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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 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
 jcp-20200502_g1.jpg
J. C. PENNEY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware26-0037077
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
6501 Legacy DrivePlanoTexas75024 - 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 classTrading Symbol(s)Name of each exchange on which registered *
Common Stock of 50 cents par value*NYSE
Preferred Stock Purchase Rights*NYSE
* On May 20, 2020, NYSE Regulation, Inc. filed a Form 25 with the Securities and Exchange Commission (the “SEC”) to delist J. C. Penney Company, Inc.’s common stock (the “common stock”) from the New York Stock Exchange. The deregistration of the common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will be effective 90 days, or such shorter period as the SEC may determine, after filing of the Form 25. Upon deregistration of the common stock under Section 12(b) of the Exchange Act, the common stock will remain registered under Section 12(g) of the Exchange Act.
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 322,382,095 shares of Common Stock of 50 cents par value, as of July 17, 2020.

EXPLANATORY NOTE
J. C. Penney Company, Inc. is filing this quarterly report on Form 10-Q after the June 11, 2020 (the “Original Due Date”) deadline applicable to it for the filing of a Form 10-Q for the quarter ended May 2, 2020 (the “Quarterly Report”) in reliance on the 45-day extension provided by an order issued by the SEC under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (the "Order").

On June 10, 2020, J. C. Penney Company, Inc. filed a Current Report on Form 8-K to indicate its intention to rely on the Order for such extension. Consistent with its statements made in the Current Report on Form 8-K, J. C. Penney Company, Inc. was unable to file the Quarterly Report by the Original Due Date, and therefore relied on the Order. The Quarterly Report is hereby filed before the extended due date permitted under the Order, i.e., 45 days after the Original Due Date, or July 27, 2020.




J. C. PENNEY COMPANY, INC.
FORM 10-Q
For the Quarterly Period Ended May 2, 2020
INDEX

 Page



Table of Contents
Part I. Financial Information
Item 1. Unaudited Interim Consolidated Financial Statements

J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
(In millions)May 2,
2020
May 4,
2019
Total net sales$1,082  $2,439  
Credit income and other114  116  
Total revenues1,196  2,555  
Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and amortization shown separately below)813  1,630  
Selling, general and administrative (SG&A)572  856  
Depreciation and amortization135  147  
Real estate and other, net(2) (5) 
Restructuring and management transition155  20  
Total costs and expenses1,673  2,648  
Operating income/(loss)(477) (93) 
Other components of net periodic pension cost/(income)(23) (13) 
Net interest expense75  73  
Loss due to discontinuance of hedge accounting77    
Income/(loss) before income taxes(606) (153) 
Income tax expense/(benefit)(60) 1  
Net income/(loss)$(546) $(154) 
Earnings/(loss) per share:
Basic$(1.69) $(0.48) 
Diluted$(1.69) $(0.48) 
Weighted average shares – basic323.7  317.7  
Weighted average shares – diluted323.7  317.7  
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


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Table of Contents
J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 Three Months Ended
(In millions)May 2,
2020
May 4,
2019
Net income/(loss)$(546) $(154) 
Other comprehensive income/(loss), net of tax:
Currency translations (1)
(1)   
Cash flow hedges (2)
  (13) 
Amortization of pension prior service (credit)/cost (3)
1  2  
Total other comprehensive income/(loss), net of tax  (11) 
Total comprehensive income/(loss), net of tax$(546) $(165) 

(1)Net of $0 million of tax in the three months ended May 2, 2020..
(2)Net of $0 million in tax in the three months ended May 4, 2019. Pre-tax amount of $(2) million for the three months ended May 4, 2019, was recognized in Net interest expense in the unaudited Interim Consolidated Statements of Operations.
(3)Net of $0 million of tax in each of the three months ended May 2, 2020, and May 4, 2019. Pre-tax amounts of $1 million and $2 million in the three months ended May 2, 2020, and May 4, 2019, respectively, were recognized in Other components of net periodic pension cost/(income) in the unaudited Interim Consolidated Statements of Operations.

