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J. C. PENNEY COMPANY, INC.
2002 ANNUAL REPORT

Table of contents

  • Page 1
    J . C . P E N N E Y C O M PA N Y, I N C . 2002 ANNUAL REPORT

  • Page 2
    J . C . P E N N E Y C O M PA N Y, I N C .

  • Page 3
    ... department stores, located throughout the United States, as well as Puerto Rico and Mexico. Virtually all store locations have catalog desks. JCPenney Catalog, including the Company's web site, jcpenney.com, is the nation's largest catalog merchant of general merchandise. The Company also operates...

  • Page 4
    ...of fashionable, trend-right merchandise packed with value and made improvements on in-stock coverage for advertised items. The merchandise support group opened 10 of 13 new store support centers in 2002, as planned. These centers, which service 875 stores, came on line under budget, on schedule, and...

  • Page 5
    ... new and relocated store plan starting in 2003. Two new markets, Phoenix/Tucson and Denver, offer favorable customer demographics. They are: low ratios of pharmacies to population, good income levels and high future growth potential. In existing markets, our plans are to add new store locations...

  • Page 6
    ... customer confidence that JCPenney consistently offers fashion-right, quality merchandise at value prices. The five key drivers of the Company's stated five-year turnaround strategy to improve department stores to competitive levels of profitability are: • to provide competitive, fashionable...

  • Page 7
    ... the name J. C. Penney Company, Inc. All outstanding shares of common and preferred stock were automatically converted into the identical number and type of shares in the Holding Company. Stockholders' ownership interests in the business did not change as a result of the new structure. Shares of...

  • Page 8
    ... point of sale or service. Revenues for catalog and internet sales are recognized at the time of shipment. Commissions earned on sales generated by licensed departments are included as a component of retail sales. For catalog orders shipped to department stores for pickup by customers, the Company...

  • Page 9
    Management's Discussion and Analysis of Financial Condition and Results of Operations service careers; therefore, the income statement effects of pension retirement benefits should follow the same pattern. Accordingly, changes in the pension obligation and the value of pension assets are recognized...

  • Page 10
    ... and asset mix strategy. Targeting the Company's portion of the pension plan's total value at this level is important since cash contributions to the plan utilize capital resources from investors and have an associated cost of capital. The Company made cash contributions to the primary plan annually...

  • Page 11
    ...'s accessories business, particularly handbags, fashion jewelry and fragrance collections. The Company will discontinue most color and treatment lines in department stores and will end its alliance with Avon in 2003. Total department store sales include sales from the Company's international stores...

  • Page 12
    ... to pricing strategies. SG&A expenses increased 1.9% in 2002 due primarily to higher planned advertising, transition costs for the new store support center (SSC) distribution network and higher non-cash pension expense. The new SSC network for department stores is key to the Company's centralization...

  • Page 13
    ... management business. The Company has just completed the second year of its stated three-year turnaround program for the Eckerd drugstore business. The focus has been on developing a strong management team, including key external hires, enhancing product offerings, implementing competitive pricing...

  • Page 14
    ... The primary goal of the Company's strategy is to ensure financial flexibility and access to capital over the turnaround timeframe. This will allow adequate time to restore the profitability of the Company's businesses to competitive levels and to increase capital spending levels to fund both future...

  • Page 15
    ... the Company's current credit ratings and increased volatility in the capital markets generally, management believes a strong cash and liquidity position is an important part of its long-term financing strategy during the remaining years of the turnaround plan. Going 12 J. C. Penney Company, Inc...

  • Page 16
    ... include adjustments to capital expenditure and working capital levels, as necessary, to maintain liquidity and financial flexibility within the parameters of the Company's long-term financing strategy. Dividend Policy JCPenney paid quarterly dividends of $0.125 per share in 2002. The dividend rate...

  • Page 17
    ... structure to ensure financial flexibility and access to capital, at a competitive cost, necessary to accomplish its business strategies. Historically, the Company has targeted a debt-to-capital ratio in the 50% to 55% range, including off-balance sheet debt. Over the remaining turnaround time...

