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 August 3, 2019May 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
 jcplogo2a18.jpgjcp-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.)
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) (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 valueJCP*New York Stock ExchangeNYSE
Preferred Stock Purchase RightsJCP*New York Stock ExchangeNYSE
* 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. 317,837,111 sharesdate. 322,382,095 shares of Common Stock of 50 cents par value, as of August 23, 2019.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 August 3, 2019May 2, 2020
INDEX


Page
Item 1. Unaudited Interim Consolidated Financial Statements
Consolidated Statements of Operations
21
Consolidated Statements of Comprehensive Income/(Loss)
32
Consolidated Balance Sheets
43
Consolidated Statements of Stockholders' Equity
54
Consolidated Statements of Cash Flows
65
Notes to Unaudited Interim Consolidated Financial Statements
1. Basis of Presentation and Consolidation
76
2. Adoption of New Accounting StandardsGlobal COVID-19 Pandemic
7
3. Effect of New Accounting Standards
8
4. LeasesEarnings/(Loss) per Share
98
5. Revenue
128
6. Earnings/(Loss) per ShareDerivative Financial Instruments
139
7. Long-Term DebtFair Value Disclosures
1311
8. Derivative Financial InstrumentsDebt
1412
9. Restructuring and Management Transition
15
10. Fair Value Disclosures
16
11. Accumulated Other Comprehensive Income/(Loss)
1713
12.10. Retirement Benefit Plans
1713
13. Real Estate 11.Restructuringand Other, NetManagementTransition
1814
14. 12.IncomeTaxes
1815
15.13. Litigation and Other Contingencies
1915
14.  Subsequent Event
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
1918
Item 3. Quantitative and Qualitative Disclosures About Market Risk
3228
Item 4. Controls and Procedures
3228
Item 1. Legal Proceedings
3228
Item 1A. Risk Factors
3228
Item 6. Exhibits
4433
4534



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)(In millions)May 2,
2020		May 4,
2019
Three Months Ended Six Months Ended
(In millions, except per share data)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Total net sales$2,509
 $2,762
 $4,948
 $5,346
Total net sales$1,082  $2,439  
Credit income and other110
 67
 226
 154
Credit income and other114  116  
Total revenues2,619
 2,829
 5,174
 5,500
Total revenues1,196  2,555  
       
Costs and expenses/(income):       Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and amortization shown separately below)1,585
 1,831
 3,215
 3,543
Cost of goods sold (exclusive of depreciation and amortization shown separately below)813  1,630  
Selling, general and administrative (SG&A)870
 880
 1,726
 1,706
Selling, general and administrative (SG&A)572  856  
Depreciation and amortization137
 140
 284
 281
Depreciation and amortization135  147  
Real estate and other, net3
 12
 (2) (6)Real estate and other, net(2) (5) 
Restructuring and management transition7
 2
 27
 9
Restructuring and management transition155  20  
Total costs and expenses2,602
 2,865
 5,250
 5,533
Total costs and expenses1,673  2,648  
Operating income/(loss)17
 (36) (76) (33)Operating income/(loss)(477) (93) 
Other components of net periodic pension cost/(income)(13) (19) (26) (38)Other components of net periodic pension cost/(income)(23) (13) 
(Gain)/loss on extinguishment of debt(1) —
 (1) 23
Net interest expense74
 79
 147
 157
Net interest expense75  73  
Loss due to discontinuance of hedge accountingLoss due to discontinuance of hedge accounting77  —  
Income/(loss) before income taxes(43) (96) (196) (175)Income/(loss) before income taxes(606) (153) 
Income tax expense/(benefit)5
 5
 6
 4
Income tax expense/(benefit)(60) 1  
Net income/(loss)$(48) $(101) $(202) $(179)Net income/(loss)$(546) $(154) 
Earnings/(loss) per share:       Earnings/(loss) per share:
Basic$(0.15) $(0.32) $(0.63) $(0.57)Basic$(1.69) $(0.48) 
Diluted$(0.15) $(0.32) $(0.63) $(0.57)Diluted$(1.69) $(0.48) 
Weighted average shares – basic319.4
 315.7
 318.6
 314.8
Weighted average shares – basic323.7  317.7  
Weighted average shares – diluted319.4
 315.7
 318.6
 314.8
Weighted average shares – diluted323.7  317.7  
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.



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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) $(165) 
 Three Months Ended Six Months Ended
($ in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Net income/(loss)$(48) $(101) $(202) $(179)
Other comprehensive income/(loss), net of tax:       
Retirement benefit plans       
Reclassification for amortization of prior service (credit)/cost (1)
2
 1
 4
 2
Cash flow hedges       
Gain/(loss) on interest rate swaps (2)
(28) —
 (39) 5
Reclassification for periodic settlements (3)
(2) —
 (4) —
Total other comprehensive income/(loss), net of tax(28) 1
 (39) 7
Total comprehensive income/(loss), net of tax$(76) $(100) $(241) $(172)


(1)Net of $0 million of tax in the three months ended May 2, 2020..
(1)
Net of $0 million of tax in each of the three and six months ended August 3,
(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, and net of $(1) million and $(2) million of tax in the three and six months ended August 4, 2018, respectively. Pre-tax amounts of $2 million and $4 million in each of the three and six months ended August 3, 2019 and August 4, 2018, respectively, were recognized in Other components of net periodic pension cost/(income) in the unaudited Interim Consolidated Statements of Operations.

(2)
Net of $0 million of tax in each of the three and six months ended August 3, 2019 and net of $(1) million of tax in the six months ended August 4, 2018.
(3)
Net of $0 million of tax in each of the three and six months ended August 3, 2019. Pre-tax amounts of $(2) million and $(4) million for the three and six months ended August 3, 2019, respectively, were recognized in Net interest expense 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  
 August 3,
2019		 August 4,
2018		 February 2,
2019
(In millions, except per share data)(Unaudited) (Unaudited)  
Assets     
Current assets:     
Cash in banks and in transit$163
 $171
 $109
Cash short-term investments12
 11
 224
Cash and cash equivalents175
 182
 333
Merchandise inventory2,471
 2,824
 2,437
Prepaid expenses and other275
 221
 189
Total current assets2,921
 3,227
 2,959
Property and equipment (net of accumulated depreciation of $3,167, $3,293 and $3,425)3,591
 4,058
 3,938
Operating lease assets925
 —
 —
Prepaid pension166
 87
 147
Other assets657
 686
 677
Total Assets$8,260
 $8,058
 $7,721
Liabilities and Stockholders’ Equity     
Current liabilities:     
Merchandise accounts payable$878
 $910
 $847
Other accounts payable and accrued expenses970
 1,025
 995
Current operating lease liabilities82
 —
 —
Current portion of finance leases and note payable2
 7
 8
Current maturities of long-term debt197
 42
 92
Total current liabilities2,129
 1,984
 1,942
Noncurrent operating lease liabilities1,089
 —
 —
Long-term finance leases and note payable1
 208
 204
Long-term debt3,589
 3,960
 3,716
Deferred taxes121
 144
 131
Other liabilities368
 546
 558
Total Liabilities7,297
 6,842
 6,551
Stockholders’ Equity     
Common stock(1)
159
 157
 158
Additional paid-in capital4,719
 4,709
 4,713
Reinvested earnings/(accumulated deficit)(3,601) (3,297) (3,373)
Accumulated other comprehensive income/(loss)(314) (353) (328)
Total Stockholders’ Equity963
 1,216
 1,170
Total Liabilities and Stockholders’ Equity$8,260
 $8,058
 $7,721


(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.
(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 317.7 million, 314.8 million and 316.1 million as of August 3, 2019, August 4, 2018 and February 2, 2019, respectively.
See the accompanying notes to the unaudited Interim Consolidated Financial Statements.


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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 Shares Common Stock Additional Paid-in Capital Reinvested 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 (See Note 2)—
 —
 —
 (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


(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
(In millions)Number of Common Shares Common Stock Additional Paid-in Capital Reinvested Earnings/(Accumulated Deficit) Accumulated Other Comprehensive Income/(Loss) Total Stockholders' Equity
February 3, 2018312.0
 $156
 $4,705
 $(3,118) $(360) $1,383
Net income/(loss)—
 —
 —
 (78) —
 (78)
Other comprehensive income/(loss)—
 —
 —
 —
 6
 6
Stock-based compensation and other2.3
 1
 3
 —
 —
 4
May 5, 2018314.3
 $157
 $4,708
 $(3,196) $(354) $1,315
Net income/(loss)—
 —
 —
 (101) —
 (101)
Other comprehensive income/(loss)—
 —
 —
 —
 1
 1
Stock-based compensation and other0.5
 —
 1
 —
 —
 1
August 4, 2018314.8
 $157
 $4,709
 $(3,297) $(353) $1,216

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


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J. C. PENNEY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Three Months Ended
($ in millions)August 3,
2019		 August 4,
2018		($ in millions)May 2,
2020		May 4,
2019
Cash flows from operating activities   Cash flows from operating activities
Net income/(loss)$(202) $(179)Net income/(loss)$(546) $(154) 
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:   Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Restructuring and management transition17
 (3)Restructuring and management transition139  15  
Asset impairments and other charges—
 52
Net (gain)/loss on sale of non-operating assets(1) —
Net (gain)/loss on sale of operating assets3
 (57)
(Gain)/loss on extinguishment of debt(1) 23
Net gain on sale of operating assetsNet gain on sale of operating assets—  (4) 
Discontinuance of hedge accountingDiscontinuance of hedge accounting77  —  
Depreciation and amortization284
 281
Depreciation and amortization135  147  
Benefit plans(29) (37)Benefit plans(22) (14) 
Stock-based compensation6
 6
Stock-based compensation2  2  
Deferred taxes—
 (1)Deferred taxes(60) (3) 
Change in cash from:   Change in cash from:
Inventory(34) (21)Inventory(55) (40) 
Prepaid expenses and other(82) (21)Prepaid expenses and other(98) (98) 
Merchandise accounts payable31
 (63)Merchandise accounts payable(207) (5) 
Income taxesIncome taxes(1) 3  
Accrued expenses and other9
 (115)Accrued expenses and other(178) (54) 
Net cash provided by/(used in) operating activities1
 (135)Net cash provided by/(used in) operating activities(814) (205) 
Cash flows from investing activities   Cash flows from investing activities
Capital expenditures(146) (221)Capital expenditures(33) (71) 
Net proceeds from sale of non-operating assets1
 —
Net proceeds from sale of operating assets12
 121
Net proceeds from sale of operating assets—  8  
Net cash provided by/(used in) investing activities(133) (100)Net cash provided by/(used in) investing activities(33) (63) 
Cash flows from financing activities   Cash flows from financing activities
Proceeds from issuance of long-term debt—
 400
Proceeds from borrowings under the credit facility946
 2,258
Proceeds from borrowings under the credit facility1,950  408  
Payments of borrowings under the credit facility(946) (2,081)Payments of borrowings under the credit facility(771) (290) 
Premium on early retirement of debt—
 (20)
Payments of finance leases and note payable(1) (4)Payments of finance leases and note payable(1) (1) 
Payments of long-term debt(26) (586)Payments of long-term debt(19) (11) 
Financing costs—
 (7)
Proceeds from stock issued under stock plans1
 2
Tax withholding payments for vested restricted stock—
 (3)
Net cash provided by/(used in) financing activities(26) (41)Net cash provided by/(used in) financing activities1,159  106  
Net increase/(decrease) in cash and cash equivalents(158) (276)Net increase/(decrease) in cash and cash equivalents312  (162) 
Cash and cash equivalents at beginning of period333
 458
Cash and cash equivalents at beginning of period386  333  
Cash and cash equivalents at end of period$175
 $182
Cash and cash equivalents at end of period$698  $171  
   
Supplemental cash flow information   Supplemental cash flow information
Income taxes received/(paid), net$(6) $(5)Income taxes received/(paid), net$—  $(2) 
Interest received/(paid), net(139) (145)Interest received/(paid), net(76) (91) 
Supplemental non-cash investing and financing activity   Supplemental non-cash investing and financing activity
Increase/(decrease) in other accounts payable related to purchases of property and equipment and software(15) (20)Increase/(decrease) in other accounts payable related to purchases of property and equipment and software1  (18) 
Remeasurement of leased assets and lease obligations52
 —
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 2, 2019 (20181, 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 20182019 Form 10-K. The February 2, 20191, 2020, financial information was derived from the audited Consolidated Financial Statements, with related footnotes, included in the 20182019 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 August 3, 2019”May 2, 2020” and “second“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 August 3, 2019, and “three months ended AugustMay 4, 2018” and “second quarter of 2018” refer to the 13-week period ended August 4, 2018. "Six months ended August 3, 2019" and "six months ended August 4, 2018" refer to the 26-week periods ended August 3, 2019 and August 4, 2018, respectively. Fiscal years 2019 and 2018 contain 52 weeks.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.

2. Adoption of New Accounting Standards
In February 2016,Voluntary Petition for Reorganization

As discussed further in Note 14, on May 15, 2020 (the “Petition Date”), the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) Topic 842, Leases (Topic 842), a replacementCompany and certain of Leases (Topic 840) and updated by various targeted improvements, which requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The Company adoptedits subsidiaries (collectively, the provisions“Debtors”) commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the new lease standard effective February 3, 2019, using the modified retrospective adoption method and the simplified transition option availableUnited States Code (the “Bankruptcy Code”) in the new lease standard. This allows us to continue to applyUnited States Bankruptcy Court for the legacy guidance in the old standard (ASC Topic 840, Leases (ASC 840)), including its disclosure requirements, in the comparative periods presented in the yearSouthern District of adoption.Texas (the “Bankruptcy Court”). The Company also elected the package of practical expedients available under the transition provisionscommencement of the new lease standard, which include a) not reassessing ASC 840 evaluations on whether expiredChapter 11 Cases constitutes an event of default or existing contracts contain leases, b) not reassessing lease classification,termination event under ASC 840, and c) not revaluing initial direct costs for existing leases under ASC 840. We also electedall debt agreements of the practical expedient to carry forward our historical accounting for any land easements on existing contracts.

In addition,Company. Accordingly, the Company changed the accounting for the failed sale-leasebackhas classified all of its home office to comply with the new lease standard's guidance for sale-leaseback accounting, and recordedoutstanding debt as a "day one impairment" of the new right-of-use assets that were included in previously impaired asset groups associated with long-lived assets. Per the transition guidance of the new lease standard, the failed sale-leaseback is considered a valid sale and leaseback that resulted in the removal of the related real

estate assets of $153 million and the financing obligation of $208 million, and the recognition of the $55 million gaincurrent liability on sale in Reinvested earnings/(accumulated deficit). Adoption of the new lease accounting standard also required us to reevaluate the accounting for a $50 million promissory note issued in connection with the sale of the home office. In accordance with previous guidance, the promissory note was not recorded in theits 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 implied gain on sale, however, undernormal course of business. As a result of the new guidance,Chapter 11 Cases, the promissory note is considered variable consideration under ASC 606, Revenue for Contracts with Customers. Accordingly, in transition,realization of assets and the Company did not recognize any amount for the $50 million promissory note,satisfaction of liabilities are subject to significant uncertainty. While operating as management assessed the most likely amount of variable consideration to be zero given the associated local real estate market dynamics. In regardsa debtor-in-possession pursuant to the "day one impairment" charge,Bankruptcy Code, we may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the Company evaluated the new right-of-use assets added to certain store asset groups that were previously determined to be impaired. Given the facts and circumstances that were still in existence upon adopting the new lease standard, the Company recorded an approximate $40 million impairment charge to Reinvested earnings/(accumulated deficit) to adjust the net book valueapproval of the new right-of-useBankruptcy 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 to their fair value.

The following table provides the overalland liabilities reported in our unaudited Interim Consolidated Balance Sheet impact of applying the new lease standard effective as of February 3, 2019. DueMay 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 changeCompany’s ability to continue as a going concern. Our future plans, including those in accounting forconnection with the Home Office sale-leaseback, there was a change inChapter 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 $5 millionrecorded asset amounts or the amounts and $10 million, respectively, in lease costs from Depreciation and amortization and Net interest expense in the prior year periodclassification of liabilities that might be necessary should we be unable to Selling, general and administrative expenses in the current year quarter and year-to-date period. There was no significant impact to the Company's unaudited Interim Consolidated Statement of Cash Flows.continue as a going concern.
 Balance as of February 3, 2019
($ in millions)Balances removed under prior accounting Balances added/reclassified under new lease standard Net impact of new lease standard
Prepaid expenses and other$—
 $(5) $(5)
Property and equipment153
 —
 (153)
Operating lease assets—
 910
 910
Other assets—
 (7) (7)
Total assets$153
 $898
 $745
      
Other accounts payable and accrued expenses$4
 $—
 $(4)
Current operating lease liabilities—
 85
 85
Current portion of finance leases and note payable5
 —
 (5)
Noncurrent operating lease liabilities—
 1,074
 1,074
Long-term finance leases and note payable203
 —
 (203)
Deferred taxes10
 —
 (10)
Other liabilities11
 (208) (219)
Reinvested earnings/(accumulated deficit)80
 (53) 27
Total liabilities and stockholders’ equity$153
 $898
 $745


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 February 2018,response to the FASB issued ASU 2018-02, 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:

•Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This standard allows companies to reclassify stranded tax effects resultingBorrowed $1.25 billion from the Tax Cuts2017 Credit Facility;
•Furloughed substantially all store associates and Jobs Act (the “Tax Act”) enactedsubstantial 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 December 22, 2017 from Accumulated other comprehensive income/(loss) to Reinvested earnings/(accumulated deficit). We adopted ASU 2018-02 on February 3, 2019the Company’s business operations, financial position, liquidity, capital resources and reclassified $53 million (netresults of federal income tax benefit) of income tax effectsoperations, including the Company’s filing of the Tax Act from Accumulated other comprehensive income/(loss)Chapter 11 Cases on May 15, 2020 (see Notes 1 and 14). Because it is impossible to Reinvested earnings/(accumulated deficit).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
On August 28, 2018,In March 2020, the FASB issued ASU 2018-13, 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.

