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Article by DailyStocks_admin    (12-04-13 10:33 PM)

Description

J C PENNEY CO INC. CEO MYRON E III ULLMAN bought 112,000 shares on 11-22-2013 at $ 8.95

BUSINESS OVERVIEW

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 1,104 department stores in 49 states and Puerto Rico as of February 2, 2013. 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 ended on February 2, 2013; fiscal year 2011 ended on January 28, 2012; and fiscal year 2010 ended on January 29, 2011. Fiscal year 2012 consisted of 53 weeks and fiscal years 2011 and 2010 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.

Business Strategy

At the beginning of 2012, we announced our plans to become America’s favorite store by creating a specialty department store experience. During our first year of transformation, we focused on building a new foundation for the future by reimagining all aspects of our business, including product, presentation, pricing and promotion.

We are making substantial changes in our merchandise and continue to edit and introduce more global brands into our merchandise assortment. We are re-organizing our department stores into separately curated unique specialty stores known as The Shops. The Shops will be organized around a pathway through our stores known as The Street TM , a bold new interface for retail, which includes places to relax, refresh, engage and check out. The Street will surround The Square TM , a dynamic seasonal space that will provide engaging experiences for our customers. Our pricing strategy is founded on providing merchandise at low everyday prices and delivering even more exciting value through sales, promotions and rewards.

During the first year of transformation we opened shops under the Levi's ®, Izod®, Liz Claiborne®, The Original Arizona Jean Co.®, and jcp™ brands. We also opened 78 Sephora inside jcpenney stores, bringing the total to 386.

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 TM , jcp ® , monet ® , Liz Claiborne ® , Okie Dokie ® , Worthington ® , a.n.a ® , St. John’s Bay ® , The Original Arizona Jean Company ® , Ambrielle ® , Decree ® , Linden Street™, 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 an Internet website at www.jcp.com and make available free of charge through this website 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 website provides 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 fro m 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 offices in 12 foreign countries as of February 2, 2013.

Employment

The Company and its consolidated subsidiaries employed approximately 116,000 full-time and part-time employees as of February 2,2013.

Environmental Matters

Environmental protection requirements did not have a material effect upon our operations during 2012. 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 February 2, 2013, we estimated our total potential environmental liabilities to range from $30 million to $36 million and recorded our best estimate of $30 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

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. 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. Hannah has served as Executive Vice President and Chief Financial Officer since May 2012. Prior to joining the Company, he was Executive Vice President and President-Solar Energy of MEMC Electronic Materials, Inc. and had previously served as Executive Vice President and President-Solar Materials from 2009 to 2012 and Senior Vice President and Chief Financial Officer from 2006 to 2009. Mr. Hannah previously held key financial leadership positions at The Home Depot, Inc., The Boeing Company and General Electric Company. He has served as a director of JCP since 2012.

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 2009.

Mr. Sweeney has served as Senior Vice President and Controller since September 2012. Prior to joining the Company, he was Vice President and Operational Controller of General Electric Company from 2008 to 2012. He previously served as Chief Financial Officer of GE-Hitachi Nuclear Energy, LLC from 2004 to 2008 and Global Controller of General Electric’s Energy Division from 1997 to 2004. Prior to joining General Electric, Mr. Sweeney held financial leadership positions with PepsiCo, Inc. from 1995 to 1997 and previously was a senior manager with KPMG LLP.

CEO BACKGROUND

The terms of each of the Company’s current directors will expire at the 2013 Annual Meeting. Each of the current directors has been nominated by the Board of Directors to serve as a continuing director for a new one-year term expiring at the 2014 Annual Meeting. Each nominee elected as a director will continue in office until his or her successor has been elected and qualified, or until his or her earlier death, resignation or retirement. We are not aware of any reason why any of these nominees would not accept the nomination. However, if any of the nominees does not accept the nomination, or is otherwise unavailable for election, the persons designated as proxies will vote for any substitute nominee recommended by the Board.

In determining whether to nominate each of the current directors for another term, the Board considered the factors discussed above in “Board Diversity, Director Qualifications and Process for Nominations” and concluded that each of the current directors standing for re-election possesses unique talents, backgrounds, perspectives, attributes and skills that will enable each of them to continue to provide valuable insights to Company management and play an important role in helping the Company achieve its long-term goals and objectives. As described below in the experience and qualifications of each of our director nominees, each nominee has achieved an extremely high level of success in his or her career. The Company does not have a mandatory retirement age for directors. There is no family relationship between any director or executive officer of the Company.
The Board recommends a vote FOR each of the nominees for director.

Nominees for Director

William A. Ackman, 46 - Director of the Company since February 2011.
Business Experience: Founder, Chief Executive Officer and Managing Member of the General Partner, since 2003, of Pershing Square Capital Management, L.P. (a registered investment adviser); Chairman of the Board of The Howard Hughes Corporation, a real estate development company since November 2010; Former Director of General Growth Properties, Inc., a real estate investment trust, from June 2009 to March 2010. Member of the Board of Dean’s Advisors of Harvard Business School, the Board of Advisors of the Center for Jewish History and a Trustee of the Pershing Square Foundation.

