false--02-01FY201900011661260.001As of the end of 2019, the funded status of the Primary Pension Plan was 104%. The Primary Benefit Obligation (PBO) is the present value of benefits earned to date by plan participants, including the effect of assumed future salary increases. Under the Employee Retirement Income Security Act of 1974 (ERISA), the funded status of the plan exceeded 100% as of December 31, 2019 and 2018, the qualified pension plan’s year end.P3YPT1000HInterest Limitation: The Tax Act limits the Company’s interest deduction to 30% of tax earnings before interest, tax, depreciation and amortization beginning in 2018 through 2021. Thereafter, the interest deduction is limited to 30% of tax earnings before interest and taxes. Any disallowed interest in a year becomes a separate deferred tax asset with an indefinite carryforward period that can be utilized by the Company in a future tax year by an amount equal to its interest limitation in excess of its interest expense for that year.As authorized by our Company’s Board of Directors (the Board), on January 27, 2014, the Company entered into an Amended and Restated Rights Agreement (Amended Rights Agreement) with Computershare Inc., as Rights Agent (Rights Agent), amending, restating and replacing the Rights Agreement, dated as of August 22, 2013 (Original Rights Agreement), between the Company and the Rights Agent. Pursuant to the terms of the Original Rights Agreement, one preferred stock purchase right (a Right) was attached to each outstanding share of Common Stock of $0.50 par value of the Company (Common Stock) held by holders of record as of the close of business on September 3, 2013. The Company has issued one Right in respect of each new share of Common Stock issued since the record date. The Rights, registered on August 23, 2013, trade with and are inseparable from our Common Stock and will not be evidenced by separate certificates unless they become exercisable. The purpose of the Amended Rights Agreement is to diminish the risk that the Company's ability to use its net operating losses and other tax assets to reduce potential future federal income tax obligations would become subject to limitations by reason of the Company's experiencing an "ownership change" as defined under Section 382 of the Internal Revenue Code of 1986, as amended (the Code). Ownership changes under Section 382 generally relate to the cumulative change in ownership among stockholders with an ownership interest of 5% or more (as determined under Section 382's rules) over a rolling three year period. The Amended Rights Agreement is intended to reduce the likelihood of an ownership change under Section 382 by deterring any person or group from acquiring beneficial ownership of 4.9% or more of the outstanding Common Stock. After various amendments to the Original Rights Agreement, expiration date of the Rights were extended to January 26, 2020 and certain other provisions were amended including the definition of "beneficial ownership" to include terms appropriate for the purpose of preserving tax benefits.   Each Right entitles its holder to purchase from the Company 1/1000th of a share of a newly authorized series of participating preferred stock at an exercise price of $55.00, subject to adjustment in accordance with the terms of the Amended Rights Agreement, once the Rights become exercisable. In general terms, under the Amended Rights Agreement, the Rights become exercisable if any person or group acquires 4.9% or more of the Common Stock or, in the case of any person or group that owned 4.9% or more of the Common Stock as of January 27, 2014, upon the acquisition of any additional shares by such person or group. In addition, the Company, its subsidiaries, employee benefit plans of the Company or any of its subsidiaries, and any entity holding Common Stock for or pursuant to the terms of any such plan, are excepted. Upon exercise of the Right in accordance with the Amended Rights Agreement, the holder would be able to purchase a number of shares of Common Stock from the Company having an aggregate market value (as defined in the Amended Rights Agreement) equal to twice the then-current exercise price for an amount in cash equal to the then-current exercise price. The Rights will not prevent an ownership change from occurring under Section 382 of the Code or a takeover of the Company, but may cause substantial dilution to a person that acquires 4.9% or more of our Common Stock.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%. These provisions trigger if there were a beneficial ownership change of 50% or more of our common stock.  0.0740.071250.076250.0690.081250.05650.063750.058750.086250.0740.071250.076250.0690.081250.05650.063750.058750.08625The discount rate used to measure pension expense each year is the rate as of the beginning of the year (i.e., the prior measurement date). The discount rate used, determined by the plan actuary, was based on a hypothetical AA yield curve represented by a series of bonds maturing over the next 30 years, designed to match the corresponding pension benefit cash payments to retirees.In 2017, the Company initiated a Voluntary Early Retirement Program (VERP) for approximately 6,000 eligible associates. Eligibility for the VERP included home office, stores and supply chain personnel who met certain criteria related to age and years of service as of January 31, 2017. The consideration period for eligible associates to accept the VERP ended on March 31, 2017. Based on the approximately 2,800 associates who elected to accept the VERP, we incurred a total charge of $112 million for special retirement benefits. The special retirement benefits increased the projected benefit obligation (PBO) of the Primary Pension Plan and the Supplemental Pension Plans by $88 million and $24 million, respectively. In addition, we incurred curtailment charges of $7 million related to our Primary Pension Plan and Supplemental Pension Plans as a result of the reduction in the expected years of future service related to these plans. We also recognized settlement expense of $13 million in 2017 due to higher lump-sum payment activity to retirees primarily as a result of the VERP executed earlier in the year. In 2009, we began implementing a liability-driven investment (LDI) strategy to lower the plan’s volatility risk and minimize the impact of interest rate changes on the plan funded status. The implementation of the LDI strategy is phased in over time by reallocating the plan’s assets more towards fixed income investments (i.e., debt securities) that are more closely matched in terms of duration to the plan liability. In 2018, we shifted 5% of the plan's target allocation from equities into fixed income. The plan’s asset portfolio is actively managed and primarily invested in fixed income balanced with investments in equity securities and other asset classes to maintain an efficient risk/return diversification profile. The risk of loss in the plan’s equity portfolio is mitigated by investing in a broad range of equity securities across different sectors and countries. Investment types, including high-yield debt securities, illiquid assets such as real estate, the use of derivatives and Company securities are set forth in written guidelines established for each investment manager and monitored by the plan’s management team. The plan’s asset allocation policy is designed to meet the plan’s future pension benefit obligations. Under the policy, asset classes are periodically reviewed and rebalanced as necessary, to ensure that the mix continues to be appropriate relative to established targets and ranges.0% - 25%60% - 75%10% - 25%The expected return on plan assets is based on the plan’s long-term asset allocation policy, historical returns for plan assets and overall capital market returns, taking into account current and expected market conditions.P371DP364DP364DOur Company was founded by James Cash Penney in 1902 and has grown to be a major national retailer, operating 846 department stores in 49 states and Puerto Rico, as well as through our eCommerce website at jcp.com and our mobile application. We sell family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside JCPenney, and home furnishings. In addition, our department stores provide services, such as styling salon, optical, portrait photography and custom decorating, to customers. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, however early adoption is permitted. We are currently evaluating the impact of this new standard on the consolidated financial statements.In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. Under the new guidance, entities will be required to measure expected credit losses for financial instruments, including trade receivables, based on historical experience, current conditions and reasonable forecasts. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We do not expect the adoption of this new standard will have a material impact on the consolidated financial statements.In August 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. We are evaluating this new standard but do not expect it to have a significant impact on our financial statement disclosures.In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which removes certain disclosures that are no longer cost beneficial and also includes additional disclosures to improve the overall usefulness of the disclosure requirements to financial statement users. This standard will be effective for public entities for fiscal years beginning after December 15, 2020, however early adoption is permitted. We are evaluating this new standard but do not expect it to have a significant impact on our financial statement disclosures.In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard will be effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, however early adoption is permitted. We do not expect the adoption of this new standard will have a material impact on the consolidated financial statements.The Company has federal net operating loss (NOL) carryforwards of $2.1 billion and $76 million of federal tax credit carryforwards as of February 1, 2020 that expire in 2032 through 2034. These NOL carryforwards arose prior to December 31, 2017 and are available to offset future taxable income. The Company may recognize additional NOLs in the future which, under the Tax Act, would not expire but would only be available to offset up to 80% of the Company’s future taxable income. 70000007000000P20YP5YP3YP3YStock options are valued primarily using the Black-Scholes option pricing model and are granted with an exercise price equal to the closing price of our common stock on the grant date. Time-based and performance-based restricted stock awards are valued using the closing price of our common stock on the grant date. Our current plan does not permit awarding stock options below grant-date market value nor does it allow any repricing subsequent to the date of grant.Valuation Method. We estimate the fair value of stock option awards on the date of grant using primarily the Black-Scholes option pricing model. Expected Term. Our expected option term represents the average period that we expect stock options to be outstanding and is determined based on our historical experience, giving consideration to contractual terms, vesting schedules, anticipated stock prices and expected future behavior of option holders. Expected Volatility. Our expected volatility is based on a blend of the historical volatility of JCPenney stock combined with an estimate of the implied volatility derived from exchange traded options. Risk-Free Interest Rate. Our risk-free interest rate is based on zero-coupon U.S. Treasury yields in effect at the date of grant with the same period as the expected option life. Expected Dividend Yield. 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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2020
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
jcpenneywordmarkred.jpg
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
26-0037077
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
6501 Legacy Drive
Plano
Texas
 
75024-3698
(Address of principal executive offices)
 
(Zip Code)
(972) 431-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock of 50 cents par value
JCP
New York Stock Exchange
Preferred Stock Purchase Rights
JCP
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
 
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No   
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (August 3, 2019). $227,240,130  
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
320,981,685 shares of Common Stock of 50 cents par value, as of March 16, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions are incorporated by reference Parts of the Form 10-K into which incorporated
J. C. Penney Company, Inc. 2020 Proxy Statement Part III



Table of Contents

INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I 
Item 1. Business
 
Business Overview
 
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 new holding company assumed the name J. C. Penney Company, Inc. (Company). The holding company has no independent assets or operations, and no direct subsidiaries other than JCP. Common stock of the Company is publicly traded under the symbol “JCP” on the New York Stock Exchange. The Company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee by the Company of certain of JCP’s outstanding debt securities is full and unconditional. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this Annual Report on Form 10-K as “we,” “us,” “our,” “ourselves,” “Company” or “JCPenney.”
 
Since our founding by James Cash Penney in 1902, we have grown to be a major retailer, operating 846 department stores in 49 states and Puerto Rico as of February 1, 2020. Our fiscal year ends on the Saturday closest to January 31. Unless otherwise stated, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal year 2019 ended on February 1, 2020; fiscal year 2018 ended on February 2, 2019; and fiscal year 2017 ended on February 3, 2018. Fiscal years 2019 and 2018 consisted of 52 weeks and fiscal year 2017 consisted of 53 weeks.
 
Our business consists of selling merchandise and services to consumers through our department stores and our website at jcp.com, which utilizes fully optimized applications for desktop, mobile and tablet devices. Our department stores and website generally serve the same type of customers, our website offers virtually the same mix of merchandise as our store assortment plus other extended categories that are not offered in store, and our department stores generally accept returns from sales made in stores and via our website. We fulfill online customer purchases by direct shipment to the customer from our distribution facilities and stores or from our suppliers' warehouses and by in store customer pick up. We primarily sell family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside JCPenney, and home furnishings. In addition, our department stores provide our customers with services such as styling salon, optical, portrait photography, and custom decorating. 
 
Based on how we categorized our divisions in 2019, our merchandise mix of total net sales over the last two years was as follows: 
 
 
2019
 
2018
Men’s apparel and accessories
 
22
%
 
20
%
Women’s apparel
 
21
%
 
20
%
Women’s accessories, including Sephora
 
14
%
 
14
%
Home
 
11
%
 
14
%
Footwear and handbags
 
11
%
 
11
%
Kids', including toys
 
9
%
 
9
%
Jewelry
 
6
%
 
6
%
Services and other
 
6
%
 
6
%
 
 
100
%
 
100
%

Competition and Seasonality
 
The business of selling merchandise and services is highly competitive. We are one of the largest department store and eCommerce retailers in the United States, and we have numerous competitors, as further described in Item 1A, Risk Factors. Many factors enter into the competition for the consumer’s patronage, including merchandise assortment, advertising, price, quality, service, location, shipping times and cost, online and mobile user experience, reputation, credit availability, customer loyalty, availability of in-store services such as styling salon, optical, portrait photography and custom decorating, and the ability to offer personalized customer experiences. Our annual earnings depend to a great extent on the results of operations for the last quarter of the fiscal year, which includes the holiday season, when a significant portion of our sales and profits are recorded.

