NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Consolidation
Basis of Presentation
J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in
Delaware
in
1924
, and J. C. Penney Company, Inc. was incorporated in Delaware in
2002
, when the holding company structure was implemented. The holding company has no independent assets or operations, and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.
J. C. Penney Company, Inc. is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by J. C. Penney Company, Inc. is full and unconditional.
These unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The accompanying unaudited Interim Consolidated Financial Statements, in our opinion, include all material adjustments necessary for a fair presentation and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended
January 28, 2017
(
2016
Form 10-K). We follow substantially the same accounting policies to prepare quarterly financial statements as are followed in preparing annual financial statements. A description of such significant accounting policies is included in the
2016
Form 10-K. The
January 28, 2017
financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the
2016
Form 10-K. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
Fiscal Year
Our fiscal year ends on the Saturday closest to January 31. As used herein, “three months ended
April 29, 2017
” and “three months ended
April 30, 2016
” refer to the 13-week periods ended
April 29, 2017
and
April 30, 2016
, respectively. Fiscal year 2017 contains 53 weeks, and fiscal year 2016 contains 52 weeks.
Basis of Consolidation
All significant inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected our net income/(loss) in any period.
2
.
Effect of New Accounting Standards
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes,
which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The new standard no longer requires allocating valuation allowances between current and noncurrent deferred tax assets because those allowances are classified as noncurrent. The Company adopted ASU 2015-17 retrospectively in its first quarter ended April 29, 2017. As a result of the retrospective adoption, the Company reclassified deferred tax assets of
$231 million
and
$196 million
as of April 30, 2016, and January 28, 2017, respectively, from Deferred taxes (a component of current assets) to a reduction in Deferred taxes (a component of long-term liabilities) on the unaudited Interim Consolidated Balance Sheets.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330),
Simplifying the Measurement of Inventory
, which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Under previous guidance, net realizable value is one of several calculations an entity needs to make to measure inventory at the lower of cost or market. However, companies will continue to apply their existing impairment models to inventories that are accounted for using last-in first-out (LIFO) and the retail inventory method (RIM). The Company adopted ASU 2015-11 in its first quarter ended April 29, 2017. The adoption of this standard did not have a material impact on our financial condition, results of operations or cash flows as substantially all of our inventory is measured by the RIM impairment model which is considered a continued acceptable method under the new standard.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 changes how companies account for certain aspects of share-based payments to employees. Entities are required to recognize the income tax effects of awards (windfalls or shortfalls) in the income statement when the awards vest or are settled (i.e., additional paid-in capital or APIC pools will be eliminated). The guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures also changed. The ASU also provides a practical expedient for public companies that allows the use of a simplified method to estimate the expected term for certain awards. The Company adopted ASU 2016-09 in its first quarter ended April 29, 2017.
As a result of ASU 2016-09 requiring all windfalls and shortfalls to be recognized when they arise, excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable have been recorded on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 29, 2017. Additionally, the deferred tax assets recognized as a result of this transition guidance have been assessed for realizability and any valuation allowance has been recognized as part of the cumulative effect adjustment to retained earnings also as a result of this transition guidance. Considering these aspects of transitioning to the new guidance, there was no impact to retained earnings as a result of a valuation allowance being recorded against the related deferred tax asset recorded as the cumulative adjustment.
In March 2016, the FASB issued ASU 2016-05,
Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the FASB Emerging Issues Task Force)
(ASU 2016-05). Under the ASU, the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The Company adopted ASU 2016-05 in the first quarter ended April 29, 2017 and the new guidance had no impact as the Company had no transactions involving the novation of a derivative.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. ASU 2017-07 requires companies to present the service cost component of net benefit cost in the same line items in which they report compensation cost. Companies will present all other components of net benefit cost outside of operating income, if this subtotal is presented. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. Entities should apply this guidance retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively, on and after the effective date, for any capitalization of the service cost component of net periodic pension cost in assets. We are currently evaluating the effect that adopting this new accounting guidance will have on our financial condition, results of operations, or cash flows.
3. Earnings/(Loss) per Share
Net income/(loss) and shares used to compute basic and diluted earnings/(loss) per share (EPS) are reconciled below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in millions, except per share data)
|
April 29,
2017
|
|
April 30,
2016
|
Earnings/(loss)
|
|
|
|
Net income/(loss)
|
$
|
(180
|
)
|
|
$
|
(68
|
)
|
Shares
|
|
|
|
Weighted average common shares outstanding (basic shares)
|
309.6
|
|
|
307.2
|
|
Adjustment for assumed dilution:
|
|
|
|
Stock options, restricted stock awards and warrant
|
—
|
|
|
—
|
|
Weighted average shares assuming dilution (diluted shares)
|
309.6
|
|
|
307.2
|
|
EPS
|
|
|
|
Basic
|
$
|
(0.58
|
)
|
|
$
|
(0.22
|
)
|
Diluted
|
$
|
(0.58
|
)
|
|
$
|
(0.22
|
)
|
The following average potential shares of common stock were excluded from the diluted EPS calculation because their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
Three Months Ended
|
(Shares in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Stock options, restricted stock awards and warrant
|
33.1
|
|
|
35.2
|
|
4. Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
April 29, 2017
|
|
April 30, 2016
|
|
January 28, 2017
|
Issue:
|
|
|
|
|
|
|
5.65% Senior Notes Due 2020
(1)
|
|
$
|
400
|
|
|
$
|
400
|
|
|
$
|
400
|
|
5.75% Senior Notes Due 2018
(1)
|
|
265
|
|
|
265
|
|
|
265
|
|
5.875% Senior Secured Notes Due 2023
(1)
|
|
500
|
|
|
—
|
|
|
500
|
|
6.375% Senior Notes Due 2036
(1)
|
|
388
|
|
|
388
|
|
|
388
|
|
6.9% Notes Due 2026
|
|
2
|
|
|
2
|
|
|
2
|
|
7.125% Debentures Due 2023
|
|
10
|
|
|
10
|
|
|
10
|
|
7.4% Debentures Due 2037
|
|
313
|
|
|
313
|
|
|
313
|
|
7.625% Notes Due 2097
|
|
500
|
|
|
500
|
|
|
500
|
|
7.65% Debentures Due 2016
|
|
—
|
|
|
78
|
|
|
—
|
|
7.95% Debentures Due 2017
|
|
—
|
|
|
220
|
|
|
220
|
|
8.125% Senior Notes Due 2019
|
|
400
|
|
|
400
|
|
|
400
|
|
2016 Term Loan Facility
|
|
1,657
|
|
|
—
|
|
|
1,667
|
|
2013 Term Loan Facility
|
|
—
|
|
|
2,188
|
|
|
—
|
|
Total debt, excluding unamortized debt issuance costs, capital leases, financing obligation and note payable
|
|
4,435
|
|
|
4,764
|
|
|
4,665
|
|
Unamortized debt issuance costs
|
|
(62
|
)
|
|
(55
|
)
|
|
(63
|
)
|
Total debt, excluding capital leases, financing obligation and note payable
|
|
4,373
|
|
|
4,709
|
|
|
4,602
|
|
Less: current maturities
|
|
307
|
|
|
321
|
|
|
263
|
|
Total long-term debt, excluding capital leases, financing obligation and note payable
|
|
$
|
4,066
|
|
|
$
|
4,388
|
|
|
$
|
4,339
|
|
|
|
(1)
|
These debt issuances contain a change of control provision that would obligate us, at the holders’ option, to repurchase the debt at a price of 101%.
|
5. Derivative Financial Instruments
We use derivative financial instruments for hedging and non-trading purposes to manage our exposure to changes in interest rates. Use of derivative financial instruments in hedging programs subjects us to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In an effective hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of our derivative financial instruments is used to measure interest to be paid or received and does not represent our exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate.
When we use derivative financial instruments for the purpose of hedging our exposure to interest rates, the contract terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument qualifies for hedge accounting, depending on the nature of the hedge, changes in the fair value of the instrument will
either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive income/(loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which we have not elected to apply hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change.
We have entered into interest rate swap agreements with notional amounts totaling
$1,250 million
to fix a portion of our variable LIBOR-based interest payments. The interest rate swap agreements have a weighted-average fixed rate of
2.04%
, mature on May 7, 2020 and have been designated as cash flow hedges.