Mr. Ackman’s investment, real estate and general business expertise provide him with knowledge in financial investment and strategy that is valuable to the Board and particularly the Finance and Planning Committee. In addition, Mr. Ackman’s prior service on the boards of several public companies gives him valuable insight regarding issues of corporate governance and the general operations of public companies.


Colleen C. Barrett, 68 - Director of the Company since 2004.
Business Experience : President Emeritus since 2008, President and Director from 2001 to 2008, Chief Operating Officer from 2001 to 2004 and Corporate Secretary from 1978 to 2008 of Southwest Airlines Co. (airline), with which she served in positions of increasing importance since 1978, including Executive Vice President-Customers from 1990 to 2001 and Vice President-Administration from 1986 to 1990. Member of the Board of Trustees of Becker College.

Ms. Barrett has extensive experience in the airline industry, in particular with Southwest Airlines, a company known for providing top customer service. In addition to customer relations, human resources and operations management experience, she has significant leadership, executive and board experience, including insights and perspectives on corporate governance, having served as a Director and in the positions of President, Chief Operating Officer and Corporate Secretary of a publicly-traded company.

Thomas J. Engibous, 60 - Chairman of the Board since January 2012, Director of the Company since 1999.
Business Experience: Retired Chairman of the Board, Director from 1996 to 2008 and President and Chief Executive Officer from 1996 to 2004, of Texas Instruments Incorporated (electronics), with which he served in positions of increasing importance since 1976, including as an Executive Vice President from 1993 to 1996; Director of Taiwan Semiconductor Manufacturing Company Limited; Chairman Emeritus of the Board of Catalyst; Member of The Business Council; Member of the National Academy of Engineering; Honorary Trustee of the Southwestern Medical Foundation.

Mr. Engibous has extensive executive, financial and board experience in the technology industry, including service as Chairman and CEO of a leading publicly-traded technology company. He brings financial expertise to the jcpenney Board, as well as skills and talents from the technology industry to help jcpenney enhance its strategies to connect with and serve customers, capitalize on opportunities in digital retailing and use technology to advance operational efficiency.

Kent B. Foster, 69 - Director of the Company since 1998.
Business Experience : Retired Chairman of the Board, Director from 2000 to 2007, and Chief Executive Officer from 2000 to 2005, of Ingram Micro Inc. (wholesale distributor of technology); President of GTE Corporation (telecommunications) from 1995 to 1999; Director of GTE Corporation from 1989 to 1999, serving as Vice Chairman of the Board of Directors from 1993 to 1995; President of GTE Telephone Operations Group from 1989 to 1995; Director of Campbell Soup Company from 1996 to 2008; Director of New York Life Insurance Company.

Mr. Foster has extensive executive and board experience in the communications and technology industries. That experience has given him skills and talents that help jcpenney enhance its customer-reach strategies, capitalize on opportunities in digital retailing and use technology to improve its operational efficiency. He also brings to the Board financial expertise resulting from his extensive executive experience and his prior service on the audit committee of the board of another company.

Ronald B. Johnson, 54 - Director of the Company since 2011.
Business Experience: Chief Executive Officer of the Company since November 2011; Senior Vice President, Retail for Apple, Inc. (technology) from 2000 to 2011; Senior Vice President of Merchandising of Target Corporation, where he served in positions of increasing importance from 1985 to 2000; Member of the Board of Directors for Stanford Hospital and Clinics and Board of Trustees of Stanford University.

Mr. Johnson has extensive experience in the retail industry, including executive experience with major U. S. retailers. He also brings insights and perspectives from positions he has held in the technology industry including his leadership in the development of Apple’s retail strategy. He brings retail experience, skills and perspective to help jcpenney connect and communicate with its customers and capitalize on opportunities in retailing.

Geraldine B. Laybourne, 65 - Director of the Company since 2009.
Business Experience : Co-Founder (1998) and Chairman and Chief Executive Officer until 2007 of Oxygen Media (cable television network); President of Disney/ABC Cable Networks (cable television network) from 1996 to 1998; President of Nickelodeon (cable television network) from 1989 to 1996, with which she served in positions of increasing importance from 1980 to 1996; Director of Insight Communications Company, Inc. from 2004 to 2010; Director of Move, Inc. from 2006 to 2010; Chairman of the Board of Directors of Alloy, Inc.; Director of Electronic Arts Inc. and Symantec Corporation; Member of Board of Trustees of Vassar College.

Ms. Laybourne has extensive executive and board experience in the cable television industry, including the founding and leadership of Oxygen Media, a pioneering network that produces content aimed at younger women. She brings extensive multimedia marketing experience, skills and perspectives to help jcpenney connect and communicate with its customers and capitalize on opportunities in digital retailing and has a deep understanding of our female customers and their families. She also has served on the boards of several publicly-traded companies.

Leonard H. Roberts, 64 - Director of the Company since 2002.
Business Experience: Retired Chairman and Chief Executive Officer of RadioShack Corporation (consumer electronics), with which he served as Executive Chairman of the Board from 2005 to 2006, Chairman of the Board and Chief Executive Officer from 1999 to 2005, President from 1993 to 2000, and a Director from 1997 to 2006; Chairman and Chief Executive Officer of Shoney’s, Inc. (restaurants) from 1990 to 1993; President and Chief Executive Officer of Arby’s, Inc. (restaurants) from 1985 to 1990; Director of TXU Corporation from 2005 to 2007; Director of Rent-A-Center, Inc.; Member of Executive Board of Students in Free Enterprise; Director of Tarrant County Safe City Commission; Former Chairman of the Board of Directors of Texas Health Resources.

