Company Quick10K Filing
Quick10K
JC Penney
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$1.28 316 $405
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-K 2018-02-03 Annual: 2018-02-03
10-Q 2018-02-03 Quarter: 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 2019-05-24 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 2019-01-08 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
SMG Scotts Miracle-Gro 4,970
IRBT Irobot 2,710
SUM Summit Materials 1,820
HONE Harborone Bancorp 613
BCOV Brightcove 364
NTIC Northern Technologies International 119
STKS One Group Hospitality 108
DWSF Morgan Stanley Smith Barney Spectrum Select 0
INNV Innovus Pharmaceuticals 0
SPIN Spine Injury Solutions 0
JCP 2019-05-04
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-10.4 jcp-05x04x201910qexhibit104.htm
EX-31.1 jcp-0504201910qexhibit311.htm
EX-31.2 jcp-0504201910qexhibit312.htm
EX-32.1 jcp-0504201910qexhibit321.htm
EX-32.2 jcp-0504201910qexhibit322.htm

JC Penney Earnings 2019-05-04

JCP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 jcp-05042019x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 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
 jcpenneylogo2a15.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)
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  x 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  x 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  x
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 x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 316,816,776 shares of Common Stock of 50 cents par value, as of May 24, 2019.



J. C. PENNEY COMPANY, INC.
FORM 10-Q
For the Quarterly Period Ended May 4, 2019
INDEX

 
 
 
Page
 
 
 
 

1


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

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
(In millions, except per share data)
May 4,
2019
 
May 5,
2018
Total net sales
$
2,439

 
$
2,584

Credit income and other
116

 
87

Total revenues
2,555

 
2,671

 
 
 
 
Costs and expenses/(income):
 
 
 
Cost of goods sold (exclusive of depreciation and amortization shown separately below)
1,630

 
1,712

Selling, general and administrative (SG&A)
856

 
826

Depreciation and amortization
147

 
141

Real estate and other, net
(5
)
 
(18
)
Restructuring and management transition
20

 
7

Total costs and expenses
2,648

 
2,668

Operating income/(loss)
(93
)
 
3

Other components of net periodic pension cost/(income)
(13
)
 
(19
)
(Gain)/loss on extinguishment of debt

 
23

Net interest expense
73

 
78

Income/(loss) before income taxes
(153
)
 
(79
)
Income tax expense/(benefit)
1

 
(1
)
Net income/(loss)
$
(154
)
 
$
(78
)
Earnings/(loss) per share:
 
 
 
Basic
$
(0.48
)
 
$
(0.25
)
Diluted
$
(0.48
)
 
$
(0.25
)
Weighted average shares – basic
317.7

 
313.9

Weighted average shares – diluted
317.7

 
313.9

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



2


J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 
Three Months Ended
 
($ in millions)
May 4,
2019
 
May 5,
2018
 
Net income/(loss)
$
(154
)
 
$
(78
)
 
Other comprehensive income/(loss), net of tax:
 
 
 
 
Retirement benefit plans
 
 
 
 
Reclassification for amortization of prior service (credit)/cost (1)
2

 
1

 
Cash flow hedges
 
 
 
 
Gain/(loss) on interest rate swaps (2)
(11
)
 
5

 
Reclassification for periodic settlements (3)
(2
)
 

 
Total other comprehensive income/(loss), net of tax
(11
)
 
6

 
Total comprehensive income/(loss), net of tax
$
(165
)
 
$
(72
)
 

(1)
Net of $0 million and $(1) million in tax in the three months ended May 4, 2019 and May 5, 2018, respectively. Pre-tax amounts of $2 million in each of the three months ended May 4, 2019 and May 5, 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 and $(1) million of tax in the three months ended May 4, 2019 and May 5, 2018, respectively.
(3)
Net of $0 million of tax in the three months ended May 4, 2019. Pre-tax amount of $(2) million for the three months ended May 4, 2019, was recognized in Net interest expense in the unaudited Interim Consolidated Statements of Operations.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


3


J. C. PENNEY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
 
May 4,
2019
 
May 5,
2018
 
February 2,
2019
(In millions, except per share data)
(Unaudited)
 
(Unaudited)
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash in banks and in transit
$
160

 
$
170

 
$
109

Cash short-term investments
11

 
11

 
224

Cash and cash equivalents
171

 
181

 
333

Merchandise inventory
2,477

 
2,948

 
2,437

Prepaid expenses and other
287

 
223

 
189

Total current assets
2,935

 
3,352

 
2,959

Property and equipment (net of accumulated depreciation of $3,339, $3,556 and $3,425)
3,669

 
4,200

 
3,938

Operating lease assets
917

 

 

Prepaid pension
156

 
74

 
147

Other assets
665

 
679

 
677

Total Assets
$
8,342

 
$
8,305

 
$
7,721

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Merchandise accounts payable
$
842

 
$
933

 
$
847

Other accounts payable and accrued expenses
925

 
957

 
995

Current operating lease liabilities
84

 

 

Current portion of finance leases and note payable
2

 
7

 
8

Current maturities of long-term debt
92

 
42

 
92

Total current liabilities
1,945

 
1,939

 
1,942

Noncurrent operating lease liabilities
1,082

 

 

Long-term finance leases and note payable
1

 
210

 
204

Long-term debt
3,826

 
4,142

 
3,716

Deferred taxes
119

 
142

 
131

Other liabilities
335

 
557

 
558

Total Liabilities
7,308

 
6,990

 
6,551

Stockholders’ Equity
 
 
 
 
 
Common stock(1)
158

 
157

 
158

Additional paid-in capital
4,715

 
4,708

 
4,713

Reinvested earnings/(accumulated deficit)
(3,553
)
 