  • Page 18
    Management's Discussion and Analysis of Financial Condition and Results of Operations • For Department Stores and Catalog the primary initiatives have been to improve the merchandise assortments to more fashionable items at value prices, support the offerings with compelling marketing programs, ...

  • Page 19
    ... in the United States; direct-to-customer strategy and other initiatives; anticipated cash flow; general economic conditions, such as higher interest rates and unemployment and normal business uncertainty. In addition, the Company typically earns a disproportionate share of its operating income in...

  • Page 20
    ... balance sheets of J. C. Penney Company, Inc. and Subsidiaries as of January 25, 2003 and January 26, 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended January 25, 2003. These consolidated financial...

  • Page 21
    .../(loss) on sale of discontinued operations (net of income tax of $(34), $(6) and $200) Net income/(loss) Less: preferred stock dividends Net income/(loss) applicable to common stockholders Earnings/(loss) per share from continuing operations: Basic Diluted Earnings/(loss) per share: Basic Diluted...

  • Page 22
    ... long-term debt Deferred taxes Total current liabilities Long-term debt Deferred taxes Other liabilities Total Liabilities Stockholders' Equity Preferred stock, no par value and stated value of $600 per share; authorized, 25 million shares; issued and outstanding, 0.6 million and 0.6 million shares...

  • Page 23
    ... (Loss)/Income(1) Total Stockholders' Equity ($ in millions) January 29, 2000 Net (loss) Unrealized gain on investments Currency translation adjustments Other comprehensive income from discontinued operations Total comprehensive (loss) Dividends declared Common stock issued Preferred stock...

  • Page 24
    ... sale of assets Company contributions to savings and profit sharing plans Benefit plans expense/(income) Vesting of restricted stock awards Deferred taxes Change in cash from: Receivables Sale of drugstore receivables Inventory Pension contribution Prepaid expenses and other assets Accounts payable...

  • Page 25
    ...operating 1,049 JCPenney department stores throughout the United States, Puerto Rico and Mexico, and 54 Renner department stores in Brazil. The Company's Department Store and Catalog business consists of selling family apparel, jewelry, shoes, accessories and home furnishings, and providing services...

  • Page 26
    ... required purchase levels are met. Pre-Opening Expenses Costs associated with the opening of new stores are expensed in the period incurred. Retirement-Related Benefits The Company accounts for its defined benefit pension plans and its non-pension post-retirement benefit plans using actuarial models...

  • Page 27
    ..., "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations. No stock-based employee compensation cost is reflected in net income for stock options, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date...

  • Page 28
    ...are capitalized. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts, with any resulting gain or loss included in net income. Capitalized Software Costs Costs associated with the acquisition or development of software for internal...

  • Page 29
    ... for sale or its fair value less costs to sell. Based on management's ongoing review of the performance of its portfolio of stores and other facilities, impairment losses totalling $76 million were recorded for underperforming department stores in the United States and Mexico and certain catalog and...

  • Page 30
    ... 2002 consolidated statement of operations. Concurrent with the closing, JCP entered into a 15-year strategic marketing arrangement with AEGON, N. V. whereby JCP will receive cash payments based on the marketing and sale of various financial and membership services products to JCPenney customers...

  • Page 31
    ...) Income/(Loss) Average Shares EPS 2002 Income from continuing operations Less: preferred stock dividends Continuing operations - basic Effect of dilutive securities: Stock options and restricted stock units 5% convertible debt Continuing operations - diluted Gain on sale of discontinued operations...

  • Page 32
    ...expenses related to operations and fixed asset accruals. Also included in other is $3 million at year-end 2002 and $4 million at year-end 2001, which represents the remaining balance of a $20 million reserve that was originally established as part of the Company's sale of its proprietary credit card...

  • Page 33
    ...certain department store support centers. The notes, which are secured by the equipment being purchased, mature in 2007, bear interest at rates from 6.35% to 7.33% and are payable in monthly installments. Principal payments of $2 million were made during 2002, resulting in a year-end 2002 balance of...

  • Page 34
    ...both, at the Company's sole discretion. Preferred Stock Purchase Rights In January 2002, in connection with the Holding Company formation, the Board of Directors issued one preferred stock purchase right on each outstanding and future share of common stock. JCP's then-existing rights plan, which was...