Mr. Roberts has extensive executive and board experience in the retail industry, including service as the Chairman and as the CEO of a publicly-traded consumer electronics retailer and CEO positions with two restaurant operators. With this background, he has insights and perspectives on delivering merchandise and services to consumers, which he brings to the jcpenney Board. As a result of his extensive executive experience, he also brings financial expertise to the Board. He also currently serves on the board of another publicly-traded company.

Steven Roth, 71 - Director of the Company since February 2011.
Business Experience: Chairman of the Board of Vornado Realty Trust (a real estate investment trust) since 1989 with which he has served as Chief Executive Officer from 1989 to 2009 and Chairman of the Executive Committee of the Board of Directors since 1980; Managing General Partner of Interstate Properties (a real estate company) since 1968; Chief Executive Officer of Alexander’s, Inc. (a real estate investment trust), since 1995 and Chairman of the Board of Alexander’s since 2004.

Mr. Roth’s expertise in real estate investment provides the Board and Finance and Planning Committee with additional knowledge of financial investment and strategy. In addition, his managerial experience and service as Chairman of the Board of Vornado has given him insight that is valuable in his service on the jcpenney Board.

Javier G. Teruel, 62 - Director of the Company since 2008.
Business Experience: Partner of Spectron Desarrollo, SC (an investment management and consulting firm); Retired Vice Chairman (2004 to 2007) of Colgate-Palmolive Company (consumer products), with which he served in positions of increasing importance since 1971, including as Executive Vice President responsible for Asia, Central Europe, Africa and Hill’s Pet Nutrition, as Vice President of Body Care in Global Business Development in New York, as President and General Manager of Colgate-Mexico, as President of Colgate-Europe, and as Chief Growth Officer responsible for the company’s growth functions; Director of The Pepsi Bottling Group, Inc. from 2007 to 2010; Director of Starbucks Corporation; Director of Nielsen Company B.V.

Mr. Teruel has extensive executive experience in the consumer products industry. He brings to the jcpenney Board considerable product development, merchandising and marketing skills and perspectives. His broad international experience also provides unique insights relevant to the Company’s product sourcing initiatives. Mr. Teruel brings the benefits of service on the boards of other publicly-traded companies to the jcpenney Board, including financial expertise resulting from his service as the chair of the audit committee of one of the boards.

R. Gerald Turner, 67 - Director of the Company since 1995.
Business Experience: President of Southern Methodist University (education) since 1995; Chancellor of the University of Mississippi from 1984 to 1995; Co-Chairman, Knight Commission on Intercollegiate Athletics since 2005; Director of Kronos Worldwide, Inc., American Beacon Funds and the National Association of Independent Colleges and Universities; Director of Methodist Hospital Foundation and the Salvation Army of Dallas.

Mr. Turner’s extensive career in academia provides the Company with valuable insights and perspectives on communicating with younger customers and Associates. He also brings experience and skills in human resources and management. Mr. Turner’s current experience as president of a leading university provides him with perspective into the challenges of managing complex, multi-faceted organizations. In addition, his service on the boards of other publicly-traded companies, including committee service, has given him insights and perspectives on governance and human resources and compensation which benefit the jcpenney Board.

Mary Beth West, 50 - Director of the Company since 2005.
Business Experience: Executive Vice President and Chief Category and Marketing Officer of Mondelez International, Inc. (branded foods and beverages) since 2012; served in positions of increasing importance at Kraft Foods, Inc. from 1986-2012, including Executive Vice President and Chief Marketing Officer from 2007 to 2010; Group Vice President and President, Kraft Foods North American Beverage Sector from 2006 to 2007; Group Vice President and President, Kraft Foods North America Grocery Segment from 2004 to 2006; Senior Vice President and General Manager, Meals Division from 2001 to 2004; and Vice President, New Meals Division from 1999 to 2001; Member of the Executive Leadership Council and Foundation.

Ms. West has extensive executive experience in the branded foods and beverages industry, serving currently as the Executive Vice President and Chief Category and Marketing Officer of a publicly-traded food products company. Her experience with the product development, merchandising and marketing functions that support some of the best-known American brands enable her to help jcpenney enhance its strategies in these areas and build an emotional connection with customers. Ms. West also brings to the Board financial expertise resulting from her executive experience at Kraft and Mondelez.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

2012 was the first year of our multi-year transformation strategy to become America’s favorite store. We underwent tremendous change as we began shifting our business model from a promotional department store to a specialty department store. 2012 was a difficult year and our sales and operating performance declined significantly. 2012 contained 53 weeks and 2011 and 2010 contained 52 weeks. Summarized financial performance for 2012 is as follows:

§

For 2012, sales were $ 1 2,9 85 million, a decrease of 24 . 8 % as compared to 2011. Excluding sales of $163 million for the 53rd week in 2012, total net sales decreased 25.7%. Comparable store sales decreased 25 . 2 % for 2012.