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

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J. C. PENNEY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
May 2,
2020
May 4,
2019
February 1,
2020
(In millions, except per share data)(Unaudited)(Unaudited) 
Assets
Current assets:
Cash in banks and in transit$62  $160  $108  
Cash short-term investments636  11  278  
Cash and cash equivalents698  171  386  
Merchandise inventory2,221  2,477  2,166  
Prepaid expenses and other272  287  174  
Total current assets3,191  2,935  2,726  
Property and equipment (net of accumulated depreciation of $3,639, $3,339 and $3,095)3,344  3,669  3,488  
Operating lease assets934  917  998  
Prepaid pension138  156  120  
Other assets616  665  657  
Total Assets$8,223  $8,342  $7,989  
Liabilities and Stockholders’ Equity
Current liabilities:
Merchandise accounts payable$579  $842  $786  
Other accounts payable and accrued expenses829  925  931  
Current operating lease liabilities84  84  67  
Current portion of finance leases and note payable  2  1  
Current portion of long-term debt4,884  92  147  
Total current liabilities6,376  1,945  1,932  
Noncurrent operating lease liabilities1,086  1,082  1,108  
Long-term debt  3,826  3,574  
Deferred taxes48  119  116  
Other liabilities365  336  430  
Total Liabilities7,875  7,308  7,160  
Stockholders’ Equity
Common stock (1)
161  158  160  
Additional paid-in capital4,725  4,715  4,723  
Reinvested earnings/(accumulated deficit)(4,215) (3,553) (3,667) 
Accumulated other comprehensive income/(loss)(323) (286) (387) 
Total Stockholders’ Equity348  1,034  829  
Total Liabilities and Stockholders’ Equity$8,223  $8,342  $7,989  

(1)1.25 billion shares of common stock are authorized with a par value of $0.50 per share. The total shares issued and outstanding were 321.9 million, 316.8 million and 320.5 million as of May 2, 2020, May 4, 2019, and February 1, 2020, respectively.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.

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Table of Contents
J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In millions)Number of Common SharesCommon StockAdditional Paid-in CapitalReinvested Earnings/(Accumulated Deficit)Accumulated Other Comprehensive Income/(Loss)Total Stockholders' Equity
February 1, 2020320.5  $160  $4,723  $(3,667) $(387) $829  
Net income/(loss)—      (546)   (546) 
Discontinuance of hedge accounting      64  64  
Stock-based compensation and other1.4  1  2  (2)   1  
May 2, 2020321.9  $161  $4,725  $(4,215) $(323) $348  

(In millions)Number of Common SharesCommon StockAdditional Paid-in CapitalReinvested Earnings/(Accumulated Deficit)Accumulated Other Comprehensive Income/(Loss)Total Stockholders' Equity
February 2, 2019316.1  $158  $4,713  $(3,373) $(328) $1,170  
ASC 842 (Leases) and ASU 2018-02 (Stranded Taxes) adoption (1)
—      (26) 53  27  
Net income/(loss)—      (154)   (154) 
Other comprehensive income/(loss)—        (11) (11) 
Stock-based compensation and other0.7    2      2  
May 4, 2019316.8  $158  $4,715  $(3,553) $(286) $1,034  
(1)Represents the cumulative-effect adjustments

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

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Table of Contents
J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended
($ in millions)May 2,
2020
May 4,
2019
Cash flows from operating activities
Net income/(loss)$(546) $(154) 
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Restructuring and management transition139  15  
Net gain on sale of operating assets  (4) 
Discontinuance of hedge accounting77    
Depreciation and amortization135  147  
Benefit plans(22) (14) 
Stock-based compensation2  2  
Deferred taxes(60) (3) 
Change in cash from:
Inventory(55) (40) 
Prepaid expenses and other(98) (98) 
Merchandise accounts payable(207) (5) 
Income taxes(1) 3  
Accrued expenses and other(178) (54) 
Net cash provided by/(used in) operating activities(814) (205) 
Cash flows from investing activities
Capital expenditures(33) (71) 
Net proceeds from sale of operating assets  8  
Net cash provided by/(used in) investing activities(33) (63) 
Cash flows from financing activities
Proceeds from borrowings under the credit facility1,950  408  
Payments of borrowings under the credit facility(771) (290) 
Payments of finance leases and note payable(1) (1) 
Payments of long-term debt(19) (11) 
Net cash provided by/(used in) financing activities1,159  106  
Net increase/(decrease) in cash and cash equivalents312  (162) 
Cash and cash equivalents at beginning of period386  333  
Cash and cash equivalents at end of period$698  $171  
Supplemental cash flow information
Income taxes received/(paid), net$  $(2) 
Interest received/(paid), net(76) (91) 
Supplemental non-cash investing and financing activity
Increase/(decrease) in other accounts payable related to purchases of property and equipment and software1  (18) 
Remeasurement of leased assets and lease obligations5  28  