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Trademarks
 
The JCPenney®, JCP®, Liz Claiborne®, Claiborne®, Okie Dokie®, Worthington®, A.N.A A NEW APPROACH®, St. John’s Bay®, The Original Arizona Jean Co®, Ambrielle®, Stafford®, J. Ferrar®, Xersion®, Belle + Sky®, Total Girl®, MONET®, JCPenney Home®, Studio JCP Home™, Sleep Chic®, Home Expressions®, Adonna®, Arizona Jean Co.®, Artesia®, Bijoux Bar™, Bold Elements®, City Streets®, East 5th®, Flirtitude®, Forever Inspired™, North Pole Trading Co.™, Outdoor Oasis™, Paw & Tail™, Peyton & Parker®, Sheer Caress™, Underscore®, and Cooks JCPenney Home™ trademarks, as well as certain other trademarks, have been registered, or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. We consider our marks and the accompanying name recognition to be valuable to our business.
 
Website Availability
 
We maintain an Internet website at www.jcp.com and make available free of charge through this website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all related amendments to those reports, as soon as reasonably practicable after the materials are electronically filed with or furnished to the Securities and Exchange Commission. In addition, our website provides press releases, access to webcasts of management presentations and other materials useful in evaluating our Company.
 
Suppliers
 
We have a diversified supplier base, both domestic and foreign, and are not dependent to any significant degree on any single supplier. We purchase our merchandise from approximately 2,800 domestic and foreign suppliers, many of whom have done business with us for many years. In addition to our Plano, Texas home office, we, through our purchasing subsidiary, maintained buying and quality assurance offices in 9 foreign countries as of February 1, 2020
 
Employment
 
The Company and its consolidated subsidiaries employed approximately 90,000 full-time and part-time employees as of February 1, 2020.
 
Environmental Matters
 
Environmental protection requirements did not have a material effect upon our operations during 2019. It is possible that compliance with such requirements (including any new requirements) would lengthen lead time in expansion or renovation plans and increase construction costs, and therefore operating costs, due in part to the expense and time required to conduct environmental and ecological studies and any required remediation.
 
As of February 1, 2020, we estimated our total potential environmental liabilities to be $19 million and recorded our estimate in Other liabilities in the Consolidated Balance Sheet as of that date. 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 or liquidity. 

Information about our Executive Officers

The following is a list, as of March 16, 2020, of the names and ages of the executive officers of J. C. Penney Company, Inc. and of the offices and other positions held by each such person with the Company. These officers hold identical positions with JCP.  There is no family relationship between any of the named persons.

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Name
  
Offices and Other Positions Held With the Company
  
Age
Jill Soltau
  
Chief Executive Officer
  
53
Bill Wafford
  
Executive Vice President, Chief Financial Officer
  
48
Brynn L. Evanson
 
Executive Vice President, Chief Human Resources Officer
 
50
Michelle Wlazlo
 
Executive Vice President, Chief Merchant
 
52
Therace M. Risch
 
Executive Vice President, Chief Information Officer
 
47
Jim DePaul
 
Executive Vice President, Stores
 
48
Steve Whaley
  
Senior Vice President, Principal Accounting Officer and Controller
  
60
Brandy L. Treadway
  
Senior Vice President, General Counsel and Secretary
  
45

Ms. Soltau has served as Chief Executive Officer and as a director of the Company since October 2018. Prior to joining the Company, she served as President and Chief Executive Officer of JoAnn Stores, Inc. (fabric and craft retailer) from 2015 to October 2018. From 2013 to 2015, she served as President of Shopko Stores (general merchandise retailer), with which she served in positions of increasing responsibility, including Executive Vice President, Chief Merchandising Officer from 2009 to 2013 and Senior Vice President, General Merchandise Manager, Apparel and Accessories from 2007 to 2009. Prior to that, she held positions of increasing responsibility with national and regional retailers including Sears Holdings, Kohl's Corporation and Carson Pirie Scott. Ms. Soltau currently serves as a director of Autozone, Inc. (automotive parts and accessories retailer).

Mr. Wafford has served as Executive Vice President, Chief Financial Officer of the Company since April 2019. Prior to that, he served as Executive Vice President, Chief Financial Officer of The Vitamin Shoppe (health and wellness retailer) since 2018 and as Senior Vice President, Strategy and Business Development of The Vitamin Shoppe from 2017 to 2018. Mr. Wafford served as a partner in the Advisory Practice of KPMG LLP (accounting firm) from 2015 to 2017. Prior to that, he served in positions of increasing responsibility with Walgreens Boots Alliance (retail pharmacy) from 2009 to 2014, including Divisional Vice President, Retail Finance from 2009 to 2012, Vice President, International Finance from 2012 to 2013, and Vice President and Managing Director, Well Ventures LLC from 2013 to 2014.

Ms. Evanson has served as Executive Vice President, Chief Human Resources Officer since 2013. She previously served as Vice President, Compensation, Benefits and Talent Operations from 2010 to 2013 and Director of Compensation from 2009 to 2010. Prior to joining the Company, she worked at the Dayton Hudson Corporation (retailer) from 1991 to 2009 (renamed Target Corporation in 2000). Ms. Evanson began her career with Marshall Field’s (department store retailer) where she advanced through positions in stores, finance, human resources and merchandising and moved to the Target stores division in 2000, ultimately serving as Director of Executive Compensation and Retirement Plans.

Ms. Wlazlo has served as Executive Vice President, Chief Merchant of the Company since March 2019. Prior to joining the Company, she served as Senior Vice President, Merchandising Apparel and Accessories for Target Corporation (retailer) from 2016 to 2019. From 1996 to 2015, she served in positions of increasing responsibility with GAP, Inc. (retailer), including Senior Vice President, Global Merchandising, GAP from 2013 to 2015, Senior Vice President, Merchandising, Old Navy from 2008 to 2013, and Vice President, Merchandising, GAP from 2005 to 2008.

Ms. Risch has served as Executive Vice President, Chief Information Officer of the Company since December 2019. Prior to that, she served as Executive Vice President, Chief Information Officer and Chief Digital Officer from March 2018 to December 2019 and as Executive Vice President and Chief Information Officer from 2015 to March 2018. Prior to joining the Company, she served as Executive Vice President and Chief Information Officer of Country Financial (insurance and investment services) from 2014 to 2015. Prior to that, Ms. Risch spent 10 years at Target Corporation in a variety of technology roles of increasing responsibility, including Vice President of Technology Delivery Services from 2012 to 2014 and Vice President, Business Technology Team from 2009 to 2012.

Mr. DePaul has served as Executive Vice President, Stores of the Company since August 2019. Prior to that, he served as Chief Operations Officer of Shopko Stores from 2017 to 2019, with whom he served in positions of increasing responsibility from 1998, including Chief Administration Officer from 2014 to 2017, Senior Vice President, Stores and Operation from 2010 to 2014, Vice President, Stores Operations and Finance, Facilities, Construction from 2006 to 2010, Regional Director of Sales from 2004 to 2006, and Senior Manager Process Improvement from 2002 to 2004. Prior to joining Shopko Stores, he served in Merchandising/Operations Team Leader positions of Target Corporation.

Mr. Whaley has served as Senior Vice President, Principal Accounting Officer and Controller of the Company since May 2019. Prior to that, he served as Senior Vice President and Global Controller, Principal Accounting Officer of Wal-Mart Stores, Inc.

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(retailer) from 2007 to 2017 and Vice President and Assistant Controller from 2005 to 2007. Mr. Whaley served as Vice President and Controller of Southwest Airlines (airline) from 2001 to 2005.

Ms. Treadway has served as Senior Vice President, General Counsel and Secretary of the Company since January 2020. Prior to that, she served as Senior Vice President, General Counsel from 2017 to January 2020. She served as Vice President, interim General Counsel from June 2017 to August 2017; Vice President, Associate General Counsel from 2016 to June 2017; Assistant General Counsel from 2014 to 2016; Senior Managing Counsel from 2012 to 2014; and Senior Counsel from 2011 to 2012. Prior to joining the Company, Ms. Treadway was an associate at Weil, Gotshal & Manges, LLP (law firm) from 2002 to 2011.

Item 1A. Risk Factors

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.

The recent coronavirus outbreak could have an adverse effect on our business.

Concerns are rapidly growing about the global outbreak of a novel strain of coronavirus (COVID-19). The virus has spread rapidly across the globe, including the U.S. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, our supply chain partners, our employees and customers, customer sentiment in general, and traffic within the malls and shopping centers containing our stores. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine may continue to increase, which has already affected, and may continue to affect, traffic to our stores. The Company has announced the closing of all stores through April 1, 2020 in response to the crisis. We are unable to predict when stores will reopen after this date or if additional periods of store closures will be needed or mandated. Continued impacts of the pandemic could materially adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows, and may require significant actions in response, including but not limited to, employee furloughs, reduced store hours, store closings, expense reductions or discounting of pricing of our products, all in an effort to mitigate such impacts. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

Our ability to achieve profitable growth is subject to both the risks affecting our business generally and the inherent difficulties associated with implementing our strategic plan.

As we position the Company for long-term growth, it may take longer than expected to achieve our objectives, and actual results may be materially less than planned. Our ability to improve our operating results depends upon a significant number of factors, some of which are beyond our control, including:
customer response to our marketing and merchandise strategies;
our ability to achieve profitable sales and to make adjustments in response to changing conditions;
our ability to respond to competitive pressures in our industry;
our ability to effectively manage inventory;
the success of our omnichannel strategy;
our ability to gather accurate and relevant data and effectively utilize that data in our strategic planning and decision making;
our ability to benefit from investments in our stores;
our ability to respond to any unanticipated changes in expected cash flows, liquidity and cash needs, including our ability to obtain any additional financing or other liquidity enhancing transactions, if and when needed;

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our ability to achieve positive cash flow;
our ability to access an adequate and uninterrupted supply of merchandise from suppliers at expected levels and on acceptable terms;
changes to the regulatory environment in which our business operates; and
general economic conditions.

There is no assurance that our marketing, merchandising and omnichannel strategies, or any future adjustments to our strategies, will improve our operating results.
We operate in a highly competitive industry, which could adversely impact our sales and profitability.

The retail industry is highly competitive, with few barriers to entry. We compete with many other local, regional and national retailers for customers, employees, locations, merchandise, services and other important aspects of our business. Those competitors include other department stores, discounters, home furnishing stores, specialty retailers, wholesale clubs, direct-to-consumer businesses, including exclusively eCommerce retailers, and other forms of retail commerce. Some competitors are larger than JCPenney, and/or have greater financial resources available to them, and, as a result, may be able to devote greater resources to sourcing, promoting, selling their products, updating their store environment and updating their technology. Competition is characterized by many factors, including merchandise assortment, advertising, price, quality, service, location, reputation, shipping times and cost, online and mobile user experience, credit availability, customer loyalty, availability of in-store services, such as styling salon, optical, portrait photography and custom decorating, and the ability to offer personalized customer experiences. We have experienced, and anticipate that we will continue to experience for at least the foreseeable future, significant competition from our competitors. The performance of competitors as well as changes in their pricing and promotional policies, marketing activities, customer loyalty programs, new strategic partnerships, availability of in-store services, new store openings, store renovations, launches of eCommerce platforms, brand launches and other merchandise and operational strategies could cause us to have lower sales, lower merchandise margin and/or higher operating expenses such as marketing costs and other selling, general and administrative expenses, which in turn could have an adverse impact on our profitability.
Our sales and operating results depend on our ability to develop merchandise offerings that resonate with our existing customers and help to attract new customers.