Fair Value Measurement.
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 iswill be effective for public business entities infor fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and for interim periods within those years. Early2020; however, early adoption is permitted, including during an interim period. This new standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively. The Company is evaluatingpermitted. We have adopted this new standard but doesbeginning February 2, 2020, and the adoption did not expect it to have a significantmaterial impact on its financial statement disclosures.the unaudited Interim Consolidated Financial Statements.

4. LeasesEarnings/(Loss) per Share

Net income/(loss) and shares used to compute basic and diluted earnings/(loss) per share (EPS) are reconciled below:
We conduct a major part
 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 our operations from leased premises (building or land) that include retail stores, store distribution centers, warehouses, offices and other facilities. Almost all leases include renewal options where we can extend the lease term from one to 50 years or more. We also lease equipment under finance leases for terms of primarily three to five years, and we rent or sublease certain real estate to third parties. Our lease contracts do not contain any purchase options or residual value guarantees.

Accounting Policy Applied in Fiscal 2019
At the lease commencement date, based on certain criteria, we determine if a lease is classified as an operating lease or finance lease and then recognize a right-of-use asset and a lease liability on the Consolidated Balance Sheets for all leases (with the exception of leases that have a term of twelve months or less). The lease liability is measured as the present value of unpaid lease payments measured based on the reasonably certain lease term and corresponding discount rate. The initial right-of-use asset is measured as the lease liability plus certain other costs and is reduced by any tenant allowances collectedcommon stock were excluded from the lessor.diluted EPS calculation because their effect would have been anti-dilutive:
Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate and termination penalties. Lease payments do not include variable lease payments other than those that depend on an index or rate or any payments not considered part of the lease (i.e. payment of the lessor’s real estate taxes and insurance). Payments not considered lease payments are expensed as incurred. Some leases require additional payments based on sales and the related contingent rent is recorded as rent expense when the payment is probable. As a policy election, we consider lease payments and all related other payments as one component of a lease.
 Three Months Ended
(Shares in millions)May 2,
2020		May 4,
2019
Stock options and restricted stock awards20.1  22.5  
The reasonably certain lease term includes the non-cancelable lease term and any renewal option periods where we have economically compelling reasons for future exercise.
The discount rate used in our present value calculations is the rate implicit in the lease, when known, or our estimated incremental borrowing rate. Our incremental borrowing rate is estimated based on our secured borrowings and our credit risk relative to the time horizons of other publicly available data points that are consistent with the respective lease term.
Whether an operating lease or a finance lease, the lease liability is amortized over the lease term at a constant periodic interest rate. The right-of-use assets related to operating leases are amortized over the lease term on a basis that renders a straight-line amount of rent expense which encompasses the amortization and interest component of the lease. With the occurrence of certain events, the amortization pattern for an operating asset is adjusted to a straight-line basis over the remaining lease term. The right-of-use asset related to a finance lease is amortized on a straight-line basis over the lease term. Rent on short-term leases is expensed on a straight-line basis over the lease term. When a lease is modified or there is a change in lease term, we assess for any change in lease classification and remeasure the lease liability with a corresponding increase or decrease to the right-of-use asset.
Sale-leasebacks are transactions through which we sell assets and subsequently lease them back. The resulting leases that qualify for sale-leaseback accounting are evaluated and accounted for as an operating lease. A transaction that does not qualify for sale-leaseback accounting as a result of finance lease classification or the failure to meet certain revenue recognition criteria is accounted for as a financing transaction. For a financing transaction, we retain the "sold" assets within property and equipment and record a financing obligation equal to the amount of cash proceeds received. Rental payments under such transactions are recognized as a reduction of the financing obligation and as interest expense using an effective interest method.
Accounting Policy Applied in Fiscal 2018
Our lease accounting policies for lease contracts in fiscal 2018 and prior are disclosed in the 2018 Form 10-K.









Leases
($ in millions) Classification 
August 3, 2019
Assets    
Operating lease assets Operating lease assets $925
Finance lease assets Property and equipment 1
Total leased assets   $926
Liabilities    
Current    
Operating Current operating lease liabilities $82
Finance Current portion of finance leases and note payable 1
Noncurrent    
Operating Noncurrent operating lease liabilities 1,089
Finance Long-term finance leases and note payable 1
Total leased liabilities   $1,173


Lease Cost
    Three Months Ended Six Months Ended
($ in millions) Classification 
August 3, 2019
 August 3, 2019
Operating lease cost Selling, general and administrative expense (SG&A) $50
 $98
Variable lease cost Selling, general and administrative expense (SG&A) 32
 64
Finance lease cost      
Amortization of leased assets Depreciation and amortization —
 —
Interest on lease liabilities Net interest expense —
 —
Rental income Real estate and other, net 3
 5
Net lease cost   $79
 $157


As of August 3, 2019, future lease payments were as follows:
($ in millions)Operating Leases Finance Leases Total
2019$104
 $—
 $104
2020196
 1
 197
2021190
 —
 190
2022179
 —
 179
2023173
 —
 173
Thereafter1,844
 2
 1,846
Total lease payments2,686
 3
 2,689
Less: amounts representing interest(1,515) (1) (1,516)
Present value of lease liabilities$1,171
 $2
 $1,173











Lease term and discount rate are as follows:
August 3, 2019
Weighted-average remaining lease term (years)
Operating leases16
Financing leases8
Weighted-average discount rate
Operating leases11%
Financing leases6%


Other information:
Six Months Ended
($ in millions)
August 3, 2019
Cash paid for amounts included in the measurement of these liabilities
Operating cash flows from operating leases102
Operating cash flows from finance leases1
Financing cash flows from finance leases1


As determined prior to the adoption of the new lease standard, the future minimum lease payments under operating leases in effect as of February 2, 2019 were as follows:
($ in millions) 
2019$190
2020178
2021163
2022148
2023135
Thereafter1,626
Less: sublease income(43)
Total minimum lease payments$2,397



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 sharingprofit-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 six months ended August 3, 2019May 2, 2020 and AugustMay 4, 2018:2019:
 Three Months Ended Six Months Ended
($ in millions)August 3, 2019 August 4, 2018 August 3, 2019 August 4, 2018
Women’s apparel$664
 26% $695
 25% $1,254
 25% $1,309
 25%
Men’s apparel and accessories537
 21% 563
 20% 1,015
 21% 1,063
 20%
Women’s accessories, including Sephora341
 14% 371
 13% 690
 14% 749
 14%
Home246
 10% 361
 13% 551
 11% 715
 13%
Children’s, including toys216
 9% 241
 9% 416
 8% 448
 8%
Footwear194
 8% 202
 7% 375
 8% 391
 7%
Jewelry155
 6% 151
 6% 322
 6% 313
 6%
Services and other156
 6% 178
 7% 325
 7% 358
 7%
Total net sales$2,509
 100% $2,762
 100% $4,948
 100% $5,346
 100%

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)August 3, 2019 August 4, 2018 February 2, 2019(in millions)May 2, 2020May 4, 2019February 1, 2020
Gift cards$114
 $116
 $140
Gift cards$123  $121  $136  
Loyalty rewards63
 62
 60
Loyalty rewards60  61  58  
Total contract liability$177
 $178
 $200
Total contract liability$183  $182  $194  


Contract liability includes consideration received for gift card and loyalty related performance obligations which have not been satisfied as of a given date.

A rollforward of the amounts included in contract liability for the first sixthree months of 20192020 and 20182019 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  
(in millions)2019 2018
Beginning balance$200
 $217
Current period gift cards sold and loyalty reward points earned182
 148
Net sales from amounts included in contract liability opening balances(56) (59)
Net sales from current period usage(149) (128)
Ending balance$177
 $178



6. 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 Six Months Ended
(in millions, except per share data)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Earnings/(loss)       
Net income/(loss)$(48) $(101) $(202) $(179)
Shares       
Weighted average common shares outstanding (basic shares)319.4

315.7
 318.6
 314.8
Adjustment for assumed dilution:       
Stock options, restricted stock awards and warrant—
 —
 —
 —
Weighted average shares assuming dilution (diluted shares)319.4
 315.7
 318.6
 314.8
EPS       
Basic$(0.15) $(0.32) $(0.63) $(0.57)
Diluted$(0.15) $(0.32) $(0.63) $(0.57)

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 Six Months Ended
(Shares in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Stock options, restricted stock awards and warrant24.7
 25.6
 23.6
 27.2


7. Long-Term Debt
($ in millions) August 3, 2019 August 4, 2018 February 2, 2019
Issue:      
8.125% Senior Notes Due 2019 $50
 $50
 $50
5.65% Senior Notes Due 2020 (1)
 105
 110
 110
2017 Credit Facility (Matures in 2022) —
 177
 —
2016 Term Loan Facility (Matures in 2023) 1,561
 1,604
 1,583
5.875% Senior Secured Notes Due 2023 (1)
 500
 500
 500
7.125% Debentures Due 2023 10
 10
 10
8.625% Senior Secured Second Priority Notes Due 2025 (1)
 400
 400
 400
6.9% Notes Due 2026 2
 2
 2
6.375% Senior Notes Due 2036 (1)
 388
 388
 388
7.4% Debentures Due 2037 313
 313
 313
7.625% Notes Due 2097 500
 500
 500
Total debt 3,829
 4,054
 3,856
Unamortized debt issuance costs (43) (52) (48)
Less: current maturities (197) (42) (92)
Total long-term debt $3,589
 $3,960
 $3,716

(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%.

As of August 3, 2019, there were no outstanding borrowings under our $2.35 billion senior secured asset-based revolving credit facility (2017 Credit Facility). All borrowings under the 2017 Credit Facility accrue interest at a rate equal to, at the Company’s option, a base rate or an adjusted LIBOR rate plus a spread.
8. 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%, maturematured on May 7, 2020, and have beenwere designated as cash flow hedges.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 have beenwere designated as cash flow hedges.hedges at the inception of the contracts.

The fair value of our interest rate swapsswaps (see Note 10) 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. TheFor swaps designated as cash flow hedges, the effective portion of the interest rate swaps' changes in fair values is reported in Accumulated other comprehensive income/(loss)AOCI (see Note 11)9), and the ineffective portion is reported in Netnet income/(loss). Amounts in Accumulated other comprehensive income/(loss)AOCI are reclassified into Netnet income/(loss) when the related interest payments affect earnings. For

Quarterly, the periods presented, allCompany 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 interest rate swapsChapter 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 100%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  $58  
(1) Derivatives as of May 2, 2020, were not designated as hedging instruments; derivatives as of May 4, 2019, and February 1, 2020, were designated as hedging instruments.
 Asset Derivatives at Fair Value Liability Derivatives at Fair Value
($ in millions)Balance Sheet Location August 3, 2019 August 4, 2018 February 2, 2019 Balance Sheet Location August 3, 2019 August 4, 2018 February 2, 2019
Derivatives designated as hedging instruments:               
Interest rate swapsPrepaid expenses and other $1
 $1
 $—
 Other accounts payable and accrued expenses $—
 $—
 $—
Interest rate swapsOther assets —
 16
 10
 Other liabilities 48
 —
 15
Total derivatives designated as hedging instruments  $1
 $17
 $10
   $48
 $—
 $15

9. Restructuring and Management Transition

In the first quarter of 2019, the Company finalized plans to close 18 full-line stores and 9 ancillary home and furniture stores, further aligning the Company's brick-and-mortar presence with its omnichannel network, and enabling capital resources to be reallocated to locations and initiatives that offer the greatest long-term value potential. The planned store closures resulted in a $14 million asset impairment charge for store assets with limited future use and a $1 million severance charge for the expected displacement of store associates.
The components of Restructuring and management transition include:
•
Home office and stores — charges for actions to reduce our store and home office expenses including employee termination benefits, store lease termination and impairment charges;
•
Management transition — charges related to implementing changes within our management leadership team for both incoming and outgoing members of management; and
•
Other — charges related primarily to contract termination costs and costs related to the closure of certain supply chain locations.
The composition of Restructuring and management transition charges was as follows:
 Three Months Ended Six Months Ended 
Cumulative
Amount From Program Inception Through
August 3, 2019
($ in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018		 
Home office and stores$4
 $2
 $23
 $9
 $509
Management transition3
 —
 4
 —
 268
Total$7
 $2
 $27
 $9
 $777



Activity for the Restructuring and management transition liability for the six months ended August 3, 2019 was as follows:
($ in millions)
Home Office
and Stores
 
Management
Transition
 Other Total
February 2, 2019$16
 $—
 $2
 $18
ASC 842 (Leases) adoption (See Note 2)(15) —
 —
 (15)
Charges4
 5
 —
 9
Cash payments(3) (2) (2) (7)
August 3, 2019$2
 $3
 $—
 $5



10.


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7. Fair Value Disclosures
In determining fair value, the accounting standards establish a three levelthree-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.
Cash Flow Hedges
Interest Rate Swaps Measured on a Recurring Basis
The fair value of our cash flow hedges areinterest 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 23 in the fair value measurement hierarchy.

In connection with the Company's decision to sell its three airplanes, long-lived assets held and used with a carrying value of $72 million were written down to their fair value of $20 million, resulting in asset impairment charges of $52 million in the three months ended August 4, 2018. The fair value was determined based on dealer quotes using a market approach and the significant inputs related to valuing the airplanes are classified as Level 2 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: 
 
August 3, 2019
 August 4, 2018 February 2, 2019
($ 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$3,829
 $2,373
 $4,054
 $3,385
 $3,856
 $2,579

 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 long-termtotal debt was estimated by obtaining quotes from brokers or was based on current rates offered for similar debt. As of August 3,May 2, 2020, May 4, 2019,, August 4, 2018 and February 2, 2019,1, 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 no0 significant concentrations of credit risk.
11.
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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 sixthree months ended August 3, 2019May 2, 2020, and the six months ended AugustMay 4, 2018:
2019:
($ in millions)
Net  Actuarial
Gain/(Loss)
 
Prior Service
Credit/(Cost)
 Foreign Currency Translation Gain/(Loss) on Cash Flow Hedges 
Accumulated
Other
Comprehensive
Income/(Loss)
February 2, 2019$(290) $(22) $(1) $(15) $(328)
ASU 2018-02 (Stranded Taxes) adoption (See Note 2)46
 3
 —
 4
 53
Other comprehensive income/(loss) before reclassifications—
 —
 —
 (39) (39)
Amounts reclassified from accumulated other comprehensive income—
 4
 —
 (4) —
August 3, 2019$(244) $(15) $(1) $(54) $(314)
(In millions)Net  Actuarial
Gain/(Loss)		Prior Service
Credit/(Cost)		Foreign Currency TranslationGain/(Loss) on Cash Flow HedgesAccumulated
Other
Comprehensive
Income/(Loss)
February 1, 2020$(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) $—  $(323) 

(1) Includes a $58 million charge reclassified to earnings and included in Discontinuance of hedge accounting and a $6 million charge reclassified to Income tax expense.
(In millions)Net  Actuarial
Gain/(Loss)		Prior Service
Credit/(Cost)		Foreign Currency TranslationGain/(Loss) on Cash Flow HedgesAccumulated
Other
Comprehensive
Income/(Loss)
February 2, 2019$(290) $(22) $(1) $(15) $(328) 
ASU 2018-02 (Stranded Taxes) adoption46  3  —  4  53  
Other comprehensive income/(loss) before reclassifications—  —  —  (11) (11) 
Amounts reclassified from accumulated other comprehensive income—  2  —  (2) —  
May 4, 2019$(244) $(17) $(1) $(24) $(286) 
($ in millions)Net  Actuarial
Gain/(Loss)		 Prior Service
Credit/(Cost)		 Foreign Currency Translation Gain/(Loss) on Cash Flow Hedges Accumulated
Other
Comprehensive
Income/(Loss)
February 3, 2018$(330) $(26) $—
 $(4) $(360)
Other comprehensive income/(loss) before reclassifications—
 —
 —
 5
 5
Amounts reclassified from accumulated other comprehensive income—
 2
 —
 —
 2
August 4, 2018$(330) $(24) $—
 $1
 $(353)


12.10. Retirement Benefit Plans
The components of net periodic pension expense/(income) for our non-contributory qualified defined benefit pension plan and supplemental pension plans were as follows:
Three Months Ended Six Months Ended Three Months Ended
($ in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018		($ in millions)May 2,
2020		May 4,
2019
Service cost$7
 $10
 $14
 $19
Service cost$8  $7  
       
Other components of net periodic pension cost/(income):       Other components of net periodic pension cost/(income):
Interest cost33
 35
 66
 70
Interest cost26  33  
Expected return on plan assets(48) (56) (96) (112)Expected return on plan assets(50) (48) 
Amortization of prior service cost/(credit)2
 2
 4
 4
Amortization of prior service cost/(credit)1  2  
(13) (19) (26) (38)
(23) (13) 
Net periodic pension expense/(income)$(6) $(9) $(12) $(19)Net periodic pension expense/(income)$(15) $(6) 


Service cost is included in SG&A in the unaudited Interim Consolidated Statements of Operations.

13. Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments, accruals for certain litigation and other non-operating charges and credits.

The composition of Real estate and other, net was as follows:
 Three Months Ended Six Months Ended
($ in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Net (gain)/loss from sale of non-operating assets$(1) $—
 $(1) $—
Investment income from Home Office Land Joint Venture—
 (1) —
 (1)
Net (gain)/loss from sale of operating assets7
 (40) 3
 (57)
Impairments—
 52
 —
 52
Other(3) 1
 (4) —
Total expense/(income)$3
 $12
 $(2) $(6)


Net (Gain)/Loss from SalePrimary Pension Plan Lump-Sum Payment Offer and VERP
In April 2020, the Company initiated a Voluntary Early Retirement Program (VERP) for approximately 4,500 eligible associates. Eligibility for the VERP included home office, stores and supply chain personnel who met certain criteria related to
13
Table of Operating AssetsContents
Duringage and years of service as of October 23, 2019. Approximately 2,500 eligible associates elected to accept the first quarter of 2018, we completedVERP during the sale of our Milwaukee, Wisconsin distribution facility for a net sale price of $30 million and recognized a net gain of $12 million. During the second quarter of 2018, we completed the sale of our Manchester, Connecticut distribution facility for a net sale price of $68 million and recognized a net gain of $38 million.

Impairments
During the second quarter of 2018, we recorded an impairment charge of $52 millionconsideration period, which ended on May 29, 2020. Charges related to the expected sale of three airplanes. TwoVERP and the impact of the airplanes were soldVERP on the Primary Pension Plan liabilities and Net periodic pension expense/(income) will be evaluated during the second quarter of 2018 at2020.

11. Restructuring and Management Transition

As of May 2, 2020, in connection with the anticipated commencement of the Chapter 11 Cases (see Note 14), the Company identified certain leased stores it considered more likely than not would be permanently closed significantly before the end of their respective estimated useful lives. Consequently, the potential closing of these stores was considered an indicator of impairment. In accordance with ASC 360, long-lived assets, including right-of-use lease assets, with indicators of impairment, are evaluated for recoverability. Assets that are not determined to be recoverable are assessed for impairment based on their current fair valuevalues. As a result of $12 million. Subsequentthis evaluation, the Company recorded impairment charges of $97 million during the first quarter of 2020, consisting of $49 million related to long-lived assets and $48 million related to right-of-use lease assets.

Similarly, the Company determined that the combination of the macro economic impact of the COVID-19 pandemic, the contemplation of bankruptcy, and the expectations of permanent store closures represented an indicator of impairment related to the secondCompany’s indefinite-lived intangible assets primarily associated with the Liz Claiborne family of trademarks and related intellectual property. As a result, the Company recorded an impairment of the intangible assets of $42 million during the first quarter of 2018,2020.

In the third airplanefirst quarter of 2020, the Company also incurred expenses related to reorganization advisory fees in the amount of $16 million.

In the first quarter of 2019, the Company finalized plans to close 18 full-line stores and 9 ancillary home and furniture stores, further aligning the Company's brick-and-mortar presence with its omnichannel network and enabling capital resources to be reallocated to locations and initiatives that offer the greatest long-term value potential. The planned store closures resulted in a $14 million asset impairment charge for store assets with limited future use and a $1 million severance charge for the expected displacement of store associates.
The components of Restructuring and management transition include:
•Home office and stores — charges for actions to reduce our store and home office expenses including impairments, employee termination benefits, store lease terminations and other restructuring/reorganization advisory costs;
•Management transition — charges related to implementing changes within our management leadership team for both incoming and outgoing members of management; and
•Other — charges related primarily to costs related to the closure of certain supply chain locations.

The composition of Restructuring and management transition charges was as follows: 
 Three Months EndedCumulative
Amount From Program Inception Through
May 2, 2020
($ in millions)May 2,
2020		May 4,
2019
Home office and stores$155  $19  $684  
Management transition—  1  269  
Other—  —  186  
Total$155  $20  $1,139  






14
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Activity for the Restructuring and management transition liability for the three months ended May 2, 2020 was sold at its fair valueas follows:
($ in millions)Home Office
and Stores		Management
Transition		Total
February 1, 2020$6  $2  $8  
Charges16  —  16  
Cash payments(13) (1) (14) 
May 2, 2020$9  $1  $10  
12. Income Taxes

On March 27, 2020, the U.S. federal government passed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act contains many tax provisions including, but not limited to, accelerated alternative minimum tax ("AMT") refunds, payroll tax payment deferrals, employee retention credits, enhanced net operating loss ("NOL") carryback rules and an increase to the interest deduction limitation. The Company has considered the income tax provisions of $8 million.the CARES Act in the tax benefit calculation for the three months ended May 2, 2020. The Company continues to monitor and analyze the CARES Act along with global legislation issued in response to the COVID-19 pandemic.

14. Income Taxes
The net tax expensebenefit of $5$60 million for the three months ended August 3, 2019May 2, 2020, consisted of federal, state and foreign tax expensesbenefit of $4$2 million, and $1 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets.
Theassets, net tax expensebenefit of $6$3 million for the six months ended August 3, 2019 consisted of federal,resulting from state and foreign tax expenses of $6 million, $2 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assetsaudit settlements and a $2$56 million benefit due tofrom the release of valuation allowance.allowance, primarily due to the generation of post-tax reform NOLs that do not expire.
As of August 3, 2019,May 2, 2020, we have approximately $2.1$2.5 billion of net operating losses (NOLs)NOLs available for U.S. federal income tax purposes, which largely expire in 2032 through 2034; $2872034, though about $350 million of the NOLs do not expire; $316 million of federal unused interest deductions that do not expire; and $69$76 million of tax credit carryforwards that expire at various dates through 2037.2039. Additionally, we have state NOLs that are subject to various limitations and expiration dates beginning in 20192020 through 20402041 and are offset fully by valuation allowances. A valuation allowance of $591$683 million fully offsets the federal deferred tax assets resulting from the NOLs, unused interest deductions and tax credit carryforwards that expire at various dates through 2037.2039. A valuation allowance of $251$259 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2040.2041. In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our periodic assessment, our estimate of the realization of deferred tax assets is solely based on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring NOL and tax credit carryforwards. Accordingly, in the three months ended August 3, 2019,May 2, 2020, the valuation allowance net increase of $17$73 million consisted of $10 million to offset the net deferred tax assets created in the quarter primarily due to the increase in NOL carryforwards, and a $7 million offsetcarryforwards. Our ability to use our NOLs may become subject to limitation or may be reduced or eliminated in connection with the tax benefit attributable to the loss recorded in Other comprehensive income/(loss). For the six months ended August 3, 2019, the valuation allowance net increase of $40 million consisted of $45 million to offset the net deferred tax assets created in the period primarily due to the increase in NOL carryforwards, $10 million which offsets the tax benefit attributable to the loss recorded in Other comprehensive income/(loss), offset by a $15 million benefit related to lease accounting.Chapter 11 Cases.

15.
13. Litigation and Other Contingencies
Litigation

Chapter 11 Proceedings

On May 15, 2020, the Debtors filed the Chapter 11 Cases seeking relief under the Bankruptcy Code. The Company expects to
continue operations in the normal course for the duration of the Chapter 11 Cases. In addition, 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
Bankruptcy Court modifies or lifts the automatic stay as to any such claim. See Note 14 for more information about the
Chapter 11 Cases.

Shareholder Derivative Litigation and Demand

15
Table of Contents
On October 19, 2018, a shareholder of the Company, Juan Rojas, filed a shareholder derivative action against certain present and former members of the Company’s Board of Directors in the Delaware Court of Chancery. The Company iswas named as a nominal defendant. The lawsuit assertsasserted claims for breaches of fiduciary duties based on alleged failures to prevent the Company from engaging in allegedly unlawful promotional pricing practices. On July 29, 2019, the Court granted defendants' motion to dismiss and dismissed plaintiff’s complaint with prejudice.

On October 21, 2019, the Company’s Board of Directors received a demand from Rojas to conduct an investigation of alleged breaches of fiduciary duties similar to those made in the dismissed derivative action regarding alleged failures to prevent the Company from engaging in allegedly unlawful promotional pricing practices. The Board of Directors appointed a committee of independent directors (the "Demand Review Committee") to review the demand and make a recommendation to the Board of Directors regarding a response to the demand. In May 2020, the Demand Review Committee completed its review and recommended that the demand be denied, which recommendation was adopted by the Board of Directors.

While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Other Legal Proceedings

We are subject to various other legal and governmental proceedings involving routine litigation incidental to our business. Accruals have been established based on our best estimates of our potential liability in certain of these matters, which we believe aggregate to an amount that is not material to the unaudited Interim Consolidated Financial Statements. These estimates were developed in consultation with in-house and outside counsel. While no assurance can be given as to the ultimate outcome of these matters, we currently believe that the final resolution of these actions, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Contingencies

As of August 3, 2019,May 2, 2020, we have an estimated accrual of $19 million related to potential environmental liabilities that is recorded in Other accounts payable and accrued expenses and Other liabilities in the unaudited Interim Consolidated Balance Sheet. This estimate covered potential liabilities primarily related to underground storage tanks and remediation of environmental conditions involving our former drugstore locations. We continue to assess required remediation and the adequacy of environmental reserves as new information becomes available and known conditions are further delineated. If we were to incur losses at the estimated amount, we do not believe that such losses would have a material effect on our financial condition, results of operations, liquidity or capital resources.

14.  Subsequent Events

The Company has evaluated subsequent events through July 21, 2020, which is the date the unaudited Interim Consolidated Financial Statements were issued.

Voluntary Petition for Reorganization

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.

The Debtors will 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 us to operate our 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
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Stakeholders”) executed the RSA. As of such date, the Consenting Stakeholders held approximately 93 percent of the Debtors’ prepetition first lien debt. The RSA contemplates a restructuring process that will establish both a financially sustainable operating company and a real estate investment trust.

Debtor-in-Possession Financing

Pursuant to the RSA, certain of the Consenting Stakeholders and/or their affiliates agreed to provide, on a committed basis, debtor-in-possession financing on the terms set forth therein. Following entry by the Bankruptcy Court of a final order on June 8, 2020, JCP, as borrower, and J. C. Penney and certain of its subsidiaries, as guarantors (together with JCP, the “Credit Parties”), entered into a Superpriority Senior Secured Debtor-In-Possession Credit and Guaranty Agreement (the “DIP Credit Agreement”) with the financial institutions identified therein as lenders (the “Lenders”), GLAS USA LLC, as administrative agent (the “Administrative Agent”), and GLAS Americas LLC, as collateral agent. The obligations under the DIP Credit Agreement are secured by substantially all of the real and personal property of the Credit Parties, subject to certain exceptions.

The DIP Credit Agreement provides for a superpriority secured debtor-in-possession credit facility comprised of term loans in an aggregate amount of up to $900 million of which (i) up to $450 million consists of “new money” loans that will be made available to JCP ($225 million of which was provided to JCP on June 8, 2020, and $225 million was funded to an escrow account on July 9, 2020), and (ii) up to $450 million consists of certain prepetition term loan and/or first lien notes obligations that are “rolled” into the DIP Credit Agreement ($225 million of which were rolled into the DIP Facility on June 8, 2020, and $225 million of which were rolled into the DIP Credit Agreement on July 9, 2020).

The DIP Credit Agreement matures on November 16, 2020, subject to earlier termination upon the occurrence of certain events specified in the DIP Credit Agreement. The proceeds of the DIP Credit Agreement will be used, in part, to provide incremental liquidity for working capital, to pay administrative costs, premiums, fees and expenses in connection with the DIP Credit Agreement and the administration of the Chapter 11 Cases, to make court approved payments in respect of prepetition obligations and for other purposes consistent with the DIP Credit Agreement.

Loans under the DIP Credit Agreement bear interest at (i) if a Base Rate Loan, at the Base Rate (which is subject to a floor of 2.25%) plus 10.75% per annum or (ii) if a Eurodollar Rate Loan, at the Adjusted Eurodollar Rate (which is subject to a floor of 1.25%) plus 11.75% per annum.

The DIP Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the Credit Parties’ and their subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and acquisitions, pay dividends and distributions and make payments in respect of junior or pre-petition indebtedness, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP Credit Agreement also includes conditions precedent, representations and warranties, mandatory prepayments, affirmative covenants and events of default customary for financings of this type. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of title 11 of the United States Code, the appointment of a trustee pursuant to chapter 11 of title 11 of the United States Code, and certain other events related to the impairment of the Lenders’ rights or liens granted under the DIP Credit Agreement.

In addition, pursuant to the DIP Credit Agreement, upon the occurrence of a “Toggle Event,” the Credit Parties shall immediately cease pursuing a Plan of Reorganization and instead pursue the consummation of a sale of all or substantially all of the assets of the Credit Parties pursuant to section 363 of the Bankruptcy Code and shall immediately seek approval of any relief required from the Bankruptcy Court in order to undertake such sale on an expedited basis. Also, upon the occurrence of a “Toggle Event,” JCP must repay amounts funded on July 9, 2020, in excess of $50 million. A “Toggle Event” occurs upon either (i) the failure of the Supermajority Lenders to approve the Business Plan by July 31, 2020, or (ii) the failure by the Credit Parties to obtain binding commitments for third-party financing (on terms and conditions satisfactory to Administrative Agent) necessary to finance the Business Plan approved by the Supermajority Lenders by August 30, 2020.

Delisting from the NYSE

On May 18, 2020, the NYSE suspended trading in our common stock at the market opening and we received written notice from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D following the filing of the Chapter 11 Cases. In reaching its delisting determination, the NYSE noted the uncertainty as to the timing and outcome of the bankruptcy process, as well as the uncertainty as to the ultimate effect of this process on the value of our common stock.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
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.
The holding company 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 the holding company is full and unconditional.
This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as of February 2, 2019,1, 2020, and for the year then ended, and related Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019 (20181, 2020 (2019 Form 10-K). Unless otherwise indicated, all references to earnings/(loss) per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.


Current Initiatives

Management is continuing its process
Recent Developments

During March 2020, the World Heath Organization declared a global pandemic related to the rapidly growing outbreak of reassessing strategiesa novel strain of coronavirus (COVID-19), which continues to spread throughout the United States. As a result, federal state and evaluatinglocal governments in the transformational needsU.S. reacted to the public health crisis by, among other things, issuing stay at home orders, implementing travel restrictions and mandating the closure of non-essential businesses. The COVID-19 pandemic has had a significant and negative impact to the business. We continue to make progress on our previously noted immediate actions to reestablisheconomic conditions in the fundamentalsU.S. and globally, significantly affecting the Company's fiscal year 2020 operations and operating results through the date of retail, which include the following initiatives:this filing.


Reducing and enhancing our inventory position;
Strengthening our integrated omnichannel strategy;
Redesigning and improving core store processes;
Improving our shrink results; and
Revamping our merchandise assortments and strategies.

First, we are continuing our efforts to reduce and enhance our inventory position. AtThe following summarizes the end of the second quarter, our year-over-year inventory was reduced by 12.5%. During the quarter, we improved the management of our markdown and clearance cadence, resulting in lower permanent markdowns, which contributed to half of our 310 basis point improvement in our cost of goods sold as a percentage of total net sales.

Second, we are continuing to strengthen our integrated omnichannel strategy to return to growth in our digital channel, in a sustainable and profitable way. Inactions taken during the first quarter of 2019, we removed2020 as a result of the COVID-19 pandemic and certain impacts on the operating results of the first quarter ended May 2, 2020:

•Borrowed $1.25 billion from its 2017 Credit Facility;
•Temporarily closed all stores beginning March 19, 2020; the Company continued to offer merchandise through jcp.com and, on a limited basis, through store contact-free curb-side pickup;
•Furloughed approximately 80,000 associates, including store and supply chain associates, as well as some corporate office associates;
•Suspended all new hiring except for eCommerce fulfillment centers;
•Cancelled 2020 merit pay increases and the 2020 incentive cash bonus programs;
•Delayed merchandise shipments from suppliers;
•Extended payment terms with merchandise and non-merchandise suppliers up to 60 days;
•Decreased planned capital expenditures by over 300,000 units of unproductive$200 million;
•Significantly reduced SG&A expenses, including payroll and unprofitable vendor fulfilled merchandise from our website,payroll related costs along with almost no impact to our online sales profitability. We are improving navigation and presentation, while curating the assortment to provide an easier shopping experience across all platforms: desktop, mobile and our app.advertising;

Third, we are redesigning and improving core store processes while implementing enhanced technology tools to better equip our store associates to deliver on our customers' expectations. In•During the first quarter of 2020, the Company incurred non-cash impairment charges related to long-lived assets, right-of-use lease assets, and indefinite-lived intangible assets totaling $139 million; and,
•Discontinued hedge accounting for the Company’s interest rate swaps, resulting in total charges of $83 million.