The fair value of our interest rate swaps are recorded on the unaudited Interim Consolidated Balance Sheets as an asset or a liability (see Note 7). The effective portion of the interest rate swaps' changes in fair values is reported in Accumulated other comprehensive income/(loss) (see Note 8), and the ineffective portion is reported in Net income/(loss). Amounts in Accumulated other comprehensive income/(loss) are reclassified into net income/(loss) when the related interest payments affect earnings. For the periods presented, all of the interest rate swaps were
100%
effective.
Information regarding the gross amounts of our derivative instruments in the unaudited Interim Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives at Fair Value
|
|
Liability Derivatives at Fair Value
|
($ in millions)
|
Balance Sheet Location
|
|
April 29, 2017
|
|
April 30, 2016
|
|
January 28, 2017
|
|
Balance Sheet Location
|
|
April 29, 2017
|
|
April 30, 2016
|
|
January 28, 2017
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
N/A
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other accounts payable and accrued expenses
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest rate swaps
|
N/A
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other liabilities
|
|
11
|
|
|
29
|
|
|
10
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
13
|
|
|
$
|
31
|
|
|
$
|
12
|
|
6. Restructuring and Management Transition
On March 17, 2017, the Company finalized its plans to close
138
stores to help align the Company's brick-and-mortar presence with its omnichannel network, thereby redirecting capital resources to invest in locations and initiatives that offer the greatest revenue potential. The expected store closures resulted in a
$77 million
asset impairment charge for store assets with limited future use and a
$14 million
severance charge for the expected displacement of store associates. Other store related closing costs such as certain lease obligations will be recorded as incurred when each respective store ceases operations.
The Company also initiated a Voluntary Early Retirement Program (VERP) for approximately
6,000
eligible associates. Eligibility for the VERP included home office, stores and supply chain personnel who met certain criteria related to age and years of service as of January 31, 2017. The consideration period for eligible associates to accept the VERP ended on March 31, 2017. Based on the approximately
2,800
associates who elected to accept the VERP, we incurred a total charge of
$112 million
for enhanced retirement benefits. The enhanced retirement benefits increased the projected benefit obligation (PBO) of the Primary Pension Plan and the Supplemental Pension Plans by
$88 million
and
$24 million
, respectively. In addition, we incurred curtailment charges of
$6 million
related to our Primary Pension Plan and
$2 million
related to Supplemental Pension Plans as a result of the reduction in the expected years of future service related to these plans. As a result of these curtailments, the assets and the liabilities for our Primary Pension Plan and the liabilities of certain Supplemental Pension Plans were remeasured as of March 31, 2017. The discount rate used for the March 31 remeasurements was
4.34%
compared to the year-end 2016 discount rate of
4.40%
. The remeasurement and curtailment resulted in the PBO of our Primary Pension Plan decreasing by
$3 million
and the related assets increasing by
$34 million
and the PBO of our Supplemental Pension Plans increasing by
$3 million
. As of April 29, 2017, the funded status of the Primary Pension Plan was
98%
.
The components of Restructuring and management transition include:
|
|
•
|
VERP
-- charges for enhanced retirement benefits, curtailment and other expenses related to the VERP;
|
|
|
•
|
Home office and stores
-- charges for actions to reduce our store and home office expenses including employee termination benefits, store lease termination and impairment charges;
|
|
|
•
|
Management transition
-- charges related to implementing changes within our management leadership team for both incoming and outgoing members of management; and
|
|
|
•
|
Other
-- charges related primarily to contract termination costs and other costs associated with our previous shops strategy and costs related to the closure of certain supply chain locations.
|
The composition of restructuring and management transition charges was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Cumulative
Amount From Program Inception Through
April 29, 2017
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
|
VERP
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
122
|
|
Home office and stores
|
98
|
|
|
4
|
|
|
395
|
|
Management transition
|
—
|
|
|
2
|
|
|
255
|
|
Other
|
—
|
|
|
—
|
|
|
178
|
|
Total
|
$
|
220
|
|
|
$
|
6
|
|
|
$
|
950
|
|
Activity for the restructuring and management transition liability for the
three
months ended
April 29, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Home Office
and Stores
|
|
Other
|
|
Total
|
January 28, 2017
|
$
|
4
|
|
|
$
|
27
|
|
|
$
|
31
|
|
Charges
|
21
|
|
|
—
|
|
|
21
|
|
Cash payments
|
(6
|
)
|
|
(19
|
)
|
|
(25
|
)
|
April 29, 2017
|
$
|
19
|
|
|
$
|
8
|
|
|
$
|
27
|
|
7. Fair Value Disclosures
In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
•
|
Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
|
Cash Flow Hedges Measured on a Recurring Basis
The
$13 million
,
$31 million
and
$12 million
fair value of our cash flow hedges as of
April 29, 2017
,
April 30, 2016
and
January 28, 2017
, respectively, are valued in the market using discounted cash flow techniques which use quoted market interest rates in discounted cash flow calculations which consider the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps are observable in the active markets and are classified as Level 2 in the fair value measurement hierarchy.
Other Non-Financial Assets Measured on a Non-Recurring Basis
In connection with the Company announcing its plan to close underperforming department stores, long-lived assets held and used with a carrying value of
$86 million
were written down to their fair value of
$9 million
, resulting in asset impairment charges of
$77 million
. The fair value was determined based on comparable market values of similar properties or on a rental income approach and the significant inputs related to valuing the store related assets are classified as Level 2 in the fair value measurement hierarchy.
Other Financial Instruments
Carrying values and fair values of financial instruments that are not carried at fair value in the unaudited Interim Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
April 30, 2016
|
|
January 28, 2017
|
($ in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Total debt, excluding unamortized debt issuance costs, capital leases, financing obligation and note payable
|
$
|
4,435
|
|
|
$
|
4,222
|
|
|
$
|
4,764
|
|
|
$
|
4,488
|
|
|
$
|
4,665
|
|
|
$
|
4,495
|
|
The fair value of long-term debt was estimated by obtaining quotes from brokers or was based on current rates offered for similar debt. As of
April 29, 2017
,
April 30, 2016
and
January 28, 2017
, the fair values of cash and cash equivalents and accounts payable approximated their carrying values due to the short-term nature of these instruments.
Concentrations of Credit Risk
We have no significant concentrations of credit risk.
8. Stockholders’ Equity
The following table shows the change in the components of stockholders’ equity for the
three
months ended
April 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Number
of
Common
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Reinvested
Earnings/
(Accumulated
Deficit)
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
Total
Stockholders’
Equity
|
January 28, 2017
|
308.3
|
|
|
$
|
154
|
|
|
$
|
4,679
|
|
|
$
|
(3,006
|
)
|
|
$
|
(473
|
)
|
|
$
|
1,354
|
|
Net income/(loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
|
(180
|
)
|
Other comprehensive income/(loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
Stock-based compensation and other
|
1.5
|
|
|
1
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
6
|
|
April 29, 2017
|
309.8
|
|
|
$
|
155
|
|
|
$
|
4,684
|
|
|
$
|
(3,186
|
)
|
|
$
|
(448
|
)
|
|
$
|
1,205
|
|
Accumulated Other Comprehensive Income/(Loss)
The following table shows the changes in accumulated other comprehensive income/(loss) balances for the
three
months ended
April 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Net Actuarial
Gain/(Loss)
|
|
Prior Service
Credit/(Cost)
|
|
Foreign Currency Translation
|
|
Gain/(Loss) on Cash Flow Hedges
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
January 28, 2017
|
$
|
(421
|
)
|
|
$
|
(33
|
)
|
|
$
|
(2
|
)
|
|
$
|
(17
|
)
|
|
$
|
(473
|
)
|
Other comprehensive income/(loss) before reclassifications
|
22
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
19
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
4
|
|
|
—
|
|
|
2
|
|
|
6
|
|
April 29, 2017
|
$
|
(399
|
)
|
|
$
|
(29
|
)
|
|
$
|
(2
|
)
|
|
$
|
(18
|
)
|
|
$
|
(448
|
)
|
9. Retirement Benefit Plans
The components of net periodic benefit expense/(income) for our non-contributory qualified defined benefit pension plan (Primary Pension Plan) and non-contributory supplemental pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Primary Pension Plan
|
|
|
|
Service cost
|
$
|
11
|
|
|
$
|
14
|
|
Interest cost
|
37
|
|
|
38
|
|
Expected return on plan assets
|
(54
|
)
|
|
(54
|
)
|
Amortization of prior service cost/(credit)
|
2
|
|
|
2
|
|
Net periodic benefit expense/(income)
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
|
|
|
Supplemental Pension Plans
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
2
|
|
|
2
|
|
Amortization of prior service cost/(credit)
|
—
|
|
|
—
|
|
Net periodic benefit expense/(income)
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
Primary and Supplemental Pension Plans Total
|
|
|
|
Service cost
|
$
|
11
|
|
|
$
|
14
|
|
Interest cost
|
39
|
|
|
40
|
|
Expected return on plan assets
|
(54
|
)
|
|
(54
|
)
|
Amortization of prior service cost/(credit)
|
2
|
|
|
2
|
|
Net periodic benefit expense/(income)
|
$
|
(2
|
)
|
|
$
|
2
|
|
Additionally, the Company had net periodic postretirement income of
$4 million
, in the
three
months ended
April 30, 2016
related to the Company's noncontributory postretirement medical and dental plan which was included in SG&A expense in the unaudited Interim Consolidated Statements of Operations. The postretirement medical and dental plan was terminated effective December 31, 2016.
10. Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments, accruals for certain litigation and other non-operating charges and credits. In addition, during the first quarter of 2014, we entered into a joint venture in which we contributed approximately
220
acres of excess property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture). The joint venture was formed to develop the contributed property and our proportional share of the joint venture's activities is recorded in Real estate and other, net.
The composition of Real estate and other, net was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Net gain from sale of non-operating assets
|
$
|
—
|
|
|
$
|
(5
|
)
|
Investment income from Home Office Land Joint Venture
|
(1
|
)
|
|
(24
|
)
|
Net gain from sale of operating assets
|
(117
|
)
|
|
(8
|
)
|
Other
|
—
|
|
|
(1
|
)
|
Total expense/(income)
|
$
|
(118
|
)
|
|
$
|
(38
|
)
|
Investment Income from Joint Ventures
During the first
three
months of
2017
, the Company had income of
$1 million
related to its proportional share of the net income in the Home Office Land Joint Venture and received an aggregate cash distribution of
$8 million
. During the first
three
months of
2016
, the Company had income of
$24 million
related to its proportional share of the net income in the Home Office Land Joint Venture and received an aggregate cash distribution of
$38 million
.
Net Gain from Sale of Operating Assets
During the first quarter of 2017, we completed the sale of our Buena Park, California distribution facility for a net sale price of
$131 million
and recorded a net gain of
$111 million
.
11. Income Taxes
The net tax benefit of
$12 million
for the
three
months ended
April 29, 2017
consisted of state and foreign tax expenses of
$3 million
and
$2 million
of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, offset by a
$16 million
benefit relating to other comprehensive income and net tax benefits of
$1 million
resulting from state audit settlements.
As of
April 29, 2017
, we have approximately
$2.1 billion
of net operating losses (NOLs) available for U.S. federal income tax purposes, which expire in 2032 through 2034 and
$62 million
of tax credit carryforwards that expire at various dates through 2035. A federal valuation allowance of
$816 million
fully offsets the deferred tax assets resulting from the NOL and tax credit carryforwards that expire at various dates through 2034. A valuation allowance of
$241 million
fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2034. In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our periodic assessment, our estimate of the realization of deferred tax assets is solely based on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring NOL and tax credit carryforwards. Accordingly, in the first quarter of
2017
, the valuation allowance was increased by
$64 million
to offset the net deferred tax assets created in the quarter relating primarily to the increase in NOL carryforwards.
12. Litigation and Other Contingencies
Litigation
Macy’s Litigation
On August 16, 2012, Macy’s, Inc. and Macy’s Merchandising Group, Inc. (together the Plaintiffs) filed suit against JCP in the Supreme Court of the State of New York, County of New York, alleging that the Company tortiously interfered with, and engaged in unfair competition relating to, a 2006 agreement between Macy’s and Martha Stewart Living Omnimedia, Inc. (MSLO) by entering into a partnership agreement with MSLO in December 2011. The Plaintiffs sought primarily to prevent the Company from implementing our partnership agreement with MSLO as it related to products in the bedding, bath, kitchen and cookware categories. The suit was consolidated with an already-existing breach of contract lawsuit by the Plaintiffs against MSLO, and a bench trial commenced on February 20, 2013. On October 21, 2013, the Company and MSLO entered into an amendment of the partnership agreement, providing in part that the Company will not sell MSLO-designed merchandise in the bedding, bath, kitchen and cookware categories. On January 2, 2014, MSLO and Macy's announced that they had settled the case as to each other, and MSLO was subsequently dismissed as a defendant. On June 16, 2014, the court issued a ruling against the Company on the remaining claim of intentional interference, and held that Macy’s is not entitled to punitive damages. The court referred other issues related to damages to a Judicial Hearing Officer. On June 30, 2014, the Company appealed the court’s decision, and Macy’s cross-appealed a portion of the decision. On February 26, 2015, the appellate court affirmed the trial court's rulings concerning the claim of intentional interference and lack of punitive damages, and reinstated Macy's claims for intentional interference and unfair competition that had been dismissed during trial. On June 17, 2015, Macy’s appealed the court’s order that the Judicial Hearing Officer proceed with the damages phase of the proceedings on the tortious interference claim. On November 24, 2015, the Judicial Hearing Officer issued a recommendation on the amount of damages to be awarded to Macy’s. On June 6, 2016, the court adopted the Judicial Hearing Officer's recommendation on the amount of damages to be awarded to Macy's and both parties filed a notice of appeal. On November 10, 2016, the appellate court issued a ruling affirming the court's order, finding Macy’s challenge to the measure of damages to be untimely. The parties subsequently reached a settlement agreement, which was effective as of January 13, 2017. On January 31, 2017, the court entered an order dismissing the case with prejudice.
Class Action Securities Litigation
The Company, Myron E. Ullman, III and Kenneth H. Hannah are parties to the Marcus consolidated purported class action lawsuit in the U.S. District Court, Eastern District of Texas, Tyler Division. The Marcus consolidated complaint is purportedly
brought on behalf of persons who acquired our common stock during the period from August 20, 2013 through September 26, 2013, and alleges claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiff claims that the defendants made false and misleading statements and/or omissions regarding the Company’s financial condition and business prospects that caused our common stock to trade at artificially inflated prices. The consolidated complaint seeks class certification, unspecified compensatory damages, including interest, reasonable costs and expenses, and other relief as the court may deem just and proper. Defendants filed a motion to dismiss the consolidated complaint which was denied by the court on September 29, 2015. Defendants filed an answer to the consolidated complaint on November 12, 2015. Plaintiff filed a motion for class certification on January 25, 2016, and on August 29, 2016, a magistrate judge issued a report and recommendation that the motion for class certification be granted. The district court adopted this report and recommendation granting class certification on March 8, 2017.
Also, on August 26, 2014, plaintiff Nathan Johnson filed a purported class action lawsuit against the Company, Myron E. Ullman, III and Kenneth H. Hannah in the U.S. District Court, Eastern District of Texas, Tyler Division. The suit is purportedly brought on behalf of persons who acquired our securities other than common stock during the period from August 20, 2013 through September 26, 2013, generally mirrors the allegations contained in the Marcus lawsuit discussed above, and seeks similar relief. On June 8, 2015, plaintiff in the Marcus lawsuit amended the consolidated complaint to include the members of the purported class in the Johnson lawsuit, and on June 10, 2015, the Johnson lawsuit was consolidated into the Marcus lawsuit.
The parties have reached an agreement in principle, subject to court approval, to settle the consolidated securities class action for
$97.5 million
, which will be funded by insurance. While no assurance can be given as to the ultimate outcome of these matters, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Shareholder Derivative Litigation
In October, 2013, two purported shareholder derivative actions were filed against certain present and former members of the Company’s Board of Directors and executives by the following parties in the U.S. District Court, Eastern District of Texas, Sherman Division: Weitzman (filed October 2, 2013) and Zauderer (filed October 3, 2013). The Company is named as a nominal defendant in both suits. The lawsuits assert claims for breaches of fiduciary duties and unjust enrichment based upon alleged false and misleading statements and/or omissions regarding the Company’s financial condition. The lawsuits seek unspecified compensatory damages, restitution, disgorgement by the defendants of all profits, benefits and other compensation, equitable relief to reform the Company’s corporate governance and internal procedures, reasonable costs and expenses, and other relief as the court may deem just and proper. On October 28, 2013, the Court consolidated the two cases into the Weitzman lawsuit. On January 15, 2014, the Court entered an order staying the derivative suits pending certain events in the class action securities litigation described above.
