 million in 2010 compared to expense of $5 million in 2009. Operating income from our real estate activities was consistent year-over-year at $34 million. We received dividend income from our REITs totaling $8 million in both 2010 and 2009. We recorded investment income for our proportional share of earnings from our joint ventures totaling $15 million in both 2010 and 2009. Gains from the sale of real estate were $6 million higher in 2010 from the sale of two properties.

In 2010, impairments totaled $3 million and related primarily to one underperforming store that continues to operate. In 2009, impairments totaled $42 million and related to seven underperforming department stores and other corporate assets. Other expenses of $11 million in 2010 included legal and other advisory costs related to the Company’s evaluation of capital restructuring alternatives.

Restructuring and Management Transition Charges


($ in millions)	2010		2009
Catalog and catalog outlet stores	$	21	$	-
Employment termination benefits		4		-
Other		7		-

Total expense	$	32	$	-

Restructuring and management transition charges in 2010 included $32 million of initial restructuring charges related primarily to the wind down of our catalog and catalog outlet store businesses and streamlining the related call center operations and facility consolidation within our custom decorating business.

Operating Income

Operating income increased 90 basis points to 4.7% of sales in 2010 compared to 3.8% in 2009. Excluding the non-cash impact of the primary pension plan expense and restructuring and management transition charges, adjusted operating income (non-GAAP) increased 60 basis points to 6.1% of sales compared to 5.5% in 2009.

Net Interest Expense

Net interest expense consists principally of interest expense on long-term debt, net of interest income earned on cash and cash equivalents. Net interest expense was $231 million, a decrease of $29 million, or 11.2%, from $260 million in 2009. The decrease was primarily due to lower debt levels combined with lower interest rate levels resulting from long-term debt transactions completed during the year.

Bond Premiums and Unamortized Costs

Income Taxes

The effective income tax rate for continuing operations for 2010 was 34.9% compared with 38.2% for 2009. The tax rate decreased due to favorable resolution of certain state income tax audits combined with changes in state tax laws and an increase in our federal wage tax credit.

Income from Continuing Operations

Income from continuing operations for 2010 increased 51.8% to $378 million, or $1.59 per share, compared with $249 million, or $1.07 per share, in 2009. Excluding the non-cash impact of the primary pension plan expense and restructuring and management transition charges, adjusted income from continuing operations (non-GAAP) increased 23.1% to $533 million, or $2.24 per share, compared to $433 million, or $1.86 per share, for 2009.

Discontinued Operations

Discontinued operations in 2010 generated a credit of $11 million, net of $4 million of income tax expense, or $0.04 per share, compared to a credit of $2 million, net of $1 million of income tax expense, or $0.01 per share, in 2009, and primarily reflected a reduction in the environmental reserve we retained when we sold our drugstore business. The reduction to the reserve was due in part to the affirmation of an additional responsible party to one of the known sites involving a warehouse facility, as well as an update for actual historical experience. These discontinued operations are not expected to have a future material impact on our results of operations, financial condition or liquidity.

Financial Condition and Liquidity

Overview

In 2011, we continued to have a strong balance sheet and liquidity position. The cornerstone of our strength is our cash and cash equivalent balances and our ability to generate positive free cash flow (non-GAAP). For 2011, we ended the year with $1.5 billion of cash and cash equivalent balances after using cash on hand to complete a $900 million share buyback program, purchase the worldwide rights for the Liz Claiborne family of trademarks and related intellectual property and the U.S. and Puerto Rico rights for the Monet family of trademarks and related intellectual property and invest in MSLO. We also ended the year with positive free cash flow of $23 million. At the end of 2011, our cash-to-debt ratio was about 49%, while our debt-to-total capital ratio was approximately 44%.

In addition to cash flow and cash and cash equivalent balances, as of year-end 2011 our revolving credit facility provided an additional $1,250 million source of liquidity. Other than the issuance of trade and standby letters of credit, which totaled $144 million at year-end 2011, we did not utilize this facility during 2011. To further enhance our liquidity, on February 10, 2012, we increased the size of our revolving credit facility to $1,500 million.

The following table provides a summary of our key components and ratios of financial condition and liquidity:


($ in millions)	2011			2010			2009
Cash and cash equivalents	$	1,507		$	2,622		$	3,011
Merchandise inventory		2,916			3,213			3,024
Property and equipment, net		5,176			5,231			5,357

Long-term debt, including current maturities	$	3,102		$	3,099		$	3,392
Stockholders’ equity		4,010			5,460			4,778

Total capital	$	7,112		$	8,559		$	8,170
Maximum capacity under our credit agreements⁽¹⁾	$	1,250		$	750		$	750
Cash flow from operating activities		820			592	⁽²⁾		1,573	⁽³⁾
Free cash flow (non-GAAP)⁽⁴⁾		23			158			677
Capital expenditures		634			499			600
Dividends paid		178			189			183
Ratios and measures:
Debt-to-total capital⁽⁵⁾		43.6	%		36.2	%		41.5	%
Cash-to-debt⁽⁶⁾		48.6	%		84.6	%		88.8	%

(1) On January 27, 2012, we entered into an amended and restated credit agreement in which we converted our prior credit facility into an asset-based revolving credit facility. On February 10, 2012, we increased the size of our revolving credit facility to $1,500 million.

(2) Includes a $392 million discretionary cash contribution and a related $152 million tax benefit.

(3) Included a $126 million tax benefit as a result of the contribution of common stock to the primary pension plan.

(4) See Item 6, Selected Financial Data, for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure.

(5) Long-term debt, including current maturities divided by total capital.

(6) Cash and cash equivalents divided by long-term debt, including current maturities.

Cash and Cash Equivalents

At year-end 2011, we had $1.5 billion of cash and cash equivalents, which represented approximately 49% of our $3.1 billion of outstanding long-term debt, including current maturities. Cash and cash

equivalents decreased $1,115 million in 2011 after cash uses that included $900 million to complete a share buyback program, $268 million to purchase the worldwide rights for the Liz Claiborne family of trademarks and related intellectual property and the U.S. and Puerto Rico rights for the Monet family of trademarks and related intellectual property and $39 million to invest in MSLO. Our cash investments are held in U.S. Treasury money market funds and a portfolio of highly rated bank deposits.

In addition to cash and cash equivalents, as of year-end 2011 our liquidity position included a $1,250 million asset-based revolving credit facility. To further enhance our liquidity, on February 10, 2012, we increased the size of our revolving credit facility to $1,500 million.

Our 2010 and 2007 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%. These provisions trigger if there were a beneficial ownership change of 50% or more of our common stock and, for the 2010 issuance, if the debt is downgraded from the Company’s credit rating level at the time of issuance, for the 2007 issuances, if the debt was rated non-investment grade. This provision applies to $1.1 billion of our debt.

Free Cash Flow (non-GAAP)

Free cash flow (non-GAAP) is defined as net cash provided by operating activities, excluding discretionary cash contributions to our primary pension plan and any associated cash tax impacts, less capital expenditures and dividends paid, plus proceeds from the sale of assets. Our 2011 free cash flow was $23 million compared to $158 million in 2010. This decrease was primarily the result of an increase in capital expenditures.

Operating Activities

Our operations are seasonal in nature, with the business depending to a great extent on the last quarter of the year when a significant portion of the sales, profits and positive operating cash flows are realized. Cash requirements are highest in the third quarter as we build inventory levels in preparation for the holiday season.

2011 cash flow from operating activities was $820 million, an increase of $228 million from the prior year. In 2010, our cash flow from operating activities was impacted by a $392 million discretionary pension contribution which resulted in a tax benefit of $152 million, for a net use of cash of $240 million. Although operating performance was lower in 2011 as compared to 2010, this was offset as we managed inventories at lower levels during 2011.

Total inventory was $2,916 million at the end of 2011, a decrease of 9.2% from 2010. In 2010, in response to the recovering environment, we maintained a higher level of merchandise inventory. At the end of 2011, we edited our assortments and lowered inventory levels as compared to the prior year in support of our new business strategy. Inventory turns for 2011, 2010 and 2009 were 3.09, 3.05 and 3.15, respectively.

2010 cash flow from operating activities was $592 million, a decrease of approximately $981 million from the prior year. The decrease was primarily attributable to higher receipts of merchandise inventory, the discretionary pension contribution, and higher payments of incentive compensation, partially offset by lower income taxes paid.

