W ebinar Presentation: J.C. PENNEY COMPANY I NC. Robert C. Pike, - PowerPoint PPT Presentation

W ebinar Presentation: J.C. PENNEY COMPANY I NC. Robert C. Pike, Senior Industry Analyst February 5, 2013 CONFI DENTI AL

J.C. PENNEY Today’s Agenda 1 . Econom ic Overview 2 . Com pany Profile & 3 Q1 2 Sum m ary 3 . Financial History 4 . Recent Developm ents 5 . Strategic I nitiatives 6 . I ssues & Conclusions 7 . Q&A February 5 , 2 0 1 3 CONFI DENTI AL 2

ECONOMI C OVERVI EW U.S. Unem ploym ent Rate 12 10 8 6 4 2 0 February 5 , 2 0 1 3 CONFI DENTI AL 3

ECONOMI C OVERVI EW Consum er Confidence N.B.: January drop attributed in part to the increase in the payroll tax. Also, 4 Q1 2 U.S. GDP fell 0 .1 % , below an expected increase of 1 .0 % . February 5 , 2 0 1 3 CONFI DENTI AL 4

J.C. PENNEY Profile Founded: 1 9 0 2 – National departm ent store chain • • HQ: Plano, TX ( approx. 1 5 9 K em ployees as of January 2 0 1 2 ) • Store Count ( a/ o 1 0 / 2 7 / 1 2 ) : 1 ,1 1 5 , in U.S. and Puerto Rico • Change over Last 1 2 Months: negligible ( + 1 net increase) • Change since 2 0 0 7 : + 4 .5 % ( + 4 8 net increase) • Approxim ately 3 9 % ow ned; rem ainder under operating leases. • Form ats ( avg store size - approxim ately 1 0 1 K square feet) : o J.C. Penney – 1 ,1 0 5 stores o The Foundry Big & Tall Supply Co. - 1 0 stores ( started 2 0 1 0 ) Distribution Facilities: 2 6 distribution centers, w arehouses and • fulfillm ent centers in 1 7 locations ( approxim ately 7 0 % ow ned) February 5 , 2 0 1 3 CONFI DENTI AL 5

J.C. PENNEY Profile, con’t. Product Mix: ( % of Sales) • • W om en’s Apparel - 2 5 % Men’s Apparel & Accessories - 2 0 % • • Hom e - 1 5 % • W om en’s Accessories ( incl. Sephora) - 1 2 % • Children’s Apparel - 1 2 % Fam ily Footw ear - 7 % • • Fine Jew elry - 4 % • Services & Other - 5 % Principal Com petition : Kohl’s, Macy’s, Bon-Ton, Belk, Dillard’s, Target, • W al-Mart and Sears, but also off-price discounters like TJX and Ross Stores. • Private/ Exclusive Brands ( approxim ately 5 2 % sales) : jcpenney, Liz Claiborne, Okie Dokie, W orthington, St. John’s Bay, The Original Arizona Jean Com pany, Am brielle, Decree, Linden Street, Article 3 6 5 , Uproar, Stafford, J. Ferrar, jcpenney Hom e Collection, and Studio by jcpenney Hom e Collection, am ong others. February 5 , 2 0 1 3 CONFI DENTI AL 6

J.C. PENNEY Profile, con’t. Key Executives & Major Shareholders Nam e Title Ow nership Ronald B. Johnson ( new ) President & CEO 3 .6 % Michael W . Kram er ( new ) COO N/ A Kenneth H. Hannah ( new ) CFO N/ A Pershing Square Capital Managem ent LP ( W . Ackm an) Shareholder ( Director) 1 8 .0 % Vornado Realty Trust ( S. Roth) Shareholder ( Director) 1 0 .8 % State Street Corp. Shareholder 9 .4 % Evercore Trust Com pany Shareholder 6 .7 % JCP Savings, Profit-Sharing & Stock Ow nership Plan Shareholder 6 .3 % N.B.: All directors and executive officers as a group ow n approxim ately 3 2 .0 % . February 5 , 2 0 1 3 CONFI DENTI AL 7