Also, in March 2016, plaintiff Frank Lipsius filed a purported shareholder derivative action against certain present and former members of the Company's Board of Directors and executives in the District Court of Collin County in the State of Texas. The Company is named as a nominal defendant in the suit. The suit generally mirrors the allegations contained in the Weitzman and Zauderer suits discussed above, and seeks similar relief.
While no assurance can be given as to the ultimate outcome of these matters, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
ERISA Class Action Litigation
JCP and certain present and former members of JCP's Board of Directors have been sued in a purported class action complaint by plaintiffs Roberto Ramirez and Thomas Ihle, individually and on behalf of all others similarly situated, which was filed on July 8, 2014 in the U.S. District Court, Eastern District of Texas, Tyler Division. The suit alleges that the defendants violated Section 502 of the Employee Retirement Income Security Act (ERISA) by breaching fiduciary duties relating to the J. C. Penney Corporation, Inc. Savings, Profit-Sharing and Stock Ownership Plan (the Plan). The class period is alleged to be between November 1, 2011 and September 27, 2013. Plaintiffs allege that they and others who invested in or held Company stock in the Plan during this period were injured because defendants allegedly made false and misleading statements and/or omissions regarding the Company’s financial condition and business prospects that caused the Company’s common stock to trade at artificially inflated prices. The complaint seeks class certification, declaratory relief, a constructive trust, reimbursement of alleged losses to the Plan, actual damages, attorneys’ fees and costs, and other relief. Defendants filed a motion to dismiss the complaint which was granted in part and denied in part by the court on September 29, 2015. The parties reached a settlement agreement, subject to final court approval, pursuant to which JCP would make available
$4.5 million
to settle class members’ claims, and the court granted preliminary approval of the settlement on January 3, 2017. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Employment Class Action Litigation
JCP is a defendant in a class action proceeding entitled
Tschudy v. JCPenney Corporation
filed on April 15, 2011 in the U.S.
District Court, Southern District of California. The lawsuit alleges that JCP violated the California Labor Code in connection with the alleged forfeiture of accrued and vested vacation time under its “My Time Off” policy. The class consists of all JCP employees who worked in California from April 5, 2007 to the present. Plaintiffs amended the complaint to assert additional claims under the Illinois Wage Payment and Collection Act on behalf of all JCP employees who worked in Illinois from January 1, 2004 to the present. After the court granted JCP’s motion to transfer the Illinois claims, those claims are now pending in a separate action in the U.S. District Court, Northern District of Illinois, entitled
Garcia v. JCPenney Corporation
. The lawsuits seek compensatory damages, penalties, interest, disgorgement, declaratory and injunctive relief, and attorney’s fees and costs. Plaintiffs in both lawsuits filed motions, which the Company opposed, to certify these actions on behalf of all employees in California and Illinois based on the specific claims at issue. On December 17, 2014, the California court granted plaintiffs’ motion for class certification. Pursuant to a motion by the Company, the California court decertified the class on December 9, 2015. On March 30, 2016, the California court granted JCP’s motion for summary judgment. On April 26, 2016, the California plaintiffs filed a notice of appeal. On May 4, 2016, the California court entered judgment for JCP on all plaintiffs’ claims. The Illinois court denied without prejudice plaintiffs' motion for class certification pending the filing of an amended complaint. Plaintiffs filed their amended complaint in the Illinois lawsuit on April 14, 2015 and the Company answered. On July 2, 2015, the Illinois plaintiffs renewed their motion for class certification, which the Illinois court granted on March 8, 2016. The parties have reached a settlement agreement, subject to court approval, to resolve the California and Illinois actions for a combined total of
$6.75 million
. While no assurance can be given as to the ultimate outcome of these matters, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Other Legal Proceedings
We are subject to various other legal and governmental proceedings involving routine litigation incidental to our business. Accruals have been established based on our best estimates of our potential liability in certain of these matters, including certain matters discussed above, all of which we believe aggregate to an amount that is not material to the Consolidated Financial Statements. These estimates were developed in consultation with in-house and outside counsel. While no assurance can be given as to the ultimate outcome of these matters, we currently believe that the final resolution of these actions, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Contingencies
As of
April 29, 2017
, we estimated our total potential environmental liabilities to range from
$20 million
to
$25 million
and recorded our best estimate of
$24 million
in Other accounts payable and accrued expenses and Other liabilities in the unaudited Interim Consolidated Balance Sheet as of that date. This estimate covered potential liabilities primarily related to underground storage tanks, remediation of environmental conditions involving our former drugstore locations and asbestos removal in connection with approved plans to renovate or dispose of our facilities. We continue to assess required remediation and the adequacy of environmental reserves as new information becomes available and known conditions are further delineated. If we were to incur losses at the upper end of the estimated range, we do not believe that such losses would have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
13. Subsequent Event
On May 22, 2017, we paid approximately $334 million aggregate consideration to settle cash tender offers with respect to portions of our outstanding 5.75% Senior Notes due 2018 and 8.125% Senior Notes due 2019 (collectively, the Securities). In doing so, we recognized a loss on extinguishment of debt of $34 million which includes the premium paid over the face value of the accepted Securities of $30 million, reacquisition costs of $1 million and the write off of unamortized debt issuance costs of $3 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.
The holding company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by the holding company is full and unconditional.
This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as of
January 28, 2017
, and for the year then ended, and related Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Annual Report on Form 10-K for the fiscal year ended
January 28, 2017
(
2016
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.
Growth Initiatives
Our growth strategy for 2017 will focus on the following five initiatives:
|
|
•
|
Women's apparel business.
|
First, we will continue to focus on our beauty categories of Sephora and The Salon by InStyle. In 2016, we opened 60 additional Sephora locations, bringing our total number of locations to 577, and we launched several new brands in our Sephora shops. We plan to add approximately 70 new Sephora locations, expand 32 existing locations and continue to roll out and launch new brands in 2017. With these plans every Sephora location we operate will be enhanced in 2017 either through an expansion or an updated assortment of brands. We are rebranding our salons to The Salon by InStyle and also recently implemented new functionality to jcpenney.com and our mobile app, allowing customers to book salon services appointments easily and more conveniently. Magnifying the importance of physical stores, we see Sephora and Salon as differentiators to help drive traffic and increase the frequency of visits to our stores.
Second, we plan to increase our revenue per customer with our home refresh initiative. In 2016, we established appliance showrooms in over 500 stores and plan to open new appliance showrooms in approximately 100 stores in the second quarter of 2017 and add new brand partners to our showrooms throughout the year. Additionally, we are conducting several tests within our Home Store focusing on home installed services including an HVAC install program through our partnership with Trane.
Third, we remain committed to becoming a world-class omnichannel retailer. Our online business remains strong, delivering double-digit growth in 2016. We plan to continue to drive increased online revenue in 2017 by increasing our online SKU assortment, continuing to improve site functionality, expanding our ship-from-store capabilities from approximately 250 stores to 100% of our store network and continuing to improve our mobile app.
Pricing optimization is our fourth initiative. In 2017, we have restructured the internal pricing process so that all of our pricing and promotional decisions will be made using a more data-driven approach. Once fully implemented, we expect our pricing initiatives to enhance our gross margin performance in 2017 and beyond.
Last, we are focused on improving our women's apparel offering. We are enhancing our partnership with Nike to create inspiring brand shops and offering an improved assortment of apparel, accessories and footwear across all divisions. In the women's area we will have Nike in all doors, an increase of over 400 stores from 2016. We are also converting all women's shoe areas to open sale fixtures this year and are introducing new styles and comfort features to attempt to seize available market share in footwear. In addition, we are taking steps in women's apparel to simplify the floor, better balance our career and casual offerings and creating a stronger value statement with pricing. We also plan to expand our use of customer and trend data more effectively to ensure we better understand the desires of the customer in advance of the season. Finally, we see an opportunity with the plus size community that remains underserved, and we want to become the destination for providing style, value and an appealing shopping environment. Our women's plus boutique shop Boutique+™ continues to resonate with our plus size customers and we plan to enhance this strategy for 2017 by launching swimwear and other accessories.