(3,196
)
 
(3,373
)
Accumulated other comprehensive income/(loss)
(286
)
 
(354
)
 
(328
)
Total Stockholders’ Equity
1,034

 
1,315

 
1,170

Total Liabilities and Stockholders’ Equity
$
8,342

 
$
8,305

 
$
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 316.8 million, 314.3 million and 316.1 million as of May 4, 2019May 5, 2018 and February 2, 2019, respectively.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


4


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


(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

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


5


J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
($ in millions)
May 4,
2019
 
May 5,
2018
Cash flows from operating activities
 
 
 
Net income/(loss)
$
(154
)
 
$
(78
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
 
 
 
Restructuring and management transition
15

 
(3
)
Asset impairments and other charges

 
1

Net gain on sale of operating assets
(4
)
 
(17
)
(Gain)/loss on extinguishment of debt

 
23

Depreciation and amortization
147

 
141

Benefit plans
(14
)
 
(19
)
Stock-based compensation
2

 
7

Deferred taxes
(3
)
 
(2
)
Change in cash from:
 
 
 
Inventory
(40
)
 
(145
)
Prepaid expenses and other
(98
)
 
(33
)
Merchandise accounts payable
(5
)
 
(40
)
Income taxes
3

 
(3
)
Accrued expenses and other
(54
)
 
(186
)
Net cash provided by/(used in) operating activities
(205
)
 
(354
)
Cash flows from investing activities
 
 
 
Capital expenditures
(71
)
 
(106
)
Net proceeds from sale of operating assets
8

 
39

Net cash provided by/(used in) investing activities
(63
)
 
(67
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt

 
400

Proceeds from borrowings under the credit facility
408

 
977

Payments of borrowings under the credit facility
(290
)
 
(626
)
Premium on early retirement of debt

 
(20
)
Payments of finance leases and note payable
(1
)
 
(2
)
Payments of long-term debt
(11
)
 
(576
)
Financing costs

 
(7
)
Proceeds from stock issued under stock plans

 
1

Tax withholding payments for vested restricted stock

 
(3
)
Net cash provided by/(used in) financing activities
106

 
144

Net increase/(decrease) in cash and cash equivalents
(162
)
 
(277
)
Cash and cash equivalents at beginning of period
333

 
458

Cash and cash equivalents at end of period
$
171

 
$
181

 
 
 
 
Supplemental cash flow information
 
 
 
Income taxes received/(paid), net
$
(2
)
 
$
(4
)
Interest received/(paid), net
(91
)
 
(113
)
Supplemental non-cash investing and financing activity
 
 
 
Increase/(decrease) in other accounts payable related to purchases of property and equipment and software
(18
)
 
(16
)
Remeasurement of leased assets and lease obligations
28

 


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

6


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 May 4, 2019” and “first quarter of 2019” refer to the 13-week period ended May 4, 2019, and “three months ended May 5, 2018” and “first quarter of 2018” refer to the 13-week period ended May 5, 2018. 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 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

7


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 unaudited Interim 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 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 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


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 of primarily three to five year periods, 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 are 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




Leases
($ in millions)
 
Classification
 
May 4, 2019
Assets
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
917

Finance lease assets
 
Property and equipment
 
1

Total leased assets
 
 
 
$
918

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current operating lease liabilities
 
$
84

Finance
 
Current portion of finance leases and note payable
 
1

Noncurrent
 
 
 
 
Operating
 
Noncurrent operating lease liabilities
 
1,082

Finance
 
Long-term finance leases and note payable
 
1

Total leased liabilities
 
 
 
$
1,168


Lease Cost
 
 
 
 
Three Months Ended
($ in millions)
 
Classification
 
May 4, 2019
Operating lease cost
 
Selling, general and administrative expense (SG&A)
 
$
48

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

Finance lease cost
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 

Interest on lease liabilities
 
Net interest expense
 

Rental income
 
Real estate and other, net
 
2

Net lease cost
 
 
 
$
78


As of May 4, 2019, future lease payments were as follows:
($ in millions)
Operating Leases
 
Finance Leases
 
Total
2019
$
156

 
$
1

 
$
157

2020
195

 
1

 
196

2021
187

 

 
187

2022
173

 

 
173

2023
166

 

 
166

Thereafter
1,816

 
2

 
1,818

Total lease payments
2,693

 
4

 
2,697

Less: amounts representing interest
(1,527
)
 
(2
)
 
(1,529
)
Present value of lease liabilities
$
1,166

 
$
2

 
$
1,168










10


Lease term and discount rate are as follows:
 
May 4,
2019
Weighted-average remaining lease term (years)
 
Operating leases
16
Financing leases
1
Weighted-average discount rate
 
Operating leases
11
%
Financing leases
6
%

Other information:
 
Three Months Ended
($ in millions)
May 4,
2019
Cash paid for amounts included in the measurement of these liabilities
 
Operating cash flows from operating leases
51

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


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.


