JCPenney 2004 Annual Report Download - page 24

J.C. PENNEY COMPANY, INC.2 004 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
retiree prescription drug benefits that are at least actuarially equiva-
lent to those offered under the government sponsored Medicare Part
D. While the provisions of FSP SFAS No. 106-2 were effective in the
Company’s third quarter of 2004, final regulations that define actuar-
ial equivalency were not issued until January 2005. As a result, the
disclosures included in Note 17 do not reflect the potential effects of
the Act, which, due largely to the cap on Company contributions, are
not expected to have a material effect on the Company’s consolidat-
ed financial statements.
In November 2004, the FASB issued SFAS No. 151, “Inventory
Costs – An Amendment of ARB No. 43, Chapter 4.” SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,”
to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage).
SFAS No. 151 is effective for fiscal years beginning after June 15,
2005 and will be early-adopted by the Company in the first quarter
of fiscal 2005. The Company does not expect SFAS No. 151 to have
amaterial impact on the Company.
In December 2004, the FASB issued SFAS No. 123 (revised)
(SFAS No. 123R), "Share-Based Payment." SFAS No. 123R will elim-
inate the ability to account for share-based compensation transac-
tions using APB No. 25 and will require instead that compensation
expense be recognized based on the fair value of the award on the
date of grant. Additional footnote disclosures will also be required.
While the Company is not required to adopt SFAS No. 123R until the
third quarter of 2005, it has elected to early-adopt the statement
effective January 30, 2005 using the modified prospective method of
application. Under this method, in addition to reflecting compensa-
tion expense for new share-based awards, expense will also be rec-
ognized to reflect the remaining vesting period of awards that had
been included in pro-forma disclosures in prior periods. The
Company estimates that the adoption of SFAS No. 123R in 2005 will
result in a charge of $19 million ($11 million after tax), or $0.05 per
share. The Company will not adjust prior year financial statements
under the optional modified retrospective method of adoption.
On February 7, 2005, the Chief Accountant of the Securities and
Exchange Commission (SEC) issued a letter to the American Institute
of Certified Public Accountants expressing the SEC staff’s views on
certain operating lease accounting issues and their application
under GAAP. As a result, the Company reviewed its accounting for
store leases and leasehold improvements and recorded an $8 mil-
lion pre-tax charge, primarily to synchronize the depreciation periods
of buildings and leasehold improvements with the related lease
terms, including renewal periods that were considered reasonably
assured of occurring. In addition, the Company recorded a $111 mil-
lion balance sheet adjustment at January 29, 2005 to increase
Property and Equipment, Net and establish a deferred rent liability,
included in Other Liabilities in the Company’s Consolidated Balance
Sheet, for the unamortized balance of developer/tenant allowances.
Historically, construction allowances were classified as reductions to
Property and Equipment, Net. The Company has changed its
accounting policies related to lease accounting to be consistent with
the SEC guidance. See Note 1 on page 30.
FISCAL YEAR 2005
In February 2005, management communicated the following guid-
ance for 2005:
•Comparable department store sales are expected to increase
low-single digits for 2005, and Catalog/Internet sales are expected to
increase low-to-mid single digits for the year.
• Earnings from continuing operations are expected to be in the
range of $2.89 to $3.01 per share for 2005, including the impact of
charges related to planned open-market purchases of debt.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
This Annual Report, including the Chairman’s letter, may contain
forward-looking statements made within the meaning of the Private
Securities Litigation Reform Act of 1995, which reflect the Company’s
current view of future events and financial performance. The words
expect, plan, anticipate, believe, intent, should, will and similar
expressions identify forward-looking statements. Any such forward-
looking statements are subject to risks and uncertainties 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, the risks and uncertainties set forth on pages
15-18, competition, consumer demand, seasonality, economic con-
ditions, including gasoline prices, changes in management, retail
industry consolidations, acts of terrorism or war and government
activity. In addition, the Company typically earns a disproportionate
share of its operating income in the fourth quarter due to holiday buy-
ing patterns, which are difficult to forecast with certainty. While the
Company believes that its assumptions are reasonable, it cautions
that it is impossible to predict the impact of such factors that could
cause actual results to differ materially from predicted results. The
Company intends the forward-looking statements in this Annual
Report to speak only at the time of its release and does not under-
take to update or revise these projections as more information
becomes available.