We believe these growth initiatives will not only serve the needs of our value-oriented customer, they will differentiate us from our traditional competitors.
First
Quarter Overview
|
|
▪
|
Sales were
$2,706 million
with a comparable store sales
decrease
of
3.5%
.
|
|
|
▪
|
Gross margin as a percentage of sales
increased
to
36.3%
compared to
36.2%
in the same period last year.
|
|
|
▪
|
Selling, general and administrative (SG&A) expenses
decreased
$29 million
, or
3.3%
, for the
first
quarter of
2017
as compared to the same period last year. These savings were primarily driven by lower marketing, store controllable costs and incentive compensation. SG&A as a percentage of sales
increased
to
31.2%
compared to
31.0%
in the same period last year.
|
|
|
▪
|
Our net loss was
$180 million
, or (
$0.58
) per share, compared to a net loss of
$68 million
, or (
$0.22
) per share, for the corresponding prior year quarter. Results for this quarter included the following amounts that are not directly related to our ongoing core business operations:
|
|
|
▪
|
$220 million, or $0.71 per share, of restructuring and management transition charges;
|
|
|
▪
|
$4 million, or $0.01 per share, of Primary Pension income;
|
|
|
▪
|
$1 million for our proportional share of net income from our joint venture formed to develop the excess property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture); and
|
|
|
▪
|
$16 million, or $0.05 per share, for the tax impact resulting from other comprehensive income allocation.
|
|
|
▪
|
Adjusted net income was $19 million, or $0.06 per share, compared to an adjusted net loss of $97 million, or $(0.32) per share, in last year's first quarter. See the reconciliation of net income/(loss) and diluted EPS, the most directly comparable GAAP financial measures, to adjusted net income/(loss) and adjusted diluted EPS on page 23.
|
|
|
▪
|
We completed the sale of our Buena Park, California distribution facility in March for a net sales price of $131 million and recorded a net gain of $111 million.
|
|
|
▪
|
Earnings before interest expense, income tax (benefit)/expense and depreciation and amortization (EBITDA) (non-GAAP) was
$40 million
, a
$136 million
decline
from the same period last year.
|
|
|
▪
|
Standard and Poor's Rating Services upgraded our corporate credit rating in March 2017 to B+ from B.
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions, except EPS)
|
April 29,
2017
|
|
April 30,
2016
|
Total net sales
|
$
|
2,706
|
|
|
$
|
2,811
|
|
Percent increase/(decrease) from prior year
|
(3.7
|
)%
|
|
(1.6
|
)%
|
Comparable store sales increase/(decrease)
(1)
|
(3.5
|
)%
|
|
(0.4
|
)%
|
Gross margin
|
983
|
|
|
1,018
|
|
Operating expenses/(income):
|
|
|
|
Selling, general and administrative
|
843
|
|
|
872
|
|
Primary pension plan
|
(4
|
)
|
|
—
|
|
Supplemental pension plans
|
2
|
|
|
2
|
|
Total pension
|
(2
|
)
|
|
2
|
|
Depreciation and amortization
|
145
|
|
|
154
|
|
Real estate and other, net
|
(118
|
)
|
|
(38
|
)
|
Restructuring and management transition
|
220
|
|
|
6
|
|
Total operating expenses
|
1,088
|
|
|
996
|
|
Operating income/(loss)
|
(105
|
)
|
|
22
|
|
(Gain)/loss on extinguishment of debt
|
—
|
|
|
(4
|
)
|
Net interest expense
|
87
|
|
|
95
|
|
Income/(loss) before income taxes
|
(192
|
)
|
|
(69
|
)
|
Income tax expense/(benefit)
|
(12
|
)
|
|
(1
|
)
|
Net income/(loss)
|
$
|
(180
|
)
|
|
$
|
(68
|
)
|
EBITDA (non-GAAP)
(2)
|
$
|
40
|
|
|
$
|
176
|
|
Adjusted EBITDA (non-GAAP)
(2)
|
$
|
255
|
|
|
$
|
153
|
|
Adjusted net income/(loss) (non-GAAP)
(2)
|
$
|
19
|
|
|
$
|
(97
|
)
|
Diluted EPS
|
$
|
(0.58
|
)
|
|
$
|
(0.22
|
)
|
Adjusted diluted EPS (non-GAAP)
(2)
|
$
|
0.06
|
|
|
$
|
(0.32
|
)
|
Ratios as a percent of sales:
|
|
|
|
Gross margin
|
36.3
|
%
|
|
36.2
|
%
|
SG&A
|
31.2
|
%
|
|
31.0
|
%
|
Total operating expenses
|
40.2
|
%
|
|
35.4
|
%
|
Operating income/(loss)
|
(3.9
|
)%
|
|
0.8
|
%
|
|
|
(1)
|
Comparable store sales include sales from all stores, including sales from services and commissions earned from our in-store licensed departments, that have been open for 12 consecutive full fiscal months and Internet sales. Stores closed for an extended period are not included in comparable store sales calculations, while stores remodeled and minor expansions not requiring store closure remain in the
calculations. Certain items, such as sales return estimates and store liquidation sales, are excluded from the Company’s calculation. Our definition and calculation of comparable store sales may differ from other companies in the retail industry.
|
|
|
(2)
|
See “Non-GAAP Financial Measures” below for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations.
|
Total Net Sales
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Total net sales
|
$
|
2,706
|
|
|
$
|
2,811
|
|
Sales percent increase/(decrease):
|
|
|
|
Total net sales
|
(3.7
|
)%
|
|
(1.6
|
)%
|
Comparable store sales
|
(3.5
|
)%
|
|
(0.4
|
)%
|
For the first quarter of
2017
, total net sales
decreased
$105 million
from the same period last year.
The following table provides the components of the net sales increase/(decrease):
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29, 2017
|
Comparable store sales increase/(decrease)
|
$
|
(98
|
)
|
Closed stores, net
|
(10
|
)
|
Other revenues and sales adjustments
|
3
|
|
Total net sales increase/(decrease)
|
$
|
(105
|
)
|
As our omnichannel strategy continues to mature, it is increasingly difficult to distinguish between a store sale and an Internet sale. Because we no longer have a clear distinction between store sales and Internet sales, we do not separately report Internet sales. Below is a list of some of our omnichannel activities:
|
|
•
|
Stores increase Internet sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online.
|
|
|
•
|
Our website increases store sales as in-store customers have often pre-shopped online before shopping in the store, including verification of which stores have online merchandise in stock.
|
|
|
•
|
Most Internet purchases are easily returned in our stores.
|
|
|
•
|
JCPenney Rewards can be earned and redeemed online or in stores.
|
|
|
•
|
In-store customers can order from our website with the assistance of associates in our stores or they can shop our website from the JCPenney app while inside the store.
|
|
|
•
|
Customers who utilize our mobile application can receive mobile coupons to use when they check out both online or in our stores.
|
|
|
•
|
Internet orders can be shipped from a dedicated jcpenney.com fulfillment center, a store, a store merchandise distribution center, a regional warehouse, directly from vendors or any combination of the above.
|
|
|
•
|
Certain categories of store inventory can be accessed and purchased by jcpenney.com customers and shipped directly to the customer's home from the store.
|
|
|
•
|
Internet orders can be shipped to stores for customer pick up.
|
|
|
•
|
"Buy online and pick up in store same day" is available in all of our stores.
|
For the
three
months ended
April 29, 2017
, comparable store sales
decreased
3.5%
, while total net sales
decreased
3.7%
to
$2,706 million
compared with
$2,811 million
for the
three
months ended
April 30, 2016
.
For the first
three
months of
2017
, average unit retail and units per transaction increased, while transaction counts decreased as compared to the prior year.
For the
first
quarter of
2017
, Home, Sephora and Fine Jewelry were our top-performing merchandise divisions, with all experiencing sales gains on a comparable store basis. Geographically, the Southwest and Southeast were the best performing regions of the country during the
first
quarter of
2017
.