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.
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J. C. PENNEY COMPANY, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Consolidation
Basis of Presentation
J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations, and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as “we,” “us,” “our,” “ourselves” or the “Company,” unless otherwise indicated.
J. C. Penney Company, Inc. is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee of certain of JCP’s outstanding debt securities by J. C. Penney Company, Inc. is full and unconditional.
These unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The accompanying unaudited Interim Consolidated Financial Statements, in our opinion, include all material adjustments necessary for a fair presentation and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (2019 Form 10-K). We follow the same accounting policies to prepare quarterly financial statements as are followed in preparing annual financial statements. A description of such significant accounting policies is included in the 2019 Form 10-K. The February 1, 2020, financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 2019 Form 10-K. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The Company considered the COVID-19 pandemic (see Note 2) and the Chapter 11 Cases (see below under "Voluntary Petition for Reorganization") related impacts to its estimates, as appropriate, within its unaudited Interim Consolidated Financial Statements and there may be changes to those estimates in future periods. The Company believes that the accounting estimates are appropriate after giving consideration to the increased uncertainties surrounding the severity and duration of the COVID-19 pandemic and the Chapter 11 Cases. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.

Fiscal Year
Our fiscal year ends on the Saturday closest to January 31. As used herein, “three months ended May 2, 2020” and “first quarter of 2020” refer to the 13-week period ended May 2, 2020, and “three months ended May 4, 2019” and “first quarter of 2019” refer to the 13-week period ended May 4, 2019.
Basis of Consolidation
All significant inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications were made to prior period amounts to conform to the current period presentation.

Voluntary Petition for Reorganization

As discussed further in Note 14, on May 15, 2020 (the “Petition Date”), the Company and certain of its subsidiaries (collectively, the “Debtors”) commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The commencement of the Chapter 11 Cases constitutes an event of default or termination event under all debt agreements of the Company. Accordingly, the Company has classified all of its outstanding debt as a current liability on its unaudited Interim Consolidated Balance Sheets as of May 2, 2020.

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors' property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors' Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the Debtors or their property
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to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors' bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.

Additionally, as the Chapter 11 Cases commenced on May 15, 2020, during the Company's second quarter, the current financial statements have not been prepared on the basis of ASC Subtopic 852-10, Reorganizations.

Ability to Continue as a Going Concern

The unaudited Interim Consolidated Financial Statements included in this Quarterly Report on Form 10-Q have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, we may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying unaudited Interim Consolidated Financial Statements. Further, a Chapter 11 plan of reorganization is likely to materially change the amounts and classifications of assets and liabilities reported in our unaudited Interim Consolidated Balance Sheet as of May 2, 2020. In addition, the COVID-19 pandemic has, and continues to have, a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations (see Note 2). The risks and uncertainties surrounding the Chapter 11 Cases, the defaults under our debt agreements (see Note 8), and our financial condition, raise substantial doubt as to the Company’s ability to continue as a going concern. Our future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements. Our consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

2.  Global COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The COVID-19 pandemic has significantly impacted the economic conditions in the U.S. and globally. The Company announced the temporary closing of all stores effective March 19, 2020, along with most of its supply chain facilities; however, we continued to operate jcp.com and fulfill orders via three eCommerce fulfillment centers.

In response to the COVID-19 pandemic, the Company has taken many additional measures to mitigate the COVID-19 pandemic’s financial impact and increase financial flexibility, including, but not limited to:

Borrowed $1.25 billion from the 2017 Credit Facility;
Furloughed substantially all store associates and substantial numbers of distribution and home office associates;
Suspended all new hiring except for eCommerce fulfillment centers;
Suspended all 2020 merit pay increases and 2020 incentive cash bonus programs;
Suspended capital spending;
Extended payment terms with merchandise and non-merchandise suppliers for up to 60 days; and,
Suspended non-essential discretionary SG&A spending.

The COVID-19 pandemic has, and continues to have, a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations, including the Company’s filing of the Chapter 11 Cases on May 15, 2020 (see Notes 1 and 14). Because it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic, or the outcome of the Chapter 11 Cases, current financial information may not be indicative of future operating results.