On May 15, 2020 (the Petition Date), as described in Note 14 to the unaudited Interim Consolidated Financial Statements, the Company and certain of its subsidiaries (the Debtors) commenced voluntary cases under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court has granted a motion seeking joint administration of the Chapter 11 Cases. The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provision of the Bankruptcy Code and the orders of the Bankruptcy Court. Following the Petition Date, the
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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.

In late April 2020, the Company began reopening 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. Additionally, the Company announced in June 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 to close by the end of September 2020. As of July 13, 2020, approximately 27,000 associates remain on furlough.

In connection with the Chapter 11 Cases, the Credit Parties entered into the DIP Credit Agreement as described in Note 14 to the unaudited Interim Consolidated Financial Statements, of which $225 million was funded to the Company on June 8, 2020, and $225 million was funded to an escrow account on July 9, 2020. Amounts in escrow will be released upon (i) Supermajority Lenders approval of the Business Plan by July 31, 2020, and (ii) Credit Parties obtaining binding commitments for third-party financing (on terms satisfactory to the Administrative Agent) necessary to finance the Business Plan by August 30, 2020.

The COVID-19 pandemic continues to have a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations. The scope and duration of the COVID-19 pandemic and the related disruption to our business and financial impacts cannot be reasonably estimated at this time. As discussed in Note 1 to the unaudited Interim Consolidated Financial Statements, the risks and uncertainties surrounding the Chapter 11 Cases, the defaults under our debt agreements, and our current financial condition, raise substantial doubt as to the Company’s ability to continue as a going concern. 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.

Plan for Renewal

On November 15, 2019, we launched a new checkout processthe Company announced its Plan for Renewal to streamline tasks and enhancereturn JCPenney to its rightful place in the retail industry. Coupled with our deep understanding of the customer, experience, which is translating intothese five components of our Plan for Renewal guide everything we do:

•Offer Compelling Merchandise through a quicker checkout timemaximized value proposition;
•Drive Traffic by refreshing and increasing the relevance of the JCPenney brand through innovation:
•Deliver an Engaging Experience through operational excellence;
•Fuel Growth by optimizing our cost and capital structure; and,
•Build a Results-Minded Culture committed and connected to achievements larger than the individual.

The Company remains focused on its Plan for our customers. During the second quarter, we implemented a new centralized pick-up and returns process in approximately 500 stores.

Fourth, we are taking immediate action to improve our shrink results. We have made technology investments and staffing adjustments which have led to improvements in our inventory shrink results during the first six months of 2019.

Lastly,Renewal as we continue to revampbelieve it will drive a return to sustainable, profitable growth and rethinka financially sound business for the long term. We are making thoughtful strategic choices to guide our merchandise assortmentstransformation, and strategies. Inwe will continue to evolve those choices as the macro conditions change. While the Company is managing through the challenges of the COVID-19 pandemic, as well as the process of navigating the Chapter 11 Cases, our planned emergence from the COVID-19 pandemic and the Chapter 11 Cases is built upon the components of, and we remain focused on executing, our Plan for Renewal.

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Results of Operations
 Three Months Ended
($ in millions, except EPS)May 2,
2020		May 4,
2019
Total net sales$1,082  $2,439  
Credit income and other114  116  
Total revenues1,196  2,555  
Total net sales increase/(decrease) from prior year(55.6)%(5.6)%
Costs and expenses/(income):
Cost of goods sold (exclusive of depreciation and amortization shown separately below)813  1,630  
Selling, general and administrative572  856  
Depreciation and amortization135  147  
Real estate and other, net(2) (5) 
Restructuring and management transition155  20  
Total costs and expenses1,673  2,648  
Operating income/(loss)(477) (93) 
Other components of net periodic pension cost/(income)(23) (13) 
Net interest expense75  73  
Loss due to discontinuance of hedge accounting77  —  
Income/(loss) before income taxes(606) (153) 
Income tax expense/(benefit)(60) 1  
Net income/(loss)$(546) $(154) 
Adjusted EBITDA (non-GAAP) (1)
$(181) $74  
Adjusted net income/(loss) (non-GAAP) (1)
$(331) $(147) 
Diluted EPS$(1.69) $(0.48) 
Adjusted diluted EPS (non-GAAP) (1)
$(1.02) $(0.46) 
Ratios as a percentage of total net sales:
Cost of goods sold75.1 %66.8 %
SG&A52.9 %35.1 %
Operating income/(loss)(44.1)%(3.8)%

(1)See “Non-GAAP Financial Measures” for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations.








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Total Net Sales
 Three Months Ended
($ in millions)May 2,
2020		May 4,
2019
Total net sales$1,082  $2,439  
Sales percent increase/(decrease):
Total net sales(55.6)%(5.6)%

Total net sales for the first quarter of 2019, we discontinued selling major appliances in an effort2020 declined 55.6% compared to improve financial performance and refocus on our legacy strengths in apparel and soft home as well as other profitable growth opportunities. In the secondfirst quarter of 2019, we continuedfiscal 2019. The decrease in net sales was primarily due to the temporary closure of all our effortsstores beginning on March 19, 2020, in response to alignthe COVID-19 pandemic.

Given our merchandise assortment and choice counts with trends, quality and stylesstores were closed for our customers and our focus to further define, expand and improve our national and private brand positions. We are also leveraging our best-in-class global sourcing and design organization across our product spectrum to enhance the style and quality we deliver, but also to improve profitability within our assortment.




Second Quarter Overview
▪Total net sales were $2,509 million with a total net sales decrease of 9.2% compared to the second quarter of 2018 and a comparable store sales decrease of 9.0%. Excluding the impact of the Company's exit from major appliances and in-store furniture categories, comparable sales decreased 6.0% for the quarter. See the reconciliation of comparable store sales increase/(decrease), the most directly comparable generally accepted accounting principle (GAAP) financial measure, to adjusted comparable store sales increase/(decrease) (non-GAAP) on page 28.

▪Credit income and other was $110 million compared to $67 million in last year's second quarter. The increase was due to an increase in our income share which resulted from improved performance of the credit portfolio.

▪Cost of goods sold, which excludes depreciation and amortization, as a percentage of Total net sales decreased to 63.2% compared to 66.3% in the same period last year. The decrease as a rate of sales was primarily driven by lower permanent markdowns, improved shrink as a rate of net sales, improvements in selling margins and the exit of major appliance and in-store furniture categories earlier this year.

▪Selling, general and administrative (SG&A) expenses as a percentage of Total net sales increased to 34.7% for the second quarter of 2019 as compared to 31.9% for the same period last year. Last year, SG&A included approximately $7 million in expense offsets related to the buyout of a leasehold interest. Additionally, due to the implementation of the new lease accounting standard, approximately $5 million in expenses for the second quarter related to the Company's home office lease, which were previously classified as interest and depreciation, are now included in SG&A.

▪Our net loss was $48 million, or ($0.15) per share, compared to a net loss of $101 million, or ($0.32) per share, for the corresponding prior year quarter. Results for this quarter included the following amounts that are not directly related to our ongoing core business operations:

▪$7 million, or ($0.01) per share, of restructuring and management transition charges;
▪$13 million, or $0.04 per share, for other components of net periodic pension income;
▪$1 million gain on extinguishment of debt; and
▪$1 million net gain on the sale of non-operating assets.

▪Adjusted net loss (non-GAAP) was $56 million, or ($0.18) per share, compared to an adjusted net loss (non-GAAP) of $120 million, or ($0.38) per share, in last year's second quarter. See the reconciliation of net income/(loss) and diluted EPS, the most directly comparable GAAP financial measures, to adjusted net income/(loss) (non-GAAP) and adjusted diluted EPS (non-GAAP) on page 27.

▪Adjusted earnings before interest expense, income tax (benefit)/expense and depreciation and amortization (Adjusted EBITDA) (non-GAAP) was $160 million, a $55 million improvement from the same period last year. See the reconciliation of net income/(loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA (non-GAAP) on page 27.

Results of Operations
 Three Months Ended Six Months Ended
($ in millions, except EPS)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Total net sales$2,509
 $2,762
 $4,948
 $5,346
Credit income and other110
 67
 226
 154
Total revenues2,619
 2,829
 5,174
 5,500
Total net sales increase/(decrease) from prior year(9.2)% (7.5)% (7.4)% (6.0)%
Comparable store sales increase/(decrease) (1)
(9.0)% 0.3 % (7.3)% 0.2 %
Adjusted comparable store sales increase/(decrease) (non-GAAP) (2)
(6.0)% 0.8 % (5.6)% 0.3 %
        
Costs and expenses/(income):       
Cost of goods sold (exclusive of depreciation and amortization shown separately below)1,585
 1,831
 3,215
 3,543
Selling, general and administrative870
 880
 1,726
 1,706
Depreciation and amortization137
 140
 284
 281
Real estate and other, net3
 12
 (2) (6)
Restructuring and management transition7
 2
 27
 9
Total costs and expenses2,602
 2,865
 5,250
 5,533
Operating income/(loss)17
 (36) (76) (33)
Other components of net periodic pension cost/(income)(13) (19) (26) (38)
(Gain)/loss on extinguishment of debt(1) —
 (1) 23
Net interest expense74
 79
 147
 157
Income/(loss) before income taxes(43) (96) (196) (175)
Income tax expense/(benefit)5
 5
 6
 4
Net income/(loss)$(48) $(101) $(202) $(179)
Adjusted EBITDA (non-GAAP) (2)
$160
 $105
 $234
 $256
Adjusted net income/(loss) (non-GAAP) (2)
$(56) $(120) $(203) $(189)
Diluted EPS$(0.15) $(0.32) $(0.63) $(0.57)
Adjusted diluted EPS (non-GAAP) (2)
$(0.18) $(0.38) $(0.64) $(0.60)
Ratios as a percent of total net sales:       
Cost of goods sold63.2 % 66.3 % 65.0 % 66.3 %
SG&A34.7 % 31.9 % 34.9 % 31.9 %
Operating income/(loss)0.7 % (1.3)% (1.5)% (0.6)%

(1)
Comparable store sales are presented on a 52-week basis and include sales from all stores, including sales from services, that have been open for 12 consecutive full fiscal months and Internet sales. Stores closed for an extended period are not included in comparable store sales calculations, while stores remodeled and minor expansions not requiring store closure remain in thecalculations. Certain items, such as sales return estimates and store liquidation sales, are excluded from the Company’s calculation. Our definition and calculation of comparable store sales may differ from other companies in the retail industry.
(2)See “Non-GAAP Financial Measures” for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations.






Total Net Sales
 Three Months Ended Six Months Ended
($ in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Total net sales$2,509
 $2,762
 $4,948
 $5,346
Sales percent increase/(decrease):       
Total net sales(9.2)% (7.5)% (7.4)% (6.0)%
Comparable store sales(9.0)% 0.3 % (7.3)% 0.2 %
Adjusted comparable store sales increase/(decrease) (non-GAAP) (1)
(6.0)% 0.8 % (5.6)% 0.3 %

(1)See “Non-GAAP Financial Measures” for a discussion of this non-GAAP measure and reconciliation to its most directly comparable GAAP financial measure and further information on its uses and limitations.

The following table provides the componentsapproximately half of the net sales increase/(decrease):
 Three Months Ended Six Months Ended
($ in millions)August 3, 2019 August 3, 2019
Comparable store sales increase/(decrease)$(240) $(378)
Closed stores and other(13) (20)
Total net sales increase/(decrease)$(253) $(398)
As our omnichannel strategy continuesquarter due to evolve, it is increasingly difficult to distinguish betweenthe COVID-19 pandemic, we are not presenting, or including a store sale and an Internet sale. Because we no longer have a clear distinction betweendiscussion on, comparable store sales and Internet sales,for the first quarter of 2020 as we believe the conditions leading up to the closure of our stores do not separately report Internet sales. Below is a list of some of our omnichannel activities:
Stores increase Internet sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online.
Our website increasesaccurately reflect the comparable store sales as in-store customers have often pre-shopped online before shopping intrends for the store, including verificationperiod or are indicative of which stores have online merchandise in stock.future operating results.
Most Internet purchases are easily returned in our stores.
JCPenney Rewards can be earned and redeemed online or in stores.
In-store customers can order from our website with the assistance of associates in our stores or they can shop our website from the JCPenney app while inside the store.
Customers who utilize the JCPenney app can receive mobile coupons to use when they check out both online or in our stores.
Internet orders can be shipped from a dedicated jcpenney.com fulfillment center, a store, a store merchandise distribution center, a regional warehouse, directly from vendors or any combination of the above.
Certain categories of store inventory can be accessed and purchased by jcpenney.com customers and shipped directly to the customer's home from the store.
Internet orders can be shipped to stores for customer pick up.
"Buy online and pick up in store same day" is available in all of our stores.

For the second quarter and first half of 2019, units per transaction and average unit retail increased, while transaction counts decreased as compared to last year.

For the second quarter and first half of 2019, our merchandise divisions that outperformed the total Company sales performance were Jewelry, Women's apparel, Footwear, Men's apparel and accessories and Women's accessories, including Sephora on a comparable store basis.

During the second quarter and first half of 2019, private brand merchandise comprised 47% and 46% of total merchandise sales, respectively. During both the second quarter and first half of 2018, private brand merchandise comprised 46% of total

merchandise sales. Exclusive brand merchandise comprised 6% and 7% of total merchandise sales in both the second quarter and first half of 2019 and 2018, respectively.
Store Count
The following table compares the number of stores for the three and six months ended August 3, 2019May 2, 2020, and AugustMay 4, 2018:2019: 
 Three Months Ended
 May 2,
2020		May 4,
2019
JCPenney department stores
Beginning of period846  864  
New stores opened—  —  
Permanently closed stores—  (3) 
End of period (1) (2)
846  861  
 Three Months Ended Six Months Ended
 August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
JCPenney department stores       
Beginning of period861
 871
 864
 872
Stores opened—
 1
 —
 1
Closed stores(15) (7) (18) (8)
End of period (1)
846
 865
 846
 865
(1)Gross selling space, including selling space allocated to services and licensed departments, was 93 million square feet as of May 2, 2020, and 95 million square feet as of May 4, 2019.
(1)Gross selling space, including selling space allocated to services and licensed departments, was 93 million square feet as of August 3, 2019 and 95 million square feet as of August 4, 2018.
(2)All stores were temporarily closed beginning March 19,2020, and the majority remained closed as of May 2, 2020.

Credit Income and Other
Our private label credit card and co-branded MasterCard® programs are owned and serviced by Synchrony Financial (Synchrony).  Under our agreement, we receive cash payments from Synchrony based upon the performance of the credit card portfolios.  We participate in the programs by providing marketing promotions designed to increase the use of each card, including enhanced marketing offers for cardholders. Additionally, we accept payments in our stores from cardholders who prefer to pay in person when they are shopping in our locations. For the second quartersfirst three months of 20192020 and 2018,2019, we recognized income of $110$114 million and $67$116 million, respectively, pursuant to our agreement with Synchrony. Forrespectively. Credit income was stronger than expected in the first sixthree months of 2019 and 2018, we recognized income of $226 million and $154 million, respectively. The increase for the three and six month periods isfiscal 2020 due to increased income share resulting from the improveda stronger than expected performance of the credit card portfolio.portfolio and a lagging impact from the COVID-19 pandemic.

Cost of Goods Sold
Cost of goods sold, exclusive of depreciation and amortization, for the three months ended August 3, 2019May 2, 2020, was $1,585$813 million, a decrease of $246$817 million compared to $1,831$1,630 million for the three months ended AugustMay 4, 2018.2019. Cost of goods sold as a percentage of Totaltotal net sales was 63.2%75.1% for the three months ended August 3, 2019May 2, 2020, compared to 66.3%66.8% for the three months ended AugustMay 4, 2018, a decrease2019, an increase of 310830 basis points. Cost of goods sold, exclusive of depreciation and amortization, for the six months ended August 3, 2019 was $3,215 million, a decrease of $328 million compared to $3,543 million for the six months ended August 4, 2018. CostThe increase in cost of goods sold as a percentage of Total net sales was 65.0% forincreased due to lower allowances from suppliers and increased markdowns during the six months ended August 3, 2019 compared to 66.3% for the six months ended August 4, 2018, a decrease of 130 basis points. The decrease as a rate of sales was primarily driven by lower permanent markdowns, improved shrink rates as a rate of net sales, improvements in selling margins and the exit of major appliance and in-store furniture categories earlier this year.period.