11


The following table provides the components of Net sales for the three months ended May 4, 2019 and May 5, 2018:
 
Three Months Ended
($ in millions)
May 4, 2019
 
May 5, 2018
Women’s apparel
$
590

 
24
%
 
$
614

 
24
%
Men’s apparel and accessories
478

 
20
%
 
500

 
19
%
Women’s accessories, including Sephora
349

 
14
%
 
378

 
15
%
Home
305

 
13
%
 
354

 
14
%
Children’s, including toys
200

 
8
%
 
207

 
8
%
Footwear
181

 
7
%
 
189

 
7
%
Jewelry
167

 
7
%
 
162

 
6
%
Services and other
169

 
7
%
 
180

 
7
%
Total net sales
$
2,439

 
100
%
 
$
2,584

 
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)
May 4, 2019
 
May 5, 2018
 
February 2, 2019
Gift cards
$
121

 
$
124

 
$
140

Loyalty rewards
61

 
71

 
60

Total contract liability
$
182

 
$
195

 
$
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 three 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
78

 
74

Net sales from amounts included in contract liability opening balances
(36
)
 
(38
)
Net sales from current period usage
(60
)
 
(58
)
Ending balance
$
182

 
$
195




12


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
(in millions, except per share data)
May 4,
2019
 
May 5,
2018
Earnings/(loss)
 
 
 
Net income/(loss)
$
(154
)
 
$
(78
)
Shares
 
 
 
Weighted average common shares outstanding (basic shares)
317.7


313.9

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

 

Weighted average shares assuming dilution (diluted shares)
317.7

 
313.9

EPS
 
 
 
Basic
$
(0.48
)
 
$
(0.25
)
Diluted
$
(0.48
)
 
$
(0.25
)
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)
May 4,
2019
 
May 5,
2018
Stock options, restricted stock awards and warrant
22.5

 
29.3


7. Long-Term Debt
($ in millions)
 
May 4, 2019
 
May 5, 2018
 
February 2, 2019
Issue:
 
 
 
 
 
 
8.125% Senior Notes Due 2019
 
$
50

 
$
50

 
$
50

5.65% Senior Notes Due 2020 (1)
 
110

 
110

 
110

2017 Credit Facility (Matures in 2022)
 
118

 
351

 

2016 Term Loan Facility (Matures in 2023)
 
1,572

 
1,614

 
1,583

5.875% Senior Secured Notes Due 2023 (1)
 
500

 
500

 
500

7.125% Debentures Due 2023
 
10

 
10

 
10

8.625% Senior Secured Second Priority Notes Due 2025 (1)
 
400

 
400

 
400

6.9% Notes Due 2026
 
2

 
2

 
2

6.375% Senior Notes Due 2036 (1)
 
388

 
388

 
388

7.4% Debentures Due 2037
 
313

 
313

 
313

7.625% Notes Due 2097
 
500

 
500

 
500

Total debt
 
3,963

 
4,238

 
3,856

Unamortized debt issuance costs
 
(45
)
 
(54
)
 
(48
)
Less: current maturities
 
(92
)
 
(42
)
 
(92
)
Total long-term debt
 
$
3,826

 
$
4,142

 
$
3,716


(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%.

13


As of May 4, 2019, outstanding borrowings under our $2.35 billion senior secured asset-based revolving credit facility (2017 Credit Facility) were $118 million. All borrowings under the 2017 Credit Facility accrue interest at a rate equal to, at the Company’s option, a base rate or an adjusted LIBOR rate plus a spread.
8. 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 a 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 is a hedge, 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 are party to 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. On September 4, 2018 we entered into additional forward interest rate swap agreements with notional amounts totaling $750 million to fix a portion of our variable LIBOR-based interest payments. The forward interest rate swap agreements have a weighted-average fixed rate of 3.135%, have an effective date from May 7, 2020 to May 7, 2025 and have been designated as cash flow hedges.

The fair value of our interest rate swaps are recorded in the unaudited Interim Consolidated Balance Sheets as an asset or a liability (see Note 10) based upon its change in fair values from its effective date. 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). 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.

14


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
 
May 4, 2019
 
May 5, 2018
 
February 2, 2019
 
Balance Sheet Location
 
May 4, 2019
 
May 5, 2018
 
February 2, 2019
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Prepaid expenses and other
 
$
1

 
$

 
$

 
Other accounts payable and accrued expenses
 
$

 
$

 
$

Interest rate swaps
Other assets
 
6

 
16

 
10

 
Other liabilities
 
25

 

 
15

Total derivatives designated as hedging instruments
 
 
$
7

 
$
16

 
$
10

 
 
 
$
25

 
$

 
$
15

9. Restructuring and Management Transition

In the first quarter of 2019, the Company finalized plans to close 18 full-line stores and 9 ancillary home and furniture stores, further aligning the Company's brick-and-mortar presence with its omnichannel network, and enabling capital resources to be reallocated to locations and initiatives that offer the greatest long-term value potential. The planned store closures resulted in a $14 million asset impairment charge for store assets with limited future use and a $1 million severance charge for the expected displacement of store associates.
The components of Restructuring and management transition include:
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 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
May 4, 2019
($ in millions)
May 4,
2019
 
May 5,
2018
 
Home office and stores
$
19

 
$
7

 
$
505

Management transition
1

 

 
265

Other

 

 
186

Total
$
20

 
$
7

 
$
956



15


Activity for the Restructuring and management transition liability for the three months ended May 4, 2019 was as follows:
($ in millions)
Home Office
and Stores
 
Other
 
Total
February 2, 2019
$
16

 
$
2

 
$
18

ASC 842 (Leases) adoption (See Note 2)
(15
)
 

 
(15
)
Charges
6

 
1

 
7

Cash payments
(2
)
 
(3
)
 
(5
)
May 4, 2019
$
5

 
$

 
$
5


10. 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 fair value of our cash flow hedges are valued in the market using discounted cash flow techniques, which use quoted market interest rates in discounted cash flow calculations that 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 stores in 2019, long-lived assets held and used with a carrying value of $22 million were written down to their fair value of $8 million, resulting in asset impairment charges of $14 million in the first quarter of 2019. Additionally, in connection with the adoption of the new lease accounting standard, right-of-use assets of $58 million were written down to their fair value of $19 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: 
 
May 4, 2019
 
May 5, 2018
 
February 2, 2019
($ in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt, excluding unamortized debt issuance costs, finance leases and note payable
$
3,963

 
$
2,833

 
$
4,238

 
$
3,712

 
$
3,856

 
$
2,579

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 May 4, 2019May 5, 2018 and February 2, 2019, 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.