In late April 2020, the Company began re-opening stores with limited operating hours. The Company re-opened 11 stores in fiscal April, 464 stores in fiscal May and 366 stores in fiscal June. All open stores and facilities have implemented enhanced safety procedures and enhanced cleaning protocols to protect the health of our customers and associates. In June, the Company announced that it would be permanently closing up to 167 stores, of which 152 stores have currently been identified for closure in 2020. The Company has commenced closing sales in the majority of these locations and expects all 152 stores to close by the end of September 2020.

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3. Effect of New Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is effective as of March 12, 2020, through December 31, 2022, and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. We do not anticipate a material impact from the adoption of this new standard.

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 have adopted this new standard beginning February 2, 2020, and the adoption did not have a material impact on the unaudited Interim Consolidated Financial Statements.
4. Earnings/(Loss) per Share
Net income/(loss) and shares used to compute basic and diluted earnings/(loss) per share (EPS) are reconciled below:
 Three Months Ended
(In millions, except per share data)May 2,
2020
May 4,
2019
Earnings/(loss)
Net income/(loss)$(546) $(154) 
Shares
Weighted average common shares outstanding (basic shares)323.7  317.7  
Adjustment for assumed dilution:
Stock options and restricted stock awards    
Weighted average shares assuming dilution (diluted shares)323.7  317.7  
EPS
Basic$(1.69) $(0.48) 
Diluted$(1.69) $(0.48) 
The following average potential shares of common stock were excluded from the diluted EPS calculation because their effect would have been anti-dilutive: 
 Three Months Ended
(Shares in millions)May 2,
2020
May 4,
2019
Stock options and restricted stock awards20.1  22.5  

5. Revenue

Our contracts with customers primarily consist of sales of merchandise and services at the point of sale, sales of gift cards to a customer for a future purchase, customer loyalty rewards that provide discount rewards to customers based on purchase activity, and certain licensing and profit-sharing arrangements involving the use of our intellectual property by others.
Revenue includes Total net sales and Credit income and other. Net sales are categorized by merchandise and service sale groupings as we believe it best depicts the nature, amount, timing and uncertainty of revenue and cash flow.

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The following table provides the components of Net sales for the three months ended May 2, 2020 and May 4, 2019:
Three Months Ended
($ in millions)May 2, 2020May 4, 2019
Women’s apparel$216  20 %$515  21 %
Men’s apparel and accessories21319 %478  20 %
Women’s accessories, including Sephora17016 %377  15 %
Home14513 %305  13 %
Footwear and handbags11711 %256  10 %
Kid’s, including toys858 %200  8 %
Jewelry757 %138  6 %
Services and other616 %170  7 %
Total net sales$1,082  100 %$2,439  100 %
Credit income and other encompasses the revenue earned from the agreement with Synchrony Financial (Synchrony) associated with our private label credit card and co-branded MasterCard® programs.
The Company has contract liabilities associated with the sales of gift cards and our customer loyalty program. These liabilities include consideration received for gift card and loyalty related performance obligations which have not been satisfied as of a given date. The liabilities are included in Other accounts payable and accrued expenses in the unaudited Interim Consolidated Balance Sheets and were as follows:
(in millions)May 2, 2020May 4, 2019February 1, 2020
Gift cards$123  $121  $136  
Loyalty rewards60  61  58  
Total contract liability$183  $182  $194  

A rollforward of the amounts included in contract liability for the first three months of 2020 and 2019 are as follows:
(in millions)20202019
Beginning balance$194  $200  
Current period gift cards sold and loyalty reward points earned37  78  
Net sales from amounts included in contract liability opening balances(23) (36) 
Net sales from current period usage(25) (60) 
Ending balance$183  $182  

6. Derivative Financial Instruments

We use derivative financial instruments for hedging and non-trading purposes to manage our exposure to changes in interest rates. Use of derivative financial instruments in hedging programs subjects us to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of our derivative financial instruments is used to measure interest to be paid or received and does not represent our exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate.

When we use derivative financial instruments for the purpose of hedging our exposure to interest rates, the contract terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative
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instrument is a hedge, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in Accumulated other comprehensive income/(loss) (AOCI) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which we have not elected to apply hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change.

