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

CONFI DENTI AL February 5 , 2 0 1 3 2

ECONOMI C OVERVI EW U.S. Unem ploym ent Rate

February 5 , 2 0 1 3 CONFI DENTI AL 3

2 4 6 8 10 12

ECONOMI C OVERVI EW Consum er Confidence

February 5 , 2 0 1 3 CONFI DENTI AL 4 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 % .

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) :
• J.C. Penney – 1 ,1 0 5 stores
• 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

February 5 , 2 0 1 3 CONFI DENTI AL 7

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 % .

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

• 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.

J.C. PENNEY 3 Q1 2 Sum m ary – Operating Perform ance

February 5 , 2 0 1 3 CONFI DENTI AL 9

• 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
• f 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!

J.C. PENNEY 3 Q1 2 Sum m ary – Operating Perform ance

February 5 , 2 0 1 3 CONFI DENTI AL 1 0

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.

J.C. PENNEY 3 Q1 2 Sum m ary

February 5 , 2 0 1 3 CONFI DENTI AL 1 1

• 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.

J.C. PENNEY 3 Q1 2 Sum m ary - Liquidity

February 5 , 2 0 1 3 CONFI DENTI AL 1 2

• 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.

J.C. PENNEY 3 Q1 2 Sum m ary – Debt & Leverage

February 5 , 2 0 1 3 CONFI DENTI AL 1 3

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) .

J.C. PENNEY 3 Q1 2 Sum m ary

February 5 , 2 0 1 3 CONFI DENTI AL 1 4

Off-Balance Sheet Com m itm ents

• Operating Leases:

$ 2 ,9 1 6 MM

• Purchasing Com m itm ents:

$ 3 ,4 2 9 MM

• Letters of Credit:

$ 2 1 4 MM

• Sim on Property Contingent Capital Com m itm ent: $ 3 6 0 MM
• Guarantees & Surety Bonds ( insurance & leases) : $ 1 1 5 MM
• Under-funded Pension:

$ 1 2 1 MM

GCS Rating/ Outlook

• High credit risk, “E”/ Negative outlook

Reasons: High leverage, deteriorating operating perform ance, negative free cash flow , ineffective m anagem ent strategies introduced over past year and w eak com petitive position,

• ffset by decent asset protection.

J.C. PENNEY 3 Q1 2 Sum m ary

February 5 , 2 0 1 3 CONFI DENTI AL 1 5

Financial History

J.C. PENNEY

February 5 , 2 0 1 3 CONFI DENTI AL 1 6

J.C. PENNEY Financial History - Sales ( $ in MMs)

February 5 , 2 0 1 3 CONFI DENTI AL 1 7

$- $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 2008 2009 2010 2011 LTM 10/27/12

N.B.: Steady sales decline despite increase in store base since 2 0 0 7 .

J.C. PENNEY Financial History - EBI TDA ( $ in MMs)

February 5 , 2 0 1 3 CONFI DENTI AL 1 8

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 2008 2009 2010 2011 LTM 10/27/12

N.B.: Gradual decline and recovery through recession follow ed by last year’s plunge.

J.C. PENNEY Financial History - EBI TDA Margin

February 5 , 2 0 1 3 CONFI DENTI AL 1 9

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 2008 2009 2010 2011 LTM 10/27/12

J.C. PENNEY Financial History - Free Cash Flow ( $ in MMs)

February 5 , 2 0 1 3 CONFI DENTI AL 2 0

($600) ($400) ($200) $0 $200 $400 $600 $800 $1,000 $1,200 2008 2009 2010 2011 LTM 10/27/12

N.B.: Spike in 2 0 0 9 due to sharp cuts in CAPX, inventory liquidation, and stretching of payables and accrued liabilities.

J.C. PENNEY Financial History - I nventory Turnover

February 5 , 2 0 1 3 CONFI DENTI AL 2 1

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2008 2009 2010 2011 YTD2012

N.B.: Recent drop reflects failure to adjust m erchandise m ix and m arketing in response to sales decline.

J.C. PENNEY Financial History - Payable Days

February 5 , 2 0 1 3 CONFI DENTI AL 2 2

• 10.0

20.0 30.0 40.0 50.0 60.0 2008 2009 2010 2011 YTD2012

N.B.: Recent rise reflects attem pt to m inim ize negative CFO by using increased trade credit.

J.C. PENNEY Financial History – Cash & Equivalents ( $ in MMs)

February 5 , 2 0 1 3 CONFI DENTI AL 2 3 N.B.: Most of $ 1 .5 B decline betw een 2 0 0 9 and 2 0 1 1 due to stock buybacks, dividends and brand investm ents ( e.g.s, Liz Claiborne; Martha Stew art) .