16


11. Accumulated Other Comprehensive Income/(Loss)

The following tables show the changes in accumulated other comprehensive income/(loss) balances for the three months ended May 4, 2019 and the three months ended May 5, 2018:
($ in millions)
Net  Actuarial
Gain/(Loss)
 
Prior Service
Credit/(Cost)
 
Foreign Currency Translation
 
Gain/(Loss) on Cash Flow Hedges
 
Accumulated
Other
Comprehensive
Income/(Loss)
February 2, 2019
$
(290
)
 
$
(22
)
 
$
(1
)
 
$
(15
)
 
$
(328
)
ASU 2018-02 (Stranded Taxes) adoption (See Note 2)
46

 
3

 

 
4

 
53

Other comprehensive income/(loss) before reclassifications

 

 

 
(11
)
 
(11
)
Amounts reclassified from accumulated other comprehensive income

 
2

 

 
(2
)
 

May 4, 2019
$
(244
)
 
$
(17
)
 
$
(1
)
 
$
(24
)
 
$
(286
)

($ in millions)
Net  Actuarial
Gain/(Loss)
 
Prior Service
Credit/(Cost)
 
Foreign Currency Translation
 
Gain/(Loss) on Cash Flow Hedges
 
Accumulated
Other
Comprehensive
Income/(Loss)
February 3, 2018
$
(330
)
 
$
(26
)
 
$

 
$
(4
)
 
$
(360
)
Other comprehensive income/(loss) before reclassifications

 

 

 
5

 
5

Amounts reclassified from accumulated other comprehensive income

 
1

 

 

 
1

May 5, 2018
$
(330
)
 
$
(25
)
 
$

 
$
1

 
$
(354
)

12. Retirement Benefit Plans
The components of net periodic pension expense/(income) for our non-contributory qualified defined benefit pension plan and supplemental pension plans were as follows:
 
Three Months Ended
 
($ in millions)
May 4,
2019
 
May 5,
2018
 
Service cost
$
7

 
$
9

 
 
 
 
 
 
Other components of net periodic pension cost/(income):
 
 
 
 
Interest cost
33

 
35

 
Expected return on plan assets
(48
)
 
(56
)
 
Amortization of prior service cost/(credit)
2

 
2

 
 
(13
)
 
(19
)
 
Net periodic pension expense/(income)
$
(6
)
 
$
(10
)
 

Service cost is included in SG&A in the unaudited Interim Consolidated Statements of Operations.
13. 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.

17



The composition of Real estate and other, net was as follows:
 
Three Months Ended
 
($ in millions)
May 4,
2019
 
May 5,
2018
 
Net gain from sale of operating assets
$
(4
)
 
$
(17
)
 
Other
(1
)
 
(1
)
 
Total expense/(income)
$
(5
)
 
$
(18
)
 

Net Gain from Sale of Operating Assets
During the first quarter of 2018, we completed the sale of our Milwaukee, Wisconsin distribution facility for a net sale price of $30 million and recognized a net gain of $12 million.

14. Income Taxes
The net tax expense of $1 million for the three months ended May 4, 2019 consisted of federal, state and foreign tax expenses of $2 million, $1 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets and a $2 million benefit due to the release of valuation allowance.
As of May 4, 2019, we have approximately $2.2 billion of net operating losses (NOLs) available for U.S. federal income tax purposes, which largely expire in 2032 through 2034; $274 million of federal unused interest deductions that do not expire; and $69 million of tax credit carryforwards that expire at various dates through 2037. Additionally, we have state NOLs that are subject to various limitations and expiration dates beginning in 2019 through 2040 and are offset fully by valuation allowances. A valuation allowance of $576 million fully offsets the federal deferred tax assets resulting from the NOL, unused interest deductions and tax credit carryforwards that expire at various dates through 2037. A valuation allowance of $249 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2037. 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 three months ended May 4, 2019, the valuation allowance net increase of $23 million consisted of $35 million to offset the net deferred tax assets created in the quarter primarily due to the increase in NOL carryforwards, $3 million which offsets the tax benefit attributable to the loss recorded in Other comprehensive income/(loss), offset by a $15 million benefit related to lease accounting.
15. Litigation and Other Contingencies
Litigation

Shareholder Derivative Litigation

On October 19, 2018, a shareholder of the Company, Juan Rojas, filed a shareholder derivative action against certain present and former members of the Company’s Board of Directors in the Delaware Court of Chancery. The Company is named as a nominal defendant. The lawsuit asserts claims for breaches of fiduciary duties based on alleged failures to prevent the Company from engaging in allegedly unlawful promotional pricing practices. 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.

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, 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.

18


Contingencies
As of May 4, 2019, we have an estimated accrual of $19 million related to potential environmental liabilities that is recorded in Other accounts payable and accrued expenses and Other liabilities in the unaudited Interim Consolidated Balance Sheet. This estimate covered potential liabilities primarily related to underground storage tanks and remediation of environmental conditions involving our former drugstore locations. 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 estimated amount, we do not believe that such losses would have a material effect on our financial condition, results of operations, liquidity or capital resources.
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 February 2, 2019, 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 Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019 (2018 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.

