Company Quick10K Filing
Quick10K
JC Penney
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.73 317 $231
10-Q 2019-08-03 Quarter: 2019-08-03
10-Q 2019-05-04 Quarter: 2019-05-04
10-K 2019-02-02 Annual: 2019-02-02
10-Q 2018-11-03 Quarter: 2018-11-03
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-02-03 Quarter: 2018-02-03
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-11-01 Quarter: 2014-11-01
10-Q 2014-08-02 Quarter: 2014-08-02
10-Q 2014-05-03 Quarter: 2014-05-03
10-K 2014-02-01 Annual: 2014-02-01
8-K 2019-08-15 Earnings, Exhibits
8-K 2019-08-06 Exhibits
8-K 2019-07-26 Officers
8-K 2019-07-05 Officers, Exhibits
8-K 2019-05-24 Officers, Shareholder Vote, Exhibits
8-K 2019-05-21 Earnings, Exhibits
8-K 2019-04-16 Officers
8-K 2019-03-25 Officers
8-K 2019-03-12 Officers
8-K 2019-02-28 Earnings, Exhibits
8-K 2019-01-08 Officers
8-K 2018-11-15 Earnings, Exhibits
8-K 2018-10-28 Officers
8-K 2018-10-05 Enter Agreement
8-K 2018-09-29 Officers
8-K 2018-09-25 Officers, Exhibits
8-K 2018-08-16 Earnings, Exhibits
8-K 2018-07-18 Officers
8-K 2018-06-08 Impairments
8-K 2018-05-25 Officers, Shareholder Vote, Exhibits
8-K 2018-05-22 Officers, Other Events, Exhibits
8-K 2018-05-17 Earnings, Exhibits
8-K 2018-03-12 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-08 Other Events, Exhibits
8-K 2018-02-26 Earnings, Officers, Exhibits
8-K 2018-01-24 Officers
TGT Target 55,296
KSS Kohl's 7,649
M Macy's 4,543
BJ BJ's 3,655
OLLI Ollie's Bargain Outlet 3,578
PSMT Pricesmart 1,830
DDS Dillard's 1,618
BIG Big Lots 859
TUES Tuesday Morning 64
FRED Freds 10
JCP 2019-08-03
Part I. Financial Information
Item 1. Unaudited Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.2 jcpexhibit102080319.htm
EX-31.1 jcp-0803201910qexhibit311.htm
EX-31.2 jcp-0803201910qexhibit312.htm
EX-32.1 jcp-0803201910qexhibit321.htm
EX-32.2 jcp-0803201910qexhibit322.htm

JC Penney Earnings 2019-08-03

JCP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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The effective portion of the interest rate swaps' changes in fair values is reported in Accumulated other comprehensive income/(loss) (see Note 11), and the ineffective portion is reported in Net income/(loss).The fair value of our interest rate swaps (see Note 10) are recorded on the unaudited Interim Consolidated Balance Sheets as an asset or a liability.Amounts in Accumulated other comprehensive income/(loss) are reclassified into Net income/(loss) when the related interest payments affect earningsFix a portion of our variable LIBOR-based interest paymentsOn August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those years. Early adoption is permitted, including during an interim period. This new standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement disclosures.20000004000000000In 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. 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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-15274
 jcplogo2a18.jpg
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
26-0037077
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
6501 Legacy Drive
Plano
Texas
 
75024 - 3698
(Address of principal executive offices)
 
(Zip Code)

(972) 431-1000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock of 50 cents par value
JCP
New York Stock Exchange
Preferred Stock Purchase Rights
JCP
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 317,837,111 shares of Common Stock of 50 cents par value, as of August 23, 2019.



