JCPenney First Quarter Earnings Per Share Increase 66 Percent; Operating Profit Increases 37 Percent to 7.5 Percent of Sales; Business Fundamentals Continue to Improve

Business Wire, May 17, 2005

PLANO, Texas -- J. C. Penney Company, Inc. (NYSE:JCP) first quarter earnings per share from continuing operations increased 66 percent to $0.63 per share from $0.38 per share in last year's period. On a dollar basis, income from continuing operations increased to $172 million from $118 million last year. Earnings per share increased primarily as the result of continued improvement in sales productivity, growth in gross margin and leverage of SG&A expenses, and also benefited from the company's ongoing stock buyback program. Net income for the quarter was $0.63 per share compared to $0.13 per share last year.

Myron E. (Mike) Ullman, III, Chairman and Chief Executive Officer said, "Our first quarter performance demonstrates that the fundamentals of our business continue to improve, driven by the positive response of the moderate customer to our merchandise, marketing and shopping experience initiatives. Operating profit increased significantly, and we are pleased that despite difficult comparisons to last year, we delivered increased sales."

Ullman added, "Our vision is to become the preferred shopping choice for middle America, a customer segment that continues to show that it is resilient and rewards retailers that meet or exceed customers' expectations. We believe that we have identified the initiatives that can make this vision a reality and have the team in place to execute our recently announced 2005 to 2009 Long-Range Plan. Our Plan is focused on making an emotional connection with the customer, creating an easy and exciting shopping environment, becoming a leader in performance and execution, and making JCPenney a great place to work -- and we believe it will drive continued growth for the company."

Operating Results

During the first quarter, sales were at the high end of guidance. Comparable department store sales increased 3.0 percent on top of a 9.5 percent increase in last year's first quarter, while total department store sales increased 3.7 percent. Improvement in sales was broad-based, with increases in all merchandise divisions and all regions of the country. Catalog/Internet sales increased 5.4 percent on top of a 6.5 percent increase last year. Internet sales increased approximately 35 percent for the quarter as we continue to attract new, younger customers to jcpenney.com.

For the first quarter, gross margin improved by 120 basis points, to 41.3 percent of sales, reflecting continued benefits of the company's centralized business model, including: improved merchandise assortments, better initial merchandise allocations and replenishment, and improved seasonal transitions and clearance. SG&A expenses increased 2.2 percent on a dollar basis and were leveraged, declining by 60 basis points as a percent of sales. SG&A expenses include a charge of $19 million, or approximately $0.05 per share, related to the expensing of employee stock options. This charge reflects the early adoption of the final accounting rules to recognize compensation expense over the employee service period, which is the earlier of the retirement eligibility date or the normal vesting period.

First quarter operating profit was $313 million or 7.5 percent of sales, compared with $229 million, or 5.7 percent of sales, last year. This represents an increase of nearly 37 percent, or 180 basis points as a percent of sales.

Other Charges and Credits

The company reported $22 million of income as real estate and other, principally related to a gain from the sale of real estate. In addition, during the quarter, the company incurred pre-tax charges of $13 million related to the repurchase of debt in open market transactions. Net interest expense was $53 million during the quarter, which was better than original expectations, and benefited from increased cash balances throughout the quarter and higher short-term interest rates on cash investments.

Financial Condition

JCPenney's financial condition remains strong. As of April 30, 2005, the company had cash investments of $4.1 billion, which will be reduced over the balance of the year as the capital structure repositioning program is completed. Long-term debt totaled $3.7 billion, including $264 million of current maturities. Free cash flow for the quarter was a negative $106 million, which was in line with expectations. The company continues to expect to generate about $100 million of positive free cash flow for the full year.

Capital Structure Repositioning

During the first quarter, the company repurchased 7.7 million shares of its common stock. Since inception of the capital structure repositioning program in August 2004, the company has repurchased approximately 58 million shares for $2.3 billion, or about 60 percent of the $3.75 billion authorized under the program. The company continues to expect to complete the program by the end of 2005. In addition, the company purchased $194 million of long-term debt in open market transactions during the first quarter. The company has authorization to repurchase an additional $56 million of its long-term debt.