Current Initiatives

With the development of a new senior leadership team, management is in the process of reassessing strategies and evaluating the transformational needs of the business. Our immediate actions to reestablish the fundamentals of retail include the following initiatives:

Reducing and enhancing our inventory position;
Strengthening our integrated omnichannel strategy;
Redesigning and improving core store processes;
Improving our shrink results; and
Revamping our merchandise assortments and strategies.

First, we are continuing our efforts to reduce and enhance our inventory position. For the first quarter of 2019, inventory was reduced by 16% and we have increased our sell through rates within all of our merchandise divisions.

Second, we are continuing to strengthen our integrated omnichannel strategy to return to growth in our digital channels, in a sustainable and profitable way. In the first quarter of 2019, we removed over 300,000 units of unproductive and unprofitable vendor fulfilled merchandise from our website, with almost no impact to our online sales profitability.

Third, we are redesigning and improving core store processes while implementing enhanced technology tools to better equip our store associates to deliver on our customers' expectations. In the first quarter of 2019, we launched a new checkout process to streamline tasks and enhance the customer experience, which is translating into a quicker checkout time for our customers. We are also in the process of testing in select stores a new centralized pick-up and returns process with plans to expand the concept to approximately 500 stores during the second quarter of 2019.


19


Fourth, we are taking immediate action to improve our shrink results. We have made technology investments and staffing adjustments which have shown improvements in our inventory shrink results during the first quarter of 2019.

Lastly, we will continue to revamp and rethink our merchandise assortments and strategies. In the first quarter of 2019, we discontinued selling major appliances in an effort to improve financial performance and refocus on our legacy strengths in apparel and soft home as well as other profitable growth opportunities. We are also leveraging our best-in-class global sourcing and design organization across our product spectrum to enhance the style and quality we deliver, but also to improve profitability within our assortment.


First Quarter Overview
 
Total net sales were $2,439 million with a total net sales decrease of 5.6% compared to the first quarter of 2018 and a comparable store sales decrease of 5.5%.

Credit income and other was $116 million compared to $87 million in last year's first quarter. The increase was due to increased gain share resulting from improved performance of the credit portfolio.

Cost of goods sold, which excludes depreciation and amortization, as a percentage of Total net sales increased to 66.8% compared to 66.3% in the same period last year. The increase as a rate of sales was primarily driven by the negative impact from the liquidation of major appliance and furniture floor model inventory, offset partially by an improvement in both store and online non-clearance selling margins.

Selling, general and administrative (SG&A) expenses as a percentage of Total net sales increased to 35.1% for the first quarter of 2019 as compared to 32.0% for the same period last year. Last year, SG&A included approximately $40 million in expense offsets related to the sale of a leasehold interest as well as the reversal of previously accrued risk insurance reserves. Additionally, due to the implementation of the new lease accounting standard, approximately $5 million in expenses for the first quarter related to the Company's home office lease, which were previously classified as interest and depreciation, are now included in SG&A.

Our net loss was $154 million, or ($0.48) per share, compared to a net loss of $78 million, or ($0.25) 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:

$20 million, or ($0.06) per share, of restructuring and management transition charges; and
$13 million, or $0.04 per share, for other components of net periodic pension income.

Adjusted net loss (non-GAAP) was $147 million, or ($0.46) per share, compared to an adjusted net loss (non-GAAP) of $69 million, or ($0.22) per share, in last year's first quarter. See the reconciliation of net income/(loss) and diluted EPS, the most directly comparable generally accepted accounting principles (GAAP) financial measures, to adjusted net income/(loss) (non-GAAP) and adjusted diluted EPS (non-GAAP) on page 26.

Adjusted earnings before interest expense, income tax (benefit)/expense and depreciation and amortization (Adjusted EBITDA) (non-GAAP) was $74 million, a $77 million decline from the same period last year. See the reconciliation of net income/(loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA (non-GAAP) on page 25.

Effective April 8, 2019, the Board of Directors elected Bill Wafford as Chief Financial Officer of the Company.

20


Results of Operations
 
Three Months Ended
($ in millions, except EPS)
May 4,
2019
 
May 5,
2018
Total net sales
$
2,439

 
$
2,584

Credit income and other
116

 
87

Total revenues
2,555

 
2,671

Total net sales increase/(decrease) from prior year
(5.6
)%
 
(4.3
)%
Comparable store sales increase/(decrease) (1)
(5.5
)%
 
0.2
 %
 
 
 
 
Costs and expenses/(income):
 
 
 
Cost of goods sold (exclusive of depreciation and amortization shown separately below)
1,630

 
1,712

Selling, general and administrative
856

 
826

Depreciation and amortization
147

 
141

Real estate and other, net
(5
)
 
(18
)
Restructuring and management transition
20

 
7

Total costs and expenses
2,648

 
2,668

Operating income/(loss)
(93
)
 
3

Other components of net periodic pension cost/(income)
(13
)
 
(19
)
(Gain)/loss on extinguishment of debt

 
23

Net interest expense
73

 
78

Income/(loss) before income taxes
(153
)
 
(79
)
Income tax expense/(benefit)
1

 
(1
)
Net income/(loss)
$
(154
)
 
$
(78
)
Adjusted EBITDA (non-GAAP) (2)
$
74

 
$
151

Adjusted net income/(loss) (non-GAAP) (2)
$
(147
)
 
$
(69
)
Diluted EPS
$
(0.48
)
 
$
(0.25
)
Adjusted diluted EPS (non-GAAP) (2)
$
(0.46
)
 
$
(0.22
)
Ratios as a percent of total net sales:
 
 
 
Cost of goods sold
66.8
 %
 
66.3
 %
SG&A
35.1
 %
 
32.0
 %
Operating income/(loss)
(3.8
)%
 
0.1
 %

(1)
Comparable store sales are presented on a 52-week basis and include sales from all stores, including sales from services, 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” 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.