§

For 2012, gross margin as a percentage of sales was 31.3% compared to 36.0% last year. The decrease in gross margin as a percentage of sales is primarily due to a higher level of clearance merchandise sales and markdowns taken during the year to clear discontinued inventory in preparation for new product and brands being introduced as part of the transformation .

§

Selling, general and administrative (SG&A) expenses decreased $ 603 million, or 1 1 . 8 %, for 2012 as compared to 2011 as we began to realize the benefits from our cost savings initiatives.

§

Our net loss from continuing operations for 2012 was $985 million, or $4.49 per share, compared to a net loss from continuing operations of $152 million, or $0.70 per share, for 2011 and net income from continuing operations of $378 million, or $1.59 per share, for 2010. Results for 2012 included $155 million ($95 million after taxes), or $0.43 per share, of markdowns related to the alignment of our inventory with our new strategy; $298 million ($182 million after taxes), or $0.83 per share, of restructuring and management transition charges; $315 million ($193 million after taxes), or $0.88 per share, for the non-cash impact of our qualified defined benefit pension plan (Primary Pension Plan) expense and $397 million ($251 million after taxes), or $1.15 per share, for the net gain on the sale or redemption of non-operating assets.

§

During the third quarter of 2012, we opened shops under the Levi’s®, The Original Arizona Jean Co., Izod®, Liz Claiborne and jcp brands. During 2012, we also opened 78 Sephora inside jcpenney stores, bringing the total to 386.

Current Developments

§

On February 8, 2013, we entered into an amended and restated credit facility in an amount up to $1,850 million. We may request that the facility be increased by an additional amount up to $400 million.

§

On March 15, 2013, we opened women’s Joe Fresh ® shops in nearly 700 of our department stores.

§

In March 2013, we began the process of transforming our home department in 505 of our department stores with completion anticipated in May 2013. We anticipate opening close to 20 shops with brand partners such as Michael Graves, Jonathan Adler and Sir Terence Conran, among others.

Results of Operations

Three-Year Comparison of Operating Performance

2012 Compared to 2011

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.

Total net sales decreased $4,275 million in 2012 compared to 2011.

In 2012, we completed the first year of our multi-year transformation strategy to become America’s favorite store. We underwent tremendous change as we began shifting our business model from a promotional department store to a specialty department store. Our first year of our transformation was a difficult year, as our comparable store sales decreased 25.2% in 2012 . Internet s ales, which are included in comparable store sales, decreased 33. 0 %, to $1,0 23 million. Total net sales decreased 24.8% to $12,985 million compared with $ 17 , 260 million in 2011. The decrease in total net sales includes the impact of our exit from our catalog outlet businesses in October 2011.

Based on a sample of our mall and off-mall stores, our store traffic and conversion rate decreased in 2012 compared to 2011. Both the number of store transactions and the number of units sold decreased in 2012 as compared to the prior year. Although we sold more items at our everyday prices at a higher average unit retail during 2012, the increase in clearance merchandise sold at a lower average unit retail and the increase in clearance merchandise sold as a percentage of total sales more than offset that benefit.

All merchandise divisions experienced comparable store sales declines in 2012 compared to 2011. Men ’s and women’s apparel experienced the smallest declines while the home division experienced the largest decline. All geographic regions also experienced comparable store sales declines. Private brands, including exclusive brands found only at jcpenney, comprised approximately 53% of total merchandise sales for 2012, compared to 5 5 % in 2011.

As we transform substantially more of our selling space and introduce new merchandise and brands to our stores, we expect our sales performance to begin to improve in the future.

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.

Gross margin for 2012 was $4,066 million, a decrease of $ 2,152 million compared to $ 6 , 218 million in 2011. Gross margin as a percentage of sales in 2012 was 3 1 . 3 % compared to 3 6 . 0 % i n 2011. The net 470 basis point decrease resulted from the following:


higher margins realized on “everyday value” priced merchandise sales, despite a lower percentage of sales sold as “everyday value” (+240 basis points);



lower margins achieved on clearance merchandise sales combined with a greater penetration of clearance sales (-460 basis points);



lower margins on services and other activities, which includes the impact of free haircuts and promotionally priced photography services during 2012 (-130 basis points);



higher levels of markdowns and inventory reserves related to our new strategy (-70 basis points); and



reduced vendor cost concessions in connection with our simplified pricing strategy (-50 basis points).

SG&A Expenses

For 2012, SG&A expenses declined $60 3 million to $4,506 million compared to $5,109 million in 2011 primarily as a result of our cost savings initiatives . As a percent of sales, SG&A expenses increased to 3 4 . 7 % compared to 29 . 6 % in 2011, as we were not able to leverage our expense reductions against lower sales . The net decrease resulted from the following:


reduced salaries and related benefits , including lower incentive compensation (- $3 86 million );



increased income from the jcpenney private label credit card activities which is recorded as a reduction of our SG&A expenses (- $95 million );



r educed advertisi ng expenses (-$106 million);



reduced costs from the exit from our catalog outlet stores and our specialty websites CLAD TM and Gifting Grace TM (- $71 million );



increased spending primarily related to enhancing information technology in our stores (+$25 million); and



net increase in other miscellaneous items (+$30 million).