SG&A Expenses
For the three months ended August 3, 2019,May 2, 2020, SG&A expenses were $870$572 million compared to $880$856 million in the corresponding period of 2018.2019. SG&A expenses as a percentpercentage of Total net sales for the second quarter of 2019 increased to 34.7% compared to 31.9% in the second quarter of 2018. For the six months ended August 3, 2019, SG&A expenses were $1,726 million compared to $1,706 million in the corresponding period of 2018. SG&A expenses as a percent of Totaltotal net sales for the first sixthree months of 20192020 increased to 34.9%52.9% compared to 31.9%35.1% in the first sixthree months of 2018.2019. The year-over-year decrease in SG&A dollars for the secondfirst quarter wasresulted primarily from the actions taken by the Company to mitigate the impact of temporarily closing its stores beginning March 19, 2020. Year-over-year savings include payroll and payroll related savings of more than $140 million due to lower store controllable expensesassociate
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furloughs, approximately $70 million from reduced advertising, along with reductions in incentive compensation and advertising, which were offset by slightly higher incentive compensation. During the second quarter of 2018, SG&A included approximately $7 million in expense offsets related to the sale of a leasehold interest. During the first six months of 2018, SG&A included approximately $47 million in expense offsets related to the sale of a leasehold interest as well as the reversal of previously accrued risk insurance reserves. Additionally, due to the implementation of the new lease accounting standard, approximately $5 million and $10 million in expenses in the second quarter and first six months of 2019, respectively, related to the Company's home office lease, which were previously classified as interest and depreciation, are now included in SG&A. The year-over-year increase in SG&A expenses as a percent of Total net sales during the three and six month periods was primarily a result of de-leveraging driven by our negative comparable store sales performance.other miscellaneous expenses.




Depreciation and Amortization Expense
Depreciation and amortization expense was $137$135 million and $140$147 million for the three months ended August 3,May 2, 2020 and May 4, 2019, and August 4, 2018, respectively. Depreciation and amortization expense was $284 million and $281 million for the three months ended August 3, 2019 and August 4, 2018, respectively.
Restructuring and Management Transition
The composition of Restructuringrestructuring and management transition charges waswere as follows: 
 Three Months Ended
($ in millions)May 2,
2020		May 4,
2019
Home office and stores$155  $19  
Management transition—  1  
Total$155  $20  
 Three Months Ended Six Months Ended
($ in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Home office and stores$4
 $2
 $23
 $9
Management transition3
 —
 4
 —
Total$7
 $2
 $27
 $9

During the sixthree months ended August 3,May 2, 2020, and May 4, 2019, and August 4, 2018, we recorded $23$155 million and $9$19 million, respectively, of costs related to reduce our store and home office expenses. Costs during the first sixthree months of 2020 include an impairment of long-lived assets of $97 million and an impairment of indefinite-lived intangible assets of $42 million. The Company also incurred $16 million of expenses related to reorganization advisory fees. See Notes 7 and 11 to the Interim Consolidated Financial Statements.

Costs during the first three months of 2019 include store impairments of $14 million and accelerated depreciation of $2 million related to announced store closures of $14 million, employee termination benefits of $4 million and store related closing costs of $3$1 million.

Real Estate and Other, Net
Real estate and other consists of ongoing operating income from our real estate subsidiaries. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used in operations, asset impairments, accruals for certain litigation and other non-operating charges and credits.

The composition of Real estate and other, net was as follows:  
 Three Months Ended Six Months Ended
($ in millions)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Net (gain)/loss from sale of non-operating assets$(1) $—
 $(1) $—
Investment income from Home Office Land Joint Venture—
 (1) —
 (1)
Net (gain)/loss from sale of operating assets$7
 $(40) 3
 (57)
Impairments—
 52
 —
 52
Other(3) 1
 (4) —
Total expense/(income)$3
 $12
 $(2) $(6)

During the first quarter of 2018, we completed the sale of our Milwaukee, Wisconsin distribution facility for a net sale price of $30 million and recognized a net gain of $12 million. During the second quarter of 2018, we completed the sale of our Manchester, Connecticut distribution facility for a net sale price of $68 million and recognized a net gain of $38 million.

During the second quarter of 2018, we recorded an impairment charge of $52 million related to the expected sale of three airplanes. Two of the airplanes were sold during the second quarter of 2018 at their fair value of $12 million. Subsequent to the second quarter of 2018, the third airplane was sold at its fair value of $8 million.

Operating Income/(Loss)
For the second quarterfirst three months of 2019,2020, we reported an operating incomeloss of $17$477 million compared to an operating loss of $36 million in the second quarter of 2018. For the first six months of 2019, we reported an operating loss of $76 million compared to an operating loss of $33$93 million in the first sixthree months of 2018.2019.
Other Components of Net Periodic Pension Cost/(Income)
Other components of net periodic pension cost/(income) was $(13)$(23) million and $(19)$(13) million for the three months ended August 3,May 2, 2020, and May 4, 2019, and August 4, 2018, respectively. Other components of net periodic pension cost/(income) was $(26) million and $(38) million for the six months ended August 3, 2019 and August 4, 2018, respectively.




(Gain)/Loss on Extinguishment of Debt
During the first quarter of 2018, we settled cash tender offers with respect to portions of our outstanding 8.125% Senior Notes Due 2019 (2019 Notes) and 5.65% Senior Notes Due 2020 (2020 Notes), resulting in a loss on extinguishment of debt of $23 million.

Net Interest Expense
Net interest expense for the second quarterfirst three months of 20192020 was $74$75 million compared to $79 million in the second quarter of 2018.
Net interest expense for the first six months of 2019 was $147 million compared to $157$73 million in the first sixthree months of 2018. The reduction in net interest expense is primarily due to the change in presentation of lease costs related to the home office.2019.
Income Taxes
The net tax expensebenefit of $5$60 million for the three months ended August 3, 2019May 2, 2020, consisted of federal, state and foreign tax expensesbenefits of $4$2 million, and $1 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assets.

Theassets, net tax expensebenefit of $6$3 million for the six months ended August 3, 2019 consisted of federal,resulting from state and foreign tax expenses of $6 million, $2 million of expense related to the deferred tax asset change arising from the tax amortization of indefinite-lived intangible assetsaudit settlements and a $2$56 million benefit due to the release of valuation allowance.
As of August 3, 2019, we have approximately $2.1 billion of net operating losses (NOLs) available for U.S. federal income tax purposes, which largely expire in 2032 through 2034; $287 million of federal unused interest deductions that do not expire; and $69 million of tax credit carryforwards that expire at various dates through 2037. Additionally, we have state NOLs that are subject to various limitations and expiration dates beginning in 2019 through 2040 and are offset fully by valuation allowances. A valuation allowance of $591 million fully offsets the federal deferred tax assets resulting from the NOL, unused interest deductions and tax credit carryforwards that expire at various dates through 2037. A valuation allowance of $251 million fully offsets the deferred tax assets resulting from the state NOL carryforwards that expire at various dates through 2040. In assessing the need for the valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our periodic assessment, our estimate of the realization of deferred tax assets is solely based on the future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to accelerate taxable income to utilize expiring NOL and tax credit carryforwards. Accordingly, in the three months ended August 3, 2019, the valuation allowance net increase of $17 million consisted of $10 million to offset the net deferred tax assets created in the quarter primarily due to the increase in NOL carryforwards and a $7 million offset to the tax benefit attributable to the loss recorded in Other comprehensive income/(loss). For the six months ended August 3, 2019, the valuation allowance net increase of $40 million consisted of $45 million to offset the net deferred tax assets created in the period primarily due to the increase in NOL carryforwards, $10 million which offsets the tax benefit attributable to the loss recorded in Other comprehensive income/(loss), offset by a $15 million benefit related to lease accounting.
Non-GAAP Financial Measures
We report our financial information in accordance with GAAP. However, we present certain financial measures identified as non-GAAP under the rules of the Securities and Exchange Commission (SEC) to assess our results. We believe the presentation of these non-GAAP financial measures is useful in order to better understand our financial performance as well as to facilitate the comparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures to assess the results of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures prepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measures presented.

The following non-GAAP financial measures are adjusted to exclude restructuring and management transition charges, other components of net periodic pension cost/(income), the (gain)/loss on extinguishmentdue to discontinuance of debt,hedge accounting, the net (gain)/loss on the sale of non-operating assets the proportional share of net income from our joint venture formed to develop the excess property adjacent to our home office in Plano, Texas (Home Office Land Joint Venture) and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps. Unlike other operating expenses, restructuring and management transition charges, other components of net periodic pension cost/(income), the (gain)/loss on extinguishmentdue to discontinuance of debt,hedge accounting, the net (gain)/loss
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on the sale of non-operating assets the proportional share of net income from the Home Office Land Joint Venture and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps are not directly related to our ongoing core business operations, which consist of selling merchandise and services to consumers through our department stores and our website at jcpenney.com.jcp.com. Further, our non-GAAP adjustments are for non-operating associated activities such as closed store impairments included in restructuring and management transition charges and such as joint venture earnings from the sale of excess land included in the proportional share of net income from our Home Office Land Joint Venture.charges. Additionally, other components of net periodic

pension cost/(income) is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond our control, such as market volatility.  We believe it is useful for investors to understand the impact of restructuring and management transition charges, other components of net periodic pension cost/(income), the (gain)/loss on extinguishmentdue to discontinuance of debt,hedge accounting, the net (gain)/loss on the sale of non-operating assets the proportional share of net income from the Home Office Land Joint Venture and the tax impact for the allocation of income taxes to other comprehensive income items related to our pension plans and interest rate swaps on our financial results and therefore are presenting the following non-GAAP financial measures: (1) adjusted EBITDA; (2) adjusted net income/(loss); and (3) adjusted earnings/(loss) per share-diluted.

Adjusted EBITDA. The following table reconciles net income/(loss), the most directly comparable GAAP measure, to adjusted EBITDA, which is a non-GAAP financial measure:
Three Months Ended Six Months Ended Three Months Ended
($ in millions)August 3, 2019 August 4, 2018 August 3, 2019 August 4, 2018($ in millions)May 2, 2020May 4, 2019
Net income/(loss)$(48) $(101) $(202) $(179)Net income/(loss)$(546) $(154) 
Add: Net interest expense74
 79
 147
 157
Add: Net interest expense75  73  
Add: (Gain)/loss on extinguishment of debt(1) —
 (1) 23
Add: Loss due to discontinuance of hedge accountingAdd: Loss due to discontinuance of hedge accounting77  —  
Add: Income tax expense/(benefit)5
 5
 6
 4
Add: Income tax expense/(benefit)(60) 1  
Add: Depreciation and amortization137
 140
 284
 281
Add: Depreciation and amortization135  147  
Add: Restructuring and management transition charges7
 2
 27
 9
Add: Restructuring and management transition charges155  20  
Add: Other components of net periodic pension cost/(income)(13) (19) (26) (38)Add: Other components of net periodic pension cost/(income)(23) (13) 
Less: Net (gain)/loss on the sale of non-operating assets(1) —
 (1) —
Less: Proportional share of net income from joint venture—
 (1) —
 (1)
Adjusted EBITDA (non-GAAP)$160
 $105
 $234
 $256
Adjusted EBITDA (non-GAAP)$(187) $74  
Adjusted Net Income/(Loss) and Adjusted Diluted EPS. The following table reconciles net income/(loss) and diluted EPS, the most directly comparable GAAP financial measures, to adjusted net income/(loss) and adjusted diluted EPS, which are non-GAAP financial measures:
  Three Months Ended
($ in millions, except per share data)May 2,
2020		 May 4,
2019
Net income/(loss)$(546) $(154) 
Diluted EPS$(1.69) $(0.48) 
Add: Restructuring and management transition charges (1)
155  20  
Add: Other components of net periodic pension cost/(income) (1)
(23) (13) 
Add: Loss due to discontinuance of hedge accounting (2)
83  —  
Adjusted net income/(loss) (non-GAAP)$(331) $(147) 
Adjusted diluted EPS (non-GAAP)$(1.02) $(0.46) 
 Three Months Ended Six Months Ended
($ in millions, except per share data)August 3,
2019		 August 4,
2018		 August 3,
2019		 August 4,
2018
Net income/(loss)$(48) $(101) $(202) $(179)
Diluted EPS$(0.15) $(0.32) $(0.63) $(0.57)
Add: Restructuring and management transition charges (1)
7
 2
 27
 9
Add: Other components of net periodic pension cost/(income) (1)
(13) (19) (26) (38)
Add: (Gain)/loss on extinguishment of debt (1)
(1) —
 (1) 23
Less: Net (gain)/loss on sale of non-operating assets (1)
(1) —
 (1) —
Less: Proportional share of net income from joint
venture (1)
—
 (1) —
 (1)
Less: Tax impact resulting from other comprehensive income allocation (2)
—
 (1) —
 (3)
Adjusted net income/(loss) (non-GAAP)$(56) $(120) $(203) $(189)
Adjusted diluted EPS (non-GAAP)$(0.18) $(0.38) $(0.64) $(0.60)

(1)(1)Adjustments reflect no tax effect due to the impact of the Company's tax valuation allowance.
(2)Represents the net tax benefit that resulted from our other comprehensive income allocation between our Operating loss and Accumulated other comprehensive income.

Adjusted Comparable Store Sales Increase/(Decrease) (Non-GAAP)
Comparable store sales is a key performance indicator used by numerous retailers to measure the sales growth of its underlying operations. Comparable store sales is considered to be a GAAP measure as the key performance indicator is measured based

on GAAP net sales. Comparable store sales that excludes the impact of major appliance and in-store furniture categories is considered a non-GAAP measure.  Given our eliminationthe Company's tax valuation allowance.
(2) Adjustment reflects $6 million reclassified to income tax expense from accumulated other comprehensive income.



23
Table of these categories from our merchandise assortment, we believe that providing a comparable store sales metric that excludes the impact of major appliance and in-store furniture categories is useful for investors to evaluate the impact of these changes to our sales performance.

The following table reconciles comparable store sales increase/(decrease), the most directly comparable GAAP measure, to adjusted comparable store sales increase/(decrease), a non-GAAP measure.
Contents
 Three Months Ended Six Months Ended
 August 3, 2019 August 4, 2018 August 3, 2019 August 4, 2018
Comparable store sales increase/(decrease)(9.0)% 0.3% (7.3)% 0.2%
Impact related to major appliance and in-store furniture categories3.0 % 0.5% 1.7 % 0.1%
Adjusted comparable store sales increase/(decrease) (non-GAAP)(6.0)% 0.8% (5.6)% 0.3%


Liquidity and Capital Resources

Overview
Our primary sources of liquidity are cash generated from operations, available cash and cash equivalents and, prior to the commencement of the Chapter 11 Cases, access to our revolving credit facility. Our cash flows may be impacted by many factors including the economic environment, consumer confidence, competitive conditions in the retail industry, and the success of our strategies.strategies and the continued uncertainties of the COVID-19 pandemic on the Company’s operations. We ended the secondfirst quarter of 20192020 with $175$698 million of cash and cash equivalents. As of the end of the secondfirst quarter of 2019,2020, based on our borrowing base, our current borrowings, and amounts reserved for outstanding letters of credit, and prior to commencement of the Chapter 11 Cases, we had $1,501 $46 million available for future borrowings under our revolving credit facility, providing total available liquidity of $744 million compared to $1,727 million as of $1,676 million.the end of the first quarter of 2019. Following the commencement of the Chapter 11 Cases, we do not have access to a revolving credit facility.
The following table provides a summary of our key components and ratios of financial condition and liquidity:
 Three Months Ended
($ in millions)May 2,
2020		May 4,
2019
Cash and cash equivalents$698  $171  
Merchandise inventory2,221  2,477  
Property and equipment, net3,344  3,669  
Total debt (1)
4,884  3,918  
Stockholders’ equity348  1,034  
Total capital5,232  4,952  
Maximum capacity under our 2017 Credit Facility2,350  2,350  
Cash flow from operating activities(814) (205) 
Free cash flow (non-GAAP) (2)
(847) (268) 
Capital expenditures (3)
33  71  
Ratios:
Total debt-to-total capital (4)
93 %79 %
Cash-to-total debt (5)
14 %4 %
 Six Months Ended
($ in millions)August 3,
2019		 August 4,
2018
Cash and cash equivalents$175
 $182
Merchandise inventory2,471
 2,824
Property and equipment, net3,591
 4,058
    
Total debt (1)
3,786
 4,002
Stockholders’ equity963
 1,216
Total capital4,749
 5,218
Maximum capacity under our Revolving Credit Facility2,350
 2,350
Cash flow from operating activities1
 (135)
Free cash flow (non-GAAP) (2)
(133) (235)
Capital expenditures (3)
146
 221
Ratios:   
Total debt-to-total capital (4)
80% 77%
Cash-to-total debt (5)
5% 5%
(1)Includes debt, net of unamortized debt issuance costs, including any borrowings under our revolving credit facility.
(1)Includes long-term debt, net of unamortized debt issuance costs, including current maturities and any borrowings under our revolving credit facility.
(2)See “Free Cash Flow” below for a reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure and further information on its uses and limitations.
(3)As of the end of the second quarters of 2019 and 2018, we had accrued capital expenditures of $28 million and $38 million, respectively.
(4)Total debt and other financing obligations divided by total capital.
(5)Cash and cash equivalents divided by total debt.