During the
first
quarters of both
2017
and
2016
, private brand merchandise comprised 44% and exclusive brand merchandise comprised 8% of total merchandise sales.
Store Count
The following table compares the number of stores for the
three
months ended
April 29, 2017
and
April 30, 2016
:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 29,
2017
|
|
April 30,
2016
|
JCPenney department stores
|
|
|
|
Beginning of period
|
1,013
|
|
|
1,021
|
|
Closed stores
|
—
|
|
|
(7
|
)
|
End of period
(1)
|
1,013
|
|
|
1,014
|
|
|
|
(1)
|
Gross selling space, including selling space allocated to services and licensed departments, was 103 million square feet as of
April 29, 2017
and 104 million square feet as of
April 30, 2016
.
|
Gross Margin
Gross margin for the
three
months ended
April 29, 2017
was
$983 million
, a
decrease
of
$35 million
compared to
$1,018 million
for the
three
months ended
April 30, 2016
. Gross margin as a percentage of sales was
36.3%
for the
three
months ended
April 29, 2017
compared to
36.2%
for the
three
months ended
April 30, 2016
, an increase of 10 basis points. Gross margin was positively impacted by improved selling margins throughout the quarter, which was partially offset by the continued growth in the Company’s online and major appliance categories.
SG&A Expenses
For the three months ended
April 29, 2017
, SG&A expenses were
$29 million
lower
than the corresponding period of
2016
. As a percent of sales, SG&A expenses
increased
to
31.2%
compared to
31.0%
in the
first
quarter of
2016
. The net
decrease
in SG&A expenses was primarily driven by lower marketing, store controllable costs and incentive compensation.
Our private label credit card and co-branded MasterCard® programs are owned and serviced by Synchrony Financial (Synchrony). Under our agreement with Synchrony, we receive cash payments from Synchrony based upon the performance of the credit card portfolio. We participate in the programs by providing marketing promotions designed to increase the use of each card, including enhanced marketing offers for cardholders. Additionally, we accept payments in our stores from cardholders who prefer to pay in person when they are shopping in our locations. The income we earn under our agreement with Synchrony is included as an offset to SG&A expenses. For the
first
quarters of
2017
and
2016
, we recognized income of $83 million and $79 million, respectively, pursuant to our private label credit card program.
Pension Expense/(Income)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Primary Pension Plan
|
$
|
(4
|
)
|
|
$
|
—
|
|
Supplemental pension plans
|
2
|
|
|
2
|
|
Total pension expense/(income)
|
$
|
(2
|
)
|
|
$
|
2
|
|
Depreciation and Amortization Expense
Depreciation and amortization expense was
$145 million
and
$154 million
for the three months ended
April 29, 2017
and
April 30, 2016
, respectively. The decrease is primarily a result of closing store locations since the beginning of 2015.
Restructuring and Management Transition
The composition of restructuring and management transition charges was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Voluntary early retirement program (VERP)
|
$
|
122
|
|
|
$
|
—
|
|
Home office and stores
|
98
|
|
|
4
|
|
Management transition
|
—
|
|
|
2
|
|
Total
|
$
|
220
|
|
|
$
|
6
|
|
In February 2017, we announced a VERP, which was offered to approximately 6,000 eligible associates. In the first quarter of 2017, we recorded a total charge of
$122 million
related to the VERP. Charges included $112 million related to enhanced retirement benefits for the approximately 2,800
associates who accepted the VERP, $8 million related to curtailment charges for our Primary Pension Plan and Supplemental Pension Plans as a result of the reduction in the expected years of future service related to these plans and $2 million in other related costs.
During the
three
months ended
April 29, 2017
and
April 30, 2016
, we recorded
$98 million
and
$4 million
, respectively, of costs to reduce our store and home office expenses. Costs during the first quarter of 2017 include store closing asset impairments of $77 million, employee termination benefits of $16 million and store closing costs of $5 million. Costs during the first quarter of 2016 primarily include employee termination benefits in connection with the elimination of positions in our home office.
We also implemented changes within our management leadership team during the
three
months ended
April 30, 2016
that resulted in management transition costs of
$2 million
for both incoming and outgoing members of management.
Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments, accruals for certain litigation and other non-operating charges and credits. In addition, during the first quarter of 2014, we entered into the Home Office Land Joint Venture in which we contributed approximately
220
acres of excess property adjacent to our home office facility in Plano, Texas. The joint venture was formed to develop the contributed property and our proportional share of the joint venture's activities is recorded in Real estate and other, net.
The composition of Real estate and other, net was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Net gain from sale of non-operating assets
|
$
|
—
|
|
|
$
|
(5
|
)
|
Investment income from Home Office Land Joint Venture
|
(1
|
)
|
|
(24
|
)
|
Net gain from sale of operating assets
|
(117
|
)
|
|
(8
|
)
|
Other
|
—
|
|
|
(1
|
)
|
Total expense/(income)
|
$
|
(118
|
)
|
|
$
|
(38
|
)
|
During the first quarters of 2017 and 2016, we sold non-operating assets for a net gain of $0 million and $5 million, respectively. Investment income from the Home Office Land Joint Venture represents our proportional share of net income from the joint venture.
During the first quarter of 2017, the net gain from the sale of operating assets includes a $111 million net gain on the sale of our Buena Park, California distribution facility and a $6 million net gain on the sale of excess land.
During the first quarter of 2016, the net gain from the sale of operating assets related primarily to the sale of land adjacent to our home office not contributed to the Home Office Land Joint Venture.
Operating Income/(Loss)
For the
first
quarter of 2017, we reported an operating loss of
$105 million
compared to operating income of
$22 million
in the
first
quarter of 2016.
(Gain)/Loss on Extinguishment of Debt
During the first quarter of 2016, we repurchased and retired $60 million aggregate principal amount of our outstanding debt resulting in a gain on extinguishment of debt of $4 million.
Net Interest Expense
Net interest expense for the
first
quarter of 2017 was
$87 million
, a decrease of $8 million, or 8.4%, from
$95 million
in the first quarter of 2016. The reduction in net interest expense is due to lower debt levels in 2017 compared to 2016.
Income Taxes
The net tax benefit of
$12 million
for the
three
months ended
April 29, 2017
consisted of state and foreign tax expenses of
$3 million
and
$2 million
of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets, offset by a
$16 million
benefit relating to other comprehensive income and net tax benefits of
$1 million
resulting from state audit settlements.
As of
April 29, 2017
, we have approximately
$2.1 billion
of net operating losses (NOLs) available for U.S. federal income tax purposes, which expire in 2032 through 2034 and
$62 million
of tax credit carryforwards that expire at various dates through 2035. A federal valuation allowance of
$816 million
fully offsets the deferred tax assets resulting from the NOL and tax credit carryforwards that expire at various dates through 2034. A valuation allowance of
$241 million
fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2034. In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our periodic assessment, our estimate of the realization of deferred tax assets is solely based on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring NOL and tax credit carryforwards. Accordingly, in the
first
quarter of 2017, the valuation allowance was increased by
$64 million
to offset the net deferred tax assets created in the quarter relating primarily to the increase in NOL carryforwards.
Non-GAAP Financial Measures
We report our financial information in accordance with generally accepted accounting principles in the United States (GAAP). However, we present certain financial measures identified as non-GAAP under the rules of the Securities and Exchange Commission (SEC) to assess our results. We believe the presentation of these non-GAAP financial measures is useful in order to better understand our financial performance as well as to facilitate the comparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures to assess the results of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measures presented.
The following non-GAAP financial measures are adjusted to exclude restructuring and management transition charges, the impact of our Primary Pension Plan, the (gain)/loss on extinguishment of debt, the net gain on the sale of non-operating assets, the proportional share of net income from our Home Office Land Joint Venture and the tax impact for the allocation of income taxes to other comprehensive income items related to our Primary Pension Plan and interest rate swaps. Unlike other operating expenses, restructuring and management transition charges, the (gain)/loss on extinguishment of debt, the net gain on the sale of non-operating assets, the proportional share of net income from our Home Office Land Joint Venture and the tax impact for the allocation of income taxes to other comprehensive income items related to our Primary Pension Plan and interest rate swaps are not directly related to our ongoing core business operations. Primary Pension Plan expense/(income) is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond our control, such as market volatility. Accordingly, we eliminate our Primary Pension Plan expense/(income) in its entirety as we view all components of net periodic benefit expense/(income) as a single, net amount, consistent with its presentation in our Consolidated Financial Statements. We believe it is useful for investors to understand the impact of restructuring and management transition charges, Primary Pension Plan expense/(income), the (gain)/loss on extinguishment of debt, the net gain on the sale of non-operating assets, the proportional share of net income from the Home Office Land Joint Venture and the tax impact for the allocation of income taxes to other comprehensive income items related to our Primary Pension Plan and interest rate swaps on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted EBITDA; (2) adjusted net income/(loss); and (3) adjusted earnings/(loss) per share-diluted.
