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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 October 31, 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-20201031_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

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. 322,897,689 shares of Common Stock of 50 cents par value, as of December 4, 2020.


J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
FORM 10-Q
For the Quarterly Period Ended October 31, 2020
INDEX

 Page








Table of Contents


Part I. Financial Information
Item 1. Unaudited Interim Consolidated Financial Statements


J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedNine Months Ended
(In millions, except per share data)October 31,
2020
November 2,
2019
October 31,
2020
November 2,
2019
Total net sales$1,675 $2,384 $4,147 $7,332 
Credit income and other83 116 266 342 
Total revenues1,758 2,500 4,413 7,674 
Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and amortization shown separately below)1,178 1,541 2,909 4,756 
Selling, general and administrative (SG&A)579 854 1,621 2,580 
Depreciation and amortization167 131 462 415 
Real estate and other, net (1)(6)(3)
Restructuring and management transition13 9 236 36 
Total costs and expenses1,937 2,534 5,222 7,784 
Operating income/(loss)(179)(34)(809)(110)
Other components of net periodic pension cost/(income)(10)(13)44 (39)
(Gain)/loss on extinguishment of debt   (1)
Net interest expense96 73 238 220 
Loss due to discontinuance of hedge accounting  77  
Reorganization items, net
102  210  
Income/(loss) before income taxes(367)(94)(1,378)(290)
Income tax expense/(benefit)1 (1)(66)5 
Net income/(loss)$(368)$(93)$(1,312)$(295)
Earnings/(loss) per share:
Basic$(1.13)$(0.29)$(4.04)$(0.92)
Diluted$(1.13)$(0.29)$(4.04)$(0.92)
Weighted average shares – basic325.1 320.9 324.6 319.3 
Weighted average shares – diluted325.1 320.9 324.6 319.3 
See the accompanying notes to the unaudited interim Consolidated Financial Statements.


1

Table of Contents
J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 Three Months EndedNine Months Ended
(In millions)October 31,
2020
November 2,
2019
October 31,
2020
November 2,
2019
Net income/(loss)$(368)$(93)$(1,312)$(295)
Other comprehensive income/(loss), net of tax:
Currency translations (1)
  (1) 
Cash flow hedges (2)
 (6) (49)
Net actuarial gain/(loss) arising during the period (3)
(17) (58) 
Prior service credit/(cost) arising during the period (4)
  4  
Amortization of pension prior service (credit)/cost (5)
1 2 4 6 
Total other comprehensive income/(loss), net of tax(16)(4)(51)(43)
Total comprehensive income/(loss), net of tax$(384)$(97)$(1,363)$(338)

(1)Net of $0 million of tax in the nine months ended October 31, 2020.
(2)Net of $0 million in tax in the three and nine months ended November 2, 2019. Pre-tax amounts of $(1) million and $(5) million in the three and nine months ended November, 2, 2019, respectively, were recognized in net interest expense in the unaudited Interim Consolidated Statements of Operations.
(3)Net of $0 million of tax in the three and nine months ended October 31, 2020.
(4)Net of $0 million of tax in the three and nine months ended October 31, 2020.
(5)Net of $0 million of tax in each of the three and nine months ended October 31, 2020, and November 2, 2019. Pre-tax amounts of $1 million and $2 million in the three months ended October 31, 2020, and November 2, 2019, respectively, were recognized in Other components of net periodic pension cost/(income) in the unaudited interim Consolidated Statements of Operations. Additionally, pre-tax amounts of $4 million and $6 million in the nine months ended October 31, 2020, and November 2, 2019, 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.
2

Table of Contents
J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31,
2020
November 2,
2019
February 1,
2020
(In millions, except per share data)(Unaudited)(Unaudited) 
Assets
Current assets:
Cash in banks and in transit$195 $147 $108 
Cash short-term investments476 10 278 
Restricted cash515   
Cash, cash equivalents and restricted cash1,186 157 386 
Merchandise inventory1,907 2,934 2,166 
Prepaid expenses and other610 285 174 
Total current assets3,703 3,376 2,726 
Property and equipment (net of accumulated depreciation of $3,457, $3,268 and $3,095)
3,037 3,548 3,488 
Operating lease assets753 942 998 
Prepaid pension16 175 120 
Other assets625 658 657 
Total Assets$8,134 $8,699 $7,989 
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Merchandise accounts payable$252 $1,105 $786 
Other accounts payable and accrued expenses805 899 931 
Current operating lease liabilities 78 68 
Debtor-in-possession financing
900   
Current portion of long-term debt1,264 147 147 
Total current liabilities3,221 2,229 1,932 
Noncurrent operating lease liabilities 1,113 1,108 
Long-term debt 4,011 3,574 
Deferred taxes41 117 116 
Other liabilities284 361 430 
Total liabilities not subject to compromise3,546 7,831 7,160 
Liabilities subject to compromise5,063   
Stockholders’ (Deficit) Equity
Common stock (1)
161 160 160 
Additional paid-in capital4,719 4,720 4,723 
Reinvested earnings/(accumulated deficit)(4,981)(3,694)(3,667)
Accumulated other comprehensive income/(loss)(374)(318)(387)
Total Stockholders’ (Deficit) Equity(475)868 829 
Total Liabilities and Stockholders’ (Deficit) Equity$8,134 $8,699 $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 322.8 million, 320.0 million and 320.5 million as of October 31, 2020, November 2, 2019, and February 1, 2020, respectively.
See the accompanying notes to the unaudited interim Consolidated Financial Statements.