Our sales and operating results depend in part on our ability to predict and respond to changes in fashion trends and customer preferences in a timely manner by consistently offering stylish, quality merchandise assortments at competitive prices. We continuously assess emerging styles and trends and focus on developing a merchandise assortment to meet customer preferences. There is no assurance that these efforts will be successful or that we will be able to satisfy constantly changing customer demands. To the extent our decisions regarding our merchandise differ from our customers’ preferences, we may be faced with reduced sales and excess inventories for some products and/or missed opportunities for others. Any sustained failure to identify and respond to emerging trends in lifestyle and customer preferences and buying trends could have an adverse impact on our business. In addition, merchandise misjudgments may adversely impact the perception or reputation of our Company, which could result in declines in customer loyalty and vendor relationship issues, and ultimately have a material adverse effect on our business, financial condition and results of operations.
We may also seek to expand into new lines of business from time to time. There is no assurance that these efforts will be successful. As we devote time and resources to new lines of business, management’s attention and resources may be diverted from existing business activities. Further, if new lines of business are not as successful as we planned, then we risk damaging our overall business results. In addition, we may seek to expand our merchandise offerings into new product categories. Moving into new lines of business and expanding our merchandise offerings may carry new or additional risks beyond those typically associated with our traditional apparel and home furnishings businesses, including potential reputational harm resulting from actions by unaffiliated third-parties that we may use to assist us in providing goods or services. We may not be able to develop new lines of business in a manner that improves our operating results or address or mitigate the risks associated with new product categories and new lines of business, and may therefore be forced to close the new lines of business or reduce our expanded merchandise offerings, which may damage our reputation and negatively impact our operating results.
Our results may be negatively impacted if customers do not maintain their favorable perception of our Company and our private brand merchandise.

Maintaining and continually enhancing the value of our Company and our private brand merchandise is important to the success of our business. The value of our private brands is based in large part on the degree to which customers perceive and

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react to them. The value of our private brands could diminish significantly due to a number of factors, including customer perception that we have acted in an irresponsible manner in sourcing our private brand merchandise, adverse publicity about our private brand merchandise, our failure to maintain the quality of our private brand products, the failure of our private brand merchandise to deliver consistently good value to the customer, or the failure to protect the image associated with our private brands. The growing use of social and digital media by customers, us, and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about us, our private brands, or any of our merchandise on social or digital media could seriously damage our reputation. If we do not maintain the favorable perception of our Company and our private brand merchandise or we experience a reduction in the level of private brand sales, our business results could be negatively impacted.
Our ability to increase sales and store productivity is largely dependent upon our ability to increase customer traffic and conversion.

Customer traffic depends upon our ability to successfully market compelling merchandise assortments, present an appealing shopping environment and experience to customers, and attract customers to our stores through omnichannel initiatives such as buy-online-pickup-in-store programs. Our strategies focus on increasing customer traffic and improving conversion in our stores and online; however, there can be no assurance that our efforts will be successful or will result in increased sales or margins. Further, costs to drive online traffic may be higher than anticipated, which could result in lower margins, and actions to drive online traffic may not deliver anticipated results. In addition, external events outside of our control, including store closings by our competitors, pandemics, terrorist threats, domestic conflicts and civil unrest, may influence customers' decisions to visit malls or might otherwise cause customers to avoid public places. There is no assurance that we will be able to reverse any decline in traffic or that increases in eCommerce sales will offset any decline in store traffic. We may need to respond to any declines in customer traffic or conversion rates by increasing markdowns or promotions to attract customers, which could adversely impact our operating results and cash flows from operating activities. In addition, the challenge of declining store traffic along with the growth of digital shopping channels and its diversion of sales from brick-and-mortar stores could lead to store closures and/or asset impairment charges, which could adversely impact our operating results, financial position and cash flows.
If we are unable to manage our inventory effectively, our merchandise margins could be adversely affected.

Our profitability depends upon our ability to manage appropriate inventory levels and respond quickly to shifts in consumer demand patterns. We must properly execute our inventory management strategies by appropriately allocating merchandise among our stores and online, timely and efficiently distributing inventory to stores, maintaining an appropriate mix and level of inventory in stores and online, adjusting our merchandise mix between our private and exclusive brands and national brands, appropriately changing the allocation of floor space of stores among product categories to respond to customer demand and effectively managing pricing and markdowns. If we overestimate customer demand for our merchandise, we will likely need to record inventory markdowns and sell the excess inventory at clearance prices which would negatively impact our merchandise margins and operating results. If we underestimate customer demand for our merchandise, we may experience inventory shortages which may result in missed sales opportunities and have a negative impact on customer loyalty. In addition, although we have various processes and systems to help protect against loss or theft of our inventory, higher than expected levels of lost or stolen inventory (called “shrinkage”) could result in write-offs and lost sales, which could adversely impact our profitability.
We must protect against security breaches or other unauthorized disclosures of confidential data about our customers as well as about our employees and other third parties.

As part of our normal operations, we and third-party service providers with whom we contract receive and maintain information about our customers (including credit/debit card information), our employees and other third parties. Confidential data must at all times be protected against security breaches or other unauthorized disclosure. We have, and require our third-party service providers to have, administrative, physical and technical safeguards and procedures in place to protect the security, confidentiality, integrity and availability of such information and to protect such information against unauthorized access, disclosure or acquisition. Despite our safeguards and security processes and procedures, our systems and processes, and those of our third-party service providers, are not free from vulnerability to security breaches, inadvertent data disclosure or acquisition by third parties. Further, because the methods used to obtain unauthorized access change frequently and may not be immediately detected, we may be unable to anticipate these methods or promptly implement safeguards.
Additionally, as the regulatory environment related to information security, data collection, and use and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs. For example, California passed the California Consumer Privacy Act of 2018 (the “CCPA”), which went into effect in January 2020 and provides broad rights to California consumers with respect to the collection and use of their information by businesses. The CCPA expands the privacy rights of California citizens and as a

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result, we may need to process enhancements and commit resources in support of compliance with California’s regulatory requirements. Any failure to adhere to the requirements of the CCPA and other evolving laws and regulations in this area, or to protect confidential data about our business or our customers, employees or other third parties, could result in financial penalties and legal liability and could materially damage our brand and reputation, as well as result in significant expenses and disruptions to our operations, and loss of customer confidence, any of which could have a material adverse impact on our business and results of operations. We could also be subject to government enforcement actions and private litigation as a result of any such failure.

The failure to retain, attract and motivate our employees, including employees in key positions, could have an adverse impact on our results of operations.

Our results depend on the contributions of our employees, including our senior management team and other key employees. This depends to a great extent on our ability to retain, attract and motivate talented employees throughout the organization, many of whom, particularly in the stores, are in entry level or part-time positions, which have historically had high rates of turnover. We currently operate with significantly fewer individuals than we have in the past who have assumed additional duties and responsibilities, which could have an adverse impact on our operating performance and efficiency. Negative media reports regarding the Company or the retail industry in general, as well as uncertainty due to store closings or future Company performance, could also have an adverse impact on our ability to attract, retain and motivate our employees. If we are unable to retain, attract and motivate talented employees with the appropriate skill sets, we may not achieve our objectives and our results of operations could be adversely impacted. Our ability to meet our changing labor needs while controlling our costs is also subject to external factors such as unemployment levels, competing wages, potential union organizing efforts and government regulation. An inability to provide wages and/or benefits that are competitive within the markets in which we operate could adversely affect our ability to retain and attract employees. In addition, the loss of one or more of our key personnel or the inability to effectively identify a suitable successor to a key role in our senior management could have a material adverse effect on our business.

If we are unable to successfully develop and maintain a relevant and reliable omnichannel experience for our customers, our sales, results of operations and reputation could be adversely affected.

We believe it is critical that we deliver a superior omnichannel shopping experience for our customers through the integration of our store and digital shopping channels. Omnichannel retailing is rapidly evolving and we must anticipate and meet changing customer expectations. Our omnichannel strategies include our ship-from-store and buy-online-pickup-in-store programs. In addition, we continue to explore ways to enhance our customers’ omnichannel shopping experience, including through investments in IT systems, operational changes and developing a more customer-friendly user experience. Our competitors are also investing in omnichannel initiatives, some of which may be more successful than our initiatives. For example, eCommerce competitors have placed an emphasis on delivery services, with customers increasingly seeking faster, guaranteed delivery times and low-price or free shipping. There is no assurance that we will be able to compete successfully on delivery times and delivery costs, which is dependent on many factors. If the implementation of our omnichannel strategies is not successful or does not meet customer expectations, or we do not realize a return on our omnichannel investments, our reputation and operating results may be adversely affected.
Disruptions in our eCommerce platforms, or our inability to successfully execute our eCommerce or omnichannel strategies, could have an adverse impact on our sales and results of operations.

We sell merchandise over the Internet through our website, www.jcp.com, and through mobile applications for smart phones and tablets. Our Internet operations are subject to numerous risks, including rapid technological change and the implementation of new systems and platforms; liability for online and mobile content; violations of state or federal laws, including those relating to online and mobile privacy and intellectual property rights; credit card fraud; problems associated with the operation, security and availability of our website, mobile applications and related support systems; computer malware; telecommunications failures; electronic break-ins and similar disruptions; and the allocation of inventory between our online operations and department stores. The failure of our website or mobile applications to perform as expected could result in disruptions and costs to our operations and make it more difficult for customers to purchase merchandise online. In addition, our inability to successfully develop and maintain the necessary technological interfaces for our customers to purchase merchandise through our website and mobile applications, including user friendly software applications for smart phones and tablets, could result in the loss of Internet sales and have an adverse impact on our results of operations.

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Our operations are dependent on information technology systems; disruptions in those systems or increased costs relating to their implementation could have an adverse impact on our results of operations.

Our operations are dependent upon the integrity, security and consistent operation of various systems and data centers, including the point-of-sale systems in the stores, our eCommerce platforms, data centers that process transactions, communication systems and various software applications used throughout our Company to source merchandise, track inventory flow, process transactions, generate performance and financial reports and administer payroll and benefit plans.
We have implemented several applications and systems from third party vendors, providers and licensors to simplify our processes and reduce our use of customized existing legacy systems and expect to place additional applications and systems into operation in the future. Any continued reliance on existing legacy systems may result in extended system outages due to the difficulty in recovering those systems as well as inefficiencies in our business workflow due to the complexity and high levels of customization inherent in such systems. Implementing new applications and systems carries substantial risk, including implementation delays, cost overruns, disruption of operations, potential loss of data or information, lower customer satisfaction resulting in lost customers or sales, inability to deliver merchandise to our stores or our customers, the potential inability to meet reporting requirements and unintentional security vulnerabilities. There can be no assurances that we will successfully launch the new applications and systems as planned, that the new applications and systems will perform as expected or that the new applications and systems will be implemented without disruptions to our operations, any of which may cause critical information upon which we rely to be delayed, unreliable, corrupted, insufficient or inaccessible.
We also outsource various information technology functions to third party service providers and may outsource other functions in the future. We rely on those third party service providers to provide services on a timely and effective basis and their failure to perform as expected or as required by contract could result in disruptions and costs to our operations.
Our vendors are also highly dependent on the use of information technology systems. Major disruptions in their information technology systems could result in their inability to communicate with us or otherwise to process our transactions or information, their inability to perform required functions, or in the loss or corruption of our information, any and all of which could result in disruptions to our operations. Our vendors are responsible for having safeguards and procedures in place to protect the confidentiality, integrity and security of our information, and to protect our information and systems against unauthorized access, disclosure or acquisition. Any failure in their systems to operate or in their ability to protect our information or systems could have a material adverse impact on our business and results of operations.
We have insourced, and may continue to insource, certain business functions from third party vendors and may seek to relocate certain business functions to international locations in an attempt to achieve additional efficiencies, both of which subject us to risks, including disruptions in our business.