Investing Activities


($ in millions)	2011			2010			2009
Net cash (used in)/provided by:
Capital expenditures	$	(634	)	$	(499	)	$	(600	)
Proceeds from sale of assets		15			14			13
Proceeds from joint venture distribution		53			-			-
Acquisition		(268	)		-			-
Cost investment, net		(36	)		-			-

Investing activities	$	(870	)	$	(485	)	$	(587	)

In 2011, we invested $634 million in capital expenditures for renewals and modernizations, three new jcpenney department stores, 77 Sephora inside jcpenney locations, 423 MNG by Mango shops, 502 Call it Spring shops and the opening of 10 Foundry stores.

In 2011, we purchased the worldwide rights for the Liz Claiborne family of trademarks and related intellectual property and the U.S. and Puerto Rico rights for the Monet family of trademarks and related intellectual property for a total purchase price of $268 million and invested $39 million through the purchase of 11 million newly issued shares of Class A common stock of MSLO and one share of MSLO preferred stock which gave us the right to designate two members of MSLO’s Board of Directors. These uses of cash were partially offset by the receipt of a $53 million cash distribution from one of our real estate joint ventures as a result of a refinancing transaction and a $3 million cash distribution from MSLO that was recorded as a return of investment.

In 2010, we invested $499 million in capital expenditures for two new stores, 26 major renovations, 76 new Sephora inside jcpenney locations, 15 store refurbishments, and fixture and store environment improvements in over 500 stores.

In 2009, we invested $600 million in capital expenditures for 17 new stores, 16 in our off-mall format, and our store in Manhattan, 64 new Sephora inside jcpenney locations, 20 major capital improvements, 22 store refurbishments, fixture and store environment improvements in over 500 stores and technology.

The following provides a breakdown of capital expenditures:


($ in millions)	2011		2010		2009
Store renewals and updates	$	410	$	257	$	195
Capitalized software		120		100		72
New and relocated stores		33		25		163
Technology and other		71		117		170

Total	$	634	$	499	$	600

In January 2012, we announced a plan to invest approximately $800 million in capital expenditures in 2012. Our plan is to fund these expenditures with cash flow from operations and existing cash and cash equivalents balances. Capital expenditures for 2012 will relate primarily to the investment in our shops inside jcpenney stores and technology improvements.

Financing Activities


($ in millions)	2011			2010			2009
Net cash (used in)/provided by:
Proceeds from issuance of long-term debt	$	-		$	392		$	-
Payments of long-term debt, including financing costs		(20	)		(707	)		(145	)
Dividends paid		(178	)		(189	)		(183	)
Proceeds from issuance of stock warrant		50			-			-
Stock repurchase program		(900	)		-			-
Other		(17	)		8			1

Total	$	(1,065	)	$	(496	)	$	(327	)

During the first half of 2011, we completed our share buyback program authorized by the Board of Directors in February 2011. Through open market transactions we repurchased approximately 24.4 million shares at a cost of $900 million and an average price of $36.98. In June 2011, we received proceeds of approximately $50 million for the sale of a warrant on 7.3 million shares of J. C. Penney Company, Inc. common stock to Ronald B. Johnson prior to the commencement of his employment. In April 2011, we paid $15 million in fees to renew our revolving credit facility and in January 2012, we paid $5 million in fees for an amendment and restatement of our credit facility, for a total of $20 million.

In 2011, we maintained our quarterly dividend on common stock at $0.20 per share and returned $178 million to stockholders through dividend payments. The Board periodically reviews the dividend policy and rate, taking into consideration our overall financial and strategic outlook, earnings, liquidity and cash flow projections, as well as competitive factors.

In 2010, we completed several financing transactions. On March 1, 2010, we repaid at maturity $393 million principal amount of 8.0% Notes due 2010. In May, we paid aggregate consideration of $314 million, including accrued but unpaid interest, to purchase $300 million principal amount of JCP’s outstanding 6.375% Senior Notes due 2036, which were validly tendered pursuant to a cash tender offer. Also in May, we closed on our offering of $400 million aggregate principal amount of 5.65% Senior Notes due 2020 and used proceeds of the offering, net of discounts, of $392 million to make a voluntary cash contribution to the J. C. Penney Corporation, Inc. Pension Plan. During 2010, we returned $189 million to stockholders through dividend payments.

In 2009, pursuant to a cash tender offer, we accepted for purchase $104 million principal amount of the 8% Notes due March 1, 2010 and purchased another $9 million of these notes in the open market. There were no issuances of new debt during 2009. We paid financing costs of $32 million, which consisted of Credit Facility fees and premiums on early retirement of debt from our cash tender offer. During 2009, we returned $183 million to stockholders through dividend payments.

Cash Flow and Financing Outlook

On January 27, 2012, we entered into an amended and restated credit agreement in which we converted our prior credit facility into an asset-based revolving credit facility. To further enhance our liquidity, on February 10, 2012, we increased the size of our revolving credit facility to $1,500 million.

We estimate our capital expenditures for the year to be $800 million and we plan to fund these amounts with cash flow from operations and existing cash and cash equivalent balances. Capital expenditures for 2012 will relate primarily to the investment in our shops inside jcpenney stores and technology improvements.

Our next scheduled debt maturity is in August 2012 for $230 million. We may pay this debt maturity with cash flow from operations and existing cash and cash equivalent balances; however, in accordance with our long-term financing strategy, we may access the capital markets opportunistically. We may borrow under our credit facility for general corporate purposes including, but not limited to, seasonal working capital needs and to support ongoing letters of credit.

Credit Facility

On January 27, 2012, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation entered into a revolving credit facility in an amount up to $1,250 million (2012 Credit Facility), which amended and restated the Company’s prior credit agreement entered into in April 2011, with the same syndicate of lenders under the previous agreement, with JPMorgan Chase Bank, N.A., as administrative agent. The 2012 Credit Facility matures on April 29, 2016.

The 2012 Credit Facility is an asset-based revolving credit facility and is secured by a perfected first-priority security interest in substantially all of our credit card receivables, accounts receivable and inventory. The 2012 Credit Facility is available for general corporate purposes, including the issuance of letters of credit. Pricing under the 2012 Credit Facility is tiered based on JCP’s senior unsecured long-term credit ratings issued by Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services. JCP’s obligations under the 2012 Credit Facility are guaranteed by J. C. Penney Company, Inc.

Availability under the 2012 Credit Facility is limited to a borrowing base which allows us to borrow up to 85% of eligible accounts receivable, plus 90% of eligible credit card receivables, plus 85% of the liquidation value of our inventory, net of certain reserves. Letters of credit reduce the amount available to borrow by their face value.

In the event that availability under the 2012 Credit Facility is at any time less than the greater of (1) $125 million or (2) 10% of the lesser of the total facility or the borrowing base then in effect, for a period of at least 30 days, the Company will be subject to a fixed charge coverage ratio covenant of 1.0 to 1.0 which is calculated as of the last day of the quarter and measured on a trailing four-quarter basis.

The 2012 Credit Facility contains covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to incur indebtedness; grant liens on assets; guarantee obligations; merge, consolidate, or sell assets; pay dividends or make other restricted payments; make investments; prepay or modify certain indebtedness; engage in transactions with affiliates; or enter into sale-leaseback transactions under certain conditions.

We may borrow under our credit facility for general corporate purposes including, but not limited to, seasonal working capital needs and to support ongoing letters of credit. Our letters of credit totaled $144 million at the end of 2011. To further enhance our liquidity, on February 10, 2012, we increased the size of our revolving credit facility to $1,500 million.

Credit Ratings

Our credit ratings and outlook as of March 19, 2012 were as follows:


	Long-Term Debt	Outlook
Moody’s Investors Service, Inc.	Ba1		Stable
Standard & Poor’s Ratings Services	BB		Stable
Fitch Ratings	BB+		Stable

Rating agencies consider changes in operating performance, comparable store sales, the economic environment, conditions in the retail industry, financial leverage and changes in our business strategy in their rating decisions.

Contractual Obligations and Commitments

Aggregated information about our obligations and commitments to make future contractual payments, such as debt and lease agreements, and contingent commitments as of January 28, 2012 is presented in the following table.