We are party to interest rate swap agreements dated May 7, 2015, with notional amounts totaling $1,250 million to fix a portion of our variable LIBOR-based interest payments. The interest rate swap agreements have a weighted-average fixed rate of 2.04%, matured on May 7, 2020, and were designated as cash flow hedges at the inception of the contracts. On September 4, 2018, we entered into additional forward interest rate swap agreements with notional amounts totaling $750 million to fix a portion of our variable LIBOR-based interest payments. The forward interest rate swap agreements have a weighted-average fixed rate of 3.135%, have an effective date from May 7, 2020, to May 7, 2025, and were designated as cash flow hedges at the inception of the contracts.

The fair value of our interest rate swaps (see Note 7) are recorded in the unaudited Interim Consolidated Balance Sheets as an asset or a liability based upon its change in fair values from its effective date. For swaps designated as cash flow hedges, the effective portion of the interest rate swaps' changes in fair values is reported in AOCI (see Note 9), and the ineffective portion is reported in net income/(loss). Amounts in AOCI are reclassified into net income/(loss) when the related interest payments affect earnings.

Quarterly, the Company evaluates the effectiveness of each hedging relationship. To continue to qualify for hedge accounting, the hedging instrument must continue to be highly effective and, for cash flow hedges, the forecasted transactions must continue to be probable of occurring. The Company's commencement of the Chapter 11 Cases (see Note 14) was deemed to be more likely than not as of May 2, 2020, the end of the Company’s fiscal quarter. Accordingly, the Company determined that it was probable that the forecasted transactions will not occur and, therefore, the hedges were no longer effective. As a result, during the first quarter of 2020, the Company recorded a charge of $77 million for discontinuance of hedge accounting, which included $58 million reclassified from AOCI.

On May 7, 2020, the Company did not make a scheduled interest payment on the aforementioned swap agreements and the agreements were cancelled.

Information regarding the gross amounts of our derivative instruments in the unaudited Interim Consolidated Balance Sheets is as follows:
Asset Derivatives at Fair ValueLiability Derivatives at Fair Value
($ in millions)Balance Sheet Location
May 2,
 2020 (1)
May 4,
2019 (1)
February 1,
2020 (1)
Balance Sheet Location
May 2,
2020 (1)
May 4,
2019 (1)
February 1,
2020 (1)
Interest rate swapsPrepaid expenses and other$  $1  $  Other accounts payable and accrued expenses$77  $  $  
Interest rate swapsOther assets  6    Other liabilities  25  58  
Total derivatives $  $7  $  $77  $25  $58  
(1) Derivatives as of May 2, 2020, were not designated as hedging instruments; derivatives as of May 4, 2019, and February 1, 2020, were designated as hedging instruments.








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7. Fair Value Disclosures
In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value, as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.

Interest Rate Swaps Measured on a Recurring Basis
The fair value of our interest rate swap agreements is valued in the market using discounted cash flow techniques, which use quoted market interest rates in discounted cash flow calculations that consider the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps are observable in the active markets and are classified as Level 2 in the fair value measurement hierarchy.

Other Non-Financial Assets Measured on a Non-Recurring Basis
As further discussed in Note 11, in the first quarter of 2020, long-lived assets held and used with a carrying value of $162 million were written down to their fair value of $113 million, and right-of-use lease assets with a carrying value of $140 million were written down to a fair value of $92 million, resulting in asset impairment charges of $49 million and $48 million, respectively, totaling $97 million. The fair value was determined based on a discounted cash flow approach. The significant inputs and assumptions used in the discounted cash flow approach included estimated market rentals for the related leases and a real estate based discount rate and are classified as Level 3 in the fair value measurement hierarchy.

Also as a result of the Company’s plans to reduce its store footprint during bankruptcy, indefinite-lived intangible assets with a carrying value of $275 million were written down to their fair value of $233 million, resulting in an asset impairment of $42 million in first quarter 2020. We evaluated the recoverability of our indefinite-lived intangible assets utilizing the relief from royalty method to determine the estimated fair value. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible assets. Key assumptions in determining relief from royalty include, among other things, discount rates, royalty rates, growth rates, sales projections and terminal value rates. The Company applied a weighted-average approach, which considered multiple scenarios with varying sales projections to estimate fair value. The fair value determined utilizing the relief from royalty method and the significant inputs related to valuing the intangible assets are classified as Level 3 in the fair value measurement hierarchy.

In connection with the Company announcing its plan to close underperforming stores in 2019, long-lived assets held and used with a carrying value of $22 million were written down to their fair value of $8 million, resulting in asset impairment charges of $14 million in the first quarter of 2019. Additionally, in connection with the adoption of the new lease accounting standard, right-of-use assets of $58 million were written down to their fair value of $19 million. The fair value was determined based on comparable market values of similar properties or on a rental income approach and the significant inputs related to valuing the store related assets are classified as Level 3 in the fair value measurement hierarchy.