Pension Expense

Total pension expense consists of our non-cash Primary Pension Plan expense and our supplemental pension plans expense. During the third quarter of 2012, as a result of previous actions taken to reduce our workforce, we remeasured our pension plans as of September 30 th . For the Primary Pension Plan, the remeasurement resulted in a reduction of $27 million to our full year 2012 non-cash Primary Pens ion Plan expense, bringing Primary Pension Plan expense to $167 million , excluding the settlement charge of $148 million incurred during the fourth quarter of 2012 . The decline relates primarily to the decrease in the number of employees accruing benefits under the plan following the reductions in our workforce. The remeasurement did not materially impact the pension expense for our supplemental pension plans.

For the first eight months of fiscal 2012, our total pension expense was based on our 2011 year-end measurement of pension plan assets and benefit obligations . The 2011 year-end measurement resulted in an increase in 2012 pension plan expense as compared to 2011 primarily as a result of an approximately 80 basis point decrease in our discount rate, an increase in the pension liability resulting from our voluntary early retirement program offered during the third quarter of 2011 and a decrease in the value of plan assets due to unfavorable capital market returns in 2011.

In September 2012, as a result of a plan amendment, we offered approximately 35,000 participants in the Primary Pension Plan who separated from service and had a deferred vested benefit as of August 31, 2012 the option to receive a lump-sum settlement payment. These participants had until November 30, 2012 to elect to receive the lump-sum settlement payment with the payments made by the Company beginning on December 4, 2012 using assets from the Primary Pension Plan. As a result of the approximately 25,000 participants who elected the lump-sum settlements, we ma de payment s totaling $4 39 million from the Primary Pension Plan’s assets and recognize d settlement expense of $1 48 million for unrecognized actuarial losses . We also amended the Primary Pension Plan to allow participants that separate from the Company on or after September 1, 2012 the option of a lump-sum settlement payment from the plan. The amendment also provided for automatic lump-sum settlement payments for participants with vested balances less than $5,000.

Based on our 2012 year-end measurement of Primary Pension Plan assets and benefit obligations, we expect our 2013 non-cash Primary Pension Plan expense to decrease to $1 00 million compared to $167 million in 2012, which excludes settlement expense of $148 million. The decrease in expected Primary Pension Plan expense for 2013 is a result of lower amortization of our actuarial loss due to the lump-sum settlements in 2012, lower service cost due to a decrease in the number of participants accruing benefits and strong asset performance. These decreases were partially offset by an approximately 60 basis point decrease in our discount rate and a 50 basis point decrease in our assumed expected return on assets.

Depreciation and Amortization Expense

Depreciation and amortization expense in 2012 increased $ 25 million to $ 543 million from $ 518 million in 2011 as a result of our investment in our shops inside our jcpenney department stores in addition to the opening of 9 department stores in 2012 . Depreciation and amortization expense for 2012 excludes $ 25 million of increased depreciation as a result of shortening the useful lives of store fixtures in our department stores that are expected to be replaced throughout 2013 with the build out of additional shops. This amount is included in the line r estructuring and m anagement t ransition on the Consolidated Statements of Operations. We anticipate depreciation expense will continue to increase as we invest and replace store fixtures in connection with the implementation of our shop strategy.

Real Estate and Other, Net

Real estate and other consists of ongoing operating income from our real estate subsidiaries whose investments are in real estate investment trusts ( REITs ) , as well as investments in nine joint ventures that own regional mall properties. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments and other non-operating charges and credits.

Monetization of Non-operating Assets
As part of our strategy to monetize assets that are not core to our operations, we generated $52 6 million of cash and recognized a net gain of $397 million from the sale or redemption of several non-operating assets during 2012. The monetization of non-operating assets primarily included the following:

REIT Assets
On July 20, 2012, SPG redeemed two million of our REIT units at a price of $124.00 per unit for a total redemption price of $246 million, net of fees. As of the market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit. In connection with the redemption, we realized a net gain of $200 million determined using the first-in-first-out method for determining the cost of REIT units sold. Following the transaction, we continue to hold approximately 205,000 REIT units in SPG.

On October 23, 2012, we sold all of our CBL REIT shares at a price of $21.35 per share for a total price of $40 million, net of fees. In connection with the sale, we realized a net gain of $15 million.

Leveraged Leases
During the third quarter of 2012, we sold all of our leveraged lease assets for $146 million, net of fees. The investments in the leveraged lease assets as of the dates of the sales were $118 million and we recorded a net gain of $28 million.

Joint Ventures
During the third quarter of 2012, we sold our investments in four joint ventures that own regional mall properties for $90 million, resulting in net gains totaling $151 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing transactions in prior periods that were recorded as net reductions in the carrying amount of the investments. The cumulative net book value of the joint venture investments was a negative $61 million.

Building
During the third quarter of 2012, we sold a building used in our former drugstore operations with a net book value of zero for $3 million resulting in a net gain of $3 million.

