JCPenney Second Quarter Results Exceed Expectations; Eckerd Operating Profits Double; Financial Condition Remains Strong

Business Wire, August 13, 2002

Business Editors

PLANO, Texas--(BUSINESS WIRE)--Aug. 13, 2002

J. C. Penney Company, Inc. (NYSE:JCP) today reported a second quarter operating loss of $0.05 per share compared with a loss of $0.20 per share in last year's period, before the effects of non-comparable items. Including the effects of non-comparable items, last year's quarterly loss was $0.23 per share.

Allen Questrom, Chairman and Chief Executive Officer, said, "Results for the quarter exceeded the First Call average estimate, with each business contributing to the improvement. In Department Stores and Catalog, operating profits improved from a combination of higher gross margins and expense management initiatives. Despite weaker than expected Department Store sales, gross margin is benefiting from a better buying process under the new centralized merchandising model. Eckerd continues to generate strong operating profits, with better gross margins and expense management. Our financial condition remains strong. After repayment of over $900 million of 2002 debt maturities, we ended the quarter with approximately $2 billion in cash investments."

Questrom added, "The operating plan for the second half of 2002 has taken into consideration the current economic and consumer environment, and the softening of sales towards the end of July. Our outlook for the second half has not changed. We continue to expect operating earnings to be $0.15 to $0.20 per share for the third quarter and $0.90 to $1.00 per share for the full year. We remain confident that the turnaround in Department Stores and Catalog is progressing and that Eckerd will continue to achieve significant improvements in its business."

The following comments discuss segment results before the effects of non-comparable items, which are described on the following page.

Department Stores and Catalog

Second quarter LIFO operating profit was $22 million compared with $11 million in last year's period. Comparable store sales decreased 2.4 percent, with Home and Fine Jewelry generating positive sales gains. The sales decline resulted principally from lower than planned levels of inventory throughout the quarter. Inventories are back on plan, particularly in Back to School categories. While Catalog sales decreased 21.4 percent, changes in policies and programs led to an improvement in its profit contribution. Department Stores and Catalog gross margin increased by 290 basis points as a percent of sales. Gross margin benefited from centralized merchandising and Catalog inventory management. SG&A expenses were well controlled, increasing only 1.3 percent despite planned increases in advertising, pension expense and transition costs for the new distribution network. Expenses for the quarter benefited from reductions in store labor costs and lower Catalog expenses.

Eckerd Drugstores

Second quarter LIFO operating profit more than doubled to $73 million compared with $30 million last year. Operating profit increased by 120 basis points to 2.1 percent of sales. Improvement in Eckerd's operating profit resulted from a combination of comparable store sales growth, gross margin improvement, and leveraging of SG&A expenses. Comparable store sales increased by 6.1 percent during the quarter, with pharmacy sales increasing 8.6 percent and non-pharmacy, or front-end, sales increasing 1.4 percent. Pharmacy sales growth during the quarter was negatively impacted by approximately 180 basis points as a result of higher generic substitution rates. The strongest front-end categories for the quarter were household products, beverages, baby and hygiene products, cosmetics and fragrances, and vitamins. FIFO gross margin for the quarter increased 40 basis points as a percent of sales, and benefited from the shift toward more generic drugs. This year's second quarter includes a LIFO charge of $9 million compared with $14 million last year. SG&A expenses continued to be well controlled and reflect the benefit of cost savings initiatives. As a percent of sales, expenses improved by 60 basis points.

Other Unallocated

Other unallocated in this year's second quarter, which is part of total Company operating income, includes impairment charges for several underperforming department stores. This reflects the Company's ongoing efforts to evaluate the performance of its stores and other assets.

Non-Comparable Items

This year's second quarter includes a $2 million net restructuring credit compared with last year's second quarter net charge of $12 million, or $0.03 per share. Last year's charge consisted of $7 million in restructuring charges; $11 million of net charges, related principally to the centralized merchandising process, that is included in other unallocated; and a net credit of $6 million, principally a pension curtailment gain, that is included in Eckerd's SG&A expense.

Senior management will host a live conference call and real-time webcast on August 13, 2002, beginning at 9:30 a.m. EST. Access to the conference call is open to the press and general public in a listen only mode. To access the conference call, please dial 416/695-5261 and reference the JCPenney Quarterly Earnings Conference Call. The telephone playback will be available for two days beginning approximately two hours after the conclusion of the call by dialing 416/695-6030 and entering the ID code 6308. The live webcast may be accessed via JCPenney's Investor Relations website (at JCPenney.net), or on StreetEvents.com (for members) and companyboardroom.com (for media and individual investors). Replays of the webcast will be available for up to 90 days after the event.