We have insourced certain business functions and may also need to continue to insource other aspects of our business in the future in order to effectively manage our costs and stay competitive. We may also seek from time to time to relocate certain business functions to countries other than the United States to access highly skilled labor markets and further control costs. There is no assurance that these efforts will be successful. In addition, future regulatory developments could hinder our ability to fully realize the anticipated benefits of these actions. These actions may also cause disruptions that negatively impact our business. If we are ultimately unable to perform insourced functions better than, or at least as well as, third party providers, or otherwise fully realize the anticipated benefits of these actions, our operating results could be adversely impacted.
Changes in our credit ratings may limit our access to capital markets and adversely affect our liquidity.

The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. Any 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. The future availability of financing will depend on a variety of factors such as economic and market conditions, the availability of credit and our credit ratings, as well as the possibility that lenders could develop a negative perception of us. There is no assurance that we will be able to obtain additional financing on favorable terms or at all.
Our profitability depends on our ability to source merchandise and deliver it to our customers in a timely and cost-effective manner.

Our merchandise is sourced from a wide variety of suppliers, and our business depends on being able to find qualified suppliers and access products in a timely and efficient manner. Inflationary pressures on commodity prices and other input costs could increase our cost of goods, and an inability to pass such cost increases on to our customers or a change in our merchandise mix as a result of such cost increases could have an adverse impact on our profitability. Additionally, the impact of economic conditions on our suppliers cannot be predicted and our suppliers may be unable to access financing or become insolvent and

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thus become unable to supply us with products. Developments in tax policy, such as the imposition of tariffs on imported merchandise, or changes to U.S. trade legislation could further have a material adverse effect on our results of operations and liquidity.
Our arrangements with our suppliers and vendors may be impacted by our financial results or financial position.

Substantially all of our merchandise suppliers and vendors sell to us on open account purchase terms. There is a risk that our key suppliers and vendors could respond to any actual or apparent decrease in or any concern with our financial results or liquidity by requiring or conditioning their sale of merchandise to us on more stringent or more costly payment terms, such as by requiring standby letters of credit, earlier or advance payment of invoices, payment upon delivery or other assurances or credit support or by choosing not to sell merchandise to us on a timely basis or at all. Our arrangements with our suppliers and vendors may also be impacted by media reports regarding our financial position. Our need for additional liquidity could significantly increase and our supply of merchandise could be materially disrupted if a significant portion of our key suppliers and vendors took one or more of the actions described above, which could have a material adverse effect on our sales, customer satisfaction, cash flows, liquidity and financial position.
Our senior secured real estate term loan credit facility and senior secured notes are secured by certain of our real property and, together with our senior secured second priority notes, substantially all of our personal property, and such property may be subject to foreclosure or other remedies in the event of our default. In addition, the real estate term loan credit facility and the indentures governing the senior secured notes and senior secured second priority notes contain provisions that could restrict our operations and our ability to obtain additional financing.
We are (i) party to a $1.688 billion senior secured term loan credit facility and (ii) the issuer of $500 million aggregate principal amount of senior secured notes. We have also issued $400 million aggregate principal amount of senior secured second priority notes. The senior secured term loan credit facility and the senior secured notes are secured by mortgages on certain real property of the Company and, together with the senior secured second priority notes, liens on substantially all personal property of the Company, subject to certain exclusions set forth in the security documents relating to the term loan credit facility, the senior secured notes and the senior secured second priority notes. The real property subject to mortgages under the term loan credit facility and the indenture governing the senior secured notes includes our distribution centers and certain of our stores.
The credit and guaranty agreement governing the term loan credit facility and the indentures governing the senior secured notes and the senior secured second-priority notes contain operating restrictions which may impact our future alternatives by limiting, without lender consent, our ability to borrow additional funds, execute certain equity financings or enter into dispositions or other liquidity enhancing or strategic transactions regarding certain of our assets, including our real property. Our ability to obtain additional or other financing or to dispose of certain assets could also be negatively impacted because a substantial portion of our assets have been restricted or pledged as collateral for repayment of our indebtedness under the term loan credit facility, the senior secured notes and the senior secured second-priority notes.
If an event of default occurs and is continuing, our outstanding obligations under the term loan credit facility, the senior secured notes and the senior secured second-priority notes could be declared immediately due and payable or the lenders could foreclose on or exercise other remedies with respect to the assets securing the term loan credit facility, the senior secured notes and the senior secured second-priority notes, including, with respect to the term loan credit facility and senior secured notes, our distribution centers and certain of our stores. If an event of default occurs, there is no assurance that we would have the cash resources available to repay such accelerated obligations or refinance such indebtedness on commercially reasonable terms, or at all. The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our senior secured asset-based revolving credit facility limits our borrowing capacity to the value of certain of our assets. In addition, our senior secured asset-based revolving credit facility is secured by certain of our personal property, and lenders may exercise remedies against the collateral in the event of our default.
We are party to a $2.35 billion senior secured asset-based revolving credit facility. Our borrowing capacity under our revolving credit facility varies according to the Company’s inventory levels, accounts receivable and credit card receivables, net of certain reserves. In the event of any material decrease in the amount of or appraised value of these assets, our borrowing capacity would similarly decrease, which could adversely impact our business and liquidity.
Our revolving credit facility contains customary affirmative and negative covenants and certain restrictions on operations become applicable if our availability falls below certain thresholds. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business.

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Our obligations under the revolving credit facility are secured by liens with respect to inventory, accounts receivable, deposit accounts and certain related collateral. In the event of a default that is not cured or waived within any applicable cure periods, the lenders’ commitment to extend further credit under our revolving credit facility could be terminated, our outstanding obligations could become immediately due and payable, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral, which generally consists of the Company’s inventory, accounts receivable and deposit accounts and cash credited thereto. If we are unable to borrow under our revolving credit facility, we may not have the necessary cash resources for our operations and, if any event of default occurs, there is no assurance that we would have the cash resources available to repay such accelerated obligations, refinance such indebtedness on commercially reasonable terms, or at all, or cash collateralize our letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our level of indebtedness may adversely affect our business and results of operations and may require the use of our available cash resources to meet repayment obligations, which could reduce the cash available for other purposes.

As of February 1, 2020, we have $3.721 billion in total indebtedness and we are highly leveraged. Our level of indebtedness may limit our ability to obtain additional financing, if needed, to fund additional projects, working capital requirements, capital expenditures, debt service, and other general corporate or other obligations, as well as increase the risks to our business associated with general adverse economic and industry conditions. Our level of indebtedness may also place us at a competitive disadvantage to our competitors that are not as highly leveraged. In addition, the future limitations on tax deductions for interest paid on outstanding indebtedness as a result of the Tax Cuts and Jobs Act enacted in December 2017 (the “Tax Act”) could have a material adverse effect on our results of operations and liquidity.

We are required to make quarterly repayments in a principal amount equal to $10.55 million during the seven-year term of the real estate term loan credit facility, subject to certain reductions for mandatory and optional prepayments. In addition, we are required to make prepayments of the real estate term loan credit facility with the proceeds of certain asset sales, insurance proceeds and excess cash flow, which could reduce the cash available for other purposes, including capital expenditures for store improvements, and could impact our ability to reinvest in other areas of our business.
There is no assurance that our internal and external sources of liquidity will at all times be sufficient for our cash requirements.

We must have sufficient sources of liquidity to fund our working capital requirements, capital improvement plans, service our outstanding indebtedness and finance investment opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash and cash equivalents, borrowings under our credit facilities, other debt financings, equity financings and sales of non-operating assets. We expect our ability to generate cash through the sale of non-operating assets to diminish as our portfolio of non-operating assets decreases. In addition, our recent operating losses have limited our capital resources. Our ability to achieve our business and cash flow plans is based on a number of assumptions which involve significant judgments and estimates of future performance, borrowing capacity and credit availability, which cannot at all times be assured. Accordingly, there is no assurance that cash flows from operations and other internal and external sources of liquidity will at all times be sufficient for our cash requirements. If necessary, we may need to consider actions and steps to improve our cash position and mitigate any potential liquidity shortfall, such as modifying our business plan, pursuing additional financing to the extent available, reducing capital expenditures, pursuing and evaluating other alternatives and opportunities to obtain additional sources of liquidity and other potential actions to reduce costs. There can be no assurance that any of these actions would be successful, sufficient or available on favorable terms. Any inability to generate or obtain sufficient levels of liquidity to meet our cash requirements at the level and times needed could have a material adverse impact on our business and financial position.
Our ability to obtain any additional financing or any refinancing of our debt, if needed at any time, depends upon many factors, including our existing level of indebtedness and restrictions in our debt facilities, historical business performance, financial projections, the value and sufficiency of collateral, prospects and creditworthiness, external economic conditions and general liquidity in the credit and capital markets. Any additional debt, equity or equity-linked financing may require modification of our existing debt agreements, which there is no assurance would be obtainable. Any additional financing or refinancing could also be extended only at higher costs and require us to satisfy more restrictive covenants, which could further limit or restrict our business and results of operations, or be dilutive to our stockholders.
Our use of interest rate hedging transactions could expose us to risks and financial losses that may adversely affect our financial condition, liquidity and results of operations.

To reduce our exposure to interest rate fluctuations, we have entered into, and in the future may enter into, interest rate swaps with various financial counterparties. The interest rate swap agreements effectively convert a portion of our variable rate

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interest payments to a fixed price. There can be no assurances, however, that our hedging activity will be effective in insulating us from the risks associated with changes in interest rates. In addition, our hedging transactions may expose us to certain risks and financial losses, including, among other things:
counterparty credit risk;
the risk that the duration or amount of the hedge may not match the duration or amount of the related liability;
the hedging transactions may be adjusted from time to time in accordance with accounting rules to reflect changes in fair values, downward adjustments or “mark-to-market losses,” which would affect our stockholders’ equity; and
the risk that we may not be able to meet the terms and conditions of the hedging instruments, in which case we may be required to settle the instruments prior to maturity with cash payments that could significantly affect our liquidity.
Further, we have designated the swaps as cash flow hedges in accordance with Accounting Standards Codification Topic 815, Derivatives and Hedging. However, in the future, we may fail to qualify for hedge accounting treatment under these standards for a number of reasons, including if we fail to satisfy hedge documentation and hedge effectiveness assessment requirements or if the swaps are not highly effective. If we fail to qualify for hedge accounting treatment, losses on the swaps caused by the change in their fair value will be recognized as part of net income, rather than being recognized as part of other comprehensive income.
Operating results and cash flows may cause us to incur asset impairment charges.

Long-lived assets, primarily property and equipment, and operating lease assets are reviewed at the store level at least annually for impairment, or whenever changes in circumstances indicate that a full recovery of net asset values through future cash flows is in question. We also assess the recoverability of indefinite-lived intangible assets at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Our impairment review requires us to make estimates and projections regarding, but not limited to, sales, operating profit and future cash flows. If our operating performance reflects a sustained decline, we may be exposed to significant asset impairment charges in future periods, which could be material to our results of operations.
Reductions in income and cash flow from our marketing and servicing arrangement related to our private label and co-branded credit cards could adversely affect our operating results and cash flows.

Synchrony Financial (“Synchrony”) owns and services our private label credit card and co-branded MasterCard® programs. Our agreement with Synchrony provides for certain payments to be made by Synchrony to the Company, including a share of income from the performance of the credit card portfolios. The income and cash flow that the Company receives from Synchrony is dependent upon a number of factors including the level of sales on private label and co-branded accounts, the percentage of sales on private label and co-branded accounts relative to the Company’s total sales, the level of balances carried on the accounts, payment rates on the accounts, finance charge rates and other fees on the accounts, the level of credit losses for the accounts, Synchrony’s ability to extend credit to our customers as well as the cost of customer rewards programs. All of these factors can vary based on changes in federal and state credit card, banking and consumer protection laws, which could also materially limit the availability of credit to consumers or increase the cost of credit to our cardholders. The factors affecting the income and cash flow that the Company receives from Synchrony can also vary based on a variety of economic, legal, social and other factors that we cannot control. If the income or cash flow that the Company receives from our consumer credit card program agreement with Synchrony decreases, our operating results and cash flows could be adversely affected.
We are subject to risks associated with importing merchandise from foreign countries.
A substantial portion of our merchandise is sourced by our vendors and by us outside of the United States. All of our direct private brand vendors must comply with our supplier legal compliance program and applicable laws, including consumer and product safety laws. Although we diversify our sourcing and production by country and supplier, the failure of a supplier to produce and deliver our goods on time, to meet our quality standards and adhere to our product safety requirements or to meet the requirements of our supplier compliance program or applicable laws could result in damage to our reputation.
Although we have implemented policies and procedures designed to facilitate compliance with laws and regulations relating to doing business in foreign markets and importing merchandise from abroad, there can be no assurance that suppliers and other third parties with whom we do business will not violate such laws and regulations or our policies, which could subject us to liability and could adversely affect our results of operations.