J.C. PENNEY 3 Q1 2 Sum m ary – Operating Perform ance 3 Q1 2 Total Sales: $ 2 .9 3 B [ $ 1 4 .5 3 B over last 1 2 m onths] • • ( 2 6 .6 % ) YoY decrease from 3 Q1 1 [ ( 1 7 .2 % ) YoY decrease for LTM period] 3 Q1 2 Sam e-Store Sales: ( 2 6 .1 % ) YoY change [ ( 2 2 .3 % ) YTD] • • 3 Q1 2 Gross Margin: 3 2 .5 % [ vs. 3 7 .4 % in 3 Q1 1 ] • 3 Q1 2 EBI TDA: ( $ 1 8 6 MM) [ $ 1 4 6 MM over last 1 2 m onths] • ( $ 4 0 2 MM) YoY decrease from 3 Q1 1 [ ( 8 9 .1 % ) YoY decrease for LTM period] • 3 Q1 2 EBI TDA Margin: Negative [ vs. 5 .4 % in 3 Q1 1 ] • 3 Q1 2 Free Cash Flow : ( $ 3 8 9 MM) [ vs. ( $ 4 8 9 MM) in 3 Q1 1 ] N.B.: FCF w ould have been w orse in 3 Q1 2 except for $ 9 9 MM of favorable w orking capital changes ( m ostly increases in payables) vs. $ 5 4 4 MM of w orking capital buildup ( m ostly increased inventory) in 3 Q1 1 . February 5 , 2 0 1 3 CONFI DENTI AL 8

J.C. PENNEY 3 Q1 2 Sum m ary – Operating Perform ance Sales: • • Com p-store sales plunged b/ c of a 1 2 % decline in traffic and 2 % fall in conversion rate. Total transactions, total unit volum es and average custom er ticket each • declined. But average num ber of units per transaction rose. • More “clearance” m erchandise sold at low er average prices than “everyday low -price” m erchandise, w hich sold at higher average prices. • The com pany discontinued the “m onth-long” values part of its new pricing strategy in August. This deterred m any custom ers w ho had regarded m onth-long value specials as another nam e for “sale.” • I nternet sales dropped 3 7 .3 % . • The exit from catalog business in FY2 0 1 1 also hurt sales. • Product Perform ance: Good – None. • • Bad – Everything. Men’s and w om en’s apparel saw the sm allest sam e- store sales declines, w hile hom e products experienced the w orst. February 5 , 2 0 1 3 CONFI DENTI AL 9

J.C. PENNEY 3 Q1 2 Sum m ary – Operating Perform ance Profitability: • • EBI TDA w as negative prim arily because of the drop in sales and gross m argins. Gross m argins declined due to ( 1 ) higher m arkdow ns and inventory • reserves, ( 2 ) unfavorable change in product m ix ( i.e., m ore clearance m erchandise; less everyday low -price) , and ( 3 ) vendor resistance to cost concessions. • Additionally, SG&A failed to decline as fast as sales did. Higher-m argin private-label and exclusive brands declined as a percentage • of total sales. • Free Cash Flow : • CFO and FCF w ere deeply negative because of a $ 3 2 0 MM net loss ( adjusted for $ 1 9 7 MM gain on sale of assets) and the near-doubling of CAPX to $ 3 4 1 MM, prim arily for the com pany’s aggressive store rem odeling program . A portion of this deficit w as funded w ith $ 2 7 9 MM of asset sales. • • Adjusted for asset sales, w orking capital changes and financing activities ( m ostly $ 2 4 3 MM of debt repaym ent) , the com pany burned through $ 4 8 8 MM of cash during the third quarter, alone! February 5 , 2 0 1 3 CONFI DENTI AL 1 0

J.C. PENNEY 3 Q1 2 Sum m ary Year-to-Date Asset Sales 2 .0 MM of 2 .2 MM Sim on Property Group • REI T L.P. Units ( July 2 0 1 2 ) : $ 2 4 8 .0 MM Leveraged Lease Assets ( 3 Q2 0 1 2 ) : $ 1 4 6 .0 MM • • I nterests in Four J.V.s that ow n Regional Malls ( 3 Q2 0 1 2 ) : $ 9 0 .0 MM • I nterests in CBL & Associates Properties REI T ( 3 Q2 0 1 2 ) : $ 4 0 .0 MM • Building ( 3 Q2 0 1 2 ) : $ 3 .0 MM Total: $ 5 2 7 .0 MM N.B.: The com pany recognized a $ 4 1 2 MM gain on the sale of these assets. February 5 , 2 0 1 3 CONFI DENTI AL 1 1