J. C. PENNEY COMPANY, INC.
FORM 10-Q
For the Quarterly Period Ended August 3, 2019
INDEX

 
 
 
Page
 
 
 
 

1

Table of Contents

Part I. Financial Information
Item 1. Unaudited Interim Consolidated Financial Statements

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In millions, except per share data)
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Total net sales
$
2,509

 
$
2,762

 
$
4,948

 
$
5,346

Credit income and other
110

 
67

 
226

 
154

Total revenues
2,619

 
2,829

 
5,174

 
5,500

 
 
 
 
 
 
 
 
Costs and expenses/(income):
 
 
 
 
 
 
 
Cost of goods sold (exclusive of depreciation and amortization shown separately below)
1,585

 
1,831

 
3,215

 
3,543

Selling, general and administrative (SG&A)
870

 
880

 
1,726

 
1,706

Depreciation and amortization
137

 
140

 
284

 
281

Real estate and other, net
3

 
12

 
(2
)
 
(6
)
Restructuring and management transition
7

 
2

 
27

 
9

Total costs and expenses
2,602

 
2,865

 
5,250

 
5,533

Operating income/(loss)
17

 
(36
)
 
(76
)
 
(33
)
Other components of net periodic pension cost/(income)
(13
)
 
(19
)
 
(26
)
 
(38
)
(Gain)/loss on extinguishment of debt
(1
)
 

 
(1
)
 
23

Net interest expense
74

 
79

 
147

 
157

Income/(loss) before income taxes
(43
)
 
(96
)
 
(196
)
 
(175
)
Income tax expense/(benefit)
5

 
5

 
6

 
4

Net income/(loss)
$
(48
)
 
$
(101
)
 
$
(202
)
 
$
(179
)
Earnings/(loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.15
)
 
$
(0.32
)
 
$
(0.63
)
 
$
(0.57
)
Diluted
$
(0.15
)
 
$
(0.32
)
 
$
(0.63
)
 
$
(0.57
)
Weighted average shares – basic
319.4

 
315.7

 
318.6

 
314.8

Weighted average shares – diluted
319.4

 
315.7

 
318.6

 
314.8

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.



2

Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
($ in millions)
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Net income/(loss)
$
(48
)
 
$
(101
)
 
$
(202
)
 
$
(179
)
Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Retirement benefit plans
 
 
 
 
 
 
 
Reclassification for amortization of prior service (credit)/cost (1)
2

 
1

 
4

 
2

Cash flow hedges
 
 
 
 
 
 
 
Gain/(loss) on interest rate swaps (2)
(28
)
 

 
(39
)
 
5

Reclassification for periodic settlements (3)
(2
)
 

 
(4
)
 

Total other comprehensive income/(loss), net of tax
(28
)
 
1

 
(39
)
 
7

Total comprehensive income/(loss), net of tax
$
(76
)
 
$
(100
)
 
$
(241
)
 
$
(172
)

(1)
Net of $0 million of tax in each of the three and six months ended August 3, 2019 and net of $(1) million and $(2) million of tax in the three and six months ended August 4, 2018, respectively. Pre-tax amounts of $2 million and $4 million in each of the three and six months ended August 3, 2019 and August 4, 2018, respectively, were recognized in Other components of net periodic pension cost/(income) in the unaudited Interim Consolidated Statements of Operations.
(2)
Net of $0 million of tax in each of the three and six months ended August 3, 2019 and net of $(1) million of tax in the six months ended August 4, 2018.
(3)
Net of $0 million of tax in each of the three and six months ended August 3, 2019. Pre-tax amounts of $(2) million and $(4) million for the three and six months ended August 3, 2019, respectively, were recognized in Net interest expense in the unaudited Interim Consolidated Statements of Operations.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


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Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
 
August 3,
2019
 
August 4,
2018
 
February 2,
2019
(In millions, except per share data)
(Unaudited)
 
(Unaudited)
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash in banks and in transit
$
163

 
$
171

 
$
109

Cash short-term investments
12

 
11

 
224

Cash and cash equivalents
175

 
182

 
333

Merchandise inventory
2,471

 
2,824

 
2,437

Prepaid expenses and other
275

 
221

 
189

Total current assets
2,921

 
3,227

 
2,959

Property and equipment (net of accumulated depreciation of $3,167, $3,293 and $3,425)
3,591

 
4,058

 
3,938

Operating lease assets
925

 

 

Prepaid pension
166

 
87

 
147

Other assets
657

 
686

 
677

Total Assets
$
8,260

 
$
8,058

 
$
7,721

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Merchandise accounts payable
$
878