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 FYE2008 FYE2009 FYE2010 FYE2011 10/27/12

J.C. PENNEY Financial History - Debt ( $ in MMs)

February 5 , 2 0 1 3 CONFI DENTI AL 2 4

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 FYE2008 FYE2009 FYE2010 FYE2011 10/27/12

N.B.: Moderate decline in debt has not m atched the sharp decline in cash.

J.C. PENNEY Financial History - Rent-Adjusted Leverage

February 5 , 2 0 1 3 CONFI DENTI AL 2 5

• 2.0

4.0 6.0 8.0 10.0 12.0 14.0 FYE2008 FYE2009 FYE2010 FYE2011 10/27/12

N.B.: Leverage has soared because of sharp deterioration in 2 0 1 2 operating perform ance.

• 2 H2 0 1 1 : Entered stockholder agreem ents w ith Pershing Square Capital

( W illiam Ackm an) and Vornado Realty Trust ( Steven Roth) , w hich together control alm ost 3 0 % of JCP com m on stock as w ell as tw o director seats.

• 2 H2 0 1 1 : Acquired the Liz Claiborne brand for $ 2 6 8 MM, replacing a 1 0 -year

licensing agreem ent that had been entered just one year earlier. The com pany also m ade a $ 3 9 MM equity investm ent in Martha Stew art Living Om nim edia w ith a side agreem ent to sell certain M.S. products exclusively in JCP stores.

• Novem ber 2 0 1 1 : Appointed new CEO - Ronald B. Johnson, the form er chief of

Apple Com puter’s retail division, replacing Myron E. Ulm an, I I I , w ho rem ained as Executive Chairm an until retiring in January 2 0 1 2 . Over the next several m onths, Mr. Johnson proceeded to m ake several other senior appointm ents, including president, COO, CFO & “chief talent officer,” several of w hich w ere filled by form er colleagues from Apple ( and som e subsequently fired – e.g., form er president, Michael Francis in June) .

• January 2 0 1 2 : I ntroduced controversial new three-tiered “Fair & Square”

pricing strategy aim ed at offering ( 1 ) everyday low prices, ( 2 ) “m onth-long” value prom otions, and ( 3 ) clearance m erchandise. This strategy replaced the com pany’s past practice of issuing coupons and regularly m arking dow n m erchandise.

J.C. PENNEY Recent Developm ents

February 5 , 2 0 1 3 CONFI DENTI AL 2 6

• January 2 0 1 2 : Em barked on com prehensive new -store rem odeling program

that w ill transform existing floor-plans into a store-w ithin-a-store form at filled w ith separately curated shops and boutiques.

• February 2 0 1 2 : Am ended its asset-backed credit facility to increase its size

by $ 2 5 0 MM to $ 1 .5 B.

• March 2 0 1 2 : Stopped reporting sam e-store sales on a m onthly basis.
• April 2 0 1 2 : Em barked on a m ajor cost reduction program intended to save

$ 9 0 0 MM over 2 4 m onths.

• May 2 0 1 2 : I ntroduced a new private-label brand called “jcp.”
• May 2 0 1 2 : Appointed a new CFO - Kenneth Hannah, form erly the CFO of

MEMC Electronic Materials and SVP of Operations at Hom e Depot.

• May 2 0 1 2 : Suspended com m on stock dividend, saving $ 1 7 5 MM/ year.
• July 2 0 1 2 : Sold substantially all of interest in Sim on Property REI T for

$ 2 4 8 MM.

J.C. PENNEY Recent Developm ents, con’t.

February 5 , 2 0 1 3 CONFI DENTI AL 2 7

• August 2 0 1 2 : Appointed new controller, Mark R. Sw eeney, form erly
• perational controller of General Electric.
• August 2 0 1 2 : Repaid $ 2 3 0 MM of 9 .0 % notes that m atured ( approxim ately

$ 2 1 MM/ year of interest savings) .

• Septem ber 2 0 1 2 : Sued by Macy’s for allegedly interfering w ith Macy’s

exclusive m arketing arrangem ents w ith Martha Stew art Living Om nim edia. Earlier in the year, Macy’s had obtained a tem porary injunction preventing MSLO from entering its joint venture w ith JCP.

• 3 Q2 0 1 2 : Sold various assets including interests in REI TS, regional m alls and

leveraged leases for an aggregate $ 2 7 9 MM.