($ in millions)	Total		2012			2013		2014		2015		2016		After 5 years
Recorded contractual obligations:
Long-term debt⁽¹⁾	$	3,102	$	231		$	1	$	1	$	201	$	200	$	2,468
Merchandise accounts payable		1,022		1,022			-		-		-		-		-
Unrecognized tax benefits⁽²⁾		110		25			-		-		-		-		85
Contributions to non-qualified supplemental retirement and postretirement medical plans⁽³⁾		315		50			48		45		43		37		92

	$	4,549	$	1,328		$	49	$	46	$	244	$	237	$	2,645

Unrecorded contractual obligations:
Interest payments on long-term debt	$	5,314	$	218	⁽⁴⁾	$	198	$	198	$	198	$	184	$	4,318
Operating leases⁽⁵⁾		2,916		260			224		194		167		144		1,927
Standby and import letters of credit⁽⁶⁾		144		144			-		-		-		-		-
Surety bonds⁽⁷⁾		74		74			-		-		-		-		-
Contractual obligations⁽⁸⁾		1,215		270			322		174		162		158		129
Purchase orders⁽⁹⁾		2,214		2,214			-		-		-		-		-
Guarantees⁽¹⁰⁾		45		5			5		5		4		2		24

	$	11,922	$	3,185		$	749	$	571	$	531	$	488	$	6,398

Total	$	16,471	$	4,513		$	798	$	617	$	775	$	725	$	9,043

(1) The weighted-average maturity of long-term debt is 23 years.

(2) Represents management’s best estimate of the payments related to tax reserves for uncertain income tax positions. Based on the nature of these liabilities, the actual payments in any given year could vary significantly from these amounts. See Note 19 to the consolidated financial statements.

(3) Represents expected cash payments through 2021.

(4) Includes $74 million of accrued interest that is included in our Consolidated Balance Sheet at January 28, 2012.

(5) Represents future minimum lease payments for non-cancelable operating leases, including renewals determined to be reasonably assured. Future minimum lease payments have not been reduced for sublease income.

(6) Standby letters of credit, which totaled $131 million, are issued as collateral to a third-party administrator for self-insured workers’ compensation and general liability claims. The remaining $13 million are outstanding import letters of credit.

(7) Surety bonds are primarily for previously incurred and expensed obligations related to workers’ compensation and general liability claims.

(8) Consists primarily of (a) minimum purchase requirements for exclusive merchandise and fixtures; (b) royalty obligations; and (c) minimum obligations for professional services, energy services, software maintenance and network services.

(9) Amounts committed under open purchase orders for merchandise inventory of which a significant portion are cancelable without penalty prior to a date that precedes the vendor’s scheduled shipment date.

(10) Relates to third-party guarantees. See Note 20 to the consolidated financial statements.

Off-Balance Sheet Arrangements

Management considers all on- and off-balance sheet debt in evaluating our overall liquidity position and capital structure. Other than operating leases, which are included in the Contractual Obligations and Commitments table, we do not have any material off-balance sheet financing. See detailed disclosure regarding operating leases and their off-balance sheet present value in Note 15 to the consolidated financial statements.

We do not have any additional arrangements or relationships with entities that are not consolidated into the financial statements.

Common Stock

The number of outstanding shares of common stock was 215.9 million at the end of 2011, 236.7 million at the end of 2010 and 236.0 million at the end of 2009. The decrease in 2011 was primarily the result of our share buyback program in which we repurchased approximately 24.4 million shares through open market transactions.

Inflation

While inflation did not significantly impact our results of operations during the past three years, the retail industry has experienced inflationary cost increases. We have experienced cost increases primarily in the latter part of 2011 driven primarily by rising costs for cotton and petroleum based textiles. We have programs in place to mitigate the effects of inflation that include adjusting our product mix, leveraging our sourcing capabilities, and where appropriate, increasing prices and reducing our promotional activity.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and use assumptions that in some instances may materially affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, we have made our best estimates and judgments based on history and current trends, as well as other factors that we believe are relevant at the time of the preparation of our consolidated financial statements. Historically, actual results have not differed materially from estimates; however, future events and their effects cannot be determined with certainty and as a result, actual results could differ from our assumptions and estimates.

We have discussed the development and selection of the critical accounting policies with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our disclosures relating to these policies in this MD&A. See Note 2 to the consolidated financial statements for a description of our significant accounting policies.

Inventory Valuation under the Retail Method

Inventories are valued primarily at the lower of cost (using the first-in, first-out or “FIFO” method) or market, determined under RIM for department stores, store distribution centers and regional warehouses and standard cost, representing average vendor cost, for merchandise we sell through the Internet at jcp.com. Under RIM, retail values are converted to a cost basis by applying specific average cost factors to groupings of merchandise. RIM inherently requires management judgment and certain estimates that may significantly impact the ending inventory valuation at cost, as well as gross margin. Two of the most significant estimates are permanent reductions to retail prices (markdowns) used primarily to clear seasonal merchandise or otherwise slow-moving inventory and inventory shortage (shrinkage).

Permanent markdowns designated for clearance activity are recorded at the point of decision, when the utility of inventory has diminished, versus the point of sale. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and style trends. Under RIM, permanent markdowns result in the devaluation of inventory and the corresponding reduction to gross margin is recognized in the period the decision to markdown is made.

Shrinkage is estimated as a percent of sales for the period from the last physical inventory date to the end of the fiscal period. Physical inventories are taken at least annually and inventory records are adjusted accordingly. The shrinkage rate from the most recent physical inventory, in combination with current events and historical experience, is used as the standard for the shrinkage accrual rate for the next inventory cycle. Historically, our actual physical inventory count results have shown our estimates to be reliable.

Based on prior experience, we do not believe that the actual results will differ significantly from the assumptions used in these estimates. A 10% increase or decrease in the permanent markdowns reflected in our inventory as of the end of the year would have impacted net income by approximately $22 million. A 10% increase or decrease in the estimated inventory shrinkage accrued as of the end of the year would have impacted net income by approximately $7 million.

Valuation of Long-Lived Assets

We evaluate recoverability of long-lived assets, such as property and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable, such as historical operating losses or plans to close stores and dispose of or sell long-lived assets before the end of their previously estimated useful lives. Additionally, for store assets, in the fourth quarter of each fiscal year, we separately test the performance of individual stores, and underperforming stores are selected for further evaluation of the recoverability of the carrying amounts. If the evaluation, performed on an undiscounted cash flow basis, indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured as the excess of carrying value over the fair value of the impaired asset. The impairment calculation requires us to apply estimates for future cash flows and use judgments for qualitative factors such as local market conditions, operating environment, mall performance and other trends. We estimate fair value based on either a projected discounted cash flow method using a discount rate that is considered commensurate with the risk inherent in our current business model or appraised value, as appropriate.

We recognize impairment losses in the earliest period that it is determined a loss has occurred. The carrying value is adjusted to the new carrying value and any subsequent increases in fair value are not recorded. If it is determined that the estimated remaining useful life of the asset should be decreased, the periodic depreciation expense is adjusted based on the new carrying value of the asset. Impairment losses totaling $58 million, $3 million and $42 million in 2011, 2010 and 2009, respectively, were recorded in the Consolidated Statement of Operations in the real estate and other, net line item. The $58 million charge for 2011 was related to eight underperforming department stores of which seven continue to operate. While we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairments, if actual results are not consistent with our estimates and assumptions, we may be exposed to additional impairment charges.

Reserves and Valuation Allowances

We are primarily self-insured for costs related to workers’ compensation and general liability claims. The liabilities represent our best estimate, using generally accepted actuarial reserving methods through which we record a provision for workers’ compensation and general liability risk based on historical experience, current claims data and independent actuarial best estimates, including incurred but not reported claims and projected loss development factors. These estimates are subject to the frequency, lag and severity of claims. We target this provision above the midpoint of the actuarial range, and total estimated claim liability amounts are discounted using a risk-free rate. We do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant fluctuation in net income. However, a 10% variance in the workers’ compensation and general liability reserves at year-end 2011 would have affected net income by approximately $15 million.

Income taxes are estimated for each jurisdiction in which we operate and require significant judgment, the use of estimates and the interpretation and application of complex tax laws. This involves assessing the current tax exposure together with temporary differences, which result from differing treatment of items for tax and book purposes. Deferred tax assets and liabilities are provided for based on these assessments. Deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent that recovery is deemed unlikely, a valuation allowance is recorded. We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return. We recognize any interest and penalties related to unrecognized tax benefits in

income tax expense. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. In assessing the likelihood of realization of deferred tax assets, we use estimates of the amount and character of future taxable income. Tax contingency accruals are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. We do not expect the outcome of tax audits to have a material adverse effect on our financial condition, results of operations or cash flow. Many years of data have been incorporated into the determination of tax reserves, and our estimates have historically been reasonable.