Impairments
In 2012, store impairments totaled $26 million and related to 13 underperforming department stores that continued to operate. In addition, during the fourth quarter of 2012, we wrote off $60 million of store-related operating assets that are no longer being used in our operations. In 2011, store impairments totaled $58 million and related to eight underperforming department stores of which seven continued to operate.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

General

J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.
The holding company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by the holding company is full and unconditional.
This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as of February 2, 2013, and for the year then ended, and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Annual Report on Form 10-K for the fiscal year ended February 2, 2013 (2012 Form 10-K). Unless otherwise indicated, all references to earnings/(loss) per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.
Second Quarter Summary and Key Developments

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For the second quarter of 2013, sales were $2,663 million, a decrease of 11.9% as compared to the corresponding quarter in 2012. Comparable store sales decreased 11.9% for the second quarter of 2013. Sales through jcp.com decreased 2.2%, to $215 million.

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For the second quarter of 2013, gross margin as a percentage of sales was 29.6% compared to 33.2% in the same period last year. The decrease in gross margin as a percentage of sales was primarily due to a change in the merchandise sales mix, which includes a higher level of clearance merchandise sales during the quarter, compared to the same period last year.

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Selling, general and administrative (SG&A) expenses decreased $24 million, or 2.3%, for the second quarter of 2013 as compared to the corresponding quarter in 2012 as we continue to realize the benefits from our cost savings initiatives.

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During the quarter, we enhanced our liquidity by entering into a $2.25 billion senior secured term loan facility. In addition, we paid $355 million to complete a cash tender offer and consent solicitation with respect to substantially all of our outstanding 7.125% Debentures due 2023. In doing so, we also recognized a loss on extinguishment of debt of $114 million.

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In the second quarter of 2013, we recognized a tax benefit of $18 million reflecting a significant reduction in tax benefits typically recognized from federal and state loss carryforwards due to the recognition of a tax valuation allowance of $218 million during the quarter. This resulted in an effective tax rate of only (3.0)% for the second quarter compared to (39.0)% in the second quarter of 2012 and negatively impacted EPS by $0.99.

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For the second quarter of 2013, our net loss was $586 million, or $2.66 per share, compared to a net loss of $147 million, or $0.67 per share, for the corresponding prior year quarter. Results for this quarter included $47 million, or $0.21 per share, of restructuring and management transition charges, $25 million, or $0.04 per share, for the impact of our qualified defined benefit pension plan (Primary Pension Plan) expense, $114 million, or $0.52 per share for the loss on extinguishment of debt, and $62 million, or $0.28 per share, for the net gain on the sale of a non-operating asset.

Results of Operations

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 to facilitate the comparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures and ratios to assess the results of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures 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.

The following non-GAAP financial measures are adjusted to exclude the impact of markdowns related to the alignment of inventory with our 2012 strategy, restructuring and management transition charges, the impact of our Primary Pension Plan expense, the loss on extinguishment of debt and the net gain on the sale or redemption of non-operating assets. Unlike other operating expenses, markdowns related to the alignment of inventory with our 2012 strategy, restructuring and management transition charges, loss on extinguishment of debt and the net gain on the sale or redemption of non-operating assets are not directly related to our ongoing core business operations. Primary Pension 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. Accordingly, we eliminate our Primary Pension Plan expense in its entirety as we view all components of net periodic benefit expense as a single, net amount, consistent with its presentation in our Consolidated Financial Statements. We believe it is useful for investors to understand the impact of markdowns related to the alignment of inventory with our 2012 strategy, restructuring and management transition charges, the impact of our Primary Pension Plan expense, the loss on extinguishment of debt and the net gain on the sale or redemption of non-operating assets on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted operating income/(loss); (2) adjusted net income/(loss); and (3) adjusted diluted EPS.

Total Net Sales

Total net sales decreased $359 million in the second quarter of 2013 compared to the second quarter of 2012. For the first six months of 2013, total net sales decreased $876 million from the same period last year.

In the second quarter of 2013, comparable store sales decreased 11.9%. Internet sales decreased 2.2%, to $215 million. Total net sales decreased 11.9% to $2,663 million compared with $3,022 million in last year’s second quarter. For the first six months of 2013, comparable store sales decreased 14.3% while comparable stores sales in last year’s first six months decreased 20.3%. Internet sales decreased 12.5%, to $432 million. Total net sales decreased 14.2% to $5,298 million compared with $6,174 million last year.

Based on a sample of our mall and off-mall stores, our store traffic and conversion rate decreased in the quarter compared to the second quarter last year. The number of store transactions and the total number of units decreased while the average number of units per transaction increased in the quarter as compared to the prior year corresponding period. The decline in sales is primarily related to the change in our pricing strategy at the beginning of 2012 that focused on everyday low prices and substantially eliminated promotional activities. During the first quarter of 2013, we began the process of returning the majority of our business to a promotional model.
Internet sales experienced less of a decline during the quarter as compared to our stores primarily as a result of better in-stock merchandise positions, improvements in site performance and a favorable response to our promotional activity.
All geographic regions and merchandise divisions experienced comparable store sales declines for the second quarter of 2013 compared to the prior year corresponding period. The home division experienced the largest decline, which includes the lengthy renovation and re-merchandising of our home department that was substantially complete by the end of the second quarter of 2013.
Private brands, including exclusive brands found only at jcpenney, decreased to 49% of total merchandise sales for the second quarter of 2013, compared to 56% in last year’s second quarter. This decrease is primarily attributed to a decline in sales from our private brands as a result of the discontinuation of some of our private label offerings during 2012. During the first half of 2013, we began to reintroduce some of our private brands that had been discontinued.