• January 3 1 , 2 0 1 3 : ABL facility increased from $ 1 .5 billion to $ 1 .7 5 billion.
• February 4 , 2 0 1 3 : The com pany reported it has received a letter from a law

firm claim ing to represent over 5 0 % of the holders of 7 .4 % debentures, due 2 0 3 7 , alleging that a default has occurred. Brow n Rudnick claim s the ABL credit facility entered in January 2 0 1 2 violated the bond indenture by failing to provide bondholders w ith a ratable security interest in inventory pledged as collateral under the ABL facility. The com pany deem s this notice of default invalid and has challenged it in Delaw are Chancery Count.

J.C. PENNEY Recent Developm ents, con’t.

February 5 , 2 0 1 3 CONFI DENTI AL 2 8

• New Pricing Program : Modified in August to elim inate “m onth-long” specials,

replacing them w ith perm anent m arkdow ns of 2 0 % -3 0 % . This affected approxim ately 2 0 % of total inventory. Now the Com pany is experim enting w ith placing MSRP labels on m erchandise next to its low er retail price in an attem pt to create the perception of value. Also, it just announced the prospect of holding periodic holiday sales ( e.g., Valentine’s Day; Easter; Mother’s Day) . But m anagem ent insists there’s been no fundam ental change in strategy.

• Store Rem odeling Plan ( “The Street & the Square”) : Approxim ately 1 1 % of

planned floor space has already been transform ed to a shop-w ithin-a-shop form at. I n addition to the long-tim e presence of Sephora and MNG by Mango, several other vendor/ partners have negotiated in-store agreem ents w ith the com pany, including Levi’s, I zod and Joe Fresh, am ong others. Separate shops also are being created for private-label m erchandise like Liz Claiborne and The Original Arizona Jean Com pany.

• $ 9 0 0 MM Cost-Cutting Program : $ 3 5 0 MM from corporate ( 1 4 % of Plano HQ

staff laid off) ; $ 4 0 0 MM from store operations; and, $ 1 5 0 MM from m arketing

• ver 2 4 m onths.

J.C. PENNEY Strategic I nitiatives

February 5 , 2 0 1 3 CONFI DENTI AL 2 9

• Confusing Strategies = Loss of Market Share:

1 . Traffic and S/ S sales trends clearly indicate custom er disenchantm ent w ith pricing changes. Even m anagem ent seem s uncertain, as it’s “sim plified” the strategy to an everyday low prices/ clearance approach, yet still tinkering w ith prom otional gim m icks ( e.g., free haircuts, free holiday portraits, prize giveaw ays) . 2 . Com pany’s billing itself as a “specialty” departm ent store chain, but pricing suggests its positioning itself as an “off-price” discounter. 3 . “The Street & Square” store rem odeling has closed off valuable floor space that otherw ise m ight be yielding increm ental sales.

• Product Mix: W om en’s m erchandise represents < 5 0 % of inventory com pared to
• ver 6 0 % for m any com petitors.
• Operating perform ance: Sub-subpar. Sam e-store sales declining at

accelerating double-digit pace for past three quarters. Negative EBI TDA getting w orse. Cash-burn rate ( i.e., > $ 1 .3 B/ year) is unsustainable w ithout asset sales. All this has occurred and w orsened since the new strategies w ere adopted.

• Excessive Leverage is Clim bing: Com pany m ust find a w ay to reduce debt and

cut rent expense. Year to date, the com pany’s turned increasingly to asset sales, w hich it w ill probably need to continue to do.

J.C. PENNEY I ssues & Conclusions

February 5 , 2 0 1 3 CONFI DENTI AL 3 0

• Liquidity: Ok, for now , but if YTD-cash burn rate does not reverse, com pany

could use up all existing cash and revolver availability w ithin the next 1 2 m onths ( i.e., $ 1 .0 billion of cash w as burned during the first nine m onths of FY2 0 1 2 , ignoring asset sales, changes in w orking capital and debt repaym ent) .

• Aggressive CAPX Program : Little firm evidence that the “Street & Square”

concept is w orking, though the com pany claim s renovated stores perform better than older stores. Query: are sam e-store sales trends still negative at rem odeled stores? Managem ent’s been silent on this question.

• Long-term Plan/ Viability: Need to perform store-by-store cash flow analysis,

and consolidate to m uch sm aller chain. Activist investors need to take m ore active steps to turn around the com pany ( i.e., Managem ent shake-up? Sale of com pany? Revisit old pricing m odel? Scale back rem odeling program ?)