In establishing our reserves for liabilities associated with underground storage tanks, we maintain and periodically update an inventory listing of potentially impacted sites. The estimated cost of remediation efforts is based on our historical experience, as well as industry and other published data. With respect to our former drugstore operations, we accessed extensive databases of environmental matters, including data from the Environmental Protection Agency, to estimate the cost of remediation. Our experience, as well as relevant data, was used to develop a range of potential liabilities, and a reserve was established at the time of the sale of our drugstore business. The reserve is adjusted as payments are made or new information becomes known. In 2010, we lowered the reserve due to the affirmation of another responsible party to one of the known sites involving a warehouse facility and review of our actual experience over the past several years. Reserves for asbestos removal are based on our known liabilities in connection with approved plans for store modernization, renovations or dispositions of store locations.

We believe the established reserves, as adjusted, are adequate to cover estimated potential liabilities.

Pension

Pension Accounting

We maintain a qualified funded defined benefit pension plan (primary plan) and smaller non-qualified unfunded supplemental defined benefit plans. The determination of pension expense is the result of actuarial calculations that are based on important assumptions about pension assets and liabilities. The most important of these are the rate of return on assets and the discount rate assumptions. These assumptions require significant judgment and a change in any one of them could have a material impact on pension expense reported in our Consolidated Statements of Operations and Consolidated Statements of Comprehensive (Loss)/Income, as well as in the assets, liability and equity sections of the Consolidated Balance Sheets.

The following table reflects our rate of return and discount rate assumptions:


	2011			2010			2009
Expected return on plan assets		7.5	%		8.4	%		8.4	%
Discount rate for pension expense		5.65	%⁽¹⁾		5.90	%		6.86	%⁽²⁾
Discount rate for pension obligation		4.82	%		5.65	%		5.90	%

(1) The discount rate used for the Supplemental Retirement Program and Benefit Restoration Plan was revised to 5.06% on the remeasurement date of October 15, 2011 as a result of the VERP.

(2) For the first four months of 2009, the discount rate was 6.95% as determined by the January 31, 2009 annual measurement. The discount rate was revised to 6.86% on the remeasurement date of May 18, 2009. The supplemental plans and retiree medical plans used 6.95% for the year, since those plans were not subject to remeasurement.

Return on Plan Assets and Impact on Earnings

For the primary plan, we apply our expected return on plan assets using fair market value as of the annual measurement date. The fair market value method results in greater volatility to our pension expense than the more commonly used calculated value method (referred to as smoothing of assets). Our primary plan asset base is well diversified with an asset allocation mix of equities (U.S., non-U.S. and private), fixed income (investment-grade and high-yield) and real estate (private and public).

As of January 1, 2007, the primary plan was closed to new entrants. As a result of this action, the future growth of the plan liability is expected to moderate and ultimately begin to decline. In recognition of the changing liability characteristics and to provide a more desirable balance of investment return and volatility risk, last year, we shifted 15% of the plan’s allocation from equities to fixed income. The shift to a higher mix of fixed income investments will provide a better match to the plan’s changing liability characteristics. As a result of the asset allocation shift, our expected return on plan assets was reduced to 7.5% in 2011 and will remain at that rate for 2012. In 2010 and 2009, the expected return on plan assets was 8.4%.

Discount Rate

The discount rate assumption used to determine our postretirement obligations was based on an externally published yield curve determined by the plan’s actuary. The yield curve is a hypothetical AA yield curve represented by a series of bonds maturing from six months to 30 years, designed to match the corresponding pension benefit cash payments to retirees. Each underlying bond issue is required to have a rating of Aa2 or better by Moody’s Investors Service, Inc. or a rating of AA or better by Standard & Poor’s Ratings Services.

For 2011, the discount rate to measure pension expense was 5.65% compared to 5.90% in 2010. For 2009, the discount rate initially increased to 6.95% from 6.54% as of January 31, 2009 and then slightly decreased to 6.86% from 6.95% for the May 18, 2009 remeasurement, which had an overall small positive impact on 2009 pension expense. The discount rate was adjusted in May 2009 for the remeasurement of plan assets and obligations to reflect the voluntary contribution of 13.4 million shares of Company common stock and update other pension liability assumptions. The discount rate to measure pension obligation declined to 4.82% as of January 28, 2012 from 5.65% as of January 29, 2011.

Sensitivity

The sensitivity of the pension expense to a plus or minus one-half of one percent of expected return on assets is a decrease or increase in expense of approximately $0.08 per share. An increase or decrease in the discount rate of one-half of one percent would decrease or increase the expense by approximately $0.14 per share.

Pension Funding

Funding requirements for our primary plan are determined under Employee Retirement Income Security Act of 1974 (ERISA) rules, as amended by the Pension Protection Act of 2006. As a result of the funded status of the primary plan, we are not required to make cash contributions in 2012.

Our funding policy is to maintain a well-funded pension plan throughout all business and economic cycles. Consistent with our funding policy, on May 24, 2010, we used net proceeds of approximately $392 million from the issuance of $400 million of 5.65% Senior Notes due 2020 to make a voluntary

cash contribution to the primary plan. In 2009, we voluntarily contributed approximately 13.4 million newly issued shares of Company common stock to the primary plan. The contribution was valued at $340 million, based on a price of $25.39 per share, reflecting a 6.5% discount to the closing price of the Company’s common stock on May 18, 2009.

Recent Accounting Pronouncements

Refer to Note 3 to the consolidated financial statements.

Cautionary Statement Regarding Forward-Looking Information

This Annual Report on Form 10-K contains forward-looking statements made within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current view of future events and financial performance. The words expect, plan, anticipate, believe, intend, should, will and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to be materially different from planned or expected results. Those risks and uncertainties include, but are not limited to, general economic conditions, including inflation, recession, unemployment levels, consumer spending patterns, credit availability and debt levels, changes in store traffic trends, the cost of goods, trade restrictions, the impact of changes designed to transform our business, changes in tariff, freight and shipping rates, changes in the cost of fuel and other energy and transportation costs, increases in wage and benefit costs, competition and retail industry consolidations, interest rate fluctuations, dollar and other currency valuations, risks associated with war, an act of terrorism or pandemic, a systems failure and/or security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or Company information and legal and regulatory proceedings. Furthermore, our Company typically earns a disproportionate share of its operating income in the fourth quarter due to holiday buying patterns, and such buying patterns are difficult to forecast with certainty. While we believe that our assumptions are reasonable, we caution that it is impossible to predict the degree to which any such factors could cause actual results to differ materially from predicted results. For additional discussion on risks and uncertainties, see Item 1A, Risk Factors. We intend the forward-looking statements in this Annual Report on Form 10-K to speak only as of the date of this report and do not undertake to update or revise these projections as more information becomes available.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

We maintain a majority of our cash and cash equivalents in financial instruments with original maturities of three months or less. Such investments are subject to interest rate risk and may have a small decline in value if interest rates increase. Since the financial instruments are of short duration, a change of 100 basis points in interest rates would not have a material effect on our financial condition.

All of our outstanding long-term debt as of January 28, 2012 is at fixed interest rates and would not be affected by interest rate changes. Future borrowings under our multi-year revolving credit facility, to the extent that fluctuating rate loans were used, would be affected by interest rate changes. As of January 28, 2012, no borrowings were outstanding under the facility other than the issuance of trade and standby letters of credit, which totaled $144 million. We do not believe that a change of 100 basis points in interest rates would have a material effect on our financial condition.

The fair value of long-term debt is estimated by obtaining quotes from brokers or is based on current rates offered for similar debt. At January 28, 2012, long-term debt, including current maturities, had a carrying value of $3.1 billion and a fair value of $3.0 billion. At January 29, 2011, long-term debt had a carrying value and fair value of $3.1 billion.

The effects of changes in the U.S. equity and bond markets serve to increase or decrease the value of assets in our primary pension plan. We seek to manage exposure to adverse equity and bond returns by maintaining diversified investment portfolios and utilizing professional investment managers.

Item 8. Financial Statements and Supplementary Data.