(2)See “Free Cash Flow” below for a reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure and further information on its uses and limitations.
(3)As of the end of the first quarters of 2020 and 2019, we had accrued capital expenditures of $16 million and $25 million, respectively.
(4)Total debt and other financing obligations divided by total capital.
(5)Cash and cash equivalents divided by total debt.

During June and July 2020, the Company borrowed $450 million in new money under the DIP Credit Agreement. See Note 14 for further information regarding the DIP Credit Agreement. $225 million of the $450 million borrowed was placed in escrow and will be released upon (i) Supermajority Lenders approval of the Business Plan by July 31, 2020, and (ii) Credit Parties obtaining binding commitments for third-party financing (on terms satisfactory to the Administrative Agent) necessary to finance the Business Plan by August 30, 2020.

Free Cash Flow (Non-GAAP)
Free cash flow is a key financial measure of our ability to generate additional cash from operating our business and in evaluating our financial performance. We define free cash flow as cash flow from operating activities, less capital expenditures plus the proceeds from the sale of operating assets. Free cash flow is a relevant indicator of our ability to repay maturing debt, revise our dividend policy or fund other uses of capital that we believe will enhance stockholder value. Free cash flow is considered a non-GAAP financial measure under the rules of the SEC. Free cash flow is limited and does not represent remaining cash flow available for discretionary expenditures due to the fact that the measure does not deduct payments required for debt maturities, payments made for business acquisitions or required pension contributions, if any. Therefore, it is important to view free cash flow in addition to, rather than as a substitute for, our entire statement of cash flows and those measures prepared in accordance with GAAP.

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The following table sets forth a reconciliation of net cash provided by/(used in) operating activities, the most directly comparable GAAP financial measure, to free cash flow, a non-GAAP financial measure, as well as information regarding net cash provided by/(used in) investing activities and net cash provided by/(used in) financing activities:
 
 Three Months Ended
($ in millions)May 2,
2020		May 4,
2019
Net cash provided by/(used in) operating activities (GAAP)$(814) $(205) 
Add:
Proceeds from sale of operating assets—  8  
Less:
Capital expenditures (1)
(33) (71) 
Free cash flow (non-GAAP)$(847) $(268) 
Net cash provided by/(used in) investing activities (2)
$(33) $(63) 
Net cash provided by/(used in) financing activities$1,159  $106  
 Six Months Ended
($ in millions)August 3,
2019		 August 4,
2018
Net cash provided by/(used in) operating activities (GAAP)$1
 $(135)
Add:   
Proceeds from sale of operating assets12
 121
Less:   
Capital expenditures (1)
(146) (221)
Free cash flow (non-GAAP)$(133) $(235)
    
Net cash provided by/(used in) investing activities (2)
$(133) $(100)
Net cash provided by/(used in) financing activities$(26) $(41)


(1)As of the end of the first quarters of 2020 and 2019, we had accrued capital expenditures of $16 million and $25 million, respectively.
(1)As of the end of the second quarters of 2019 and 2018, we had accrued capital expenditures of $28 million and $38 million, respectively.
(2)Net cash provided by investing activities includes capital expenditures and proceeds from sale of operating assets, which are also included in our computation of free cash flow.
(2)Net cash provided by/(used in) investing activities includes capital expenditures and proceeds from sale of operating assets, which are also included in our computation of free cash flow.
During the first quarter of fiscal 2020, free cash flow was an outflow of $847 million compared to an outflow of $268 million for the same period of the prior year. The increase in the outflow resulted primarily from the effect of the COVID-19 pandemic and the related temporary store closures.
Operating Activities
While a significant portion of our sales, profit and operating cash flows have historically been realized in the fourth quarter, our quarterly results of operations may fluctuate significantly as a result of many factors, including seasonal fluctuations in customer demand, product offerings, inventory levels and promotional activity.

Cash flowsflow from operating activities for the sixthree months ended August 3, 2019 improved $136May 2, 2020, declined $609 million to an inflowoutflow of $1$814 million compared to an outflow of $135$205 million for the same period in 2018. Cash flows from operating activities increased from the prior year period2019 primarily due to lower levelsthe temporary closure of inventory purchases.
Cash flows from operating activities for eachall stores beginning March 19, the majority of which remained closed through the end of the first six months of 2019 and 2018 also included construction allowances from landlords of $4 million, which funded a portion of our capital expenditures in investing activities.quarter.

Merchandise inventory decreased $353$256 million, or 12.5%10.3%, to $2,471$2,221 million as of the end of the secondfirst quarter of 20192020 compared to $2,824$2,477 million as of the end of the secondfirst quarter of 20182019 and increased $34$55 million from year-end 2018.2019 as there were no store sales in the back half of the quarter due to the temporary store closures and deferral of supplier shipments. Merchandise accounts payablepayables decreased $32$263 million as of the end of the secondfirst quarter of 20192020 compared to the corresponding prior year period and increased $31decreased $207 million from year end 2018.2019 as the deferral of inventory receipts more than offset the deferral of supplier payments.

Following the temporary store closures in March 2020, companies issuing credit cards accepted by the Company for consumer sales transactions withheld $63 million in cash as of May 2, 2020, to be held as additional reserves. These reserves were established in accordance with the various credit card agreements and are recorded in Prepaid expenses and other.

Investing Activities
Investing activities for the sixthree months ended August 3, 2019May 2, 2020 resulted in cash outflows of $133$33 million compared to outflows of $100$63 million for the same sixthree month period of 2018.
Cash2019, primarily due to the decrease of cash capital expenditures were $146 million forspending during the six months ended August 3, 2019 and were $221 million forperiod related to the six months ended August 4, 2018.temporary store closures. In addition, as of the end of the secondfirst quarters of 20192020 and 2018,2019, we had $28$16 million and $38$25 million,

respectively, of accrued capital expenditures. ThroughCash capital expenditures related primarily to investments in our store environment and store facility improvements and investments in information technology in both our home office and stores.

Investing activities for the first sixthree months ofended May 4, 2019, capital expenditures related primarily to investments in our store environment and store facility improvements and investments in information technology in both our home office and stores. We received construction
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allowances from landlords of $4 million in the first sixthree months of 2019 to fund a portion of the capital expenditures related to store leasehold improvements. These funds are classified as operating activities and have been recorded as a reduction of operating lease assets in the unaudited Interim Consolidated Balance Sheets.
For the six months ended August 4, 2018, capital expenditures related primarily to investments in our store environment and store facility improvements, including investments in 27 new Sephora inside JCPenney stores and investments in information technology in both our home office and stores. We received construction allowances from landlords of $4 million in the first six months of 2018.
Full year 2019 capital expenditures are expected to be approximately $300 million to $325 million net of construction allowances from landlords. Capital expenditures for the remainder of 2019 include accrued expenditures of $28 million at the end of the second quarter.
Financing Activities
FinancingFor the first quarter of 2020, cash flows from financing activities for the six months ended August 3, 2019 resulted inwere an outflowinflow of $26$1,159 million compared to an outflowinflow of $41$106 million for the same period last year.prior year period. During the first six monthsquarter of 2019,fiscal 2020, the Company had net borrowings of $1,179 million under its 2017 Credit Facility, primarily drawn to enhance liquidity at the onset of the COVID-19 pandemic.

During the first quarter of fiscal 2020, we paid $22$19 million in required principal payments on outstanding debt.

During the first six months of 2018, we issued $400 million aggregate principal amount of senior secured second priority notes due 2025 and incurred $7 million in related issuance costs, paid $395 million to settle cash tender offers with respect to portions of our outstanding 2019 Notes and 2020 Notes and had net credit facility borrowings of $177 million. Additionally, we paid $190 million to retire outstanding debt at maturity, paid $21 million in required principal payments on outstanding debt and $4 million in required payments on our finance leases and note payable.

Free Cash Flow
Free cash flow for the six months ended August 3, 2019 improved $102 million to an outflow of $133 million compared to an outflow of $235 million in the same period last year. The year-over-year improvement was primarily due to lower capital expenditures and a decrease in the volume of inventory purchases.
Cash Flow Outlook
For the remainder of 2019, we
We believe that our existing liquidity, including cash on hand and funds generated from ongoing operations, and availability of cash under the DIP Credit Agreement, will be adequate to fund our capital expenditures and working capital needs; however, in accordance with our long-term financing strategy, we may accessanticipated cash requirements through the capital markets opportunistically. We believe that our current financial position will provide us the financial flexibility to support our current initiatives.Chapter 11 Cases.

Credit Ratings

Our credit ratings and outlook as of August 23, 2019 from various credit rating agencies were as follows:
CorporateOutlook
Fitch RatingsB-Stable
Moody’s Investors Service, Inc.Caa1Stable
Standard & Poor’s Ratings ServicesCCC+Negative
Credit rating agencies periodically review our capital structure and the quality and stability of our earnings.  Rating agencies consider, among other things, changes in operating performance, comparable store sales, the economic environment, conditions in the retail industry, financial leverage and changes in our business strategy in their rating decisions.  Downgrades to our long-term credit ratings could result in reduced access to the credit and capital markets and higher interest costs on future financings. Following the commencement of the Chapter 11 Cases (see Note 14 to the unaudited Interim Consolidated Financial Statements), all three credit rating agencies, Fitch Ratings, Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services, lowered their issue-level ratings on the Company to a ‘Default’ status rating. Additionally, and subsequent to downgrading the Company's issue-level rating to 'Default' and pursuant to our voluntary Chapter 11 filing, all three of the aforementioned credit rating agencies withdrew their issued credit ratings and outlook and have discontinued their rating coverage of the Company.
Contractual Obligations and Commitments
Aggregate information about our obligations and commitments to make future payments under contractual or contingent arrangements was disclosed in the 20182019 Form 10-K.
Impact of Inflation, Deflation and Changing Prices
We have experienced inflation and deflation related to our purchase of certain commodity products. We do not believe that changing prices for commodities have had a material effect on our Net Sales or results of operations. Although we cannot

precisely determine the overall effect of inflation and deflation on operations, we do not believe inflation and deflation have had a material effect on our financial condition or results of operations.

With a sizable portion of our private and national branded apparel and footwear sourced from China, we are exposed to potential increases in product costs which may result from increased tariffs imposed by the U.S. government in connection with its trade disputes with China. We expect a minimal impact on our product costs based on the current tariffs that are in effect and have taken actions to diversify our sourcing operations. However, we can expect a more meaningful increase to our product costs if potential additional tariffs go into effect on all Chinese imports and specifically apparel and footwear. The impact of COVID-19 on factory efficiency and capacity also has the potential to impact product costing and delivery.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Notes 2 andNote 3 to the unaudited Interim Consolidated Financial Statements.
Seasonality
While a significant portion of our sales, profit and operating cash flows have historically been realized in the fiscal fourth quarter, our quarterly results of operations may fluctuate significantly as a result of many factors, including seasonal fluctuations in customer demand, product offerings, inventory levels and our promotional activity. TheDue to the COVID-19 pandemic, the results of operations and cash flows for the sixthree months ended August 3, 2019May 2, 2020, are not necessarily indicative of the results for future quarters or the entire year.
Cautionary Statement Regarding Forward-Looking Statements

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This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current view of future events and financial performance. Words such as "expect" and similar expressions identify forward-looking statements, which include, but are not limited to, statements regarding sales, cost of goods sold, selling, general and administrative expenses, earnings, cash flows and liquidity. Forward-looking statements are based only on the Company's current assumptions and views of future events and financial performance. They are subject to known and unknown risks and uncertainties, many of which are outside of the Company's control, that may cause the Company's actual results to be materially different from planned or expected results. Those risks and uncertainties include, but are not limited to, risks attendant to the bankruptcy process, including the Company’s ability to obtain court approval from the Bankruptcy Court with respect to motions or other requests made to the Bankruptcy Court throughout the course of the Chapter 11 Cases; the ability of the Company to negotiate, develop, confirm and consummate a plan of reorganization; the effects of the Chapter 11 Cases, including increased legal and other professional costs necessary to execute the Company’s reorganization, on the Company’s liquidity (including the availability of operating capital during the pendency of the Chapter 11 Cases), results of operations or business prospects; the effects of the Chapter 11 Cases on the interests of various constituents; the length of time that the Company will operate under Chapter 11 protection; risks associated with third-party motions in the Chapter 11 Cases; Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general; conditions to which any debtor-in-possession financing is subject and the risk that these conditions may not be satisfied for various reasons, including for reasons outside the Company’s control; general economic conditions, including inflation, recession, unemployment levels, consumer confidence and spending patterns, credit availability and debt levels,levels; changes in store traffic trends,trends; the cost of goods,goods; more stringent or costly payment terms and/or the decision by a significant number of vendors not to sell usthe Company merchandise on a timely basis or at all,all; trade restrictions,restrictions; the ability to monetize non-core assets on acceptable terms,terms; the ability to implement ourthe Company’s strategic plan, including ourits omnichannel initiatives,initiatives; customer acceptance of our strategies, ourthe Company’s strategies; the Company’s ability to attract, motivate and retain key executives and other associates,associates; the impact of cost reduction initiatives, ourinitiatives; the Company’s ability to generate or maintain liquidity,liquidity; implementation of new systems and platforms,platforms; changes in tariff, freight and shipping rates,rates; changes in the cost of fuel and other energy and transportation costs,costs; disruptions and congestion at ports through which we import goods,the Company imports goods; increases in wage and benefit costs,costs; competition and retail industry consolidations,consolidations; interest rate fluctuations,fluctuations; dollar and other currency valuations,valuations; the impact of weather conditions,conditions; risks associated with war, an act of terrorism or pandemic,pandemic; the ability of the federal government to fund and conduct its operations,operations; a systems failure and/or security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or Company information,information; legal and regulatory proceedings,proceedings; the Company’s ability to access the debt or equity markets on favorable terms or at all and the Company's ability to comply with the continued listing criteria of the NYSE, andall; risks arising from the potential suspension of tradingdelisting of the Company'sCompany’s common stock from the New York Stock Exchange; and the impact of natural disasters, public health crises or other catastrophic events on that exchange.the Company’s financial results, in particular as the Company manages its business through the COVID-19 pandemic and the resulting restrictions and uncertainties in the general economic and business environment. There can be no assurances that the Company will achieve expected results, and actual results may be materially less than expectations. While we believe that our assumptions are reasonable, we caution that it is impossible to predict the degree to which any such factors could cause actual results to differ materially from predicted results. We intend the forward-looking statements in this Quarterly Report on Form 10-Q to speak only as of the date of this report and do not undertake to update or revise projections as more information becomes available.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the normal course of business due to changes in interest rates. Our market risks related to interest rates at August 3, 2019May 2, 2020, are similar to those disclosed in the 20182019 Form 10-K.10-K except for the following sentence. The filing of the Chapter 11 Cases permitted the counterparties to our derivative instruments to terminate their outstanding interest rate hedges, and certain of our counterparties elected to exercise their right to terminate. Refer to Note 6 - “Derivative Financial Instruments” in the notes to the unaudited Interim Consolidated Financial Statements for more information on the effect of these terminations on our financial position and results of operations.
Item 4. Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

The remote working of our associates and the corresponding remote closing of our books due to the COVID-19 pandemic did not have a material impact on our ability to maintain control over financial reporting and our disclosure controls and procedures for the three months ended May 2, 2020. There were no changes in our internal control over financial reporting during the first quarter ended May 2, 2020, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The matters under the caption "Litigation" in Note 1513 of the Notes to the unaudited Interim Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q are incorporated herein by reference.
Item 1A. Risk Factors

The riskRisk factors listed below update and supersede the risk factors associated with our business previously disclosedrelating to us are contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.1, 2020, and in Item 8.01 of our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on June 10, 2020. There have been no material changes to the risk factors disclosed in Item 1A of such Annual Report, except the following:

Our abilityCOVID-19 is adversely affecting, and is expected to achieve profitable growthcontinue to adversely affect, our business.

The global outbreak of a novel strain of coronavirus (COVID-19) and its rapid spread across the globe, including the U.S., is subject to bothhaving an unprecedented impact on the risks affecting our business generallyU.S. economy and the inherent difficulties associated with implementing our strategic plan.
As we positionretail industry. International, federal, state, and local public health and governmental authorities have taken extraordinary actions to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. In response to these actions, the Company for long-term growth, it may take longer than expected to achieve our objectives,temporarily closed all of its physical stores effective March 19, 2020, and actual results may be materially less than planned. Our ability to improve our operating results depends uponfurloughed a significant number of factors, someits associates in early April 2020.