• Com fort Factor: Asset protection – fortunately, the com pany ow ns a lot of its

stores and other properties that should go a long w ay tow ard m aking creditors w hole in a w orst-case scenario. No real estate is subject to m ortgages. As of 1 0 / 2 7 / 2 0 1 2 , net PP&E plus w orking capital covered total debt approxim ately 2 .5 x and total liabilities alm ost 1 0 0 % .

J.C. PENNEY I ssues & Conclusions, con’t.

February 5 , 2 0 1 3 CONFI DENTI AL 3 1

J.C. PENNEY Com parable Com pany Analysis

February 5 , 2 0 1 3 3 2 CONFI DENTI AL Com m ent: JCP has low est EBI TDA and m argin. Leverage is highest am ong its peers.

COMPARABLE-COMPANY ANALYSIS

Revenues EBITDA EBITDA Cash Debt R/A Inventory GCS Company Stores ($MM) ($MM) Margin ($MM) ($MM) Leverage T.O. Rating Bon-Ton

273 $ 2,953.9 $ 157.1 5.3% $ 8.1 $ 1,022.5 7.1 2.0 E-

J.C. Penney

1,115 $ 14,526.0 $ 146.0 1.0% $ 525.0 $ 2,965.0 12.0 2.5 E

Burlington Coat

497 $ 4,081.4 $ 305.8 7.5% $ 30.2 $ 1,428.1 6.0 3.1 E+

Belk

301 $ 3,843.7 $ 455.6 11.9% $ 143.4 $ 417.6 1.9 2.2 C+

Kohl's

1,146 $ 18,955.0 $ 2,823.0 14.9% $ 550.0 $ 4,578.0 2.2 2.7 C

Macy's

847 $ 27,060.0 $ 3,590.0 13.3% $ 1,264.0 $ 6,940.0 2.3 2.4 C

Dillard's

302 $ 6,603.7 $ 766.9 11.6% $ 124.8 $ 851.9 1.4 2.5 C

Ross Stores

1,205 $ 9,358.3 $ 1,383.8 14.8% $ 625.3 $ 150.0 1.8 5.4 B+

TJX

3,046 $ 24,863.9 $ 3,367.5 13.5% $ 1,842.9 $ 774.5 2.1 5.6 B+

Questions & Answ ers

J.C. PENNEY

February 5 , 2 0 1 3 3 3 CONFI DENTI AL

ADMI NI STRATI VE I TEMS Contact I nform ation

• Robert C. Pike – Senior I ndustry Analyst
• Phone: (917) 388-8835
• Email: pike@globalcreditservices.com

February 5 , 2 0 1 3 3 4 CONFI DENTI AL

ADMI NI STRATI VE I TEMS Upcom ing W ebinars

• Tuesday Morning
• W ednesday, February 2 0 , 2 0 1 3 @ 2 PM Eastern
• George Rom ey, Senior I ndustry Analyst
• Nash Finch & Supervalu
• W ednesday, March 1 3 , 2 0 1 3 @ 2 PM Eastern
• Jonathan Kanarek, CFA, Director of Analysis
• Shopko Stores & ALCO Stores
• Tuesday, March 2 6 , 2 0 1 3 @ 2 PM Eastern
• Dana Melillo, CFA, Senior I ndustry Analyst

February 5 , 2 0 1 3 3 5 CONFI DENTI AL

CONFI DENTI AL

ADMI NI STRATI VE I TEMS GCS Ratings Definitions

August 7 , 2 0 1 2 3 6

CONFI DENTI AL

ADMI NI STRATI VE I TEMS Map of GCS Scores & Ratings To Agencies

Global Credit Services Score Rating From To S&P / Fitch Moodys

• NR

NR 1.00 1.32 A+ AAA Aaa 1.00 1.32 A+ AA+ Aa1 1.33 1.65 A AA Aa2 1.66 1.99 A- AA- Aa3 2.00 2.32 B+ A+ A1 2.33 2.65 B A A2 2.66 2.99 B- A- A3 3.00 3.32 C+ BBB+ Baa1 3.33 3.65 C BBB Baa2 3.66 3.99 C- BBB- Baa3 4.00 4.32 D+ BB+ Ba1 4.00 4.32 D+ BB Ba2 4.33 4.65 D BB- Ba3 4.66 4.99 D- B+ B1 5.00 5.32 E+ B B2 5.00 5.32 E+ B- B3 5.33 5.65 E CCC+ Caa1 5.33 5.65 E CCC Caa2 5.66 5.99 E- CCC- Caa3 6.00 6.32 F+ CC+ Ca1 6.00 6.32 F+ CC Ca2 6.33 6.65 F CC- Ca3 6.66 6.99 F- C C 6.66 6.99 F- D D

February 5 , 2 0 1 3 3 7