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J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Unaudited)
(In millions)Number of Common SharesCommon StockAdditional Paid-in CapitalReinvested Earnings/(Accumulated Deficit)Accumulated Other Comprehensive Income/(Loss)Total Stockholders' (Deficit) 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 
Net income /(loss)—   (398) (398)
Other comprehensive income/(loss)—    (35)(35)
Stock-based compensation and other0.5 (4)  (4)
August 1, 2020322.4 161 4,721 (4,613)(358)(89)
Net income/(loss)—   (368) (368)
Other comprehensive income/(loss)—    (16)(16)
Stock-based compensation and other0.4  (2)  (2)
October 31, 2020322.8 $161 $4,719 $(4,981)$(374)$(475)

(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 
Net income/(loss)—   (48) (48)
Other comprehensive income/(loss)—    (28)(28)
Stock-based compensation and other0.9 1 4   5 
August 3, 2019317.7 159 4,719 (3,601)(314)963 
Net income/(loss)—   (93) (93)
Other comprehensive income/(loss)—    (4)(4)
Stock-based compensation and other2.3 1 1   2 
November 2, 2019320.0 $160 $4,720 $(3,694)$(318)$868 
(1)Represents the cumulative-effect adjustments

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

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J. C. PENNEY COMPANY, INC.
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months Ended
($ in millions)October 31,
2020
November 2,
2019
Cash flows from operating activities
Net income/(loss)$(1,312)$(295)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Restructuring and management transition163 20 
Reorganization items, net28  
Net (gain)/loss on sale of non-operating assets (1)
Net (gain)/loss on sale of operating assets 2 
(Gain)/loss on extinguishment of debt (1)
Discontinuance of hedge accounting77  
Depreciation and amortization462 415 
Benefit plans59 (44)
Stock-based compensation(2)9 
Deferred taxes(67)(5)
Change in cash from:
Inventory259 (497)
Prepaid expenses and other(428)(109)
Merchandise accounts payable(42)258 
Income taxes(1)3 
Accrued expenses and other6 (61)
Net cash provided by/(used in) operating activities(798)(306)
Cash flows from investing activities
Capital expenditures(59)(226)
Net proceeds from sale of non-operating assets 1 
Net proceeds from sale of operating assets12 14 
Insurance proceeds received for damage to property and equipment1  
Net cash provided by/(used in) investing activities(46)(211)
Cash flows from financing activities
Proceeds from debtor-in-possession financing450  
Proceeds from borrowings under the credit facility2,735 1,827 
Payments of borrowings under the credit facility(1,471)(1,398)
Payments of finance leases and note payable(1)(2)
Payments of long-term debt(19)(86)
Debtor-in-possession financing fees(50) 
Proceeds from stock issued under stock plans 1 
Tax withholding payments for vested restricted stock (1)
Net cash provided by/(used in) financing activities1,644 341 
Net increase/(decrease) in cash, cash equivalents and restricted cash800 (176)
Cash and cash equivalents at beginning of period386 333 
Cash, cash equivalents and restricted cash at end of period$1,186 $157 
Supplemental cash flow information
Income taxes received/(paid), net$(2)$(8)
Interest received/(paid), net(233)(230)
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 obligations(107)77 

See the accompanying notes to the unaudited Interim Consolidated Financial Statements.
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J. C. PENNEY COMPANY, INC.
(Debtor-In-Possession)
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.

