JCPenney 2003 Annual Report Download - page 6

J. C. Penney Company, Inc.4
largest increase in the last five years. About half of these stores will
be off-mall. Off-mall locations give us an opportunity to add
stores without having to rely solely on the development of new
malls and provide our moderate customer another convenient
alternative for shopping at JCPenney.
We will also devote our attention to another key priority in
2004: reducing operating expenses without compromising our
level of customer service. Earlier this year, we launched a major ini-
tiative to capture the full benefits of our new centralized business
model by streamlining operations, eliminating redundancies and
moving toward a more competitive cost structure. By the time
this initiative is completed over the next two years, we expect to
achieve savings in excess of $200 million annually.
Catalog and Internet
Our efforts to reposition our Big Book and specialty catalog
business over the past three years have centered on refining the
infrastructure of the business, as well as improving the fashion,
quality and value of our merchandise assortments. These efforts
were rewarded in 2003 with solid sales improvement and a posi-
tive contribution to the Company’s overall results. With an
improved mix of fashionable merchandise at compelling price
points and a corresponding emphasis on value, the JCPenney
Catalog has become more relevant to our customer.
I am especially pleased with the rapid growth of the Internet
channel. The online shopping experience has increasingly become
a favored outlet for a broad group of consumers, both young and
old, and is the fastest growing selling channel for JCPenney.
Whether the measurement is response time or site availability,
jcpenney.com is an industry leader. This performance enhances
our customer’s experience, and leads to one of the highest shop-
per-to-buyer conversion ratios among online retail merchants.
With sales of over $600 million in 2003, we are well on our way to
achieving sales of $1 billion in the next few years.
Our ability to offer broad assortments of appealing merchan-
dise in three channels – any way, time and place our customer
wants to shop – is unparalleled in the retail industry. Our
Catalog/Internet infrastructure provides the flexibility to support
our current business model, as well as the model of an ever-
changing future. We lead the industry in offering shopping solu-
tions for our customers, a leadership position about which we are
justifiably proud.
FINANCIAL CONDITION
The Company’s financial position further strengthened during
2003 and continues to provide the resources to support the
strategic and operational needs of our business. 2003 represent-
ed our fourth consecutive year of generating positive free cash
flow from operations, a significant accomplishment during the
course of a turnaround.
With positive free cash flow and an unsecured debt offering
early in the year, we finished 2003 with almost $3 billion in cash
investments. The ability to maintain strong liquidity and an over-
all financial position that continued to improve, despite a chal-
lenging first half environment, provide evidence that our financing
strategy remains sound.
As we proceed with the divestiture of our drugstore operations,
we expect to use proceeds from such a transaction to further
strengthen the Company’s financial position and capital structure.
Through an appropriate mix of both common stock repurchases
and debt retirements, we will seek to deliver value to our share-
holders and support our long-term objective of improving our
bond credit ratings. Going forward, our financing strategy will
remain focused on preserving both strong liquidity and financial
flexibility as we work to improve the performance of our
Department Store and Catalog/Internet business.
THE FUTURE
At any point in time, prognostication of future events and con-
ditions can always include both good and bad. At JCPenney, we
prefer to see the future in a positive light. Economic indicators,
corporate earnings and consumer confidence have improved
from a year ago. Interest rates are at historical lows, and more
people are finding jobs. Closer to home, last year’s tax reform is
providing increased levels of disposable income for our target
moderate customers.
To continue our turnaround, each step forward must be fol-
lowed by another one. As I mentioned in my remarks last year, our
turnaround effort is not unlike climbing a mountain. Now, we are
further up the mountain, but the climb is still difficult. Our mer-
chandise offerings, our value equation and our service all continue
to improve, yet we must endeavor to work on every aspect of our
business and to keep our merchandise relevant to our customers.
For 2004 and beyond, we will continue to focus our efforts on
improving execution. We have overcome many of the initial hur-
dles associated with our shift to a centralized business model, and
now superior and consistent execution will be the key to our con-
tinued success. Going forward we must utilize – and maximize –
the resources and new processes that are now in place.
Although the path to restoring competitive profitability in a
turnaround situation is rarely a smooth one, I remain impressed
with the commitment and ingenuity demonstrated by the asso-
ciates in every part of our business. We are progressing toward
completion of a major turnaround that many thought impossible.
For that I must express my sincere gratitude to the entire
JCPenney organization – the associates in this company who,
through their dedication and hard work, are making it happen.
Togeth er, we are determined to reach the summit of this
mountain.
Allen Questrom
Chairman of the Board and
Chief Executive Officer