In addition, we believe that EBITDA is a useful measure in assessing our operating performance and are therefore presenting this non-GAAP financial measure in addition to the non-GAAP financial measures listed above.
EBITDA and Adjusted EBITDA.
The following table reconciles net income/(loss), the most directly comparable GAAP measure, to EBITDA and adjusted EBITDA, which are non-GAAP financial measures:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29, 2017
|
|
April 30, 2016
|
Net income/(loss)
|
$
|
(180
|
)
|
|
$
|
(68
|
)
|
Add: Net interest expense
|
87
|
|
|
95
|
|
Add: (Gain)/loss on extinguishment of debt
|
—
|
|
|
(4
|
)
|
Total interest expense
|
87
|
|
|
91
|
|
Add: Income tax expense/(benefit)
|
(12
|
)
|
|
(1
|
)
|
Add: Depreciation and amortization
|
145
|
|
|
154
|
|
EBITDA (non-GAAP)
|
40
|
|
|
176
|
|
Add: Restructuring and management transition charges
|
220
|
|
|
6
|
|
Add: Primary Pension Plan expense/(income)
|
(4
|
)
|
|
—
|
|
Less: Net gain on the sale of non-operating assets
|
—
|
|
|
(5
|
)
|
Less: Proportional share of net income from joint venture
|
(1
|
)
|
|
(24
|
)
|
Adjusted EBITDA (non-GAAP)
|
$
|
255
|
|
|
$
|
153
|
|
For the
three
months ended
April 29, 2017
, EBITDA was
$40 million
, a reduction of $136 million compared to
$176 million
in the prior year corresponding period. Excluding restructuring and management transition charges, the impact of our Primary Pension Plan expense/(income), the net gain on the sale of non-operating assets, and the proportional share of net income from the Home Office Land Joint Venture, adjusted EBITDA improved $102 million to
$255 million
for the
three
months ended
April 29, 2017
compared to
$153 million
for the prior year corresponding period.
For the
three
months ended
April 29, 2017
, EBITDA decreased from the prior year due to $220 million in restructuring charges partially offset by the $118 million gain on the sale of operating assets. Adjusted EBITDA improved as compared to the corresponding prior year period as we recorded a significant net gain on the sale of operating assets and effectively managed our controllable expenses.
Adjusted Net Income/(Loss) and Adjusted Diluted EPS.
The following table reconciles net income/(loss) and diluted EPS, the most directly comparable GAAP financial measures, to adjusted net income/(loss) and adjusted diluted EPS, which are non-GAAP financial measures:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions, except per share data)
|
April 29,
2017
|
|
April 30,
2016
|
Net income/(loss)
|
$
|
(180
|
)
|
|
$
|
(68
|
)
|
Diluted EPS
|
$
|
(0.58
|
)
|
|
$
|
(0.22
|
)
|
Add: Restructuring and management transition charges
(1)
|
220
|
|
|
6
|
|
Add: Primary Pension Plan expense/(income)
(1)
|
(4
|
)
|
|
—
|
|
Add: (Gain)/loss on extinguishment of debt
(1)
|
—
|
|
|
(4
|
)
|
Less: Net gain on sale of non-operating assets
(1)
|
—
|
|
|
(5
|
)
|
Less: Proportional share of net income from joint venture
(1)
|
(1
|
)
|
|
(24
|
)
|
Less: Tax impact resulting from other comprehensive income allocation
(2)
|
(16
|
)
|
|
(2
|
)
|
Adjusted net income/(loss) (non-GAAP)
|
$
|
19
|
|
|
$
|
(97
|
)
|
Adjusted diluted EPS (non-GAAP)
|
$
|
0.06
|
|
|
$
|
(0.32
|
)
|
|
|
(1)
|
Reflects no tax effect due to the impact of the Company's tax valuation allowance.
|
|
|
(2)
|
Represents the net tax benefit that resulted from our other comprehensive income allocation between our Operating loss and Accumulated other comprehensive income.
|
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash generated from operations, available cash and cash equivalents and access to our revolving credit facility. Our cash flows may be impacted by many factors including the economic environment, consumer confidence, competitive conditions in the retail industry and the success of our strategies. We ended the
first
quarter of
2017
with
$363 million
of cash and cash equivalents. As of the end of the
first
quarter of
2017
, based on our borrowing base and amounts reserved for outstanding letters of credit, we had
$2,005 million
available for future borrowings under our revolving credit facility, providing total available liquidity of
$2,368 million
.
The following table provides a summary of our key components and ratios of financial condition and liquidity:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Cash and cash equivalents
|
$
|
363
|
|
|
$
|
415
|
|
Merchandise inventory
|
2,949
|
|
|
2,925
|
|
Property and equipment, net
|
4,437
|
|
|
4,735
|
|
|
|
|
|
Total debt
(1)
|
4,602
|
|
|
4,733
|
|
Stockholders’ equity
|
1,205
|
|
|
1,250
|
|
Total capital
|
5,807
|
|
|
5,983
|
|
Maximum capacity under our credit agreement
|
2,350
|
|
|
2,350
|
|
Cash flow from operating activities
|
(346
|
)
|
|
(394
|
)
|
Free cash flow (non-GAAP)
(2)
|
(293
|
)
|
|
(421
|
)
|
Capital expenditures
(3)
|
83
|
|
|
39
|
|
Ratios:
|
|
|
|
Total debt-to-total capital
(4)
|
79
|
%
|
|
79
|
%
|
Cash-to-total debt
(5)
|
8
|
%
|
|
9
|
%
|
|
|
(1)
|
Total debt includes long-term debt, net of unamortized debt issuance costs, including current maturities, capital leases, financing obligation, note payable and any borrowings under our revolving credit facility.
|
|
|
(2)
|
See “Free Cash Flow” below for a reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure and further information on its uses and limitations.
|
|
|
(3)
|
As of the end of the
first
quarters of
2017
and
2016
, we had accrued capital expenditures of
$38 million
and
$54 million
, respectively.
|
|
|
(4)
|
Total debt divided by total capital.
|
|
|
(5)
|
Cash and cash equivalents divided by total debt.
|
Free Cash Flow (Non-GAAP)
Free cash flow is a key financial measure of our ability to generate additional cash from operating our business and in evaluating our financial performance. We define free cash flow as cash flow from operating activities, less capital expenditures plus the proceeds from the sale of operating assets. Free cash flow is a relevant indicator of our ability to repay maturing debt, revise our dividend policy or fund other uses of capital that we believe will enhance stockholder value. Free cash flow is considered a non-GAAP financial measure under the rules of the SEC. Free cash flow is limited and does not represent remaining cash flow available for discretionary expenditures due to the fact that the measure does not deduct payments required for debt maturities, payments made for business acquisitions or required pension contributions, if any. Therefore, it is important to view free cash flow in addition to, rather than as a substitute for, our entire statement of cash flows and those measures prepared in accordance with GAAP.
The following table sets forth a reconciliation of net cash provided by/(used in) operating activities, the most directly comparable GAAP financial measure, to free cash flow, a non-GAAP financial measure, as well as information regarding net cash provided by/(used in) investing activities and net cash provided by/(used in) financing activities:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($ in millions)
|
April 29,
2017
|
|
April 30,
2016
|
Net cash provided by/(used in) operating activities (GAAP)
|
$
|
(346
|
)
|
|
$
|
(394
|
)
|
Add:
|
|
|
|
Proceeds from sale of operating assets
|
136
|
|
|
12
|
|
Less:
|
|
|
|
Capital expenditures
(1)
|
(83
|
)
|
|
(39
|
)
|
Free cash flow (non-GAAP)
|
$
|
(293
|
)
|
|
$
|
(421
|
)
|
|
|
|
|
Net cash provided by/(used in) investing activities
(2)
|
$
|
61
|
|
|
$
|
(11
|
)
|
Net cash provided by/(used in) financing activities
|
$
|
(239
|
)
|
|
$
|
(80
|
)
|
|
|
(1)
|
As of the end of the
first
quarters of
2017
and
2016
, we had accrued capital expenditures of
$38 million
and
$54 million
, respectively.
|
|
|
(2)
|
Net cash provided by investing activities includes capital expenditures and proceeds from sale of operating assets, which are also included in our computation of free cash flow.
|
Operating Activities
While a significant portion of our sales, profit and operating cash flows have historically been realized in the fourth quarter, our quarterly results of operations may fluctuate significantly as a result of many factors, including seasonal fluctuations in customer demand, product offerings, inventory levels and promotional activity.