As discussed further in Note 2, 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 Company considered impacts related to the Chapter 11 Cases and the COVID-19 pandemic (see Note 3) to its use of any estimates, as appropriate, within its unaudited interim Consolidated Financial Statements. 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 October 31, 2020” and “third quarter of 2020” refer to the 13-week period ended October 31, 2020, and “three months ended November 2, 2019” and “third quarter of 2019” refer to the 13-week period ended November 2, 2019. "Nine months ended October 31, 2020" and "nine months ended November 2, 2019" refer to the 39-week periods ended October 31, 2020 and November 2, 2019, respectively. Fiscal years 2020 and 2019 contain 52 weeks.
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.
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 October 31, 2020. In addition, the COVID-19 pandemic (see Note 3) has, and continues to have, a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations. The
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risks and uncertainties surrounding the Chapter 11 Cases and the COVID-19 pandemic, the defaults under our debt agreements (see Note 9), and our financial condition, raise substantial doubt as to the Company’s ability to continue as a going concern.

As discussed in Note 16, Subsequent Events, on November 24, 2020, the Bankruptcy Court orally approved the Company's plan of reorganization, which effectively will sell/distribute substantially all operating assets through the Asset Purchase Agreement (defined below) and the Company will wind down, once the transactions outlined in the Asset Purchase Agreement are consummated, through the liquidation of any remaining assets and liabilities. Our unaudited interim 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 due to the Company's inability to continue as a going concern.
Bankruptcy Accounting
The unaudited interim Consolidated Financial Statements included herein have been prepared as if we are a going concern and in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic No. 852 – Reorganizations (ASC 852). As a result, we have segregated liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the Chapter 11 Cases and have classified these items as Liabilities Subject to Compromise on our unaudited interim Consolidated Balance Sheets. In addition, we have classified all income, expenses, gains or losses that were incurred or realized as a direct result of the Chapter 11 Cases since filing as Reorganization items in our unaudited interim Consolidated Statement of Operations.

Certain subsidiary entities are not debtors under the Chapter 11 Cases. However, condensed combined financial statements of the Debtors are not presented in the notes to the unaudited interim Consolidated Financial Statements as the assets and liabilities, operating results and cash flows of the non-debtor entities included in the unaudited interim Consolidated Financial Statements are insignificant and, therefore, the unaudited interim Consolidated Financial Statements presented herein materially represent the condensed combined financial statements of the debtor entities for all periods presented. As of October 31, 2020, total assets, total liabilities and net income of the non-debtor entities represents 0.7%, 0.2%, and (0.7)% of total consolidated assets, liabilities and net income, respectively. As of October 31, 2020, the non-debtor entities have intercompany receivables and intercompany payables from/to the debtor entities of $28.8 million and $0.0 million, respectively.

Restricted Cash
Amounts included in restricted cash represent those required to be set aside by a contractual agreement or requirements of the Bankruptcy Court. Amounts included in restricted cash as of October 31, 2020 include:

(In Millions)October 31, 2020
DIP financing funded to escrow pending resolution of contingencies (see Note 9)$225 
Cash collateral in escrow under the requirements of the 2017 Revolving Credit Facility195 
Cash deposited into escrow to pay bankruptcy professional fees upon emergence
78 
Other17 
Total restricted cash
$515 
2. Chapter 11 Cases

Voluntary Petition for Reorganization
On the Petition Date, the Debtors filed voluntary petitions in the Bankruptcy Court seeking relief under the Bankruptcy Code. Pursuant to order of the Bankruptcy Court, the Chapter 11 Cases are being jointly administered under the caption In re: J. C. Penney Company, Inc. et al., Case No. 20-20182 (DRJ) Documents. Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://cases.primeclerk.com/JCPenney.

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 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.

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The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. Following the Petition Date, the Bankruptcy Court entered certain interim and final orders facilitating the Debtors’ operational transition into Chapter 11. These orders authorized the Debtors to, among other things, access cash collateral, pay employee wages and benefits, honor customer programs and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date. These orders are significant because they allow the Debtors to operate their businesses in the normal course.

Prior to the commencement of the Chapter 11 Cases, on May 15, 2020, the Debtors entered into a Restructuring Support Agreement (together with all exhibits and schedules thereto, the “RSA”) with members of an ad hoc group of lenders and noteholders (the “Ad Hoc Group”) that held approximately 70 percent of the Debtors’ first lien debt as of such date. On or about June 7, 2020, additional lenders and noteholders (collectively, and together with the Ad Hoc Group, the “Consenting Stakeholders”) executed the RSA. As of such date, the Consenting Stakeholders held approximately 93 percent of the Debtors’ prepetition first lien debt. The RSA contemplated a restructuring process that would establish both a financially sustainable operating company and a real estate investment trust. On September 10, 2020, the Company entered into a non-binding letter-of-intent (“LOI”) with the Ad Hoc Group, Simon Property Group and Brookfield Property Group that is generally consistent with the framework of the restructuring process contemplated in the RSA. On October 28, 2020, the Company, together with certain of its subsidiaries, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Copper Retail JV LLC, an entity formed by and under the control of Simon Property Group and Brookfield Property Group, and Copper Bidco LLC, an entity that is controlled by the lenders under the Superpriority Senior Secured Debtor-In-Possession Credit and Guaranty Agreement and the other holders of the Debtors’ first lien debt.