 
$
910

 
$
847

Other accounts payable and accrued expenses
970

 
1,025

 
995

Current operating lease liabilities
82

 

 

Current portion of finance leases and note payable
2

 
7

 
8

Current maturities of long-term debt
197

 
42

 
92

Total current liabilities
2,129

 
1,984

 
1,942

Noncurrent operating lease liabilities
1,089

 

 

Long-term finance leases and note payable
1

 
208

 
204

Long-term debt
3,589

 
3,960

 
3,716

Deferred taxes
121

 
144

 
131

Other liabilities
368

 
546

 
558

Total Liabilities
7,297

 
6,842

 
6,551

Stockholders’ Equity
 
 
 
 
 
Common stock(1)
159

 
157

 
158

Additional paid-in capital
4,719

 
4,709

 
4,713

Reinvested earnings/(accumulated deficit)
(3,601
)
 
(3,297
)
 
(3,373
)
Accumulated other comprehensive income/(loss)
(314
)
 
(353
)
 
(328
)
Total Stockholders’ Equity
963

 
1,216

 
1,170

Total Liabilities and Stockholders’ Equity
$
8,260

 
$
8,058

 
$
7,721


(1)
1.25 billion shares of common stock are authorized with a par value of $0.50 per share. The total shares issued and outstanding were 317.7 million, 314.8 million and 316.1 million as of August 3, 2019August 4, 2018 and February 2, 2019, respectively.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


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Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In millions)
Number of Common Shares
 
Common Stock
 
Additional Paid-in Capital
 
Reinvested Earnings/(Accumulated Deficit)
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
February 2, 2019
316.1


$
158

 
$
4,713

 
$
(3,373
)
 
$
(328
)
 
$
1,170

ASC 842 (Leases) and ASU 2018-02 (Stranded Taxes) adoption (See Note 2)

 

 

 
(26
)
 
53

 
27

Net income/(loss)

 

 

 
(154
)
 

 
(154
)
Other comprehensive income/(loss)

 

 

 

 
(11
)
 
(11
)
Stock-based compensation and other
0.7

 

 
2

 

 

 
2

May 4, 2019
316.8

 
$
158

 
$
4,715

 
$
(3,553
)
 
$
(286
)
 
$
1,034

Net income/(loss)

 

 

 
(48
)
 

 
(48
)
Other comprehensive income/(loss)

 

 

 

 
(28
)
 
(28
)
Stock-based compensation and other
0.9

 
1

 
4

 

 

 
5

August 3, 2019
317.7

 
$
159

 
$
4,719

 
$
(3,601
)
 
$
(314
)
 
$
963


(In millions)
Number of Common Shares
 
Common Stock
 
Additional Paid-in Capital
 
Reinvested Earnings/(Accumulated Deficit)
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
February 3, 2018
312.0

 
$
156

 
$
4,705

 
$
(3,118
)
 
$
(360
)
 
$
1,383

Net income/(loss)

 

 

 
(78
)
 

 
(78
)
Other comprehensive income/(loss)

 

 

 

 
6

 
6

Stock-based compensation and other
2.3

 
1

 
3

 

 

 
4

May 5, 2018
314.3

 
$
157

 
$
4,708

 
$
(3,196
)
 
$
(354
)
 
$
1,315

Net income/(loss)

 

 

 
(101
)
 

 
(101
)
Other comprehensive income/(loss)

 

 

 

 
1

 
1

Stock-based compensation and other
0.5

 

 
1

 

 

 
1

August 4, 2018
314.8

 
$
157

 
$
4,709

 
$
(3,297
)
 
$
(353
)
 
$
1,216

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


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Table of Contents

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
($ in millions)
August 3,
2019
 
August 4,
2018
Cash flows from operating activities
 
 
 
Net income/(loss)
$
(202
)
 
$
(179
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
 
 
 
Restructuring and management transition
17

 
(3
)
Asset impairments and other charges

 
52

Net (gain)/loss on sale of non-operating assets
(1
)
 

Net (gain)/loss on sale of operating assets
3

 
(57
)
(Gain)/loss on extinguishment of debt
(1
)
 
23

Depreciation and amortization
284

 
281

Benefit plans
(29
)
 