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We are subject to the various risks of importing merchandise from abroad and purchasing product made in foreign countries, such as:
potential disruptions in manufacturing, logistics and supply;
changes in duties, tariffs, quotas and voluntary export restrictions on imported merchandise;
strikes and other events affecting delivery;
consumer perceptions of the safety of imported merchandise;
product compliance with laws and regulations of the destination country;
product liability claims from customers or penalties from government agencies relating to products that are recalled, defective or otherwise noncompliant or alleged to be harmful;
concerns about human rights, working conditions and other labor rights and conditions and environmental impact in foreign countries where merchandise is produced and raw materials or components are sourced, and changing labor, environmental and other laws in these countries;
local business practice and political issues that may result in adverse publicity or threatened or actual adverse consumer actions, including boycotts;
natural disasters, public health crisis, acts of terrorism and other catastrophic events that could result in significant disruptions at our manufacturing facilities or distribution centers of our third-party manufacturers, suppliers and delivery service providers;
compliance with laws and regulations concerning ethical business practices, such as the U.S. Foreign Corrupt Practices Act; and
economic, political or other problems in countries from or through which merchandise is imported.
Political or financial instability, trade restrictions, tariffs, currency exchange rates, labor conditions, congestion and labor issues at major ports, transport capacity and costs, systems issues, problems in third party distribution and warehousing and other interruptions of the supply chain, compliance with U.S. and foreign laws and regulations and other factors relating to international trade and imported merchandise beyond our control could affect the availability and the price of our inventory. These risks and other factors relating to foreign trade could subject us to liability or hinder our ability to access suitable merchandise on acceptable terms or at all, which could adversely impact our results of operations. In addition, developments in tax policy, such as the imposition of tariffs on imported merchandise or changes to U.S. trade legislation, could have a material adverse effect on our results of operations and liquidity.
Disruptions and congestion at ports through which we import merchandise may increase our costs and/or delay the receipt of goods in our stores, which could adversely impact our profitability, financial position and cash flows.
We ship the majority of our private brand merchandise by ocean to ports in the United States. Our national brand suppliers also ship merchandise by ocean. Disruptions in the operations of ports through which we import our merchandise, including, but not limited to, labor disputes involving work slowdowns, lockouts or strikes, natural disasters, public health crises, and other catastrophic events, could require us and/or our vendors to ship merchandise by air freight or to alternative ports in the United States. Shipping by air is significantly more expensive than shipping by ocean, which could adversely affect our profitability. Similarly, shipping to alternative ports in the United States could result in increased lead times and transportation costs. Disruptions at ports through which we import our goods could also result in unanticipated inventory shortages, which could adversely impact our reputation and our results of operations.
If we cannot meet the continued listing requirements of the NYSE, the NYSE may delist our common stock.
On January 31, 2020, we received written notification from the New York Stock Exchange (“NYSE”) that the average closing price of our common stock had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average closing share price required to maintain listing under Section 802.01C of the NYSE Listed Company Manual. The notice has no immediate impact on the listing of our common stock, which will continue to be listed and traded on the NYSE during the period allowed to regain compliance, subject to our compliance with other listing standards. Our common stock is permitted to continue to trade on the NYSE under the symbol “JCP,” but will have an added designation of “.BC” to indicate the status of the common stock as “below compliance.”
We informed the NYSE that we intend to cure the deficiency and to return to compliance with the NYSE continued listing requirements. We can regain compliance at any time during the six-month period following receipt of the notification if our common stock has a closing share price of at least $1.00 on the last trading day of any calendar month during the six-month period and also has an average closing share price of at least $1.00 over the 30-trading day period ending on the last trading day of that month.

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Notwithstanding the foregoing, if we were to determine that we must cure the deficiency by taking an action that would require approval of our stockholders (such as a reverse stock split), we could also regain compliance by (i) obtaining the requisite stockholder approval for such action and (ii) implementing the action promptly thereafter, such that the price of our common stock would promptly exceed $1.00 per share, provided that the price must remain above that level for at least the following 30 trading days. However, there is no assurance that our stockholders would vote for such proposal.
While we are considering various options to cure the deficiency, it may take a significant effort to regain compliance with this continued listing standard, and there can be no assurance that we will be successful.
Our common stock could also be delisted if (i) our average market capitalization over a consecutive 30 trading-day period is less than $15 million, or (ii) our common stock trades at an “abnormally low” price. In either case, we would not have an opportunity to cure the deficiency, and, as a result, our common stock would be suspended from trading on the NYSE immediately, and the NYSE would begin the process to delist our common stock, subject to our right to appeal under NYSE rules. There is no assurance that any appeal we undertake in these or other circumstances would be successful, nor is there any assurance that we will continue to comply with the other NYSE continued listing standards.
Failure to maintain our NYSE listing could negatively impact us and our stockholders by reducing the willingness of investors to hold our common stock because of the resulting decreased price, liquidity and trading of our common stock, limited availability of price quotations, and reduced news and analyst coverage. These developments may also require brokers trading in our common stock to adhere to more stringent rules and may limit our ability to raise capital by issuing additional shares in the future. Delisting may adversely impact the perception of our financial condition and cause reputational harm with investors and parties conducting business with us. In addition, the perceived decreased value of employee equity incentive awards may reduce their effectiveness in encouraging performance and retention.
Our Company’s growth and profitability depend on the levels of consumer confidence and spending.

Our results of operations are sensitive to changes in overall economic and political conditions that impact consumer spending, including discretionary spending. Many economic factors outside of our control, including the housing market, interest rates, recession, inflation and deflation, energy costs and availability, consumer credit availability and terms, consumer debt levels, tax rates and policy, and unemployment trends, influence consumer confidence and spending. The domestic and international political situation and actions also affect consumer confidence and spending. Additional events that could impact our performance include public health crises, terrorist threats and activities, worldwide military and domestic disturbances and conflicts, political instability and civil unrest. Declines in the level of consumer spending could adversely affect our growth and profitability.
Our business is seasonal, which impacts our results of operations.

Our annual earnings and cash flows depend to a great extent on the results of operations for the last quarter of our fiscal year, which includes the holiday season. Our fiscal fourth-quarter results may fluctuate significantly, based on many factors, including holiday spending patterns and weather conditions. This seasonality causes our operating results to vary considerably from quarter to quarter.
Our profitability may be impacted by weather conditions.

Our merchandise assortments reflect assumptions regarding expected weather patterns and our profitability depends on our ability to timely deliver seasonally appropriate inventory. Unseasonable or unexpected weather conditions such as warm temperatures during the winter season or prolonged or extreme periods of warm or cold temperatures could render a portion of our inventory incompatible with consumer needs. Extreme weather or natural disasters could also severely hinder our ability to timely deliver seasonally appropriate merchandise, preclude customers from traveling to our stores, delay capital improvements or cause us to close stores. A reduction in the demand for or supply of our seasonal merchandise could have an adverse effect on our inventory levels and results of operations.
Changes in federal, state or local laws and regulations could increase our expenses and adversely affect our results of operations.

Our business is subject to a wide array of laws and regulations. Government intervention and activism and/or regulatory reform may result in substantial new regulations and disclosure obligations and/or changes in the interpretation of existing laws and regulations, which may lead to additional compliance costs as well as the diversion of our management’s time and attention from strategic initiatives. If we fail to comply with applicable laws and regulations, we could be subject to legal risk, including government enforcement action and class action civil litigation that could disrupt our operations and increase our costs of doing business. Changes in the regulatory environment regarding topics such as privacy and information security, tax policy, product

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safety, environmental protection, including regulations in response to concerns regarding climate change, collective bargaining activities, minimum wage, wage and hour, and health care mandates, among others, as well as changes to applicable accounting rules and regulations, could also cause our compliance costs to increase and adversely affect our business, financial condition and results of operations.
Legal and regulatory proceedings could have an adverse impact on our results of operations.

Our Company is subject to various legal and regulatory proceedings relating to our business, certain of which may involve jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. We are impacted by trends in litigation, including class action litigation brought under various consumer protection, employment, and privacy and information security laws. In addition, litigation risks related to claims that technologies we use infringe intellectual property rights of third parties have been amplified by the increase in third parties whose primary business is to assert such claims. Reserves are established, as needed, based on our best estimates of our potential liability. However, we cannot accurately predict the ultimate outcome of any such proceedings due to the inherent uncertainties of litigation. Regardless of the outcome or whether the claims are meritorious, legal and regulatory proceedings may require that we devote substantial time and expense to defend our Company. Unfavorable rulings could result in a material adverse impact on our business, financial condition or results of operations.
Significant changes in discount rates, actual investment return on pension assets, and other factors could affect our earnings, equity, and pension contributions in future periods.

Our earnings may be positively or negatively impacted by the amount of income or expense recorded for our qualified pension plan. Generally accepted accounting principles in the United States of America (GAAP) require that income or expense for the plan be calculated at the annual measurement date using actuarial assumptions and calculations. The most significant assumptions relate to the capital markets, interest rates and other economic conditions. Changes in key economic indicators can change the assumptions. Two critical assumptions used to estimate pension income or expense for the year are the expected long-term rate of return on plan assets and the discount rate. In addition, at the measurement date, we must also reflect the funded status of the plan (assets and liabilities) on the balance sheet, which may result in a significant change to equity through a reduction or increase to other comprehensive income. We may also experience volatility in the amount of the annual actuarial gains or losses recognized as income or expense because we have elected to recognize pension expense using mark-to-market accounting. Although GAAP expense and pension contributions are not directly related, the key economic factors that affect GAAP expense would also likely affect the amount of cash we could be required to contribute to the pension plan. Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve a plan’s funded status.
Our stock price has been and may continue to be volatile.

The market price of our common stock has fluctuated substantially and may continue to fluctuate significantly. Future announcements or disclosures concerning us or any of our competitors, our strategic initiatives, our sales and profitability, our financial condition, any quarterly variations in actual or anticipated operating results or comparable sales, any failure to meet analysts’ expectations and sales of large blocks of our common stock, among other factors, could cause the market price of our common stock to fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks that have often been unrelated or disproportionate to the operating performance of these companies. This volatility could affect the price at which you could sell shares of our common stock.
Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation could result in substantial costs, divert our management’s attention and resources and have an adverse effect on our business, results of operations and financial condition.
The Company’s ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes may be limited.

The Company has a federal net operating loss (NOL) of $2.1 billion as of February 1, 2020. Nearly all of these NOL carryforwards (expiring in 2032 through 2034) arose prior to December 31, 2017 and are available to offset future taxable income in full. NOLs recognized after December 31, 2017 are only available to offset up to 80% of the Company’s future taxable income.

Section 382 of the Internal Revenue Code of 1986, as amended (the Code), imposes an annual limitation on the amount of taxable income that may be offset by a corporation's NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the Company’s “five-percent shareholders” (as defined in

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Section 382 of the Code) collectively increase their ownership in the Company by more than 50 percentage points (by value) over a rolling three-year period. Additionally, various states have similar limitations on the use of state NOLs following an ownership change.