Please see Note 16 for additional information regarding the completion of certain of the transactions contemplated by the Asset Purchase Agreement and the approval of the plan of reorganization.

Financing During the Chapter 11 Cases
See Note 9 for discussion of the DIP Credit Agreement, which provides up to $450 million in senior secured, super-priority new money financing, subject to the terms, conditions, and priorities set forth in the applicable definitive documentation and orders of the Bankruptcy Court.

Liabilities Subject to Compromise
As a result of the Chapter 11 Cases, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, critical vendors and debt.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.

The following table presents Liabilities subject to compromise as reported in the unaudited interim Consolidated Balance Sheet at October 31, 2020:

(In millions)October 31, 2020
Debt (1)
$3,289 
Operating leases (including $91 million in landlord damage claims related to rejected leases)944 
Merchandise accounts payable492 
Other accounts payable and accrued expenses188 
Other liabilities116 
Accrued interest34 
Total liabilities subject to compromise
$5,063 
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(1) Please see Note 9 for details of the pre-petition debt reported as liabilities subject to compromise.

Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code the Debtors may assume, assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of other applicable conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such contract and, subject to certain exceptions, relieves the Debtors from performing future obligations under such contract but entitles the counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Alternatively, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this report, including where applicable quantification of the Company’s obligations under such executory or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. See Note 11 for additional information regarding the rejection of certain leases.

Reorganization Items, Net
Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of the following for the quarter ended October 31, 2020:
Three Months 
Ended
Nine Months 
Ended
(In millions)October 31, 2020October 31, 2020
Advisor fees$73 $137 
Debtor-in-possession financing fees 50 
Write-off of pre-petition unamortized debt issuance costs 33 
Employee retention11 32 
(Gain)/loss on lease terminations, net of landlord damage claims11 (55)
Other7 13 
Total reorganization items, net (1)
$102 $210 
(1) Cash paid for reorganization items, net for the three months ended October 31, 2020, was $73 million, which includes $47 million in advisor fees and $19 million for employee retention payments.

Store Asset Related Charges/Gains
In conjunction with our restructuring process that began toward the end of the first quarter of 2020 and continued into the second and third quarters with the bankruptcy proceedings, the Company identified certain properties to be considered, and designated, for closing. Additionally, the filing of the Chapter 11 Cases and other restructuring considerations have resulted in various impairment analyses, the reassessment and remeasurement of certain reasonably certain lease terms and the reconsideration of the amortization periods for leasehold improvements and related fixed assets. The effects of these actions during 2020, resulted in multiple adjustments to store-related and other assets, including right-of-use lease assets and lease liabilities for the three-month and nine-month periods ended October 31, 2020. These adjustments included impairments of long-lived assets, impairments of operating lease assets, remeasurement of certain operating lease assets and liabilities based on a reassessment of the reasonably certain lease term, and the rejection of certain leases through the Bankruptcy Court. Since these accounting write offs are primarily related to actual, or the eventual, closure of stores and other properties, the Company summarized the impact on the unaudited interim Consolidated Statement of Operations in the table below for the three-month and nine-month periods ended October 31, 2020, including the caption in which each item is recorded in the unaudited interim Consolidated Statement of Operations.

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Three 
Months 
Ended
Nine Months Ended
(In millions)October 31, 2020October 31, 2020Statement of Operations Line Item
Impairments of long-lived assets (see note 13)$ $75 Restructuring and management transition
Impairments of operating lease assets (see note 13) 50 Restructuring and management transition
Write off of store assets 1 Restructuring and management transition
Accelerated amortization of operating lease assets (see note 11)2 13 SG&A
Accelerated depreciation of long-lived assets (1)
46 74 Depreciation and amortization
Gain on remeasurement of operating lease assets and operating lease liabilities (see notes 11 and 13) (20)Restructuring and management transition
(Gain)/loss on store lease terminations from rejection of leases, net (see note 11)11 (50)Reorganization items, net
Gain on sale of closed stores(3)(3)Restructuring and management transition
Gain on sale of closing store fixtures(7)(8)Restructuring and management transition
  Total$49 $132 