(37
)
Stock-based compensation
6

 
6

Deferred taxes

 
(1
)
Change in cash from:
 
 
 
Inventory
(34
)
 
(21
)
Prepaid expenses and other
(82
)
 
(21
)
Merchandise accounts payable
31

 
(63
)
Accrued expenses and other
9

 
(115
)
Net cash provided by/(used in) operating activities
1

 
(135
)
Cash flows from investing activities
 
 
 
Capital expenditures
(146
)
 
(221
)
Net proceeds from sale of non-operating assets
1

 

Net proceeds from sale of operating assets
12

 
121

Net cash provided by/(used in) investing activities
(133
)
 
(100
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt

 
400

Proceeds from borrowings under the credit facility
946

 
2,258

Payments of borrowings under the credit facility
(946
)
 
(2,081
)
Premium on early retirement of debt

 
(20
)
Payments of finance leases and note payable
(1
)
 
(4
)
Payments of long-term debt
(26
)
 
(586
)
Financing costs

 
(7
)
Proceeds from stock issued under stock plans
1

 
2

Tax withholding payments for vested restricted stock

 
(3
)
Net cash provided by/(used in) financing activities
(26
)
 
(41
)
Net increase/(decrease) in cash and cash equivalents
(158
)
 
(276
)
Cash and cash equivalents at beginning of period
333

 
458

Cash and cash equivalents at end of period
$
175

 
$
182

 
 
 
 
Supplemental cash flow information
 
 
 
Income taxes received/(paid), net
$
(6
)
 
$
(5
)
Interest received/(paid), net
(139
)
 
(145
)
Supplemental non-cash investing and financing activity
 
 
 
Increase/(decrease) in other accounts payable related to purchases of property and equipment and software
(15
)
 
(20
)
Remeasurement of leased assets and lease obligations
52

 


See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

6

Table of Contents

J. C. PENNEY COMPANY, INC.
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 February 2, 2019 (2018 Form 10-K). We follow 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 2018 Form 10-K. The February 2, 2019 financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2018 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 August 3, 2019” and “second quarter of 2019” refer to the 13-week period ended August 3, 2019, and “three months ended August 4, 2018” and “second quarter of 2018” refer to the 13-week period ended August 4, 2018. "Six months ended August 3, 2019" and "six months ended August 4, 2018" refer to the 26-week periods ended August 3, 2019 and August 4, 2018, respectively. Fiscal years 2019 and 2018 contain 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.

2. Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) Topic 842, Leases (Topic 842), a replacement of Leases (Topic 840) and updated by various targeted improvements, which requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The Company adopted the provisions of the new lease standard effective February 3, 2019, using the modified retrospective adoption method and the simplified transition option available in the new lease standard. This allows us to continue to apply the legacy guidance in the old standard (ASC Topic 840, Leases (ASC 840)), including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company also elected the package of practical expedients available under the transition provisions of the new lease standard, which include a) not reassessing ASC 840 evaluations on whether expired or existing contracts contain leases, b) not reassessing lease classification, under ASC 840, and c) not revaluing initial direct costs for existing leases under ASC 840. We also elected the practical expedient to carry forward our historical accounting for any land easements on existing contracts.

In addition, the Company changed the accounting for the failed sale-leaseback of its home office to comply with the new lease standard's guidance for sale-leaseback accounting, and recorded a "day one impairment" of the new right-of-use assets that were included in previously impaired asset groups associated with long-lived assets. Per the transition guidance of the new lease standard, the failed sale-leaseback is considered a valid sale and leaseback that resulted in the removal of the related real

7

Table of Contents

estate assets of $153 million and the financing obligation of $208 million, and the recognition of the $55 million gain on sale in Reinvested earnings/(accumulated deficit). Adoption of the new lease accounting standard also required us to reevaluate the accounting for a $50 million promissory note issued in connection with the sale of the home office. In accordance with previous guidance, the promissory note was not recorded in the Consolidated Balance Sheets and not included in the implied gain on sale, however, under the new guidance, the promissory note is considered variable consideration under ASC 606, Revenue for Contracts with Customers. Accordingly, in transition, the Company did not recognize any amount for the $50 million promissory note, as management assessed the most likely amount of variable consideration to be zero given the associated local real estate market dynamics. In regards to the "day one impairment" charge, the Company evaluated the new right-of-use assets added to certain store asset groups that were previously determined to be impaired. Given the facts and circumstances that were still in existence upon adopting the new lease standard, the Company recorded an approximate $40 million impairment charge to Reinvested earnings/(accumulated deficit) to adjust the net book value of the new right-of-use assets to their fair value.