See the Index to Consolidated Financial Statements on Page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The management of our company, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

The management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The management of our Company has assessed the effectiveness of our Company’s internal control over financial reporting as of January 28, 2012. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control–Integrated Framework. Based on its assessment, the management of our Company believes that, as of January 28, 2012, our Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm, KPMG LLP, has audited the financial statements included in this Annual Report on Form 10-K and has issued an audit report on the effectiveness of our Company’s internal control over financial reporting. Their report follows.

There were no changes in our Company’s internal control over financial reporting during the fourth quarter ended January 28, 2012, that have materially affected, or are reasonably likely to materially affect, our Company’s internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

J. C. Penney Company, Inc.:

We have audited J. C. Penney Company, Inc’s internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). J. C. Penney Company, Inc’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, J. C. Penney Company, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the related consolidated statements of operations, comprehensive (loss)/income, stockholders’ equity and cash flows for each of the years in the three-year period ended January 28, 2012, and our report dated March 27, 2012 expressed an unqualified opinion on those consolidated financial statements.

LOGO

Dallas, Texas

March 27, 2012

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by Item 10 with respect to executive officers is included within Item 1 in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant.”

The information required by Item 10 with respect to directors, audit committee, audit committee financial experts and Section 16(a) beneficial ownership reporting compliance is included under the captions “Board Committees–Audit Committee,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Election of Directors” in our Company’s definitive proxy statement for 2012, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and is incorporated herein by reference.

Code of Ethics, Corporate Governance Guidelines and Committee Charters

Our Company has adopted a code of ethics for officers and employees, which applies to, among others, our Company’s principal executive officer, principal financial officer, and principal accounting officer, and which is known as the “Statement of Business Ethics.” We have also adopted certain ethical principles and policies for our directors, which are set forth in Article V of our Corporate Governance Guidelines. The Statement of Business Ethics and Corporate Governance Guidelines are available on our websites at www.jcpenney.com and www.jcpenney.net. Additionally, we will provide copies of these documents without charge upon request made to:

J. C. Penney Company, Inc.

Office of Investor Relations

6501 Legacy Drive

Plano, Texas 75024

(Telephone 972-431-5500)

Our Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to or waiver of any provision of the Statement of Business Ethics that applies to any officer of our Company by posting such information on our websites at www.jcpenney.com and www.jcpenney.net.

Copies of our Company’s Audit Committee, Human Resources and Compensation Committee, the Committee of the Whole and Corporate Governance Committee Charters are also available on our websites at www.jcpenney.com and www.jcpenney.net. Copies of these documents will likewise be provided without charge upon request made to the address or telephone number provided above.

Item 11. Executive Compensation.

The information required by Item 11 is included under the captions “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Report of the Human

Resources and Compensation Committee,” “Summary Compensation Table,” “Grants of Plan-Based Awards for Fiscal 2011,” “Outstanding Equity Awards at Fiscal Year-End 2011,” “Option Exercises and Stock Vested for Fiscal 2011,” “Pension Benefits,” “Nonqualified Deferred Compensation for Fiscal 2011,” “Potential Payments and Benefits on Termination of Employment,” “Termination Without a Change in Control,” “Change in Control; Termination Following a Change in Control,” and “Director Compensation for Fiscal 2011” in our Company’s definitive proxy statement for 2012, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by Item 12 with respect to beneficial ownership of our Company’s common stock is included under the caption “Beneficial Ownership of Common Stock” and with respect to equity compensation plans is included under the caption “Equity Compensation Plan(s) Information” in our Company’s definitive proxy statement for 2012, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 13 is included under the captions “Policies and Procedures with Respect to Related Person Transactions” and “Board Independence” in our Company’s definitive proxy statement for 2012, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by Item 14 is included under the captions “Audit and Other Fees” and “Audit Committee’s Pre-Approval Policies and Procedures” in our Company’s definitive proxy statement for 2012, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) Documents filed as part of this report:

1. Consolidated Financial Statements:

The consolidated financial statements of J. C. Penney Company, Inc. and subsidiaries are listed in the accompanying “Index to Consolidated Financial Statements” on page F-1.

2. Financial Statement Schedules:

Schedules have been omitted as they are inapplicable or not required under the rules, or the information has been submitted in the consolidated financial statements and related financial information contained otherwise in this Annual Report on Form 10-K.

3. Exhibits:

See separate Exhibit Index beginning on page E-1. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K is specifically identified in the separate Exhibit Index beginning on page E-1 and filed with or incorporated by reference in this report.

(b) See separate Exhibit Index beginning on page E-1.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


J. C. PENNEY COMPANY, INC.
(Registrant)

By:		/s/ Michael P. Dastugue
		Michael P. Dastugue
		Executive Vice President and Chief Financial Officer

Dated: March 27, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signatures	Title	Date

Ronald B. Johnson* Ronald B. Johnson	Chief Executive Officer (principal executive officer); Director	March 27, 2012

/s/ Michael. P. Dastugue Michael P. Dastugue	Executive Vice President and Chief Financial Officer (principal financial officer)	March 27, 2012

Dennis P. Miller* Dennis P. Miller	Senior Vice President and Controller (principal accounting officer)	March 27, 2012

Thomas J. Engibous* Thomas J. Engibous	Chairman of the Board; Director	March 27, 2012

William A. Ackman* William A. Ackman	Director	March 27, 2012

Colleen C. Barrett* Colleen C. Barrett	Director	March 27, 2012

Kent B. Foster* Kent B. Foster	Director	March 27, 2012

Geraldine B. Laybourne* Geraldine B. Laybourne	Director	March 27, 2012

Burl Osborne* Burl Osborne	Director	March 27, 2012

Leonard H. Roberts* Leonard H. Roberts	Director	March 27, 2012

Steven Roth* Steven Roth	Director	March 27, 2012

Javier G. Teruel* Javier G. Teruel	Director	March 27, 2012

R. Gerald Turner* R. Gerald Turner	Director	March 27, 2012

Mary Beth West* Mary Beth West	Director	March 27, 2012


*By:		/s/ Michael P. Dastugue
		Michael P. Dastugue
		Attorney-in-fact

J. C. PENNEY COMPANY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm			F-2

Consolidated Statements of Operations for the Fiscal Years Ended January 28, 2012, January 29, 2011 and January 30, 2010			F-3

Consolidated Statements of Comprehensive (Loss)/Income for the Fiscal Years Ended January 28, 2012, January 29, 2011 and January 30, 2010			F-4

Consolidated Balance Sheets as of January 28, 2012 and January 29, 2011			F-5

Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended January 28, 2012, January 29, 2011 and January 30, 2010			F-6

Consolidated Statements of Cash Flows for the Fiscal Years Ended January 28, 2012, January 29, 2011 and January 30, 2010			F-7

Notes to Consolidated Financial Statements			F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

J. C. Penney Company, Inc.:

We have audited the accompanying consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the related consolidated statements of operations, comprehensive (loss)/income, stockholders’ equity and cash flows for each of the years in the three-year period ended January 28, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of J. C. Penney Company, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), J. C. Penney Company, Inc.’ s internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 27, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

LOGO

Dallas, Texas

March 27, 2012

F-2

CONSOLIDATED STATEMENTS OF OPERATIONS


($ in millions, except per share data)	2011			2010			2009
Total net sales	$	17,260		$	17,759		$	17,556
Cost of goods sold		11,042			10,799			10,646

Gross margin		6,218			6,960			6,910
Operating expenses/(income):
Selling, general and administrative (SG&A)		5,109			5,358			5,410
Pension		121			255			337
Depreciation and amortization		518			511			495
Real estate and other, net		21			(28	)		5
Restructuring and management transition		451			32			-

Total operating expenses		6,220			6,128			6,247

Operating (loss)/income		(2	)		832			663
Net interest expense		227			231			260
Bond premiums and unamortized costs		-			20			-

(Loss)/income from continuing operations before income taxes		(229	)		581			403
Income tax (benefit)/expense		(77	)		203			154

(Loss)/income from continuing operations		(152	)		378			249
Income from discontinued operations, net of income tax expense of $-, $4 and $1, respectively		-			11			2

Net (loss)/income	$	(152	)	$	389		$	251

Basic (loss)/earnings per share:
Continuing operations	$	(0.70	)	$	1.60		$	1.07
Discontinued operations		-			0.04			0.01

Net (loss)/income	$	(0.70	)	$	1.64		$	1.08

Diluted (loss)/earnings per share:
Continuing operations	$	(0.70	)	$	1.59		$	1.07
Discontinued operations		-			0.04			0.01

Net (loss)/income	$	(0.70	)	$	1.63		$	1.08

Weighted average shares–basic		217.4			236.4			232.0
Weighted average shares–diluted		217.4			238.0			233.1

The accompanying notes are an integral part of these consolidated financial statements.

