JCPenney Second Quarter Operating Profit Triples; Sales Momentum Continues into August; Financial Position Strengthened and Cash Flow Trending Positive

Business Wire, August 17, 2004

PLANO, Texas -- J. C. Penney Company, Inc. (NYSE:JCP) reported today that second quarter earnings from continuing operations were $0.23 per share compared to a loss of $0.03 per share last year. Earnings for the quarter benefited from strong department store sales, continued improvement in gross margin, and SG&A leverage.

During the quarter, the Company completed its sale of the Eckerd business. Reflecting sale adjustments and operating losses from this discontinued operation, as discussed below, the Company had modest net income for the quarter.

Allen Questrom, Chairman and Chief Executive Officer said, "I am pleased with second quarter operating results, and our recently announced capital structure repositioning. Our management team is focused on the customer and ensuring we are delivering fashionable, trend-right merchandise assortments that offer quality and value, with the added convenience of our three shopping channels. The sales and earnings trends we have experienced this year clearly demonstrate that we are connecting with the customer."

Questrom added, "Early back-to-school results are exceeding our expectations. A number of external factors, including higher oil prices and concerns over terrorism, could impact future consumer spending patterns, but we remain confident that our third quarter sales and operating profits will improve."

Operating Results

Second quarter operating profit nearly tripled to $156 million compared with $53 million last year, with strong sales, continued improvement in gross margin and expense leverage. Operating profit increased to 4.0 percent of sales, an improvement of 260 basis points. Comparable department store sales increased 7.1 percent. Sales reflect strength in both fashion and basic merchandise, and good customer response to planned marketing events. While Catalog/Internet sales decreased 1.6 percent, its contribution to profit continued to generate solid improvement. Internet sales continue to experience strong growth, increasing over 30 percent for the quarter, and about 40 percent year-to-date.

Gross margin increased by 150 basis points as a percent of sales, reflecting good sell-through of seasonal product, less clearance merchandise and consistent execution. Expenses were leveraged by 110 basis points as a percent of sales.

Discontinued Operations

The second quarter loss from discontinued operations was $71 million, net of taxes, and is comprised of Eckerd's operating loss as well as adjustments to reflect the final terms of the sale.

Financial Condition and Cash Flow

As of July 31, 2004, cash investments were $7.4 billion and include the receipt of gross proceeds from the sale of Eckerd. Long-term debt was $5.1 billion, reflecting the payment of $230 million of long-term debt that matured during the second quarter. With better than planned results in the first half of the year and continued improvement anticipated in the second half, free cash flow for the year is now expected to be positive.

August Sales and Third Quarter Earnings Guidance

August Department Store sales have exceeded expectations during the first two weeks of the period. Operating profit for the quarter is expected to benefit from continued improvement in gross margin and expense leverage. The Company currently anticipates that third quarter earnings from continuing operations will be in the range of $0.35 to $0.40 per share. Earnings guidance has been reduced to reflect the $0.11 per share impact from the previously announced one-time charges related to early debt retirements.

Equity and Debt Reduction Program

In early August, the Company initiated a major equity and debt reduction program utilizing $3.5 billion in net cash proceeds from the sale of Eckerd and $1.1 billion of existing cash balances. To date, the Company has repurchased 1.8 million shares in open market transactions and has taken steps to retire $487 million of long-term debt through early retirements and sinking fund payments, as follows:

--$200 million of 6.0% Debentures Due 2006 (effective interest rate of 13.2%),

--$92 million of 9.75% Sinking Fund Notes Due 2021, and

--$195 million of 8.25% Sinking Fund Notes Due 2022 (including $37.5 million in sinking fund payments)

As previously announced, the Company expects to complete the equity and debt reduction program within the next nine to twelve months.

Senior management will host a live conference call and real-time webcast on Tuesday, Aug. 17, 2004, beginning at 9:30 a.m. EDT. 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 973-935-2035 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 973-341-3080, pin code 4323458. The live webcast may be accessed via JCPenney's Investor Relations website (at JCPenney.net), or on StreetEvents.com (for members) and FullDisclosure.com (for media and individual investors). Replays of the webcast will be available for up to 90 days after the event.