The following table provides the overall unaudited Interim Consolidated Balance Sheet impact of applying the new lease standard effective as of February 3, 2019. Due to the change in accounting for the Home Office sale-leaseback, there was a change in classification of $5 million and $10 million, respectively, in lease costs from Depreciation and amortization and Net interest expense in the prior year period to Selling, general and administrative expenses in the current year quarter and year-to-date period. There was no significant impact to the Company's unaudited Interim Consolidated Statement of Cash Flows.
 
Balance as of February 3, 2019
($ in millions)
Balances removed under prior accounting
 
Balances added/reclassified under new lease standard
 
Net impact of new lease standard
Prepaid expenses and other
$

 
$
(5
)
 
$
(5
)
Property and equipment
153

 

 
(153
)
Operating lease assets

 
910

 
910

Other assets

 
(7
)
 
(7
)
Total assets
$
153

 
$
898

 
$
745

 
 
 
 
 
 
Other accounts payable and accrued expenses
$
4

 
$

 
$
(4
)
Current operating lease liabilities

 
85

 
85

Current portion of finance leases and note payable
5

 

 
(5
)
Noncurrent operating lease liabilities

 
1,074

 
1,074

Long-term finance leases and note payable
203

 

 
(203
)
Deferred taxes
10

 

 
(10
)
Other liabilities
11

 
(208
)
 
(219
)
Reinvested earnings/(accumulated deficit)
80

 
(53
)
 
27

Total liabilities and stockholders’ equity
$
153

 
$
898

 
$
745



In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This standard allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017 from Accumulated other comprehensive income/(loss) to Reinvested earnings/(accumulated deficit). We adopted ASU 2018-02 on February 3, 2019 and reclassified $53 million (net of federal income tax benefit) of income tax effects of the Tax Act from Accumulated other comprehensive income/(loss) to Reinvested earnings/(accumulated deficit).

3. Effect of New Accounting Standards
On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those years. Early adoption is permitted, including during an interim period. This new standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement disclosures.

8

Table of Contents


4. Leases

We conduct a major part of our operations from leased premises (building or land) that include retail stores, store distribution centers, warehouses, offices and other facilities. Almost all leases include renewal options where we can extend the lease term from one to 50 years or more. We also lease equipment under finance leases for terms of primarily three to five years, and we rent or sublease certain real estate to third parties. Our lease contracts do not contain any purchase options or residual value guarantees.