If an ownership change occurs, the amount of the taxable income for any post-change year that may be offset by a pre-change loss is subject to an annual limitation that is cumulative to the extent it is not all utilized in a year. This limitation is derived by multiplying the fair market value of the Company stock as of the ownership change by the applicable federal long-term tax-exempt rate, which was 1.63% at February 1, 2020. To the extent that a company has a net unrealized built-in gain at the time of an ownership change, which is realized or deemed recognized during the five-year period following the ownership change, there is an increase in the annual limitation for each of the first five-years that is cumulative to the extent it is not all utilized in a year.

The Company has an ongoing study of the rolling three-year testing periods. Based upon the elections the Company has made and the information that has been filed with the Securities and Exchange Commission through February 1, 2020, the Company has not had a Section 382 ownership change through February 1, 2020.

If an ownership change should occur in the future, the Company’s ability to use the NOL to offset future taxable income will be subject to an annual limitation and will depend on the amount of taxable income generated by the Company in future periods. There is no assurance that the Company will be able to fully utilize the NOL and the Company could be required to record an additional valuation allowance related to the amount of the NOL that may not be realized, which could impact the Company’s result of operations.

We believe that these NOL carryforwards are a valuable asset for us. Consequently, we have a stockholders' rights agreement (Amended Rights Agreement) in place, which was approved by the Company’s stockholders, to protect our NOLs during the effective period of the Amended Rights Agreement. On January 24, 2020, the term of the Amended Rights Agreement was extended to January 25, 2023. The Company expects to submit the extension of the Amended Rights Agreement to stockholders for approval at its 2020 annual meeting of stockholders. If stockholders do not approve the extension of the Amended Rights Agreement, the Amended Rights Agreement will terminate.

Although the Amended Rights Agreement is intended to reduce the likelihood of an “ownership change” that could adversely affect us, there is no assurance that the restrictions on transferability in the rights plan will prevent all transfers that could result in such an “ownership change”.

The Amended Rights Agreement could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our Company or a large block of our common stock.  A third party that acquires 4.9% or more of our common stock could suffer substantial dilution of its ownership interest under the terms of the Amended Rights Agreement through the issuance of common stock or common stock equivalents to all stockholders other than the acquiring person.

The foregoing provisions may adversely affect the marketability of our common stock by discouraging potential investors from acquiring our stock.  In addition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders.
Item 1B. Unresolved Staff Comments 
 
None. 

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Item 2. Properties
 
At February 1, 2020, we operated 846 department stores throughout the continental United States, Alaska and Puerto Rico, of which 387 were owned, including 110 stores located on ground leases. The following table lists the number of stores operating by state as of February 1, 2020:
Alabama
 
15
 
Maine
 
5
 
Oklahoma
 
14
Alaska
 
1
 
Maryland
 
15
 
Oregon
 
8
Arizona
 
21
 
Massachusetts
 
9
 
Pennsylvania
 
27
Arkansas
 
13
 
Michigan
 
33
 
Rhode Island
 
2
California
 
71
 
Minnesota
 
15
 
South Carolina
 
13
Colorado
 
16
 
Mississippi
 
9
 
South Dakota
 
3
Connecticut
 
7
 
Missouri
 
23
 
Tennessee
 
21
Delaware
 
3
 
Montana
 
5
 
Texas
 
82
Florida
 
52
 
Nebraska
 
8
 
Utah
 
8
Georgia
 
21
 
Nevada
 
6
 
Vermont
 
4
Idaho
 
8
 
New Hampshire
 
9
 
Virginia
 
22
Illinois
 
29
 
New Jersey
 
11
 
Washington
 
19
Indiana
 
22
 
New Mexico
 
10
 
West Virginia
 
8
Iowa
 
11
 
New York
 
38
 
Wisconsin
 
10
Kansas
 
14
 
North Carolina
 
20
 
Wyoming
 
3
Kentucky
 
22
 
North Dakota
 
5
 
Puerto Rico
 
6
Louisiana
 
13
 
Ohio
 
36
 
 
 
 
Total square feet
 
93.5 million
 
 
 
 
 
 
 
 

We are party to a $1.688 billion senior secured term loan credit facility and the issuer of $500 million aggregate principal amount of senior secured notes that are secured by mortgages on certain real property of the Company, in addition to liens on substantially all personal property of the Company, subject to certain exclusions set forth in the security documents relating to the term loan credit facility and the senior secured notes. The real property subject to mortgages under the term loan credit facility and the indenture governing the senior secured notes includes our distribution centers and certain of our stores.

At February 1, 2020, our supply chain network operated 11 facilities with multiple types of distribution activities, including jcp.com fulfillment centers (direct to customers), store merchandise distribution centers (stores) and regional warehouses (regional) as indicated in the following table:
 
    
 
 
 
 
Square Footage
Leased/Owned
 
Number
 
Primary Function(s)
 
(in thousands)
Owned
 
6
 
direct to customers, stores, regional
 
9,266

Leased
 
5
 
stores, regional
 
2,529

 
 
 
 
 
 
11,795


Item 3. Legal Proceedings

The matters under the caption "Litigation" in Note 22 of the Notes to Consolidated Financial Statements included in this Form 10-K are incorporated herein by reference.   
Item 4. Mine Safety Disclosures
 
Not applicable.  

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PART II 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market for Registrant’s Common Equity
 
Our common stock is traded principally on the New York Stock Exchange (NYSE) under the symbol “JCP.” The number of stockholders of record at March 16, 2020, was 20,557.  In addition to common stock, we have authorized 25 million shares of preferred stock, of which no shares were issued and outstanding at February 1, 2020.
 
Since May 2012, the Company has not paid a dividend. Under our senior secured term loan credit facility and senior secured asset-based credit facility, we are subject to covenants restricting our ability to pay cash dividends.
 
Additional information relating to the common stock and preferred stock is included in this Annual Report on Form 10-K in the Consolidated Statements of Stockholders’ Equity and in Note 14 to the Consolidated Financial Statements.
 
Issuer Purchases of Securities
 
No repurchases of common stock were made during the fourth quarter of 2019 and no amounts are authorized for share repurchases as of February 1, 2020.

Recent Sales of Unregistered Securities
 
On May 2, 2019, the Company granted a compensatory equity award of 284,091 time-based restricted stock units (TBRSUs) to Steve Whaley, the Company's senior vice president, principal accounting officer and controller using the exemption rule under Rule 506 of Regulation D.

On April 11, 2019, the Company granted a compensatory equity award of 1,209,678 TBRSUs to Bill Wafford, the Company's executive vice president, chief financial officer using the exemption rule under Rule 506 of Regulation D.

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Five-Year Total Stockholder Return Comparison
 
The following presentation compares our cumulative stockholder returns for the past five fiscal years with the returns of the S&P 500 Stock Index and the S&P 500 Retail Index for Department Stores over the same period. A list of these companies follows the graph below. The graph assumes $100 invested at the closing price of our common stock on the NYSE and each index as of the last trading day of our fiscal year 2014 and assumes that all dividends, if applicable, were reinvested on the date paid. The points on the graph represent fiscal year-end amounts based on the last trading day of each fiscal year. The following graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.


chart-c6300c66714f57aaa1d.jpg

S&P Department Stores:
Macy’s, Kohl’s, Nordstrom
 
 
 
2015
 
2016
 
2017
 
2018
 
2019
 
2020
JCPenney
 
$100
 
$100
 
$89
 
$49
 
$18
 
$10
S&P 500
 
100
 
99
 
120
 
147
 
147
 
179
S&P Department Stores
 
100
 
72
 
58
 
72
 
76
 
54
 
The stockholder returns shown are neither determinative nor indicative of future performance.

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Item 6. Selected Financial Data
Effective February 3, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), as amended. The Company adopted the provisions of ASU 2016-02 using the modified retrospective adoption method and the simplified transition option. As a result, prior period financial position information has not been restated to reflect the new accounting standard. See Note 3 to the Consolidated Financial Statements for further information.
As of February 4, 2018, we adopted Accounting Standards Codification (ASC) Topic 606 (ASC 606), Revenue from Contracts with Customers, and ASU 2017-07, Compensation -- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost. As a result, certain prior period results have been adjusted due to the transition method applied.

Five-Year Financial Summary
($ in millions, except per share data)
2019
 
2018
 
2017
 
2016

2015
(1) 
Results for the year
 
 
 
 
 
 
 
 
 
 
Total net sales
$
10,716

 
$
11,664

 
$
12,554

 
$
12,571

 
$
12,625

 
Sales percent increase/(decrease):
 

 
 

 
 

 
 

 
 

 
Total net sales
(8.1
)%
 
(7.1
)%
(2) 
(0.1
)%
(2) 
(0.4
)%
(3) 
3.0
%
 
Comparable store sales (4)
(7.7
)%
 
(3.1
)%
 
0.1
 %
 
0.0
 %
 
4.5
%
 
Operating income/(loss)
(8
)
 
(6
)
 
212

 
324

 
4

 
As a percent of sales
(0.1
)%
 
(0.1
)%
 
1.7
 %
 
2.6
 %
 
0.0
%
 
Net income/(loss) from continuing operations
(268
)
 
(255
)
 
(118
)
 
(17
)
 
(513
)
 
Adjusted EBITDA (non-GAAP) (5)
583

 
568

 
935

 
926

 
654

 
Adjusted net income/(loss) from continuing operations (non-GAAP) (5)
(257
)
 
(296
)
 
31

 
(59
)
 
(376
)
 
Per common share
 

 
 

 
 

 
 

 
 

 
Earnings/(loss) per share from continuing operations, diluted
$
(0.84
)
 
$
(0.81
)
 
$
(0.38
)
 
$
(0.06
)
 
$
(1.68
)
 
Adjusted earnings/(loss) per share from continuing operations, diluted (non-GAAP) (5)
$
(0.80
)
 
$
(0.94
)
 
$
0.10

 
$
(0.19
)
 
$
(1.23
)
 
Financial position and cash flow
 

 
 

 
 

 
 

 
 

 
Total assets
$
7,989

 
$
7,721

 
$
8,454

 
$
9,160

 
$
9,211


Cash and cash equivalents
386

 
333

 
458

 
887

 
900

 
Total debt (6)
3,721

 
3,808

 
4,012

 
4,602

 
4,769

 
Free cash flow (non-GAAP) (5)
145

 
111

 
213

 
3

 
131

 
 
(1)
We have chosen to not adjust 2015 results for ASC 606, as permitted. Therefore, 2015 only reflects adjusted results for ASU 2017-07.
(2)
Includes the effect of the 53rd week in 2017. Excluding sales of $147 million for the 53rd week in 2017, total net sales decreased 6.0% in 2018 and 1.3% in 2017.
(3)
Calculation of increase/(decrease) of Total net sales as presented.
(4)
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 eCommerce 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.
(5)
See Non-GAAP Financial Measures herein for additional information and reconciliation to the most directly comparable GAAP financial measure.
(6)
Total debt includes long-term debt, net of unamortized debt issuance costs, including current maturities and any borrowings under our revolving credit facility.







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Five-Year Operations Summary
 
 
2019
 
2018
 
2017
 
2016
 
2015
Number of department stores:
 
 
 
 
 
 
 
 
 
 
Beginning of year
 
864

 
872

 
1,013

 
1,021

 
1,062

Openings
 

 
1

 

 
1

 

Closings
 
(18
)
 
(9
)
 
(141
)
 
(9
)
 
(41
)
End of year
 
846

 
864

 
872

 
1,013

 
1,021

Gross selling space (square feet in millions)
 
93.5

 
95.0

 
95.6

 
103.3

 
104.7

Sales per gross square foot (1)
 
$
114

 
$
122

 
$
127

 
$
121

 
$
120

Sales per net selling square foot (1)
 
$
159

 
$
170

 
$
177

 
$
166

 
$
165

 
(1)
Calculation includes the sales, including commission revenue, and square footage of department stores, including selling space allocated to services and licensed departments, that were open for the full fiscal year, as well as eCommerce sales.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
The following discussion, which presents our results, should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto, along with the Five-Year Financial and Operations Summaries, the risk factors and the cautionary statement regarding forward-looking information. Unless otherwise indicated, all references in this Management’s Discussion and Analysis (MD&A) related 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.