21


Total Net Sales
 
Three Months Ended
($ in millions)
May 4,
2019
 
May 5,
2018
Total net sales
$
2,439

 
$
2,584

Sales percent increase/(decrease):
 
 
 
Total net sales
(5.6
)%
 
(4.3
)%
Comparable store sales
(5.5
)%
 
0.2
 %

Total net sales decreased $145 million in the first quarter of 2019 compared to the first quarter of 2018.

The following table provides the components of the net sales increase/(decrease): 
 
Three Months Ended
($ in millions)
May 4, 2019
Comparable store sales increase/(decrease)
$
(138
)
Closed stores and other
(7
)
Total net sales increase/(decrease)
$
(145
)
As our omnichannel strategy continues to evolve, 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 the JCPenney app 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 first quarter of 2019, units per transaction and average unit retail increased, while transaction counts decreased as compared to last year.

For the first quarter of 2019, our merchandise divisions that outperformed the total Company sales performance were Jewelry, Children's, Women's Apparel and Men's on a comparable store basis. Geographically, the Midwest and Northeast were the best performing regions of the country during the first quarter.

During the first quarters of 2019 and 2018, private brand merchandise comprised 45% and 48% of total merchandise sales, respectively. Exclusive brand merchandise comprised 7% of total merchandise sales in each of the first quarters of 2019 and 2018.


22


Store Count
The following table compares the number of stores for the three months ended May 4, 2019 and May 5, 2018: 
 
Three Months Ended
 
May 4,
2019
 
May 5,
2018
JCPenney department stores
 
 
 
Beginning of period
864

 
872

Closed stores
(3
)
 
(1
)
End of period (1)
861

 
871

(1)
Gross selling space, including selling space allocated to services and licensed departments, was 95 million square feet as of May 4, 2019 and May 5, 2018.
Credit Income and Other
Our private label credit card and co-branded MasterCard® programs are owned and serviced by Synchrony Financial (Synchrony).  Under our agreement, we receive cash payments from Synchrony based upon the performance of the credit card portfolios.  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. For the first quarters of 2019 and 2018, we recognized income of $116 million and $87 million, respectively, pursuant to our agreement with Synchrony. The increase for the three month period is due to increased income share resulting from the improved performance of the credit card portfolio.

Cost of Goods Sold
Cost of goods sold, exclusive of depreciation and amortization, for the three months ended May 4, 2019 was $1,630 million, a decrease of $82 million compared to $1,712 million for the three months ended May 5, 2018. Cost of goods sold as a percentage of Total net sales was 66.8% for the three months ended May 4, 2019 compared to 66.3% for the three months ended May 5, 2018, an increase of 50 basis points. The increase as a rate of sales for the three month period was primarily driven by the negative impact from the liquidation of major appliance and furniture floor model inventory, offset partially by an improvement in both store and online non-clearance selling margins.
 
SG&A Expenses
For the three months ended May 4, 2019, SG&A expenses were $856 million compared to $826 million in the corresponding period of 2018. SG&A expenses as a percent of Total net sales for the first quarter of 2019 increased to 35.1% compared to 32.0% in the first quarter of 2018. Last year, SG&A included approximately $40 million in expense offsets related to the sale of a leasehold interest as well as the reversal of previously accrued risk insurance reserves. Additionally, due to the implementation of the new lease accounting standard, approximately $5 million in expenses in the first quarter related to the Company's home office lease, which were previously classified as interest and depreciation, are now included in SG&A.
Depreciation and Amortization Expense
Depreciation and amortization expense was $147 million and $141 million for the three months ended May 4, 2019 and May 5, 2018, respectively.
Restructuring and Management Transition
The composition of Restructuring and management transition charges was as follows: 
 
Three Months Ended
($ in millions)
May 4,
2019
 
May 5,
2018
Home office and stores
$
19

 
$
7

Management transition
1

 

Other

 

Total
$
20

 
$
7


During the three months ended May 4, 2019 and May 5, 2018, we recorded $19 million and $7 million, respectively, of costs to reduce our store and home office expenses. Costs during the first three months of 2019 include store impairments related to

23


announced store closures of $14 million, employee termination benefits of $4 million and store related closing costs of $1 million.

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.

The composition of Real estate and other, net was as follows:  
 
Three Months Ended
($ in millions)
May 4,
2019
 
May 5,
2018
Net gain from sale of operating assets
$
(4
)
 
$
(17
)
Other
(1
)
 
(1
)
Total expense/(income)
$
(5
)
 
$
(18
)

During the first quarter of 2018, we completed the sale of our Milwaukee, Wisconsin distribution facility for a net sale price of $30 million and recognized a net gain of $12 million.

Operating Income/(Loss)
For the first quarter of 2019, we reported an operating loss of $93 million compared to operating income of $3 million in the first quarter of 2018.
 
Other Components of Net Periodic Pension Cost/(Income)
Other components of net periodic pension cost/(income) was $(13) million and $(19) million for the three months ended May 4, 2019 and May 5, 2018, respectively.

(Gain)/Loss on Extinguishment of Debt
During the first quarter of 2018, we settled cash tender offers with respect to portions of our outstanding 8.125% Senior Notes Due 2019 (2019 Notes) and 5.65% Senior Notes Due 2020 (2020 Notes), resulting in a loss on extinguishment of debt of $23 million.