Accounting Policy Applied in Fiscal 2019
At the lease commencement date, based on certain criteria, we determine if a lease is classified as an operating lease or finance lease and then recognize a right-of-use asset and a lease liability on the Consolidated Balance Sheets for all leases (with the exception of leases that have a term of twelve months or less). The lease liability is measured as the present value of unpaid lease payments measured based on the reasonably certain lease term and corresponding discount rate. The initial right-of-use asset is measured as the lease liability plus certain other costs and is reduced by any tenant allowances collected from the lessor.
Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate and termination penalties. Lease payments do not include variable lease payments other than those that depend on an index or rate or any payments not considered part of the lease (i.e. payment of the lessor’s real estate taxes and insurance). Payments not considered lease payments are expensed as incurred. Some leases require additional payments based on sales and the related contingent rent is recorded as rent expense when the payment is probable. As a policy election, we consider lease payments and all related other payments as one component of a lease.
The reasonably certain lease term includes the non-cancelable lease term and any renewal option periods where we have economically compelling reasons for future exercise.
The discount rate used in our present value calculations is the rate implicit in the lease, when known, or our estimated incremental borrowing rate. Our incremental borrowing rate is estimated based on our secured borrowings and our credit risk relative to the time horizons of other publicly available data points that are consistent with the respective lease term.
Whether an operating lease or a finance lease, the lease liability is amortized over the lease term at a constant periodic interest rate. The right-of-use assets related to operating leases are amortized over the lease term on a basis that renders a straight-line amount of rent expense which encompasses the amortization and interest component of the lease. With the occurrence of certain events, the amortization pattern for an operating asset is adjusted to a straight-line basis over the remaining lease term. The right-of-use asset related to a finance lease is amortized on a straight-line basis over the lease term. Rent on short-term leases is expensed on a straight-line basis over the lease term. When a lease is modified or there is a change in lease term, we assess for any change in lease classification and remeasure the lease liability with a corresponding increase or decrease to the right-of-use asset.
Sale-leasebacks are transactions through which we sell assets and subsequently lease them back. The resulting leases that qualify for sale-leaseback accounting are evaluated and accounted for as an operating lease. A transaction that does not qualify for sale-leaseback accounting as a result of finance lease classification or the failure to meet certain revenue recognition criteria is accounted for as a financing transaction. For a financing transaction, we retain the "sold" assets within property and equipment and record a financing obligation equal to the amount of cash proceeds received. Rental payments under such transactions are recognized as a reduction of the financing obligation and as interest expense using an effective interest method.
Accounting Policy Applied in Fiscal 2018
Our lease accounting policies for lease contracts in fiscal 2018 and prior are disclosed in the 2018 Form 10-K.









9

Table of Contents

Leases
($ in millions)
 
Classification
 
August 3, 2019
Assets
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
925

Finance lease assets
 
Property and equipment
 
1

Total leased assets
 
 
 
$
926

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current operating lease liabilities
 
$
82

Finance
 
Current portion of finance leases and note payable
 
1

Noncurrent
 
 
 
 
Operating
 
Noncurrent operating lease liabilities
 
1,089

Finance
 
Long-term finance leases and note payable
 
1

Total leased liabilities
 
 
 
$
1,173



Lease Cost
 
 
 
 
Three Months Ended
 
Six Months Ended
($ in millions)
 
Classification
 
August 3, 2019
 
August 3, 2019
Operating lease cost
 
Selling, general and administrative expense (SG&A)
 
$
50

 
$
98

Variable lease cost
 
Selling, general and administrative expense (SG&A)
 
32

 
64

Finance lease cost
 
 
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 

 

Interest on lease liabilities
 
Net interest expense
 

 

Rental income
 
Real estate and other, net
 
3

 
5

Net lease cost
 
 
 
$
79

 
$
157



As of August 3, 2019, future lease payments were as follows:
($ in millions)
Operating Leases
 
Finance Leases
 
Total
2019
$
104

 
$

 
$
104

2020
196

 
1

 
197

2021
190

 

 
190

2022
179

 

 
179

2023
173

 

 
173

Thereafter
1,844

 
2

 
1,846

Total lease payments
2,686

 
3

 
2,689

Less: amounts representing interest
(1,515
)
 
(1
)
 
(1,516
)
Present value of lease liabilities
$
1,171

 
$
2

 
$
1,173












10

Table of Contents

Lease term and discount rate are as follows:
 
August 3, 2019
Weighted-average remaining lease term (years)
 
Operating leases
16

Financing leases
8

Weighted-average discount rate
 
Operating leases
11
%
Financing leases
6
%


Other information:
 
Six Months Ended
($ in millions)
August 3, 2019
Cash paid for amounts included in the measurement of these liabilities
 
Operating cash flows from operating leases
102

Operating cash flows from finance leases
1

Financing cash flows from finance leases
1



As determined prior to the adoption of the new lease standard, the future minimum lease payments under operating leases in effect as of February 2, 2019 were as follows:
($ in millions)
 
2019
$
190

2020
178

2021
163

2022
148

2023
135

Thereafter
1,626

Less: sublease income
(43
)
Total minimum lease payments
$
2,397




11

Table of Contents

5. Revenue

Our contracts with customers primarily consist of sales of merchandise and services at the point of sale, sales of gift cards to a customer for a future purchase, customer loyalty rewards that provide discount rewards to customers based on purchase activity, and certain licensing and profit sharing arrangements involving the use of our intellectual property by others.
Revenue includes Total net sales and Credit income and other. Net sales are categorized by merchandise and service sale groupings as we believe it best depicts the nature, amount, timing and uncertainty of revenue and cash flow.