JCPenney is a national omnichannel retailer operating through our 846 stores in 49 states and Puerto Rico as well as eCommerce channels, which consist of our website at www.jcp.com and our JCPenney mobile application. We offer a wide range of apparel and home merchandise from a portfolio of private, exclusive and national brands. We operate in a highly competitive retail environment, competing with brick and mortar stores, as well as omnichannel and exclusively eCommerce businesses.
Plan for Renewal

In November 2019, the Company announced its Plan for Renewal to return JCPenney to sustainable, profitable growth. Coupled with our deep understanding of the customer, these five components of our Plan for Renewal guide everything we do:

Offer compelling merchandise;
Deliver an engaging experience;
Drive traffic;
Fuel growth; and
Build a results-minded culture.

We plan to transform our merchandising efforts centered around Offering Compelling Merchandise within the five lifestyles of how our customers, in particular the All-in Shopping Enthusiast, live and want to shop:

To Deliver an Engaging Experience, we used our extensive research and customer insights to create test and learns which featured occasion merchandising, improved visual merchandising, and a redesigned shopping experience. We expanded the learnings from these tests to over 90 stores. In addition, in November, we opened our Brand-Defining store to create an inspiring, shared experience showcasing compelling products and brands along with differentiating elements. It is the fullest articulation of our customer commitment - and the manifestation of the research, planning, and hard work that characterized 2019. We are measuring over 100 touchpoints in this lab store to inform our future actions.

To Drive Traffic, we have three distinct work streams: personalization, our affinity programs, and improvements to our eCommerce site -- which we consider our flagship store. Additionally, we strengthened our execution on fulfillment, including shipping from stores and picking up online orders in stores, which is helping us meet our increasing fulfillment demands.

To Fuel Growth, we are developing a more efficient operating model, reinvesting in value-creating activities, and establishing a capital structure that supports the long-term needs of the company.

Lastly, we are developing a Results-Minded Culture focused on accountability, urgency, and innovative problem solving at all levels of the organization, and we are building a culture that connects all associates to achievements larger than the individual.

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2019 Summary
 
Total net sales were $10,716 million, a decrease of 8.1% as compared to 2018, and comparable store sales decreased 7.7% for the year. Adjusted comparable store sales, which exclude the impact of the Company's exit from major appliance and in-store furniture categories, decreased 5.6% for the year. 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.

Credit income and other was $451 million compared to $355 million in 2018. The increase was due to improved performance of the credit portfolio.

Cost of goods sold, which excludes depreciation and amortization, as a percentage of Total net sales was 65.4% compared to 67.5% last year. The improvement as a rate of net sales was primarily driven by an increase in both store and online selling margins, improved shrinkage results and the exit from the major appliance and in-store furniture categories earlier this year.

SG&A expenses decreased $11 million, or 0.3%, as compared to 2018. The decrease in SG&A dollars was primarily due to lower advertising and store controllable expenses, which were offset by slightly higher incentive compensation.

Net loss was $268 million, or $0.84 per share, compared to a net loss of $255 million, or $0.81 per share, in 2018.  Results for 2019 included the following amounts that are not directly related to our ongoing core business operations:

$48 million, or $(0.15) per share, of restructuring and management transition charges;
$35 million, or $0.11 per share, for other components of net periodic pension and postretirement benefit income;
$1 million, or $0.00 per share, for the gain on extinguishment of debt; and
$1 million, or $0.00 per share, for the net gain on the sale of non-operating assets.

Adjusted net loss was $257 million, or $(0.80) per share, compared to adjusted net loss of $296 million, or $(0.94) per share, in 2018. 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.

Adjusted EBITDA was $583 million for 2019 compared to adjusted EBITDA of $568 million in 2018. 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.

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Results of Operations
Effective February 3, 2019, we adopted ASU 2016-02, Leases (Topic 842), as amended. The Company adopted the provisions of the new lease standard using the modified retrospective adoption method and the simplified transition option. See Note 3 to the Consolidated Financial Statements for further information.
 
Three-Year Comparison of Operating Performance
(in millions, except per share data)
2019
 
2018
 
2017
 
Total net sales
$
10,716

 
$
11,664

 
$
12,554

 
Credit income and other
451

 
355

 
319

 
Total revenues
11,167

 
12,019

 
12,873

 
Total net sales percent increase/(decrease) from prior year
(8.1
)%
 
(7.1
)%
(1) 
(0.1
)%
(1) 
Comparable store sales increase/(decrease) (2)
(7.7
)%
 
(3.1
)%
 
0.1
 %
 
Adjusted comparable store sales increase/(decrease) (non-GAAP) (3)
(5.6
)%
 
(2.3
)%
 
(1.9
)%
 
Costs and expenses/(income):
 
 
 
 
 
 
Cost of goods sold (exclusive of depreciation and amortization shown separately below)
7,013

 
7,870

 
8,208

 
Selling, general and administrative
3,585

 
3,596

 
3,845

 
Depreciation and amortization
544

 
556

 
570

 
Real estate and other, net
(15
)
 
(19
)
 
(146
)
 
Restructuring and management transition
48

 
22

 
184

 
Total costs and expenses
11,175

 
12,025

 
12,661

 
Operating income/(loss)
(8
)
 
(6
)
 
212

 
As a percent of sales
(0.1
)%
 
(0.1
)%
 
1.7
 %
 
Other components of net periodic pension and postretirement benefit cost/(income)
(35
)
 
(71
)
 
98

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

 
33

 
Net interest expense
293

 
313

 
325

 
Income/(loss) before income taxes
(265
)
 
(271
)
 
(244
)
 
Income tax (benefit)/expense
3

 
(16
)
 
(126
)
 
Net income/(loss)
$
(268
)
 
$
(255
)
 
$
(118
)
 
Adjusted EBITDA (3)
$
583

 
$
568

 
$
935

 
Adjusted net income/(loss) (non-GAAP) (3)
$
(257
)
 
$
(296
)
 
$
31

 
Diluted EPS
$
(0.84
)
 
$
(0.81
)
 
$
(0.38
)
 
Adjusted diluted EPS (non-GAAP) (3)
$
(0.80
)
 
$
(0.94
)
 
$
0.10

 
Weighted average shares used for diluted EPS
320.2

 
315.7

 
311.1

 
 
(1)
Includes the effect of the 53rd week in 2017. Excluding sales of $147 million for the 53rd week in 2017, total net sales decreased 6.0% in 2018 and 1.3% in 2017.
(2)
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 eCommerce 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.
(3)
See discussion herein of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure.

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2019 Compared to 2018
 
Total Net Sales
Our year-to-year change in total net sales is comprised of (a) sales from new stores net of closings and relocations, referred to as non-comparable store sales, (b) sales of stores opened in both years as well as eCommerce sales, referred to as comparable store sales and (c) other revenue adjustments such as sales return estimates and store liquidation sales. We consider comparable store sales to be a key indicator of our current performance; measuring the growth in sales and sales productivity of existing stores. Positive comparable store sales contribute to greater leveraging of operating costs, particularly payroll and occupancy costs, while negative comparable store sales contribute to de-leveraging of costs. Comparable store sales also have a direct impact on our total net sales and the level of cash flow.
 
2019
 
2018
 
Total net sales (in millions)
$
10,716

 
$
11,664

 
Sales percent increase/(decrease)
 
 
 
 
Total net sales
(8.1
)%
 
(7.1
)%
(1) 
Comparable store sales (2)
(7.7
)%
 
(3.1
)%
 
Adjusted comparable store sales increase/(decrease) (non-GAAP) (3)
(5.6
)%
 
(2.3
)%
 
Sales per gross square foot (4)
$
114

 
$
122

 

(1)
Includes the effect of the 53rd week in 2017. Excluding sales of $147 million for the 53rd week in 2017, total net sales decreased 6.0% in 2018.
(2)
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 eCommerce 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.
(3)
See discussion herein of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure.
(4)
Calculation includes the sales, including commission revenue, and square footage of department stores, including selling space allocated to services and licensed departments, that were open for the full fiscal year, as well as eCommerce sales.
 
The following table provides the components of the net sales decrease
($ in millions)
2019
Comparable store sales increase/(decrease)
$
(864
)
Sales related to closed stores
(84
)
Total net sales increase/(decrease)
$
(948
)
As our omnichannel strategy, which includes our stores, our website at jcp.com, or our JCPenney mobile app, continues to mature, it is increasingly difficult to distinguish between a store sale and an eCommerce sale. Because we no longer have a clear distinction between store sales and eCommerce sales, we do not separately report eCommerce sales. Below is a list of some of our omnichannel activities:
Stores increase eCommerce sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online or through the JCPenney app.
Our website and JCPenney app increase store sales as in-store customers have often pre-shopped online or the JCPenney app before shopping in the store, including verification of which stores have online merchandise in stock.
Most eCommerce purchases are easily returned in our stores.
JCPenney Rewards can be earned and redeemed through all sales channels.
In-store customers can order from our website with the assistance of associates in our stores or they can shop via 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.
eCommerce orders can be shipped from a dedicated jcp.com fulfillment center, a store, a regional warehouse, directly from vendors or any combination of the above.

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Table of Contents

Certain categories of store inventory can be accessed and purchased online or through the JCPenney app and shipped directly to the customer's home from the store.
eCommerce orders can be shipped to stores for customer pick up.
"Buy online and pick up in store" is now available in all of our stores.

For 2019, average unit retail selling price increased, while transaction counts and units per transaction decreased as compared to the prior year. On a geographic basis, all regions experienced comparable store sales decreases for 2019 compared to the prior year. During 2019, all merchandise divisions experienced comparable store sales decreases with Jewelry, Women's apparel and Men's apparel and accessories being our best performing divisions.
 
During both 2019 and 2018, private brand merchandise comprised 46% of total merchandise sales. Exclusive brand merchandise comprised 6% and 7% of total merchandise sales in 2019 and 2018, respectively.

Credit Income and Other
Our private label credit card and co-branded MasterCard® programs are owned and serviced by Synchrony.  Under our agreement, we receive cash payments from Synchrony based upon the performance of the credit card portfolio.  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 2019 and 2018, we recognized income of $451 million and $355 million, respectively, pursuant to our agreement with Synchrony. The increase in 2019 resulted from the improved loss performance of the underlying credit portfolio and the associated reserve changes.

Cost of Goods Sold
Cost of goods sold, exclusive of depreciation and amortization, improved to 65.4% of sales in 2019, or 210 basis points, compared to 67.5% in 2018. On a dollar basis, cost of goods sold decreased $857 million, or 10.9%, to $7,013 million in 2019 compared to $7,870 million in the prior year. The net 210 basis point improvement was primarily driven by an increase in selling margins, improved shrinkage results and the exit from the major appliance and in-store furniture categories earlier in the year.

SG&A Expenses
SG&A expenses declined $11 million to $3,585 million in 2019 compared to $3,596 million in 2018. The decrease in SG&A dollars was primarily due to lower advertising and store controllable expenses, which were offset by slightly higher incentive compensation. As a percentage of Total net sales, SG&A expenses were 33.5% compared to 30.8% in the prior year. The net 270 basis point increase was primarily driven by de-leveraging of SG&A expenses as a result of our negative comparable store sales performance. During 2018, SG&A included approximately $73 million in expense offsets related to the sale of leasehold interests as well as the reversal of previously accrued risk insurance reserves. Additionally, due to the implementation of the new lease accounting standard, approximately $20 million in expenses in 2019 related to the Company's home office lease, which were previously classified as elements of interest and depreciation and amortization, are now included in SG&A.