Cash flow from operating activities for the
three
months ended
April 29, 2017
improved
$48 million
to an
outflow
of
$346 million
compared to an
outflow
of
$394 million
for the same period in 2016. Our net loss of
$180 million
for the
three
months ended
April 29, 2017
includes significant income and expense items that do not impact operating cash flow including depreciation and amortization, the gain on the sale of assets, restructuring and management transition, benefit plans and stock-based compensation. The overall decrease in cash used in operations for the three month period was primarily due to less merchandise purchases and lower incentive compensation payments.
Cash flows from operating activities for the first
three
months of
2017
also included construction allowances from landlords of $8 million, which funded a portion of our capital expenditures in investing activities.
Merchandise inventory
increased
$24 million
to
$2,949 million
, or
0.8%
, as of the end of the
first
quarter of
2017
compared to
$2,925 million
as of the end of the
first
quarter last year and increased $95 million from year-end 2016. Merchandise accounts payable decreased $102 million as of the end of the
first
quarter of
2017
compared to the corresponding prior year period and decreased $84 million from year end.
Investing Activities
Investing activities through the first
three
months of 2017 resulted in cash
inflow
s of
$61 million
compared to
outflow
s of
$11 million
for the same
three
month period of
2016
.
Cash capital expenditures were
$83 million
for the
three
months ended
April 29, 2017
and were
$39 million
for the
three
months ended
April 30, 2016
. In addition, as of the end of the
first
quarters of
2017
and 2016, we had
$38 million
and
$54 million
, respectively, of accrued capital expenditures. Through the first
three
months of
2017
, capital expenditures related primarily to investments in our store environment and store facility improvements, including investments in 32 Sephora inside JCPenney stores opening in May 2017, and investments in information technology in both our home office and stores. We received construction allowances from landlords of $8 million in the first
three
months of
2017
to fund a portion of the capital expenditures related to store leasehold improvements. These funds are classified as operating activities and have been recorded as deferred rent credits in the Consolidated Balance Sheets and are amortized as an offset to rent expense.
For the
three
months ended
April 30, 2016
capital expenditures related primarily to the opening of 28 Sephora inside JCPenney stores, investments in our store environment and store facility maintenance and investments in information technology in both our home office and stores. We also received construction allowances from landlords of $3 million in the first three months of
2016
.
Full year
2017
capital expenditures are expected to be approximately $400 million net of construction allowances from landlords. Capital expenditures for the remainder of 2017 include accrued expenditures of
$38 million
at the end of the
first
quarter.
Financing Activities
Financing activities for the
three
months ended
April 29, 2017
resulted in an
outflow
of
$239 million
compared to an
outflow
of
$80 million
for the same period last year.
During the first
three
months of 2017, we paid $220 million to retire outstanding debt at maturity and we paid $10 million in required principal payments on outstanding debt and $6 million in required payments on our capital leases, financing obligation and note payable.
Free Cash Flow
Free cash flow for the
three
months ended
April 29, 2017
improved
$128 million
to an
outflow
of
$293 million
compared to an
outflow
of
$421 million
in the same period last year. The year-over-year increase was primarily due to the net gain on the Buena Park, California distribution facility sale and lower incentive compensation payments.
Cash Flow Outlook
For the remainder of
2017
, we believe that our existing liquidity will be adequate to fund our capital expenditures and working capital needs; however, in accordance with our long-term financing strategy, we may access the capital markets opportunistically. We believe that our current financial position will provide us the financial flexibility to support our growth initiatives.
Credit Ratings
Our credit ratings and outlook as of
June 2, 2017
from various credit rating agencies were as follows:
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Corporate
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Outlook
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Fitch Ratings
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B+
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Stable
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Moody’s Investors Service, Inc.
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B1
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Stable
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Standard & Poor’s Ratings Services
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B+
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Positive
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Standard and Poor's Rating Services upgraded our corporate credit rating in March 2017 to B+ from B.
Credit rating agencies periodically review our capital structure and the quality and stability of our earnings. Rating agencies consider, among other things, 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. Downgrades to our long-term credit ratings could result in reduced access to the credit and capital markets and higher interest costs on future financings.
Contractual Obligations and Commitments
Aggregate information about our obligations and commitments to make future payments under contractual or contingent arrangements was disclosed in the
2016
Form 10-K.
Impact of Inflation, Deflation and Changing Prices
We have experienced inflation and deflation related to our purchase of certain commodity products. We do not believe that changing prices for commodities have had a material effect on our Net Sales or results of operations. Although we cannot precisely determine the overall effect of inflation and deflation on operations, we do not believe inflation and deflation have had a material effect on our financial condition or results of operations.
Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations is based upon our unaudited Interim Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements requires us to make estimates and use judgments that affect reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, we evaluate estimates used, including those related to inventory valuation under the retail method, valuation of long-lived assets, estimation of reserves and valuation allowances specifically related to closed stores, insurance, income taxes, litigation and environmental contingencies 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 unaudited Interim Consolidated Financial Statements.
There were no changes to our critical accounting policies during the
three
months ended
April 29, 2017
. For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our
2016
Form 10-K.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Note 2 to the unaudited Interim Consolidated Financial Statements.
Seasonality
While a significant portion of our sales, profit and operating cash flows have historically been realized in the fiscal fourth quarter, our quarterly results of operations may fluctuate significantly as a result of many factors, including seasonal fluctuations in customer demand, product offerings, inventory levels and our promotional activity. The results of operations and cash flows for the
three
months ended
April 29, 2017
are not necessarily indicative of the results for future quarters or the entire year.
Cautionary Statement Regarding Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current view of future events and financial performance. Words such as "expect" and similar expressions identify forward-looking statements, which include, but are not limited to, statements regarding sales, gross margin, selling, general and administrative expenses, earnings, cash flows and liquidity. Forward-looking statements are based only on the Company's current assumptions and views of future events and financial performance. They are subject to known and unknown risks and uncertainties, many of which are outside of the Company's control, that may cause the Company's actual results to be materially different from planned or expected results. Those risks and uncertainties include, but are not limited to, general economic conditions, including inflation, recession, unemployment levels, consumer confidence and spending patterns, credit availability and debt levels, changes in store traffic trends, the cost of goods, more stringent or costly payment terms and/or the decision by a significant number of vendors not to sell us merchandise on a timely basis or at all, trade restrictions, the ability to monetize non-core assets on acceptable terms, the ability to implement our strategic plan including our omnichannel initiatives, customer acceptance of our strategies, our ability to attract, motivate and retain key executives and other associates, the impact of cost reduction initiatives, our ability to generate or maintain liquidity, implementation of new systems and platforms, changes in tariff, freight and shipping rates, changes in the cost of fuel and other energy and transportation costs, disruptions and congestion at ports through which we import goods, increases in wage and benefit costs, competition and retail industry consolidations, interest rate fluctuations, dollar and other currency valuations, the impact of weather conditions, risks associated with war, an act of terrorism or pandemic, the ability of the federal government to fund and conduct its operations, a systems failure and/or security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or Company information, legal and regulatory proceedings and the Company’s ability to access the debt or equity markets on favorable terms or at all. There can be no assurances that the Company will achieve expected results, and actual results may be materially less than expectations. 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. We intend the forward-looking statements in this Quarterly Report on Form 10-Q to speak only as of the date of this report and do not undertake to update or revise projections as more information becomes available.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the normal course of business due to changes in interest rates. Our market risks related to interest rates at
April 29, 2017
are similar to those disclosed in the
2016
Form 10-K.