The strategy we introduced in 2012 emphasized national brands in a shops presentation and introduced new merchandise brands. This re-merchandising effort has not resonated well with our customers so we are editing our existing merchandise assortments and undertaking several merchandise initiatives to make assortments more compelling to customers and to reflect the reintroduction of some of our private brands. The largest implementation of our former strategy was in the home department. These changes also did not resonate with our customers. As a result, we are making adjustments to our home merchandise assortments to present a better balance between traditional and modern home furnishings, a more balanced selection of good, better and best price points across key items, and merchandise arranged by category rather than brand.

Gross Margin

Gross margin for the second quarter of 2013 was $787 million, a decrease of $217 million compared to $1,004 million in the second quarter of 2012. Gross margin as a percentage of sales in the second quarter of 2013 was 29.6% compared to 33.2% in the second quarter of 2012. The 360 basis point decrease resulted from the following:

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change in merchandise sales mix, including a higher level of clearance merchandise sales (-360 basis points);
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re-ticketing costs as a result of moving back to a promotional strategy on selected merchandise (-27 basis points);
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higher levels of markdowns and inventory reserves (-33 basis points);
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improved merchandise and distribution costs (+47 basis points);
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increased vendor cost concessions (+9 basis points); and
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net change in other miscellaneous items (+4 basis points).

Gross margin for the six months ended August 3, 2013 was $1,599 million, a decrease of $591 million compared to $2,190 million for the six months ended July 28, 2012. Gross margin as a percentage of sales for the six months ended August 3, 2013 was 30.2% compared to 35.5% for the six months ended July 28, 2012. The 530 basis point decrease resulted from the following:

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change in merchandise sales mix, including a higher level of clearance merchandise sales (-410 basis points);
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re-ticketing costs as a result of moving back to a promotional strategy on selected merchandise (-52 basis points);
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higher levels of markdowns and inventory reserves (-49 basis points);
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reduced vendor cost concessions (-21 basis points); and
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net change in other miscellaneous items (+2 basis points).

SG&A Expenses
For the three months ended August 3, 2013, SG&A expenses were $24 million lower compared to the three months ended July 28, 2012. As a percent of sales, SG&A expenses increased to 38.5% compared to 34.7% in the second quarter of 2012, as we were not able to fully leverage our expense reductions against lower sales. The net $24 million decrease primarily resulted from the following:

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increased income from the jcpenney private label credit card activities, which is recorded as a reduction of our SG&A expenses (-$13 million);
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savings from lower utilities (-$11 million);
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savings from general store expense, support costs and rent (-$15 million);
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increased advertising expenses (+$33 million); and
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net decrease in other miscellaneous items (-$18 million).

For the six months ended August 3, 2013, SG&A expenses were $106 million lower compared to the six months ended July 28, 2012. As a percent of sales, SG&A expenses increased to 39.7% compared to 35.8% in the second quarter of 2012, as we were not able to fully leverage our expense reductions against lower sales. The net $106 million decrease primarily resulted from the following:

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reduced salaries and related benefits, including lower incentive compensation (-$31 million);
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increased income from the jcpenney private label credit card activities, which is recorded as a reduction of our SG&A expenses (-$37 million);
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savings from lower utilities (-$30 million);
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increased advertising expenses (+$24 million);
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savings from general store expense, support costs and rent (-$17 million); and
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net decrease in other miscellaneous items (-$15 million).

Pension Expense

Total pension expense, which consists of our Primary Pension Plan expense and our supplemental pension plans expense, is based on our 2012 year-end measurement of pension plan assets and benefit obligations. Primary Pension Plan expense for the period decreased $23 million, to $25 million compared with $48 million in the second quarter of 2012. The decrease in Primary Pension Plan expense for 2013 is a result of lower amortization of our actuarial loss due to certain lump-sum settlements in 2012, lower service cost due to a decrease in the number of participants accruing benefits and strong asset performance in 2012. These decreases were partially offset by an approximately 60 basis point decrease in our discount rate and a 50 basis point decrease in our assumed expected return on assets. During the three months ended August 3, 2013 and July 28, 2012, supplemental pension plans expense was $9 million and $10 million, respectively. For the first six months of 2013, our Primary Pension Plan expense decreased $47 million to $50 million and our supplemental pension plans expense decreased $1 million to $18 million.

Depreciation and Amortization Expense

Depreciation and amortization expense in the second quarter of 2013 increased $15 million to $143 million from $128 million for the comparable 2012 period. For the first six months of 2013, depreciation and amortization increased $26 million to $279 million from $253 million last year. This increase is a result of our investment and replacement of store fixtures in connection with the implementation of our former shops strategy. Depreciation and amortization expense for the three and six months ended August 3, 2013 excludes $16 million and $29 million, respectively, of increased depreciation as a result of shortening the useful lives of store fixtures in our department stores that were replaced during the quarter or are expected to be replaced during 2013 with the build out of our home department and other attractions. This amount is included in the line Restructuring and Management Transition in the interim Unaudited Consolidated Statements of Operations.