F-3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME


($ in millions)	2011			2010			2009
Net (loss)/income	$	(152	)	$	389		$	251
Other comprehensive (loss)/income, net of tax:
Unrealized gain on investments, net of tax of $(29), $(27) and $(27), respectively		53			49			48
Net actuarial (loss)/gain, net of tax of $277, $(249) and $(94), respectively		(440	)		391			151
Prior service credit adjustment, net of tax of $11, $9 and $9, respectively		(17	)		(15	)		(15	)

Total other comprehensive (loss)/income, net of tax		(404	)		425			184

Total comprehensive (loss)/income, net of tax	$	(556	)	$	814		$	435

The accompanying notes are an integral part of these consolidated financial statements.

F-4

CONSOLIDATED BALANCE SHEETS


($ in millions, except per share data)	2011			2010
Assets
Current assets
Cash in banks and in transit	$	175		$	169
Cash short-term investments		1,332			2,453

Cash and cash equivalents		1,507			2,622
Merchandise inventory		2,916			3,213
Income taxes		413			334
Prepaid expenses and other		245			201

Total current assets		5,081			6,370
Property and equipment, net		5,176			5,231
Prepaid pension		-			763
Other assets		1,167			704

Total Assets	$	11,424		$	13,068

Liabilities and Stockholders’ Equity
Current liabilities
Merchandise accounts payable	$	1,022		$	1,133
Other accounts payable and accrued expenses		1,503			1,514
Current maturities of long-term debt, including capital leases		231			-

Total current liabilities		2,756			2,647
Long-term debt		2,871			3,099
Deferred taxes		888			1,192
Other liabilities		899			670

Total Liabilities		7,414			7,608

Stockholders’ Equity
Common stock⁽¹⁾		108			118
Additional paid-in capital		3,699			3,925
Reinvested earnings		1,412			2,222
Accumulated other comprehensive (loss)		(1,209	)		(805	)

Total Stockholders’ Equity		4,010			5,460

Total Liabilities and Stockholders’ Equity	$	11,424		$	13,068

(1) Common stock has a par value of $0.50 per share; 1,250 million shares are authorized. At January 28, 2012, 215.9 million shares were issued and outstanding. At January 29, 2011, 236.7 million shares were issued and outstanding.

The accompanying notes are an integral part of these consolidated financial statements.

F-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


							Additional Paid-in Capital			Reinvested Earnings			Accumulated Other Comprehensive (Loss)/Income			Total Stockholders’ Equity
	Common Stock
(in millions, except per share data)	Shares			Amount
January 31, 2009		222.1		$	111		$	3,499		$	1,959		$	(1,414	)	$	4,155
Net income		-			-			-			251			-			251
Other comprehensive income		-			-			-			-			184			184
Dividends declared, common ($0.80 per share)		-			-			-			(187	)		-			(187	)
Common stock contributed to primary pension plan		13.4			7			333			-			-			340
Stock-based compensation		0.5			-			35			-			-			35

January 30, 2010		236.0			118			3,867			2,023			(1,230	)		4,778
Net income		-			-			-			389			-			389
Other comprehensive income		-			-			-			-			425			425
Dividends declared, common ($0.80 per share)		-			-			-			(190	)		-			(190	)
Stock-based compensation		0.7			-			58			-			-			58

January 29, 2011		236.7			118			3,925			2,222			(805	)		5,460
Net (loss)		-			-			-			(152	)		-			(152	)
Other comprehensive (loss)		-			-			-			-			(404	)		(404	)
Dividends declared, common ($0.80 per share)		-			-			-			(174	)		-			(174	)
Stock warrant issued		-			-			50			-			-			50
Common stock repurchased and retired		(24.4	)		(12	)		(404	)		(484	)		-			(900	)
Stock-based compensation		3.6			2			128			-			-			130

January 28, 2012		215.9		$	108		$	3,699		$	1,412		$	(1,209	)	$	4,010

The accompanying notes are an integral part of these consolidated financial statements.

F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS


($ in millions)	2011			2010			2009
Cash flows from operating activities:
Net (loss)/income	$	(152	)	$	389		$	251
(Income) from discontinued operations		-			(11	)		(2	)
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Restructuring and management transition		314			24			-
Asset impairments and other charges		67			8			48
Depreciation and amortization		518			511			495
Net (gains) on sale of assets		(6	)		(8	)		(2	)
Benefit plans expense		55			197			276
Pension contribution		-			(392	)		-
Stock-based compensation		46			53			40
Excess tax benefits from stock-based compensation		(10	)		(2	)		-
Deferred taxes		(153	)		126			76
Change in cash from:
Inventory		297			(189	)		235
Prepaid expenses and other assets		(67	)		27			36
Merchandise accounts payable		(111	)		(93	)		32
Current income taxes payable		(15	)		33			(54	)
Accrued expenses and other		37			(81	)		142

Net cash provided by operating activities		820			592			1,573

Cash flows from investing activities:
Capital expenditures		(634	)		(499	)		(600	)
Proceeds from sale of assets		15			14			13
Proceeds from joint venture distribution		53			-			-
Acquisition		(268	)		-			-
Cost investment, net		(36	)		-			-

Net cash (used in) investing activities		(870	)		(485	)		(587	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		-			392			-
Payments of long-term debt		-			(693	)		(113	)
Financing costs		(20	)		(14	)		(32	)
Dividends paid, common		(178	)		(189	)		(183	)
Proceeds from issuance of stock warrant		50			-			-
Stock repurchase program		(900	)		-			-
Proceeds from stock options exercised		18			8			4
Excess tax benefits from stock-based compensation		10			2			-
Tax withholding payments reimbursed by restricted stock		(45	)		(2	)		(3	)

Net cash (used in) financing activities		(1,065	)		(496	)		(327	)

Net (decrease)/increase in cash and cash equivalents		(1,115	)		(389	)		659
Cash and cash equivalents at beginning of year		2,622			3,011			2,352

Cash and cash equivalents at end of year	$	1,507		$	2,622		$	3,011

Supplemental cash flow information:
Income taxes paid	$	91		$	50		$	130
Interest paid		227			258			264
Interest received		2			5			5

Significant non-cash transactions:
Pension contribution of Company common stock	$	-		$	-		$	340

The accompanying notes are an integral part of these consolidated financial statements.

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1) Basis of Presentation and Consolidation

Nature of Operations

Our Company was founded by James Cash Penney in 1902 and has grown to be a major national retailer, operating 1,102 department stores in 49 states and Puerto Rico, as well as through our Internet website at jcp.com. We sell family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside jcpenney, and home furnishings. In addition, our department stores provide services, such as styling salon, optical, portrait photography and custom decorating, to customers.

Basis of Presentation and Consolidation

The consolidated financial statements present the results of J. C. Penney Company, Inc. and our subsidiaries (the Company or jcpenney). All significant intercompany transactions and balances have been eliminated in consolidation.

We are 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 direct subsidiaries other than JCP, and has no independent assets or operations.

The Company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. We guarantee certain of JCP’s outstanding debt securities fully and unconditionally.

Fiscal Year

Our fiscal year ends on the Saturday closest to January 31. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. Fiscal year 2012 will contain 53 weeks.


Fiscal Year	Ended		Weeks
2011		January 28, 2012		52
2010		January 29, 2011		52
2009		January 30, 2010		52

Use of Estimates

The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America (GAAP), requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities and 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) and adjustments for shortages (shrinkage); valuation of long-lived assets; valuation allowances and reserves for workers’ compensation and general liability, environmental contingencies, income taxes and litigation; and pension accounting. While actual results could differ from these estimates, we do not expect the differences, if any, to have a material effect on the consolidated financial statements.

Reclassifications

Certain reclassifications were made to prior year amounts to conform to the current period presentation. Beginning in 2011, pre-opening expenses, previously reported as a separate operating

F-8

expense line, were included in SG&A expense due to the immaterial nature of such expense in recent years. The impact to the SG&A expense ratio for 2010 and 2009 was an increase of 10 basis points. Beginning in 2011, restructuring and management transition charges were reported as a separate operating expense line. Previously, 2010 charges were included in real estate and other, net. None of the reclassifications affected our net (loss)/income in any period.