  • Page 35
    ... debt Long-term debt Short-term investments Other, net Total $ $ 4 $ 403 (41) 22 388 $ - $ 426 (50) 10 386 $ 13 464 (45) (5) 427 14 LEASES 5,840 $ 48 The Company conducts the major part of its operations from leased premises that include retail stores, catalog fulfillment centers, warehouses...

  • Page 36
    ... funded plan throughout all business and economic cycles. The primary pension plan is well diversified with an asset allocation policy that provides for a 70%, 20% and 10% mix of equities (U.S., nonU.S. and private), fixed income (investment grade and high yield) and real estate (private and public...

  • Page 37
    ... of taxes charged against stockholders' equity. The prepaid pension cost carried on the Company's balance sheet as of year-end 2002 represents pension funding as well as return on plan assets in excess of pension expense recognized 34 J. C. Penney Company, Inc. 2 0 0 2 a n n u a l r e p o r t

  • Page 38
    ... Company's Savings, Profit Sharing and Stock Ownership Plan were transferred to the new plan. Eckerd provides eligible drugstore associates with a guaranteed match of $1.50 for each $1.00 contributed on the first 2% of pay and a $1.00 for $1.00 Asset impairments, PVOL and other unit closing costs...

  • Page 39
    ... company's corporate and field structure for department stores. Incremental ACT costs over the two-year transition period (2000-2001) totaled $91 million. Including $20 million of capitalized hardware and software costs, total ACT expenditures were $111 million. Beginning in 2002, costs associated...

  • Page 40
    ... loss exposure was developed and the reserve was increased to an amount that the Company believes is adequate to cover estimated potential liabilities. Four of the 10 JCPenney department store support centers (SSCs) are operated by outside service providers. Two of the three SSCs scheduled to open...

  • Page 41
    ...Department Stores and Catalog Eckerd Drugstores Other Unallocated Total Company 2002 Retail sales, net $ 17,704 Segment operating profit 695 Other unallocated Net interest expense Acquisition amortization Income from continuing operations before income taxes Total assets 10,974 Capital expenditures...

  • Page 42
    .../(loss) from continuing operations(1) Dividends Stockholders' equity Financial position Capital expenditures Total assets Long-term debt, including current maturities Stockholders' equity Other Common shares outstanding at end of year Weighted average common shares: Basic Diluted Number of employees...

  • Page 43
    ...year Renner department stores Total department stores Gross selling space (square feet in millions) Sales ($ in millions) Sales per gross square foot(2) Number of catalog units: Department stores Third party merchants, outlet stores and freestanding sales centers Drugstores Total catalog units Total...

  • Page 44
    ... part of the Company's operations, management believes that this approach is the most realistic view of financial leverage. The more traditional debt-to-capital ratio is presented for comparison purposes. ($ in millions) 2002 2001 2000 Department Stores and Catalog Segment operating profit...

  • Page 45
    ... Securities and Exchange Commission; or (4) in the event a stockholder has made a written comment on such material. CORPORATE CITIZENSHIP Community Relations The Company remains committed to investing in community programs that are important to its customers and its employees. JCPenney's commitment...

  • Page 46
    ... Compliance Program," which may be obtained as indicated on the inside back cover of this Annual Report. Annual Meeting The Company's Annual Meeting of Stockholders will be held at 10:00 a.m. CDT, Friday, May 16, 2003, at the JCPenney Home Office located at 6501 Legacy Drive, Plano, Texas, 75024...

  • Page 47
    ... and operation of certain of the Company's retirement and welfare plans. 4. Member of the Finance Committee. This committee is responsible for reviewing the Company's financial policies, strategies and capital structure. Reference to Proxy Statement For additional information about Company directors...

  • Page 48
    ... your account online at melloninvestor.com Exchange Listing: The New York Stock Exchange Ticker symbol: JCP Web Sites: Shopping and Company information - jcpenney.com Investor relations - jcpenney.net Sales Release Dates for Fiscal 2003 Release Date Sales Period Copies of all SEC filings, including...