Other Financial Instruments
Carrying values and fair values of financial instruments that are not carried at fair value in the unaudited Interim Consolidated Balance Sheets are as follows: 
 May 2, 2020May 4, 2019February 1, 2020
($ in millions)Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Total debt, excluding unamortized debt issuance costs, finance leases and note payable$4,918  $2,151  $3,963  $2,833  $3,758  $2,464  
The fair value of total debt was estimated by obtaining quotes from brokers or was based on current rates offered for similar debt. As of May 2, 2020, May 4, 2019, and February 1, 2020, the fair values of cash and cash equivalents and accounts payable approximated their carrying values due to the short-term nature of these instruments.
Concentrations of Credit Risk
We have no significant concentrations of credit risk.
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8. Debt
($ in millions)May 2, 2020May 4, 2019February 1, 2020
Issue:   
8.125% Senior Notes Due 2019$  $50  $  
5.65% Senior Notes Due 2020 (1)
105  110  105  
2017 Credit Facility (Matures in 2022)1,179  118    
2016 Term Loan Facility (Matures in 2023)1,521  1,572  1,540  
5.875% Senior Secured Notes Due 2023 (1)
500  500  500  
7.125% Debentures Due 202310  10  10  
8.625% Senior Secured Second Priority Notes Due 2025 (1)
400  400  400  
6.9% Notes Due 20262  2  2  
6.375% Senior Notes Due 2036 (1)
388  388  388  
7.4% Debentures Due 2037313  313  313  
7.625% Notes Due 2097500  500  500  
Total debt4,918  3,963  3,758  
Unamortized debt issuance costs(34) (45) (37) 
Less: current portion (4,884) (92) (147) 
Total long-term debt$  $3,826  $3,574  

(1)These debt issuances contain a change of control provision that would obligate us, at the holders’ option, to repurchase the debt at a price of 101%.

On March 16 and March 19, 2020, the Company borrowed $800 million and $450 million, respectively, from the senior secured asset-based revolving credit facility (the 2017 Credit Facility). Borrowings under the 2017 Credit Facility bear interest, at the Company’s option, at a base rate or LIBOR, plus an applicable interest rate margin varying depending on the Company’s utilization of the 2017 Credit Facility. The rates on the borrowings as of May 2, 2020, range from 2.75% to 4.25%. The proceeds from the 2017 Credit Facility may be used for working capital needs or general corporate purposes.
As of May 2, 2020, there were $1,179 million in outstanding borrowings under the 2017 Credit Facility. Following the commencement of the Chapter 11 Cases, we do not have access to a revolving credit facility.

The commencement of the Chapter 11 Cases constitutes an event of default or termination event under all debt agreements of the Company. As a result, the Company has classified all of its outstanding debt as a current liability as of May 2, 2020.
Any efforts to enforce payment obligations related to the Company’s outstanding debt have been automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. See Note 14 for more information on the Chapter 11 Cases.

In April 2020, the Company did not make its scheduled payment of interest related to the 6.375% Senior Secured Notes Due 2036 and did not cure that default prior to commencement of the Chapter 11 Cases. During the period of the Chapter 11 Cases, the Company will make adequate protection payments, consisting of interest and fees, in respect of the obligations under the outstanding Senior Secured Notes Due 2023, the 2017 Credit Facility, and the 2016 Term Loan Facility. All other interest payments on pre-petition outstanding debt have been suspended.

For further information on the Company's debt structure in conjunction with the Chapter 11 Cases, see Note 14.




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9. Accumulated Other Comprehensive Income/(Loss)

The following tables show the changes in accumulated other comprehensive income/(loss) balances for the three months ended May 2, 2020, and May 4, 2019:
(In millions)Net  Actuarial
Gain/(Loss)
Prior Service
Credit/(Cost)
Foreign Currency TranslationGain/(Loss) on Cash Flow HedgesAccumulated
Other
Comprehensive
Income/(Loss)
February 1, 2020$(310) $(12) $(1) $(64) $(387) 
Discontinuance of hedge accounting (1)
      64  64  
Amounts reclassified from accumulated other comprehensive income  1  (1)     
May 2, 2020$(310) $(11) $(2) $