2) Significant Accounting Policies

Merchandise and Services Revenue Recognition

Total net sales, which exclude sales taxes and are net of estimated returns, are recorded at the point of sale when payment is received and the customer takes possession of the merchandise in department stores, at the point of shipment of merchandise ordered through the Internet, or, in the case of services, at the time the customer receives the benefit of the service, such as salon, portrait, optical or custom decorating. Commissions earned on sales generated by licensed departments are included as a component of total net sales. Shipping and handling fees charged to customers are also included in total net sales with corresponding costs recorded as cost of goods sold. We provide for estimated future returns based primarily on historical return rates and sales levels.

Gift Card Revenue Recognition

At the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the card. The liability remains recorded until the earlier of redemption, escheatment or 60 months. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise. We escheat a portion of unredeemed gift cards according to Delaware escheatment requirements that govern remittance of the cost of the merchandise portion of unredeemed gift cards over five years old. After reflecting the amount escheated, any remaining liability (referred to as breakage) is relieved and recognized as a reduction of SG&A expenses as an offset to the costs of administering the gift card program. Though our gift cards do not expire, it is our historical experience that the likelihood of redemption after 60 months is remote. The liability for gift cards is recorded in other accounts payable and accrued expenses on the Consolidated Balance Sheets.

Customer Loyalty Program

Customers who spend a certain amount with us using our private label card or registered third party credit cards receive JCP Rewards^® certificates, which can be redeemed for goods or services in our stores the following month. We estimate the net cost of the rewards that will be issued and redeemed and record this cost as rewards points are accumulated. We record the cost of the loyalty program benefits for JCP Rewards in cost of sales given that we provide customers with products or services for these rewards. Other administrative costs of the loyalty program are recorded in SG&A expenses as incurred.

Cost of Goods Sold

Cost of goods sold includes all costs directly related to bringing merchandise to its final selling destination. These costs include the cost of the merchandise (net of discounts or allowances earned), sourcing and procurement costs, buying and brand development costs, including buyers’ salaries and related expenses, freight costs, warehouse operating expenses, merchandise examination, inspection and testing, store merchandise distribution center expenses, including rent, and shipping and handling costs incurred for sales via the Internet.

F-9

Selling, General and Administrative Expenses

SG&A expenses include the following costs, except as related to merchandise buying, sourcing, warehousing or distribution activities: salaries, marketing costs, occupancy and rent expense, utilities and maintenance, pre-opening expenses, costs related to information technology, administrative costs related to our home office and district and regional operations, real and personal property and other taxes (excluding income taxes) and credit card fees.

Vendor Allowances

We receive vendor support in the form of cash payments or allowances for a variety of reimbursements such as cooperative advertising, markdowns, vendor shipping and packaging compliance and defective merchandise. We have agreements in place with each vendor setting forth the specific conditions for each allowance or payment. Depending on the arrangement, we either recognize the allowance as a reduction of current costs or defer the payment over the period the related merchandise is sold. If the payment is a reimbursement for costs incurred, it is offset against those related costs; otherwise, it is treated as a reduction to the cost of merchandise.

For cooperative advertising programs offered by national brands, we generally offset the allowances against the related advertising expense. Certain programs require proof-of-advertising to be provided to the vendor to support the reimbursement of the incurred cost. Programs that do not require proof-of-advertising are monitored to ensure that the allowance provided by each vendor is a reimbursement of costs incurred to advertise for that particular vendor’s label. If the allowance exceeds the advertising costs incurred on a vendor-specific basis, then the excess allowance for the vendor is recorded as a reduction of merchandise cost.

Markdown reimbursements related to merchandise that has been sold are negotiated and documented by our buying teams and are credited directly to cost of goods sold in the period received. Vendor allowances received prior to merchandise being sold are deferred and recognized as a reduction of merchandise cost based on an inventory turnover rate.

Vendor compliance charges reimburse us for incremental merchandise handling expenses incurred due to a vendor’s failure to comply with our established shipping or merchandise preparation requirements. Vendor compliance charges are recorded as a reduction of merchandise handling costs.

Advertising

Advertising costs, which include newspaper, television, Internet search marketing, radio and other media advertising, are expensed either as incurred or the first time the advertisement occurs. Total advertising costs, net of cooperative advertising vendor reimbursements of $118 million, $142 million and $137 million for 2011, 2010 and 2009, respectively, were $1,039 million, $1,172 million and $1,175 million.

Income Taxes

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded

F-10

to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense on our Consolidated Statements of Operations.

(Loss)/Earnings per Share

Basic (loss)/earnings per share (EPS) is computed by dividing net (loss)/income by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding during the period increased to include the number of additional common shares that would have been outstanding if the potentially dilutive shares had been issued. Potentially dilutive shares include stock options, unvested restricted stock units and awards and a warrant outstanding during the period, using the treasury stock method. Potentially dilutive shares are excluded from the computations of diluted EPS if their effect would be anti-dilutive.

Cash and Cash Equivalents

Cash and cash equivalents include cash short-term investments that are highly liquid investments with original maturities of three months or less. Cash short-term investments consist primarily of short-term U.S. Treasury money market funds and a portfolio of highly rated bank deposits and are stated at cost, which approximates fair market value due to the short-term maturity. Cash in banks and in transit also include credit card sales transactions that are settled early in the following period.

Merchandise Inventory

Inventories are valued at the lower of cost (using the first-in, first-out or “FIFO” method) or market. For department stores, regional warehouses and store distribution centers, we value inventories using the retail method. Under the retail method, retail values are converted to a cost basis by applying specific average cost factors to groupings of merchandise. For Internet, we use standard cost, representing average vendor cost, to determine lower of cost or market.

Physical inventories are taken on a staggered basis at least once per year at all store and supply chain locations, inventory records are adjusted to reflect actual inventory counts and any resulting shortage (shrinkage) is recognized. Following inventory counts, shrinkage is estimated as a percent of sales, based on the most recent physical inventory, in combination with current events and historical experience. We have loss prevention programs and policies in place that are intended to mitigate shrinkage.

Property and Equipment, Net


($ in millions, except estimated useful lives)	Estimated Useful Lives (Years)		2011			2010
Land		N/A	$	312		$	315
Buildings		50		4,549			4,434
Furniture and equipment		3-20		2,173			2,271
Leasehold improvements				1,107			1,065
Accumulated depreciation				(2,965	)		(2,854	)

Property and equipment, net			$	5,176		$	5,231

Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed primarily by using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the term of the lease, including renewals determined to be reasonably assured.

F-11

We expense routine maintenance and repairs when incurred. We capitalize major replacements and improvements. We remove the cost of assets sold or retired and the related accumulated depreciation or amortization from the accounts and include any resulting gain or loss in income from continuing operations.

We recognize a liability for the fair value of our conditional asset retirement obligations, which are primarily related to asbestos removal, when incurred if the liability’s fair value can be reasonably estimated.

Capitalized Software Costs

We capitalize costs associated with the acquisition or development of major software for internal use in other assets in our Consolidated Balance Sheets and amortize the asset over the expected useful life of the software, generally between three and seven years. We only capitalize subsequent additions, modifications or upgrades to internal-use software to the extent that such changes allow the software to perform a task it previously did not perform. We expense software maintenance and training costs as incurred.

Impairment of Long-Lived Assets

We evaluate long-lived assets such as store property and equipment and other corporate assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Factors considered important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant changes in the manner of use of the assets or our overall business strategies. Potential impairment exists if the estimated undiscounted cash flows expected to result from the use of the asset plus any net proceeds expected from disposition of the asset are less than the carrying value of the asset. The amount of the impairment loss represents the excess of the carrying value of the asset over its fair value and is included in real estate and other, net on the Consolidated Statements of Operations. We estimate fair value based on either a projected discounted cash flow method using a discount rate that is considered commensurate with the risk inherent in our current business model or appraised value, as appropriate. We also take other factors into consideration in estimating the fair value of our stores, such as local market conditions, operating environment, mall performance and other trends.