The following table provides the components of Net sales for the three and six months ended August 3, 2019 and August 4, 2018:
 
Three Months Ended
 
Six Months Ended
($ in millions)
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Women’s apparel
$
664

 
26
%
 
$
695

 
25
%
 
$
1,254

 
25
%
 
$
1,309

 
25
%
Men’s apparel and accessories
537

 
21
%
 
563

 
20
%
 
1,015

 
21
%
 
1,063

 
20
%
Women’s accessories, including Sephora
341

 
14
%
 
371

 
13
%
 
690

 
14
%
 
749

 
14
%
Home
246

 
10
%
 
361

 
13
%
 
551

 
11
%
 
715

 
13
%
Children’s, including toys
216

 
9
%
 
241

 
9
%
 
416

 
8
%
 
448

 
8
%
Footwear
194

 
8
%
 
202

 
7
%
 
375

 
8
%
 
391

 
7
%
Jewelry
155

 
6
%
 
151

 
6
%
 
322

 
6
%
 
313

 
6
%
Services and other
156

 
6
%
 
178

 
7
%
 
325

 
7
%
 
358

 
7
%
Total net sales
$
2,509

 
100
%
 
$
2,762

 
100
%
 
$
4,948

 
100
%
 
$
5,346

 
100
%

Credit income and other encompasses the revenue earned from the agreement with Synchrony Financial (Synchrony) associated with our private label credit card and co-branded MasterCard® programs.

The Company has contract liabilities associated with the sales of gift cards and our customer loyalty program.
The liabilities are included in Other accounts payable and accrued expenses in the unaudited Interim Consolidated Balance Sheets and were as follows:
(in millions)
August 3, 2019
 
August 4, 2018
 
February 2, 2019
Gift cards
$
114

 
$
116

 
$
140

Loyalty rewards
63

 
62

 
60

Total contract liability
$
177

 
$
178

 
$
200



Contract liability includes consideration received for gift card and loyalty related performance obligations which have not been satisfied as of a given date.

A rollforward of the amounts included in contract liability for the first six months of 2019 and 2018 are as follows:
(in millions)
2019
 
2018
Beginning balance
$
200

 
$
217

Current period gift cards sold and loyalty reward points earned
182

 
148

Net sales from amounts included in contract liability opening balances
(56
)
 
(59
)
Net sales from current period usage
(149
)
 
(128
)
Ending balance
$
177

 
$
178




12

Table of Contents

6. 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
 
Six Months Ended
(in millions, except per share data)
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Earnings/(loss)
 
 
 
 
 
 
 
Net income/(loss)
$
(48
)
 
$
(101
)
 
$
(202
)
 
$
(179
)
Shares
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic shares)
319.4


315.7

 
318.6

 
314.8

Adjustment for assumed dilution:
 
 
 
 
 
 
 
Stock options, restricted stock awards and warrant

 

 

 

Weighted average shares assuming dilution (diluted shares)
319.4

 
315.7

 
318.6

 
314.8

EPS
 
 
 
 
 
 
 
Basic
$
(0.15
)
 
$
(0.32
)
 
$
(0.63
)
 
$
(0.57
)
Diluted
$
(0.15
)
 
$
(0.32
)
 
$
(0.63
)
 
$
(0.57
)

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
 
Six Months Ended
(Shares in millions)
August 3,
2019
 
August 4,
2018
 
August 3,
2019
 
August 4,
2018
Stock options, restricted stock awards and warrant
24.7

 
25.6

 
23.6

 
27.2



7. Long-Term Debt
($ in millions)
 
August 3, 2019
 
August 4, 2018
 
February 2, 2019
Issue:
 
 
 
 
 
 
8.125% Senior Notes Due 2019
 
$
50

 
$
50

 
$
50

5.65% Senior Notes Due 2020 (1)
 
105

 
110

 
110

2017 Credit Facility (Matures in 2022)
 

 
177

 

2016 Term Loan Facility (Matures in 2023)