(1) Represents the incremental depreciation expense recorded during the respective period due to the reduced estimated useful life of the underlying long-lived assets

The accounting standards applicable to these adjustments to long-lived assets and operating lease assets and liabilities are based on various facts and circumstances over the period from a decision to close a store (as an indicator of impairment) to the cease use date and sale or lease rejection approval from the Bankruptcy Court. These events drive the timing of recognition and the presentation location in the unaudited interim Consolidated Statement of Operations. At the point that an operating lease for a closing store is rejected and the Company ceases use of the property, the store’s related long-lived assets will be written-off to their residual value and the store’s operating lease assets and liabilities will be written down to zero. However, under the applicable accounting standards, the write down of these assets and liabilities occurs at different points in time as these stores are eventually closed and the related store leases progress toward rejection.

3.  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. Additionally, subsequent to temporarily closing all stores, the Company furloughed approximately 80,000 associates, including store and supply chain associates, as well as some corporate office associates.

In late April 2020, the Company began re-opening stores with limited operating hours and staffing. 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. The majority of our stores continue to operate with limited hours and staffing. As of October 31, 2020, the Company completed the closing of 153 stores and is in the process of closing 3 additional stores. Going out of business sales have been completed at all of these stores, with the final three stores closing in November 2020. As of October 31, 2020, less than 1,000 associates remain on furlough.

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. 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.

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4. 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.

5. 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 EndedNine Months Ended
(In millions, except per share data)October 31,
2020
November 2,
2019
October 31,
2020
November 2,
2019
Earnings/(loss)
Net income/(loss)$(368)$(93)$(1,312)$(295)
Shares
Weighted average shares assuming dilution (basic and diluted shares)325.1 320.9 324.6 319.3 
EPS
Basic$(1.13)$(0.29)$(4.04)$(0.92)
Diluted$(1.13)$(0.29)$(4.04)$(0.92)
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 EndedNine Months Ended
(Shares in millions)October 31,
2020
November 2,
2019
October 31,
2020
November 2,
2019
Stock options and restricted stock awards9.6 23.8 11.8 23.7 
6. 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 and nine months ended October 31, 2020 and November 2, 2019:
Three Months EndedNine Months Ended
($ in millions)October 31, 2020November 2, 2019October 31, 2020November 2, 2019
Women’s apparel$342 20 %$509 21 %$829 20 %$1,582 21 %
Men’s apparel and accessories340 20 %524 22 %84220 %1,539 21 %
Women’s accessories, including Sephora230 14 %328 14 %61915 %1,106 15 %
Home187 11 %229 10 %50412 %780 11 %
Footwear and handbags164 10 %281 12 %42810 %809 11 %
Kid’s, including toys169 10 %253 11 %3629 %669 9 %
Jewelry126 8 %106 4 %2917 %368 5 %
Services and other117 7 %154 6 %2727 %479 7 %
Total net sales$1,675 100 %$2,384 100 %$4,147 100 %$7,332 100 %
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)October 31, 2020November 2, 2019February 1, 2020
Gift cards$102 $110 $136 
Loyalty rewards67 63 58 
Total contract liability$169 $173 $194 

A rollforward of the amounts included in contract liability for the first nine months of 2020 and 2019 are as follows:
(in millions)20202019
Beginning balance$194 $200 
Current period gift cards sold and loyalty reward points earned114 246 
Net sales from amounts included in contract liability opening balances(54)(71)
Net sales from current period usage(85)(202)
Ending balance$169 $173 
7. 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.

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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 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 8) 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 10), 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 2) was deemed to be more likely than not as of May 2, 2020, the end of the Company’s fiscal first quarter. Accordingly, the Company determined that it was probable that the forecasted transactions would not occur and, therefore, the hedges were no longer effective. As a result, during 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. As of May 7, 2020, the fair value of the interest swaps was $77 million. The interest rate swaps liability is secured by the collateral of the 2017 Credit Facility (see Note 9) and is not subject to compromise. The interest rate swaps are no longer subject to fair value changes after May 7, 2020.

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
October 31,
 2020 (1)
November 2,
2019 (1)
February 1,
2020 (1)
Balance Sheet Location
October 31,
2020 (1)
 November 2,
2019 (1)
February 1,
2020 (1)
Interest rate swapsPrepaid expenses and other$ $ $ Other accounts payable and accrued expenses$77 $ $ 
Interest rate swapsOther assets