J.C. PENNEY 3 Q1 2 Sum m ary - Liquidity Cash ( a/ o 1 0 / 2 7 / 1 2 ) : $ 5 2 5 MM [ vs. $ 1 .0 9 B a/ o 1 0 / 2 9 / 1 1 ] • ( N.B.: Cash has declined $ 9 8 2 MM over past nine m onths; $ 1 .5 1 B w ithout asset sales.) • R/ C Available: $ 1 .2 9 B of $ 1 .5 0 B Asset-Backed Facility* , due April 2 9 , 2 0 1 6 ( Adm in Agent = JPMorgan Chase) • No outstanding borrow ings at the end of 3 Q1 2 . $ 2 1 4 MM of letters of credit issued. • • Total Liquidity: $ 1 .8 2 B [ vs. $ 2 .1 8 B a/ o 1 0 / 2 9 / 1 1 ] * Collateral = first lien on credit card receivables, accounts receivables and inventory. Borrow ing base = 8 5 % of eligible accounts receivable, 9 0 % of eligible credit card receivables and 9 0 % of the liquidation value of inventory, net of certain reserves. Facility increased to $ 1 .7 5 B on 1 / 3 1 / 2 0 1 3 . N.B.: The only financial covenant applicable to this facility is a m inim um fixed charge covenant of 1 .0 0 :1 .0 0 that applies only if availability falls below the greater of ( 1 ) $ 1 2 5 MM or ( 2 ) 1 0 % of the lesser of ( i) the total com m itm ent and ( ii) the borrow ing base in effect at the tim e of m easurem ent. February 5 , 2 0 1 3 CONFI DENTI AL 1 2

J.C. PENNEY 3 Q1 2 Sum m ary – Debt & Leverage Debt: $ 2 .9 7 B [ vs. $ 3 .1 0 B a/ o 1 0 / 2 9 / 1 1 ] • Net Debt: $ 2 .4 4 B [ vs. $ 2 .0 2 B a/ o 1 0 / 2 9 / 1 1 ] • • Net Debt increased by $ 8 4 5 MM since the end of FY2 0 1 1 . • Rent-Adj Debt-to-EBI TDAR: 1 2 .0 x [ vs. 3 .4 x a/ o 1 0 / 2 9 / 1 1 ] • Principal Com ponents of Debt • $ 0 .0 MM outstanding on $ 1 .5 B Asset-Backed R/ C, due 2 0 1 6 • $ 2 .8 7 B Various Series of Notes & Debentures, due 2 0 1 5 -2 0 9 7 $ 9 7 .0 MM capital leases & notes payable • N.B.: Only $ 2 2 .0 MM of debt m atures before the end of next October. February 5 , 2 0 1 3 CONFI DENTI AL 1 3

J.C. PENNEY 3 Q1 2 Sum m ary YTD Restructuring Charges Hom e Office & Stores ( headcount reduction) : $ 1 0 5 MM • Supply Chain Consolidation ( DC closing/ severance) : $ 1 9 MM • Softw are & System s ( asset w ritedow ns/ disposal) : $ 3 6 MM • Store Fixtures ( w ritedow ns/ disposal) : $ 6 0 MM • Managem ent Transition ( retention/ severance) : $ 3 6 MM • • Other ( e.g., closure of PA call center) : $ 1 3 MM Total: $ 2 6 9 MM N.B.: These charges follow $ 4 5 1 MM of aggregate restructuring and m anagem ent transition charges recognized in FY2 0 1 1 for supply chain consolidation ( $ 4 1 MM) , catalog & catalog outlet store closings ( $ 3 4 MM) , severance ( $ 4 1 MM) , a voluntary early retirem ent program ( $ 1 7 9 MM) , executive m anagem ent changes ( $ 1 3 0 MM) and other m iscellaneous item s ( $ 2 6 MM) . February 5 , 2 0 1 3 CONFI DENTI AL 1 4