Net Interest Expense
Net interest expense for the first quarter of 2019 was $73 million compared to $78 million in the first quarter of 2018. The reduction in net interest expense is primarily due to the change in presentation of lease costs related to the home office.
Income Taxes
The net tax expense of $1 million for the three months ended May 4, 2019 consisted of federal, state and foreign tax expenses of $2 million, $1 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets and a $2 million benefit due to the release of valuation allowance.
As of May 4, 2019, we have approximately $2.2 billion of net operating losses (NOLs) available for U.S. federal income tax purposes, which largely expire in 2032 through 2034; $274 million of federal unused interest deductions that do not expire; and $69 million of tax credit carryforwards that expire at various dates through 2037. A valuation allowance of $576 million fully offsets the federal deferred tax assets resulting from the NOL, unused interest deductions and tax credit carryforwards that expire at various dates through 2037. Additionally, we have state NOLs that are subject to various limitations and expiration dates beginning in 2019 through 2040 and are offset fully by valuation allowances. A valuation allowance of $249 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2037. 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 three months ended May 4, 2019, the valuation allowance net increase of $23 million consisted of $35 million to offset the net deferred tax assets created in the quarter primarily due to the increase in NOL carryforwards, $3 million which offsets the tax benefit attributable to the loss recorded in Other comprehensive income/(loss), offset by a $15 million benefit related to lease accounting.

24


Non-GAAP Financial Measures
We report our financial information in accordance with 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, other components of net periodic pension cost/(income), the (gain)/loss on extinguishment of debt and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps. Unlike other operating expenses, restructuring and management transition charges, other components of net periodic pension cost/(income), the (gain)/loss on extinguishment of debt and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps are not directly related to our ongoing core business operations, which consist of selling merchandise and services to consumers through our department stores and our website at jcpenney.com. Further, our non-GAAP adjustments are for non-operating associated activities such as closed store impairments included in restructuring and management transition charges. Additionally, other components of net periodic pension cost/(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.  We believe it is useful for investors to understand the impact of restructuring and management transition charges, other components of net periodic pension cost/(income), the (gain)/loss on extinguishment of debt and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans 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.

Adjusted EBITDA. The following table reconciles net income/(loss), the most directly comparable GAAP measure, to adjusted EBITDA, which is a non-GAAP financial measure:
 
Three Months Ended
($ in millions)
May 4, 2019
 
May 5, 2018
Net income/(loss)
$
(154
)
 
$
(78
)
Add: Net interest expense
73

 
78

Add: (Gain)/loss on extinguishment of debt

 
23

Add: Income tax expense/(benefit)
1

 
(1
)
Add: Depreciation and amortization
147

 
141

Add: Restructuring and management transition charges
20

 
7

Add: Other components of net periodic pension cost/(income)
(13
)
 
(19
)
Adjusted EBITDA (non-GAAP)
$
74

 
$
151









25


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)
May 4,
2019
 
May 5,
2018
Net income/(loss)
$
(154
)
 
$
(78
)
Diluted EPS
$
(0.48
)
 
$
(0.25
)
Add: Restructuring and management transition charges (1)
20

 
7

Add: Other components of net periodic pension cost/(income) (1)
(13
)
 
(19
)
Add: (Gain)/loss on extinguishment of debt (1)

 
23

Less: Tax impact resulting from other comprehensive income allocation (2)

 
(2
)
Adjusted net income/(loss) (non-GAAP)
$
(147
)
 
$
(69
)
Adjusted diluted EPS (non-GAAP)
$
(0.46
)
 
$
(0.22
)

(1)
Adjustments reflect 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 2019 with $171 million of cash and cash equivalents. As of the end of the first quarter of 2019, based on our borrowing base, our current borrowings and amounts reserved for outstanding letters of credit, we had $1,556 million available for future borrowings under our revolving credit facility, providing total available liquidity of $1,727 million.
The following table provides a summary of our key components and ratios of financial condition and liquidity:
 
 
Three Months Ended
($ in millions)
May 4,
2019
 
May 5,
2018
Cash and cash equivalents
$
171

 
$
181

Merchandise inventory
2,477

 
2,948

Property and equipment, net
3,669

 
4,200

 
 
 
 
Total debt (1)
3,918

 
4,184

Stockholders’ equity
1,034

 
1,315

Total capital
4,952

 
5,499

Maximum capacity under our Revolving Credit Facility
2,350

 
2,350

Cash flow from operating activities
(205
)
 
(354
)
Free cash flow (non-GAAP) (2)
(268
)
 
(421
)
Capital expenditures (3)
71

 
106

Ratios:
 
 
 
Total debt-to-total capital (4)
79
%
 
76
%
Cash-to-total debt (5)
4
%
 
4
%
(1)
Includes long-term debt, net of unamortized debt issuance costs, including current maturities and any borrowings under our revolving credit facility.

26


(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 2019 and 2018, we had accrued capital expenditures of $25 million and $42 million, respectively.
(4)
Total debt and other financing obligations divided by total capital.
(5)
Cash and cash equivalents divided by total debt and other financing obligations.

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)
May 4,
2019
 
May 5,
2018
Net cash provided by/(used in) operating activities (GAAP)
$
(205
)
 
$
(354
)
Add:
 
 
 
Proceeds from sale of operating assets
8

 
39

Less:
 
 
 
Capital expenditures (1)
(71
)
 
(106
)
Free cash flow (non-GAAP)
$
(268
)
 
$
(421
)
 
 
 
 
Net cash provided by/(used in) investing activities (2)
$
(63
)
 
$
(67
)
Net cash provided by/(used in) financing activities
$
106

 
$
144


(1)
As of the end of the first quarters of 2019 and 2018, we had accrued capital expenditures of $25 million and $42 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 flows from operating activities for the three months ended May 4, 2019 improved $149 million to an outflow of $205 million compared to an outflow of $354 million for the same period in 2018. Cash flows used in operating activities were lower than the prior year period primarily due to lower levels of inventory purchases.
Cash flows from operating activities for the first three months of 2019 and 2018 also included construction allowances from landlords of $4 million and $3 million, respectively, which funded a portion of our capital expenditures in investing activities.
Merchandise inventory decreased $471 million, or 16.0%, to $2,477 million as of the end of the first quarter of 2019 compared to $2,948 million as of the end of the first quarter of 2018 and increased $40 million from year-end 2018. Merchandise accounts payable decreased $91 million as of the end of the first quarter of 2019 compared to the corresponding prior year period and decreased $5 million from year end 2018.