Leases

We use a consistent lease term when calculating amortization of leasehold improvements, determining straight-line rent expense and determining classification of leases as either operating or capital. For purposes of recognizing incentives, premiums, rent holidays and minimum rental expenses on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we take control of the property. Renewal options determined to be reasonably assured are also included in the lease term. Some leases require additional payments based on sales and are recorded in rent expense when the contingent rent is probable.

Some of our lease agreements contain developer/tenant allowances. Upon receipt of such allowances, we record a deferred rent liability in other liabilities on the Consolidated Balance Sheets. The allowances are then amortized on a straight-line basis over the remaining terms of the corresponding leases as a reduction of rent expense.

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Retirement-Related Benefits

We recognize the funded status – the difference between the fair value of plan assets and the plan’s benefit obligation – of our defined benefit pension and postretirement plans directly on the Consolidated Balance Sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. We adjust other comprehensive (loss)/income to reflect prior service cost or credits and actuarial gain or loss amounts arising during the period and reclassification adjustments for amounts being recognized as components of net periodic pension/postretirement cost, net of tax. Other comprehensive (loss)/income is amortized over the average remaining service period, a period of about seven years for the primary plan.

We measure the plan assets and obligations annually at the adopted measurement date of January 31 to determine pension expense for the subsequent year. The factors and assumptions affecting the measurement are the characteristics of the population and salary increases, with the most important being the expected return on plan assets and the discount rate for the pension obligation. We use actuarial calculations for the assumptions, which require significant judgment.

Exit or Disposal Activity Costs

Costs associated with exit or disposal activities are recorded at their fair values when a liability has been incurred. Reserves are established at the time of closure for the present value of any remaining operating lease obligations (PVOL), net of estimated sublease income. For severance, a reserve is established when communication has occurred to the affected employees. Other exit costs are accrued either at the point of decision or the communication date, depending on the nature of the item.

Stock-Based Compensation

We record compensation expense for time-vested awards on a straight-line basis over the associates’ service period, to the earlier of the retirement eligibility date, if the grant contains provisions such that the award becomes fully vested upon retirement, or the stated vesting period (the non-substantive vesting period approach).

3) Effect of New Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in existing guidance and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (OCI). The update does not change the items that must be reported in OCI and its amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The guidance must be applied retrospectively for all periods presented in the financial statements. Early adoption is permitted. We adopted this standard at the end of 2011. As this update only relates to financial statement presentation, the adoption did not have a material effect on our consolidated results of operations, cash flows or financial position.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”

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(ASU 2011-04). ASU 2011-04 amends the current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This guidance will be effective for interim and annual periods beginning after December 15, 2011. We do not expect the adoption to have a material impact on our consolidated results of operations, cash flows or financial position.

4) Acquisition

On November 2, 2011, we completed an acquisition, pursuant to the asset purchase agreement dated October 12, 2011 (Purchase Agreement), to acquire the worldwide rights for the Liz Claiborne family of trademarks and related intellectual property, as well as the U.S. and Puerto Rico rights for the Monet trademarks and related intellectual property. We have been the primary exclusive licensee for all Liz Claiborne and Claiborne branded merchandise in the U.S. and Puerto Rico since August 2010 under an original 10-year license agreement dated October 5, 2009. As a result of the acquisition, we permanently added a number of well-established trademarks to our private and exclusive brands.

We allocated the purchase price of the acquisition to identifiable intangible assets based on their estimated fair values. Intangible assets were valued using the relief from royalty and discounted cash flow methodologies which are considered Level 3 fair value measurements. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible assets. Key assumptions used in this model include discount rates, royalty rates, growth rates and sales projections. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates and cash flow projections. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment.

The consideration paid for the brands was $268 million with the entire purchase price allocated to the calculated fair values of the acquired trade names and recorded as intangible assets with indefinite lives at the acquisition date. We incurred an insignificant amount of direct transaction costs as a result of this acquisition. Pro forma financial information has not been provided as the acquisition did not have a material impact on our financial information.

As a result of this acquisition, we will assess the recoverability of indefinite-lived intangible assets at least annually or whenever events or changes in circumstances indicate that the carrying amount of the indefinite-lived intangible asset may not be fully recoverable. We will test for indefinite-lived intangible asset impairments during the fourth quarter of our fiscal year using our third quarter balances. We will measure the recoverability of the indefinite-lived intangible asset by a comparison of the carrying value over its fair value. Any excess of the carrying value over its fair value will be recognized as an impairment loss.

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5) (Loss)/Earnings per Share

(Loss)/income from continuing operations and shares used to compute EPS from continuing operations, basic and diluted, are reconciled below:


(in millions, except EPS)	2011			2010		2009
(Loss)/earnings:
(Loss)/income from continuing operations	$	(152	)	$	378	$	249

Shares:
Weighted average common shares outstanding (basic shares)		217.4			236.4		232.0
Adjustment for assumed dilution – stock options, restricted stock awards and stock warrant		-			1.6		1.1

Weighted average shares assuming dilution (diluted shares)		217.4			238.0		233.1

EPS from continuing operations:
Basic	$	(0.70	)	$	1.60	$	1.07
Diluted	$	(0.70	)	$	1.59	$	1.07

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

(shares in millions)

2011

2010

2009

Stock options, restricted awards and warrant

24.1

10.8

9.3

6) Other Assets


($ in millions)	2011		2010
Real estate investment trusts (REITs)	$	336	$	254
Capitalized software, net		297		233
Intangible assets (Note 4)		268		-
Leveraged lease investments		128		136
Cost investment (Note 9)		36		-
Debt issuance costs, net		22		25
Other		80		56

Total	$	1,167	$	704

The market value of our investment in public REITs are accounted for as available for sale securities and are carried at fair value on an ongoing basis. The change from year to year relates primarily to the increase in market value of these investments. See Note 9 for the related fair value disclosures and Note 13 for the net unrealized gains on real estate investments. As of the end of 2011 and 2010, our REITs consisted of the following:


REIT		Shares
Simon Properties Group, Inc. (SPG)		2,205,006
CBL & Associates Properties, Inc. (CBL)		1,895,358
Ramco-Gershenson Properties Trust (RPT)		89,063

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7) Other Accounts Payable and Accrued Expenses


($ in millions)	2011		2010
Accrued salaries, vacation and bonus	$	324	$	361
Customer gift cards		238		229
Taxes other than income taxes		113		113
Occupancy and rent-related		111		100
Interest		74		74
Advertising		67		87
Current portion of workers’ compensation and general liability insurance		55		59
Restructuring and management transition (Note 17)		52		8
Current portion of retirement plan liabilities (Note 16)		48		31
Common dividends		43		47
Capital expenditures		42		34
Unrecognized tax benefits (Note 19)		25		61
Other		311		310

Total	$	1,503	$	1,514

8) Other Liabilities


($ in millions)	2011		2010
Supplemental pension and other postretirement benefit plan liabilities (Note 16)	$	285	$	206
Long-term portion of workers’ compensation and general liability insurance		168		177
Deferred developer/tenant allowances		135		135
Primary pension plan (Note 16)		121		-
Unrecognized tax benefits (Note 19)		85		101
Restructuring and management transition (Note 17)		8		-
Other		97		51

Total	$	899	$	670

9) 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.

REIT Assets Measured on a Recurring Basis

We determined the fair value of our investments in REITs using quoted market prices. As of January 28, 2012 and January 29, 2011, our REITs had a cost basis of $80 million. Our REIT assets measured at fair value on a recurring basis were as follows:


($ in millions)	Fair Value as of January 28, 2012						Fair Value as of January 29, 2011
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
REIT assets	$	336	$	-	$	-	$	254	$	-	$	-

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Other Non-Financial Assets Measured on a Non-Recurring Basis

In 2011, eight underperforming department stores with a carrying value of $68 million were written down to their fair value of $10 million and resulted in an impairment charge of $58 million, which was included in real estate and other, net in the Consolidated Statement of Operations for the period (see Note 18). The inputs to determine fair values were primarily based on projected discounted cash flow as well as other market information obtained from brokers.

The following table presents fair values for those assets measured at fair value during 2011 on a non-recurring basis, and remaining on our Consolidated Balance Sheet:


($ in millions)	Assets at Fair Value as of January 28, 2012
	Level 1		Level 2		Level 3		Total
Stores	$	-	$	-	$	10	$	10

In 2010, primarily one underperforming department store with a carrying value of $3 million was impaired, which resulted in a $3 million charge to earnings and no remaining fair value.

Other Financial Instruments

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

2011