Depreciation and Amortization Expenses
Depreciation and amortization expense in 2019 decreased $12 million to $544 million, or 2.2%, compared to $556 million in 2018. This decrease is primarily a result of the implementation of the new lease accounting standard as discussed above.
Real Estate and Other, Net
Real estate and other primarily 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. Prior to 2019, real estate and other also consisted of ongoing income from our real estate subsidiaries. During the first quarter of 2014, we formed a joint venture to develop property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture) in which we contributed approximately 220 acres of property. The joint venture was formed to develop the contributed property and our proportional share of the joint venture's activities is recorded in Real estate and other, net. During the third quarter of 2018, we sold our interest to the other partner and are no longer a member of the joint venture.



27

Table of Contents

The composition of real estate and other, net was as follows:  
($ in millions)
 
2019
 
2018
Net gain from sale of non-operating assets
 
$
(1
)
 
$

Investment income from Home Office Land Joint Venture
 

 
(4
)
Net gain from sale of operating assets
 
(8
)
 
(67
)
Impairments
 

 
52

Other
 
(6
)
 

Total expense/(income)
 
$
(15
)
 
$
(19
)

See Note 19 to the Consolidated Financial Statements for further discussion of real estate and other, net.
Restructuring and Management Transition
The composition of restructuring and management transition charges was as follows:     
($ in millions)
 
2019
 
2018
Home office and stores
 
$
43

 
$
13

Management transition
 
5

 
9

Total
 
$
48

 
$
22


In 2019 and 2018, we recorded $43 million and $13 million, respectively, of costs to reduce our store and home office expenses. Costs during 2019 include store impairments of $19 million and accelerated depreciation of $4 million related to announced store closures, employee termination benefits of $10 million, store related closing costs of $4 million and advisory costs of $6 million. Costs during 2018 include employee termination benefits of $10 million, store related closing costs of $6 million and a $3 million net gain of the sales of certain closed stores.

Other Components of Net Periodic Pension and Postretirement Benefit Cost/(Income)
Other components of net periodic pension and postretirement benefit cost/(income) was $(35) million in 2019 compared to $(71) million in 2018. The decrease in 2019 resulted from recognition of certain settlement accounting charges and a decline in the discount rate in determining pension obligations.

(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 consists principally of interest expense on long-term debt, net of interest income earned on cash and cash equivalents.  In 2019, net interest expense was $293 million, a decrease of $20 million, or 6.4%, from $313 million in 2018. The reduction in net interest expense is due to lower debt levels in 2019 compared to 2018 and as a result of the implementation of the new lease accounting standard as discussed above.

Income Taxes
Our deferred tax assets, which include the future tax benefits of our net operating loss carryforwards, are subject to a valuation allowance. At February 1, 2020, the federal and state valuation allowances were $614 million and $255 million, respectively. Our deferred tax assets include the impact of re-measurement on U. S. deferred taxes at the lower enacted corporate tax rate resulting from U. S. tax reform enacted in December 2017. Future book pre-tax losses will require additional valuation allowances to offset the deferred tax assets created. Until such time that we achieve sufficient profitability to allow removal of most of our valuation allowance, utilization of our loss carryforwards will result in a corresponding decrease in the valuation allowance and offset our tax provision dollar for dollar.

We are required to allocate a portion of our tax provision between operating losses and Accumulated other comprehensive income/(loss).  In 2019, the Company did not recognize an income tax benefit from any of its operating loss and incurred an actuarial loss in Other comprehensive income/(loss), the tax benefit on which was fully offset by a valuation allowance within Other comprehensive income/(loss). Accordingly, included in the total valuation allowance of $869 million is $189 million of valuation allowance which offsets the deferred tax benefit attributable to the actuarial loss reported in Other comprehensive income/(loss).

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Table of Contents


For 2019, we recorded net tax expense of $3 million. Tax expense includes $4 million related to the amortization of certain indefinite-lived intangible assets, $9 million for federal, state and foreign jurisdictions where loss carryforwards are limited or unavailable offset by $9 million to adjust the valuation allowance and $1 million for state audit settlements.

For 2018, we recorded a net tax benefit of $16 million. Tax benefit includes $16 million to adjust the valuation allowance, $1 million for state audit settlements and $11 million related to other comprehensive income offset by tax expense of $4 million related to the amortization of certain indefinite-lived intangible assets, $7 million for federal, state and foreign jurisdictions where loss carryforwards are limited or unavailable and $1 million for state law changes.

Net Income/(Loss) and Adjusted Net Income/(Loss) (non-GAAP)
In 2019, we reported a loss of $268 million, or $0.84 per share, compared with a loss of $255 million, or $0.81 per share, in 2018. Excluding the impact of restructuring and management transition charges, other components of periodic pension and postretirement benefit cost/(income), the (gain)/loss on extinguishment of debt, the proportional share of net income from joint venture, the tax impact resulting from other comprehensive income allocation, and the impact of tax reform, adjusted net income/(loss) (non-GAAP) was a loss of $257 million, or $0.80 per share, in 2019 compared to a loss of $296 million, or $0.94 per share, in 2018.

The higher net loss in 2019 was driven primarily by the higher income tax expense in 2019 as the loss before income taxes improved from 2018.

2018 Compared to 2017
For a comparison of our results of operations for 2018 and 2017, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended February 2, 2019, filed with the SEC on March 19, 2019.

Non-GAAP Financial Measures
 
We report our financial information in accordance with generally accepted accounting principles in the United States (GAAP). However, we present certain financial measures and ratios 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 and ratios 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 and ratios 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 and ratios 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 and postretirement benefit cost/(income), the (gain)/loss on extinguishment of debt, the net gain on the sale of non-operating assets, the proportional share of net income from our joint venture formed to develop the excess property adjacent to our home office facility in Plano, Texas (Home Office Land Joint Venture), the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps and the impact of tax reform. Unlike other operating expenses, restructuring and management transition charges, other components of net periodic pension and postretirement benefit cost/(income), the (gain)/loss on extinguishment of debt, the net gain on the sale of non-operating assets, the proportional share of net income from the Home Office Land Joint Venture, the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps and the impact of tax reform 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 jcp.com. Further, our non-GAAP adjustments are for non-operating associated activities such as closed store impairments included in restructuring and management transition charges and such as joint venture earnings from the sale of excess land included in the proportional share of net income from our Home Office Land Joint Venture. Additionally, other components of net periodic pension and postretirement benefit 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 and postretirement benefit cost/(income), the (gain)/loss on extinguishment of debt, the net gain on the sale of non-operating assets, the proportional share of net income from the Home Office Land Joint Venture, the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps and the impact of tax reform on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted EBITDA; (2) adjusted net income/(loss)

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Table of Contents

from continuing operations; (3) adjusted earnings/(loss) per share-diluted from continuing operations; and (4) adjusted comparable store sales increase/(decrease).

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:
($ in millions)
2019
 
2018
 
2017
 
2016
 
2015
Net income/(loss) from continuing operations
$
(268
)
 
$
(255
)
 
$
(118
)
 
$
(17
)
 
$
(513
)
Add: Net interest expense
293

 
313

 
325

 
363

 
405

Add: (Gain)/loss on extinguishment of debt
(1
)
 
23

 
33

 
30

 
10

Add: Income tax expense/(benefit)
3

 
(16
)
 
(126
)
 
1

 
9

Add: Depreciation and amortization
544

 
556

 
570

 
609

 
616

Add: Restructuring and management transition charges
48

 
22

 
184

 
26

 
84

Add: Other components of net periodic pension and postretirement benefit cost/(income)
(35
)
 
(71
)
 
98

 
(53
)
 
93

Less: Net gain on the sale of non-operating assets
(1
)
 

 

 
(5
)
 
(9
)
Less: Proportional share of net income from home office land joint venture

 
(4
)
 
(31
)
 
(28
)
 
(41
)
Adjusted EBITDA (non-GAAP)
$
583

 
$
568

 
$
935

 
$
926

 
$
654



Adjusted Net Income/(Loss) and Adjusted Diluted EPS from Continuing Operations. The following table reconciles net income/(loss) and diluted EPS from continuing operations, the most directly comparable GAAP financial measures, to adjusted net income/(loss) and adjusted diluted EPS from continuing operations, non-GAAP financial measures:
($ in millions, except per share data)
2019
 
2018
 
2017
 
2016
 
2015
Net income/(loss) (GAAP) from continuing operations
$
(268
)
 
$
(255
)
 
$
(118
)
 
$
(17
)
 
$
(513
)
Diluted EPS (GAAP) from continuing operations
$
(0.84
)
 
$
(0.81
)
 
$
(0.38
)
 
$
(0.06
)
 
$
(1.68
)
Add: Restructuring and management transition charges (1)
48

 
22

 
184

 
26

 
84

Add: Other components of net periodic pension and postretirement benefit cost/(income) (1)
(35
)
 
(71
)
 
98

 
(53
)
 
93

Add: (Gain)/loss on extinguishment of debt (1)
(1
)
 
23

 
33

 
30

 
10

Less: Net gain on the sale of non-operating assets (1)
(1
)
 

 

 
(5
)
 
(9
)
Less: Proportional share of net income from home office land joint venture (1)

 
(4
)
 
(31
)
 
(28
)
 
(41
)
Less: Tax impact resulting from other comprehensive income allocation

 
(11
)
(2) 
(60
)
(2) 
(12
)
(2) 

Less: Impact of tax reform

 

 
(75
)
 

 

Adjusted net income/(loss) (non-GAAP) from continuing operations
$
(257
)
 
$
(296
)
 
$
31

 
$
(59
)
 
$
(376
)
Adjusted diluted EPS (non-GAAP) from continuing operations
$
(0.80
)
 
$
(0.94
)
 
$
0.10

 
$
(0.19
)
 
$
(1.23
)

(1)
Reflects no tax effect due to the impact of the Company's tax valuation allowance.
(2)
Represents the tax benefits related to the allocation of tax expense to other comprehensive income items, including the amortization of actuarial losses and prior service costs related to the Primary Pension Plan and the results of our annual remeasurement of our pension plans.

Adjusted Comparable Store Sales Increase/(Decrease) (Non-GAAP)
Comparable store sales is a key performance indicator used by numerous retailers to measure the sales growth of its underlying operations. Comparable store sales is considered to be a GAAP measure as the key performance indicator is measured based on GAAP net sales. Comparable store sales that excludes the impact of major appliance and in-store furniture categories is considered a non-GAAP measure.  Given our elimination of these categories from our merchandise assortment, we believe that providing a comparable store sales metric that excludes the impact of major appliance and in-store furniture categories is useful for investors to evaluate the impact of these changes to our sales performance.

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Table of Contents


The following table reconciles comparable store sales increase/(decrease), the most directly comparable GAAP measure, to adjusted comparable store sales increase/(decrease), a non-GAAP measure.
 
2019
 
2018
Comparable store sales increase/(decrease)
(7.7
)%
 
(3.1
)%
Impact related to major appliance and in-store furniture categories
2.1
 %
 
0.8
 %
Adjusted comparable store sales increase/(decrease) (non-GAAP)
(5.6
)%
 
(2.3
)%

Financial Condition and Liquidity
Overview
Our primary sources of liquidity are cash generated from operations, available cash and cash equivalents and access to our $2.35 billion senior secured asset-based revolving credit facility (Revolving Credit Facility).

We ended the year with $386 million of cash and cash equivalents, an increase of $53 million from the prior year. As of the end of 2019, based on our borrowing base and amounts reserved for outstanding standby letters of credit, we had $1,391 million available for future borrowings under the Revolving Credit Facility, providing total available liquidity of approximately $1.8 billion.
 
The following table provides a summary of our key components and ratios of financial condition and liquidity:
($ in millions) 
2019
 
2018
 
2017
Cash and cash equivalents
$
386

 
$
333

 
$
458

Merchandise inventory
2,166

 
2,437

 
2,803

Property and equipment, net
3,488

 
3,938

 
4,281

 
 
 
 
 
 
Total debt (1)
3,721

 
3,808

 
4,012

Stockholders’ equity
829

 
1,170

 
1,383