27


Investing Activities
Investing activities for the three months ended May 4, 2019 resulted in cash outflows of $63 million compared to outflows of $67 million for the same three month period of 2018.
Cash capital expenditures were $71 million for the three months ended May 4, 2019 and were $106 million for the three months ended May 5, 2018. In addition, as of the end of the first quarters of 2019 and 2018, we had $25 million and $42 million, respectively, of accrued capital expenditures. Through the first three months of 2019, capital expenditures related primarily to investments in our store environment and store facility improvements and investments in information technology in both our home office and stores. We received construction allowances from landlords of $4 million in the first three months of 2019 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 a reduction of operating lease assets in the unaudited Interim Consolidated Balance Sheets.
For the three months ended May 5, 2018, capital expenditures related primarily to investments in our store environment and store facility improvements, including investments in 13 new Sephora inside JCPenney stores and investments in information technology in both our home office and stores. We received construction allowances from landlords of $3 million in the first three months of 2018.
Full year 2019 capital expenditures are expected to be approximately $300 million to $325 million net of construction allowances from landlords. Capital expenditures for the remainder of 2019 include accrued expenditures of $25 million at the end of the first quarter.
Financing Activities
Financing activities for the three months ended May 4, 2019 resulted in an inflow of $106 million compared to an inflow of $144 million for the same period last year. During the first three months of 2019, we had net credit facility borrowings of $118 million and we paid $11 million in required principal payments on outstanding debt and $1 million in required payments on our finance leases and note payable.

During the first quarter of 2018, we issued $400 million aggregate principal amount of senior secured second priority notes due 2025 and incurred $7 million in related issuance costs, paid $395 million to settle cash tender offers with respect to portions of our outstanding 2019 Notes and 2020 Notes and had net credit facility borrowings of $351 million. Additionally, we paid $190 million to retire outstanding debt at maturity, paid $11 million in required principal payments on outstanding debt and $2 million in required payments on our finance leases and note payable.

Free Cash Flow
Free cash flow for the three months ended May 4, 2019 improved $153 million to an outflow of $268 million compared to an outflow of $421 million in the same period last year. The year-over-year improvement was primarily due to lower capital expenditures and a decrease in the volume of inventory purchases.
Cash Flow Outlook
For the remainder of 2019, 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 current initiatives.

Credit Ratings

Our credit ratings and outlook as of May 24, 2019 from various credit rating agencies were as follows:
 
Corporate
 
Outlook
Fitch Ratings
B-
 
Stable
Moody’s Investors Service, Inc.
B3
 
Stable
Standard & Poor’s Ratings Services
CCC+
 
Negative
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.

28


Contractual Obligations and Commitments
Aggregate information about our obligations and commitments to make future payments under contractual or contingent arrangements was disclosed in the 2018 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.

With a sizable portion of our private and national branded apparel sourced from China, we are exposed to potential increases in product costs which may result from increased tariffs imposed by the U.S. government in connection with its trade disputes with China. We expect a minimal impact on our product costs based on the current tariffs that are in effect and have taken actions to diversify our sourcing operations. However, we can expect a more meaningful increase to our product costs if potential additional tariffs go into effect on all Chinese imports and specifically apparel and footwear.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Notes 2 and 3 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 May 4, 2019 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, cost of goods sold, 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.

29


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 May 4, 2019 are similar to those disclosed in the 2018 Form 10-K.
Item 4. Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
In conjunction with the adoption of ASC Topic 842, Leases (Topic 842), a replacement of Leases (Topic 840) and updated by various targeted improvements, the Company enhanced its use of its lease accounting system and modified certain lease accounting processes. This resulted in a material change in a component of the Company's internal control over financial reporting. The operating effectiveness of these process changes will be evaluated as part of the Company's annual assessment of the effectiveness of internal controls over financial reporting.

Except as noted above, there were no changes in our internal control over financial reporting during the first quarter ended May 4, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The matters under the caption "Litigation" in Note 15 of the Notes to the unaudited Interim Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q are incorporated herein by reference.
Item 1A. Risk Factors

There have been no material changes to the risk factors set forth under Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

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Item 6. Exhibits
Exhibit Index 
 
 
 
 
Incorporated by Reference
 
 
Exhibit No.
 
Exhibit Description
 
Form
 
SEC
File No.
 
Exhibit
 
Filing
Date
 
Filed (†)
Herewith
(as indicated)
3.1
 
 
10-Q
 
001-15274
 
3.1
 
6/8/2011
 
 
3.2
 
 
8-K
 
001-15274
 
3.1
 
7/21/2016
 
 
3.3
 
 
8-K
 
001-15274
 
3.1
 
8/22/2013
 
 
10.1
 


 
8-K
 
001-15274
 
10.1
 
3/26/2019
 
 
10.2
 
 
8-K
 
001-15274
 
10.1
 
4/18/2019
 
 
10.3
 

 
8-K
 
001-15274
 
10.2
 
4/18/2019
 
 
10.4