Restructuring and Management Transition

Supply chain

As a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011, during the three and six months ended July 28, 2012 we recorded charges of $10 million and $16 million, respectively, related to increased depreciation, termination benefits and unit closing costs. This restructuring activity was completed during the third quarter of 2012.

Home office and stores

During the three months ended August 3, 2013 and July 28, 2012, we recorded $4 million and $56 million, respectively, of charges associated with employee termination benefits for actions to reduce our store and home office expenses. During the six months ended August 3, 2013 and July 28, 2012, we recorded charges of $32 million and $101 million, respectively.

Software and systems

During the three and six months ended July 28, 2012, we recorded a charge of $36 million related to the disposal of software and systems that based on our evaluation no longer supported our then current strategy. Included in this amount is $3 million of consulting fees related to that evaluation.

Store fixtures

During the three months ended August 3, 2013, we recorded $1 million of charges for the write-off of store fixtures related to the renovations in our home department and $16 million of increased depreciation as a result of shortening the useful lives of fixtures in our department stores that were replaced during the first half of 2013 or are expected to be replaced during 2013.

During the six months ended August 3, 2013, we recorded $7 million of charges for the write-off of store fixtures related to the renovations in our home department and $29 million of increased depreciation as a result of shortening the useful lives of fixtures in our department stores that were replaced during the first half of 2013 or are expected to be replaced during 2013. In addition, during the six months ended August 3, 2013, we recorded $9 million of charges for the impairment of certain store fixtures related to our former shops strategy that were used in our prototype department store.
During the three and six months ended July 28, 2012, we recorded $42 million of charges related to the replacement of store fixtures in connection with the launch of our first 10 attractions in August and September of 2012.

Management transition

During the three months ended August 3, 2013 and July 28, 2012, we implemented several changes within our management leadership team that resulted in management transition costs of $13 million and $10 million, respectively, for both incoming and outgoing members of management. During the six months ended August 3, 2013 and July 28, 2012, we recorded management transition charges of $29 million and $30 million, respectively.

Other

During the three months ended August 3, 2013 and July 28, 2012, we recorded $13 million and $5 million, respectively, of miscellaneous restructuring charges. During the six months ended August 3, 2013 and July 28, 2012, we recorded $13 million and $10 million, respectively, of miscellaneous restructuring charges. The charges during the second quarter of 2013 were related to contract termination costs associated with our previous marketing and shops strategy. The charges in the first quarter of 2012 were primarily related to the exit of our specialty websites CLAD TM and Gifting Grace TM and the charges in the second quarter of 2012 were primarily related to costs associated with the closing of our Pittsburgh, Pennsylvania customer call center.

CONF CALL

Kristin Hays - SVP, Investor Relations
Good morning. Thank you, operator. As a reminder, the presentation this morning includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the company's current view of future events and financial performance.

The words expect, plan, anticipate, believe, and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties and the company's future results of operations could differ materially from historical results or current expectations. For more details on these risks, please refer to the company’s form 10-K and other SEC filings.

Also, please note that no portion of this presentation may be rebroadcast in any form without the prior written consent of J.C. Penney. For those listening after November 20, 2013, please note that this presentation will not be updated and it is possible that the information discussed will no longer be current.

With that, I will now turn the call over to our CEO, Mike Ullman.

Mike Ullman - CEO
Good morning. Thank you for joining us. I’m here with Chief Financial Officer Ken Hannah and we are glad to be with you this morning. On today’s call, I’ll provide an overview of our third quarter results and an update on the continued progress on our turnaround. I’ll also discuss some of our objectives and plans for the fourth quarter, including the holiday season. After that, I’ll turn the call over to Ken, who will walk through the third quarter financials in more detail, and then we’ll be happy to take your questions.

Let me start off by saying that the turnaround of J.C. Penney is beginning to take hold. We’re making significant strides toward restoring J.C. Penney to its rightful place in retail. The work we’ve been doing over the last seven months to stabilize the business financially and operationally required fundamental changes in many aspects of our business. It’s hard work with no quick fixes, but our teams are rising to the challenge and our customers tell us they love the progress we’re making.

I’m pleased to report that during the third quarter we began generating positive sales momentum, which has enabled us to get off to an encouraging start in the fourth quarter. This is especially noteworthy in light of the still-sluggish retail environment and the pressures that our customer, in particular, continues to face.

Ken will take you through the details, but some of the key metrics for the third quarter were as follows. Comp store sales improved by 710 basis points from last quarter, ending the period down 4.8% year over year. This reflects sequential improvement in each of the three months in the quarter. Importantly, we reported positive comps in October, the first since December 2011, and it was a considerable achievement given the impact of 17 days of government shutdown during the month.

Women’s apparel, men’s apparel, and fine jewelry were some of the top performers in the quarter, especially in seasonal categories as the weather turned colder. Men’s apparel, children’s apparel, and home were the top performers online. Our private brands, such as Worthington, St. John’s Bay, and important national brands such as Izod, [unintelligible], Carter’s, and others, were strong sellers in both stores and online.

Our home categories, such as bedding, bath, window covering, and housewares, were also strong in the quarter. Our customer is responding well to the remerchandising and rework we’re doing in the home department. We look forward to having this substantially complete in spring 2014.

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