We continued to operate jcp.com throughout the period in which all of which are beyond our control, including:
customer responsephysical stores were temporarily closed to our marketing and merchandise strategies;

our ability to achieve profitable sales and to make adjustmentscustomers in response to changing conditions;

our abilitystate and local shelter-in-place orders. Stores began re-opening to respond to competitive pressuresthe public in our industry;

our ability to effectively manage inventory;

the successlate April 2020, and nearly all of our omnichannel strategy;

approximately 850 retail stores have been re-opened, with restricted operations in most cases. Additionally, even in markets where shelter-in-place orders have been lifted, and where we have fully re-opened stores, we are experiencing significantly reduced customer traffic relative to the same period last year. Customer traffic may be further reduced in areas experiencing increases in new COVID-19 cases. We may resume temporary closures, or further restrict the operations of our abilitystores, corporate offices and distribution facilities, if we deem this necessary or if recommended or mandated by authorities. The extent to gather accurate and relevant data and effectively utilize that data inwhich the COVID-19 pandemic impacts our strategic planning and decision making;

our ability to benefit from investments in our stores;

our ability to respond to any unanticipated changes in expectedbusiness, financial position, cash flows liquidity and cash needs,results of operations will depend on future developments, including, our ability to obtain any additional financing or other liquidity enhancing transactions, if and when needed;

our ability to achieve positive cash flow;

our ability to access an adequate and uninterrupted supply of merchandise from suppliers at expected levels and on acceptable terms;


changesbut not limited to, the duration, spread, severity and impact of the COVID-19 pandemic, its effects on our customers, associates and suppliers, the regulatory environment in which our business operates; and

general economic conditions.

There is no assurance that our marketing, merchandising and omnichannel strategies, or any future adjustments to our strategies, will improve our operating results.
We operate in a highly competitive industry, which could adversely impact our sales and profitability.
The retail industry is highly competitive, with few barriers to entry. We compete with many other local, regional and national retailers for customers, employees, locations, merchandise, services and other important aspects of our business. Those competitors include other department stores, discounters, home furnishing stores, specialty retailers, wholesale clubs, direct-to-consumer businesses, including those on the Internet, and other forms of retail commerce. Some competitors are larger than JCPenney, and/or have greater financial resources available to them, and, as a result, may be able to devote greater resources to sourcing, promoting, selling their products, updating their store environment and updating their technology. Competition is characterized by many factors, including merchandise assortment, advertising, price, quality, service, location, reputation, shipping times and cost, online and mobile user experience, credit availability, customer loyalty, availability of in-store services, such as styling salon, optical, portrait photography and custom decorating,response and the abilityimpact of stimulus measures adopted by local, state and federal governments, to offer personalized customer experiences. We have experienced,what extent normal economic and anticipate thatoperating conditions can resume, and whether the
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COVID-19 pandemic leads to recessionary conditions in the United States. As such, impacts of COVID-19 to the Company are highly uncertain and we will continue to experienceassess the financial impacts. The disruption to the global economy and to the Company's business may lead to additional triggering events that may indicate that the carrying value of certain assets, including inventories, long-lived assets, and intangibles may not be recoverable. Additionally, the COVID-19 pandemic may also exacerbate other risks disclosed in our Annual Report on Form 10-K for at least the foreseeable future, significant competition fromyear ended February 1, 2020, including, but not limited to, our competitors. The performance of competitors as well as changes in their pricingcompetitiveness, supplier and promotional policies, marketing activities, customer loyalty programs, new strategic partnerships, availability of in-store services, new store openings, store renovations, launches of Internet websites or mobile platforms, brand launchessupply chain risks, available liquidity and other merchandise and operational strategies could cause us to have lower sales, lower merchandise margin and/or higher operating expenses such as marketing costs and other selling, general and administrative expenses, which in turn could have an adverse impact on our profitability.financing risks.
Our sales and operating results depend on our ability to develop merchandise offerings that resonate with our existing customers and help to attract new customers.
Our sales and operating results depend in part on our ability to predict and respond to changes in fashion trends and customer preferences in a timely manner by consistently offering stylish, quality merchandise assortments at competitive prices. We continuously assess emerging styles and trends and focus on developing a merchandise assortment to meet customer preferences. There is no assurance that these efforts will be successful or that we will be able to satisfy constantly changing customer demands. To the extent our decisions regarding our merchandise differ from our customers’ preferences, we may be faced with reduced sales and excess inventories for some products and/or missed opportunities for others. Any sustained failure to identify and respond to emerging trends in lifestyle and customer preferences and buying trends could have an adverse impact on our business. In addition, merchandise misjudgments may adversely impact the perception or reputation of our Company, which could result in declines in customer loyalty and vendor relationship issues, and ultimately have a material adverse effect on our business, financial condition and results of operations.
We may also seekare subject to expand into new lines of business from time to time. There is no assurance that these efforts will be successful. As we devote timerisks and resources to new lines of business, management’s attention and resources may be diverted from existing business activities. Further, if new lines of business are not as successful as we planned, then we risk damaging our overall business results. In addition, we may seek to expand our merchandise offerings into new product categories. Moving into new lines of business and expanding our merchandise offerings may carry new or additional risks beyond those typicallyuncertainties associated with our traditional apparel and home furnishings businesses, including potential reputational harm resulting from actions by unaffiliated third-parties that we may use to assist us in providing goods or services. We may not be able to develop new lines of business in a manner that improves our operating results or address or mitigate the risks associated with new product categories and new lines of business, and may therefore be forced to close the new lines of business or reduce our expanded merchandise offerings, which may damage our reputation and negatively impact our operating results.Chapter 11 Cases.
Our results may be negatively impacted if customers do not maintain their favorable perception of our Company and our private brand merchandise.
Maintaining and continually enhancing the value of our Company and our private brand merchandise is important to the success of our business. The value of our private brands is based in large part on the degree to which customers perceive and react to them. The value of our private brands could diminish significantly due to a number of factors, including customer perception that we have acted in an irresponsible manner in sourcing our private brand merchandise, adverse publicity about our private brand merchandise, our failure to maintain the quality of our private brand products, the failure of our private brand merchandise to deliver consistently good value to the customer, or the failure to protect the image associated with our private brands. The growing use of social and digital media by customers, us, and third parties increases the speed and extent that

information or misinformation and opinions can be shared. Negative posts or comments about us, our private brands, or any of our merchandise on social or digital media could seriously damage our reputation. If we do not maintain the favorable perception of our Company and our private brand merchandise or we experience a reduction in the level of private brand sales, our business results could be negatively impacted.
Our ability to increase sales and store productivity is largely dependent upon our ability to increase customer traffic and conversion.
Customer traffic depends upon our ability to successfully market compelling merchandise assortments, present an appealing shopping environment and experience to customers, and attract customers to our stores through omnichannel initiatives such as buy-online-pickup-in-store programs. Our strategies focus on increasing customer traffic and improving conversion in our stores and online; however, there can be no assurance that our efforts will be successful or will result in increased sales or margins. Further, costs to drive online traffic may be higher than anticipated, which could result in lower margins, and actions to drive online traffic may not deliver anticipated results. In addition, external events outside of our control, including store closings by our competitors, pandemics, terrorist threats, domestic conflicts and civil unrest, may influence customers' decisions to visit malls or might otherwise cause customers to avoid public places. There is no assurance that we will be able to reverse any decline in traffic or that increases in Internet sales will offset any decline in store traffic. We may need to respond to any declines in customer traffic or conversion rates by increasing markdowns or promotions to attract customers, which could adversely impact our operating results and cash flows from operating activities. In addition, the challenge of declining store traffic along with the growth of digital shopping channels and its diversion of sales from brick-and-mortar stores could lead to store closures and/or asset impairment charges, which could adversely impact our operating results, financial position and cash flows.
If we are unable to manage our inventory effectively, our merchandise margins could be adversely affected.
Our profitability depends upon our ability to manage appropriate inventory levels and respond quickly to shifts in consumer demand patterns. We must properly execute our inventory management strategies by appropriately allocating merchandise among our stores and online, timely and efficiently distributing inventory to stores, maintaining an appropriate mix and level of inventory in stores and online, adjusting our merchandise mix between our private and exclusive brands and national brands, appropriately changing the allocation of floor space of stores among product categories to respond to customer demand and effectively managing pricing and markdowns. If we overestimate customer demand for our merchandise, we will likely need to record inventory markdowns and sell the excess inventory at clearance prices which would negatively impact our merchandise margins and operating results. If we underestimate customer demand for our merchandise, we may experience inventory shortages which may result in missed sales opportunities and have a negative impact on customer loyalty. In addition, although we have various processes and systems to help protect against loss or theft of our inventory, higher than expected levels of lost or stolen inventory (called “shrinkage”) could result in write-offs and lost sales, which could adversely impact our profitability.
We must protect against security breaches or other unauthorized disclosures of confidential data about our customers as well as about our employees and other third parties.
As part of our normal operations, we and third-party service providers with whom we contract receive and maintain information about our customers (including credit/debit card information), our employees and other third parties. Confidential data must at all times be protected against security breaches or other unauthorized disclosure. We have, and require our third-party service providers to have, administrative, physical and technical safeguards and procedures in place to protectpreviously reported, the security, confidentiality, integrity and availability of such information and to protect such information against unauthorized access, disclosure or acquisition. Despite our safeguards and security processes and procedures, there is no assurance that all of our systems and processes, or those of our third-party service providers, are free from vulnerability to security breaches, inadvertent data disclosure or acquisition by third parties. Further, becauseDebtors commenced the methods used to obtain unauthorized access change frequently and may not be immediately detected, we may be unable to anticipate these methods or promptly implement safeguards.
Additionally, asChapter 11 Cases on May 15, 2020. For the regulatory environment related to information security, data collection, and use and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs. For example, California recently passed the California Consumer Privacy Act of 2018 (the “CCPA”), which goes into effect in January 2020 and provides broad rights to California consumers with respect to the collection and use of their information by businesses. The CCPA expands the privacy rights of California citizens and as a result, we may need to process enhancements and commit resources in support of compliance with California’s regulatory requirements. Any failure to adhere to the requirementsduration of the CCPA and other evolving laws and regulations in this area, or to protect confidential data about our business or our customers, employees or other third parties, could result in financial penalties and legal liability and could materially damage our brand and reputation, as well as result in significant expenses and disruptions to our operations, and loss of customer confidence, any of which could have a material adverse impact on our

business and results of operations. We could also be subject to government enforcement actions and private litigation as a result of any such failure.
The failure to retain, attract and motivate our employees, including employees in key positions, could have an adverse impact on our results of operations.
Our results depend on the contributions of our employees, including our senior management team and other key employees. This depends to a great extent on our ability to retain, attract and motivate talented employees throughout the organization, many of whom, particularly in the stores, are in entry level or part-time positions, which have historically had high rates of turnover. We currently operate with significantly fewer individuals than we have in the past who have assumed additional duties and responsibilities, which could have an adverse impact on our operating performance and efficiency. Negative media reports regarding the Company or the retail industry in general, as well as uncertainty due to store closings, could also have an adverse impact on our ability to attract, retain and motivate our employees. If we are unable to retain, attract and motivate talented employees with the appropriate skill sets, we may not achieve our objectives and our results of operations could be adversely impacted. Our ability to meet our changing labor needs while controlling our costs is also subject to external factors such as unemployment levels, competing wages, potential union organizing efforts and government regulation. An inability to provide wages and/or benefits that are competitive within the markets in which we operate could adversely affect our ability to retain and attract employees. In addition, the loss of one or more of our key personnel or the inability to effectively identify a suitable successor to a key role in our senior management could have a material adverse effect on our business.
If we are unable to successfully develop and maintain a relevant and reliable omnichannel experience for our customers, our sales, results of operations and reputation could be adversely affected.
We believe it is critical that we deliver a superior omnichannel shopping experience for our customers through the integration of our store and digital shopping channels. Omnichannel retailing is rapidly evolving and we must anticipate and meet changing customer expectations. Our omnichannel strategies include our ship-from-store and buy-online-pickup-in-store programs. In addition, we continue to explore ways to enhance our customers’ omnichannel shopping experience, including through investments in IT systems, operational changes and developing a more customer-friendly user experience. Our competitors are also investing in omnichannel initiatives, some of which may be more successful than our initiatives. For example, online and other competitors have placed an emphasis on delivery services, with customers increasingly seeking faster, guaranteed delivery times and low-price or free shipping. There is no assurance that we will be able to maintain an ability to be competitive on delivery times and delivery costs, which is dependent on many factors. If the implementation of our omnichannel strategies is not successful or does not meet customer expectations, or we do not realize a return on our omnichannel investments, our reputation and operating results may be adversely affected.
Disruptions in our Internet website or mobile applications, or our inability to successfully execute our online strategies, could have an adverse impact on our sales and results of operations.
We sell merchandise over the Internet through our website, www.jcpenney.com, and through mobile applications for smart phones and tablets. Our Internet operations are subject to numerous risks, including rapid technological change and the implementation of new systems and platforms; liability for online and mobile content; violations of state or federal laws, including those relating to online and mobile privacy and intellectual property rights; credit card fraud; problems associated with the operation, security and availability of our website, mobile applications and related support systems; computer malware; telecommunications failures; electronic break-ins and similar disruptions; and the allocation of inventory between our online operations and department stores. The failure of our website or mobile applications to perform as expected could result in disruptions and costs to our operations and make it more difficult for customers to purchase merchandise online. In addition, our inability to successfully develop and maintain the necessary technological interfaces for our customers to purchase merchandise through our website and mobile applications, including user friendly software applications for smart phones and tablets, could result in the loss of Internet sales and have an adverse impact on our results of operations.
Our operations are dependent on information technology systems; disruptions in those systems or increased costs relating to their implementation could have an adverse impact on our results of operations.
Our operations are dependent upon the integrity, security and consistent operation of various systems and data centers, including the point-of-sale systems in the stores, our Internet website and mobile applications, data centers that process transactions, communication systems and various software applications used throughout our Company to track inventory flow, process transactions, generate performance and financial reports and administer payroll and benefit plans.
We have implemented several applications and systems from third party vendors, providers and licensors to simplify our processes and reduce our use of customized existing legacy systems and expect to place additional applications and systems into operation in the future. Any continued reliance on existing legacy systems may result in extended system outages due to the difficulty in recovering those systems as well as inefficiencies in our business workflow due to the complexity and high

levels of customization inherent in such systems. Implementing new applications and systems carries substantial risk, including implementation delays, cost overruns, disruption of operations, potential loss of data or information, lower customer satisfaction resulting in lost customers or sales, inability to deliver merchandise to our stores or our customers, the potential inability to meet reporting requirements and unintentional security vulnerabilities. There can be no assurances that we will successfully launch the new applications and systems as planned, that the new applications and systems will perform as expected or that the new applications and systems will be implemented without disruptions to our operations, any of which may cause critical information upon which we rely to be delayed, unreliable, corrupted, insufficient or inaccessible.
We also outsource various information technology functions to third party service providers and may outsource other functions in the future. We rely on those third party service providers to provide services on a timely and effective basis and their failure to perform as expected or as required by contract could result in disruptions and costs to our operations.
Our vendors are also highly dependent on the use of information technology systems. Major disruptions in their information technology systems could result in their inability to communicate with us or otherwise to process our transactions or information, their inability to perform required functions, or in the loss or corruption of our information, any and all of which could result in disruptions to our operations. Our vendors are responsible for having safeguards and procedures in place to protect the confidentiality, integrity and security of our information, and to protect our information and systems against unauthorized access, disclosure or acquisition. Any failure in their systems to operate or in their ability to protect our information or systems could have a material adverse impact on our business and results of operations.
We have insourced, and may continue to insource, certain business functions from third party vendors and may seek to relocate certain business functions to international locations in an attempt to achieve additional efficiencies, both of which subject us to risks, including disruptions in our business.
We have insourced certain business functions and may also need to continue to insource other aspects of our business in the future in order to effectively manage our costs and stay competitive. We may also seek from time to time to relocate certain business functions to countries other than the United States to access highly skilled labor markets and further control costs. There is no assurance that these efforts will be successful. In addition, future regulatory developments could hinder our ability to fully realize the anticipated benefits of these actions. These actions may also cause disruptions that negatively impact our business. If we are ultimately unable to perform insourced functions better than, or at least as well as, third party providers, or otherwise fully realize the anticipated benefits of these actions, our operating results could be adversely impacted.
Changes in our credit ratings may limit our access to capital markets and adversely affect our liquidity.
The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. Any downgrades to our long-term credit ratings could result in reduced access to the credit and capital markets and higher interest costs on future financings. The future availability of financing will depend on a variety of factors such as economic and market conditions, the availability of credit and our credit ratings, as well as the possibility that lenders could develop a negative perception of us. There is no assurance that we will be able to obtain additional financing on favorable terms or at all.
Our profitability depends on our ability to source merchandise and deliver it to our customers in a timely and cost-effective manner.
Our merchandise is sourced from a wide variety of suppliers, and our business depends on being able to find qualified suppliers and access products in a timely and efficient manner. Inflationary pressures on commodity prices and other input costs could increase our cost of goods, and an inability to pass such cost increases on to our customers or a change in our merchandise mix as a result of such cost increases could have an adverse impact on our profitability. Additionally, the impact of economic conditions on our suppliers cannot be predicted and our suppliers may be unable to access financing or become insolvent and thus become unable to supply us with products. Developments in tax policy, such as the disallowance of tax deductions for imported merchandise, the imposition of tariffs on imported merchandise, or changes to U.S. trade legislation could further have a material adverse effect on our results of operations and liquidity.
Our arrangements with our suppliers and vendors may be impacted by our financial results or financial position.
Substantially all of our merchandise suppliers and vendors sell to us on open account purchase terms. There is a risk that our key suppliers and vendors could respond to any actual or apparent decrease in or any concern with our financial results or liquidity by requiring or conditioning their sale of merchandise to us on more stringent or more costly payment terms, such as by requiring standby letters of credit, earlier or advance payment of invoices, payment upon delivery or other assurances or credit support or by choosing not to sell merchandise to us on a timely basis or at all. Our arrangements with our suppliers and vendors may also be impacted by media reports regarding our financial position. Our need for additional liquidity could significantly increase and our supply of merchandise could be materially disrupted if a significant portion of our key suppliers

and vendors took one or more of the actions described above, which could have a material adverse effect on our sales, customer satisfaction, cash flows, liquidity and financial position.
Our senior secured real estate term loan credit facility and senior secured notes are secured by certain of our real property and, together with our senior secured second priority notes, substantially all of our personal property, and such property may be subject to foreclosure or other remedies in the event of our default. In addition, the real estate term loan credit facility and the indentures governing the senior secured notes and senior secured second priority notes contain provisions that could restrictChapter 11 Cases, our operations and our ability to obtain additional financing.
We are (i) party to a $1.688 billion senior secured term loan credit facilitydevelop and (ii) the issuer of $500 million aggregate principal amount of senior secured notes. We have also issued $400 million aggregate principal amount of senior secured second priority notes. The senior secured term loan credit facility and the senior secured notes are secured by mortgages on certain real property of the Company and, together with the senior secured second priority notes, liens on substantially all personal property of the Company, subject to certain exclusions set forth in the security documents relating to the term loan credit facility, the senior secured notes and the senior secured second priority notes. The real property subject to mortgages under the term loan credit facility and the indenture governing the senior secured notes includesexecute our distribution centers and certain of our stores.
The credit and guaranty agreement governing the term loan credit facility and the indentures governing the senior secured notes and the senior secured second-priority notes contain operating restrictions which may impact our future alternatives by limiting, without lender consent,business plan, as well as our ability to borrow additional funds, execute certain equity financingscontinue as a going concern, are subject to risks and uncertainties associated with bankruptcy and the Chapter 11 Cases. These risks include:

•our ability to negotiate, develop, confirm and consummate a Chapter 11 plan of reorganization or enter into dispositions or other liquidity enhancing or strategic transactions regarding certainalternative restructuring transaction;
•the high costs of bankruptcy proceedings and related fees;
•our assets, including our real property. Our ability to obtain additionalsufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence;
•our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;
•our ability to maintain contracts that are critical to our operations;
•our ability to attract, motivate and retain key employees;
•the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;
•the ability of third parties to seek and obtain court approval to convert the Chapter 11 Cases to a Chapter 7 proceeding; and,
•the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans.

Delays in our Chapter 11 Cases increase the risks of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.

These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with our Chapter 11 Cases could adversely affect our relationships with suppliers, service providers, customers, employees and other financingthird parties, which in turn could adversely affect our results of operations and financial condition. Also, pursuant to the Bankruptcy Code, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or to disposetake advantage of certain assets could also be negatively impacted because a substantial portion of our assets have been restricted or pledged as collateral for repayment of our indebtedness under the term loan credit facility, the senior secured notes and the senior secured second-priority notes.
If an event of default occurs and is continuing, our outstanding obligations under the term loan credit facility, the senior secured notes and the senior secured second-priority notes could be declared immediately due and payable or the lenders could foreclose on or exercise other remediesopportunities. In addition, certain parties may commence litigation with respect to the assets securingtreatment of their claims under a plan. Although it is not possible to predict the term loan credit facility, the senior secured notes and the senior secured second-priority notes, including, with respect to the term loan credit facility and senior secured notes, our distribution centers and certain of our stores. If an event of default occurs, there is no assurancepotential litigation that we wouldmay become party to, or the final resolution of such litigation, such litigation could result in settlements or damages that could significantly affect our financial results. Because of the risks and uncertainties associated with our Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact that events that occur during our Chapter 11 Cases will have on our business, financial condition, results of operations and cash flows.

Operating under the cash resources available to repay such accelerated obligations or refinance such indebtedness on commercially reasonable terms, or at all. The occurrenceBankruptcy Court’s protection for a long period of any onetime may harm our business.

A long period of these eventsoperations under the Bankruptcy Court’s protection could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our senior secured asset-based revolving credit facility limits our borrowing capacity A prolonged period of operating under the Bankruptcy Court’s protection may also make it more difficult to retain management and other key personnel necessary to the value of certainsuccess and growth of our assets.business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our senior secured asset-based revolving credit facility is secured by certain of our personal property,customers and lenders may exercise remedies against the collateralsuppliers will lose confidence in the event of our default.
We are party to a $2.35 billion senior secured asset-based revolving credit facility. Our borrowing capacity under our revolving credit facility varies according to the Company’s inventory levels, accounts receivable and credit card receivables, net of certain reserves. In the event of any material decrease in the amount of or appraised value of these assets, our borrowing capacity would similarly decrease, which could adversely impact our business and liquidity.
Our revolving credit facility contains customary affirmative and negative covenants and certain restrictions on operations become applicable if our availability falls below certain thresholds. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactionsreorganize our business successfully and will seek to engage inestablish alternative commercial relationships. Furthermore, so long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other actionsexpenses associated with the administration of the Chapter 11 Cases.

Any plan of reorganization that we may believe are advisable or necessary forimplement will be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our business.plan may be unsuccessful in its execution.
Our obligations
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Any plan of reorganization that we may implement could affect both our capital structure and the ownership, structure and operation of our businesses and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the revolving credit facility are secured by lienscircumstances. In addition, any plan of reorganization will rely upon financial projections, including with respect to inventory, accounts receivable, deposit accounts and certain related collateral. In the event of a default that is not cured or waived within any applicable cure periods, the lenders’ commitment to extend further credit under our revolving credit facility could be terminated, our outstanding obligations could become immediately due and payable, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral, which generally consists of the Company’s inventory, accounts receivable and deposit accounts and cash credited thereto. If we are unable to borrow under our revolving credit facility, we may not have the necessary cash resources for our operations and, if any event of default occurs, there is no assurance that we would have the cash resources available to repay such accelerated obligations, refinance such indebtedness on commercially reasonable terms, or at all, or cash collateralize our letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and liquidity.


Our level of indebtedness may adversely affect our business and results of operations and may require the use of our available cash resources to meet repayment obligations, which could reduce the cash available for other purposes.
As of August 3, 2019, we have $3.786 billion in total indebtedness and we are highly leveraged. Our level of indebtedness may limit our ability to obtain additional financing, if needed, to fund additional projects, working capital requirements,revenues, capital expenditures, debt service and other general corporatecash flow. Financial forecasts are necessarily speculative, and it is likely that one or other obligations, as well as increasemore of the risks to our business associated with general adverse economicassumptions and industry conditions. Our level of indebtedness may also place us at a competitive disadvantage to our competitorsestimates that are the basis of these financial forecasts will not be accurate. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to substantially change our capital structure, (ii) our ability to obtain adequate liquidity and financing sources, (iii) our ability to maintain customers’ confidence in our viability as highly leveraged. a continuing entity and to attract and retain sufficient business from them, (iv) our ability to retain key employees, and (v) the overall strength and stability of general economic conditions of the retail industry in the U.S. The impact of the COVID-19 pandemic on the retail industry in general, and on us, make it even more challenging than usual to develop financial forecasts. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of any plan of reorganization.

In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.

There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases.

If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan or reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

In addition, any future limitations on tax deductions for interest paid on outstanding indebtedness aspursuant to the DIP Credit Agreement, upon the occurrence of a result“Toggle Event,” the Debtors shall immediately cease pursuing a plan of reorganization and instead pursue the consummation of a sale of all or substantially all of the Tax Cutsassets of the Debtors pursuant to section 363 of the Bankruptcy Code and Jobs Act enactedshall immediately seek approval of any relief required from the Bankruptcy Court in December 2017 (the “Tax Act”)order to undertake such sale on an expedited basis. A “Toggle Event” occurs upon either (i) the failure of the Supermajority Lenders (as defined in the DIP Credit Agreement) to approve the Business Plan (as defined in the DIP Credit Agreement) by July 31, 2020, or (ii) the failure by the Debtors to obtain binding commitments for third-party financing (on terms and conditions satisfactory to Administrative Agent under the DIP Credit Agreement) necessary to finance the Business Plan approved by the Supermajority Lenders by August 30, 2020.

We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial condition and results of operations.

The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose before confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of the plan of reorganization. Any claims not ultimately discharged through the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on their financial condition and results of operations and liquidity.on a post-reorganization basis.
We are required to make quarterly repayments in a principal amount equal to $10.55 million during the seven-year term
The pursuit of the real estate term loan credit facility, subjectChapter 11 Cases has consumed, and will continue to certain reductions for mandatory and optional prepayments. In addition, we are required to make prepaymentsconsume, a substantial portion of the real estate term loan credit facility with the proceeds of certain asset sales, insurance proceedstime and excess cash flow, which could reduce the cash available for other purposes, including capital expenditures for store improvements, and could impact our ability to reinvest in other areasattention of our business.
There is no assurance that our internal and external sources of liquidity will at all times be sufficient for our cash requirements.
We mustmanagement, which may have sufficient sources of liquidity to fund our working capital requirements, capital improvement plans, service our outstanding indebtedness and finance investment opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash and cash equivalents, borrowings under our credit facilities, other debt financings, equity financings and sales of non-operating assets. We expect our ability to generate cash through the sale of non-operating assets to diminish as our portfolio of non-operating assets decreases. In addition, our recent operating losses have limited our capital resources. Our ability to achieve our business and cash flow plans is basedan adverse effect on a number of assumptions which involve significant judgments and estimates of future performance, borrowing capacity and credit availability, which cannot at all times be assured. Accordingly, there is no assurance that cash flows from operations and other internal and external sources of liquidity will at all times be sufficient for our cash requirements. If necessary, we may need to consider actions and steps to improve our cash position and mitigate any potential liquidity shortfall, such as modifying our business plan, pursuing additional financing to the extent available, reducing capital expenditures, pursuing and evaluating other alternatives and opportunities to obtain additional sources of liquidity and other potential actions to reduce costs. There can be no assurance that any of these actions would be successful, sufficient or available on favorable terms. Any inability to generate or obtain sufficient levels of liquidity to meet our cash requirements at the level and times needed could have a material adverse impact on our business and financial position.
Our ability to obtain any additional financing or any refinancing of our debt, if needed at any time, depends upon many factors, including our existing level of indebtedness and restrictions in our debt facilities, historical business performance, financial projections, the value and sufficiency of collateral, prospects and creditworthiness, external economic conditions and general liquidity in the credit and capital markets. Any additional debt, equity or equity-linked financing may require modification of our existing debt agreements, which there is no assurance would be obtainable. Any additional financing or refinancing could also be extended only at higher costs and require us to satisfy more restrictive covenants, which could further limit or restrict our business and results of operations, orand we may face increased levels of employee attrition.

While the Chapter 11 Cases continue, our management will be dilutiverequired to spend a significant amount of time and effort focusing on the Chapter 11 Cases instead of focusing exclusively on our stockholders.business operations. This diversion of attention may
Our use
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Table of interest rate hedging transactions could expose us to risks and financial losses that mayContents
materially adversely affect the conduct of our business, and, as a result, our financial condition liquidityand results of operations, particularly if the Chapter 11 Cases are protracted.

During the duration of the Chapter 11 Cases, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a material adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.
To reduce
Trading in our exposure to interest rate fluctuations, we have entered into, and insecurities during the future may enter into, interest rate swaps with various financial counterparties. The interest rate swap agreements effectively convert a portionpendency of our variable rate interest payments to a fixed price. There can be no assurances, however,Chapter 11 Cases poses substantial risks and is highly speculative. It is likely that our hedging activityequity securities will be effective in insulating us from the risks associatedcanceled, or that holders of such equity will not receive any distribution with changes in interest rates. In addition, our hedging transactions may expose usrespect to, certain risks and financial losses, including, among other things:
counterparty credit risk;

the risk that the duration or amount of the hedge may not match the duration or amount of the related liability;

the hedging transactions may be adjusted from time to time in accordance with accounting rules to reflect changes in fair values, downward adjustments or “mark-to-market losses,” which would affect our stockholders’ equity; and


the risk that we may not be able to meetrecover any portion of, their investments. It is also impossible to predict at this time whether any of our other securities will be canceled or if holders of such securities will be able to realize any portion of their investment.

We caution that trading in our securities, including J. C. Penney’s common stock, during the terms and conditionspendency of the hedging instruments,Chapter 11 Cases is highly speculative and poses substantial risks. Trading prices for the Company’s securities may bear little or no relationship to the actual recovery, if any, by holders of the Company’s securities in which casethe Chapter 11 Cases. In particular, J. C. Penney expects that its equity holders could experience a significant or complete loss on their investment, depending on the outcome of the Chapter 11 Cases.

We have recorded impairment charges in the past and we may be required to settle the instruments prior to maturity with cash payments that could significantly affect our liquidity.

Further, we have designated the swaps as cash flow hedges in accordance with Accounting Standards Codification Topic 815, Derivatives and Hedging. However,recognize impairment charges in the future, we may fail to qualify for hedge accounting treatment under these standards for a number of reasons, including if we fail to satisfy hedge documentation and hedge effectiveness assessment requirements or if the swaps are not highly effective. If we fail to qualify for hedge accounting treatment, losses on the swaps caused by the change in their fair value will be recognized as part of net income, rather than being recognized as part of other comprehensive income.future.
Operating results and cash flows may cause us to incur asset impairment charges.
Long-lived assets, primarily property and equipment, and right-of-use lease assets are reviewed at the store level at least annually for impairment, or whenever changes in circumstances indicate that a full recovery of net asset values through future cash flows is in question. We also assess the recoverability of indefinite-lived intangible assets at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Our impairment review requires us to make estimates and projections regarding, but not limited to, sales, operating profit and future cash flows. If our operating performance reflects a sustained decline, we may be exposed to significant asset impairment charges in future periods, which could be material to our results of operations.
Reductions in income and cash flow Impairment charges, if any, resulting from our marketing and servicing arrangementthe periodic testing are non-cash. We recognized impairment charges of $139 million related to our private labelintangible assets, right-of-use assets and co-branded credit cards could adversely affectlong-lived assets during the three months ended May 2, 2020. Additional charges may result from additional store closures based on the Debtors' review or rejection of other leases and contracts, or due to changes in other factors or circumstances, including deterioration in the macroeconomic environment or in the retail industry, deterioration in our operating results and cash flows.
Synchrony Financial (“Synchrony”) owns and servicesperformance or our private label credit card and co-branded MasterCard® programs. Our agreement with Synchrony provides for certain payments to be made by Synchrony to the Company, includingfuture projections as a share of income from the performanceresult of the credit card portfolios.Chapter 11 Cases or otherwise, if actual results are not consistent with our estimates and assumptions used in the impairment analyses, or changes in our plans for one or more indefinite-lived intangible assets. The incomeimpairment analyses are particularly sensitive to changes in the projected revenue growth rate and cash flow that the Company receives from Synchrony is dependent upon a number of factors including the level of sales on private label and co-branded accounts, the percentage of sales on private label and co-branded accounts relative to the Company’s total sales, the level of balances carried on the accounts, payment rates on the accounts, finance charge rates and other fees on the accounts, the level of credit losses for the accounts, Synchrony’s ability to extend credit to our customers as well as theassumed weighted-average cost of customer rewards programs. Allcapital or other discount rates. Changes to these key assumptions could result in revisions of these factors can vary based on changes in federal and state credit card, banking and consumer protection laws, which could also materially limit the availability of credit to consumers or increase the cost of credit to our cardholders. The factors affecting the income and cash flow that the Company receives from Synchrony can also vary based on a variety of economic, legal, social and other factors that we cannot control. If the income or cash flow that the Company receives from our consumer credit card program agreement with Synchrony decreases, our operating results and cash flows could be adversely affected.
We are subject to risks associated with importing merchandise from foreign countries.
A substantial portion of our merchandise is sourced by our vendors and by us outsidemanagement's estimates of the United States. Allfair value of our direct private brand vendors must comply with our supplier legal compliance program and applicable laws, including consumer and product safety laws. Although we diversify our sourcing and production by country and supplier, the failure of a supplier to produce and deliver our goods on time, to meet our quality standards and adhere to our product safety requirementsindefinite-lived intangible assets, or to meet the requirements of our supplier compliance programlong-lived assets or applicable lawsright-of-use lease assets and could result in damage to our reputation.
Although we have implemented policies and procedures designed to facilitate compliance with laws and regulations relating to doing businessimpairment charges in foreign markets and importing merchandise from abroad, there can be no assurance that suppliers and other third parties with whom we do business will not violate such laws and regulations or our policies,the future, which could subject usbe material to liability and could adversely affect our results of operations.
We are subject to the various risks of importing merchandise from abroad and purchasing product made in foreign countries, such as:
potential disruptions in manufacturing, logistics and supply;

changes in duties, tariffs, quotas and voluntary export restrictions on imported merchandise;

strikes and other events affecting delivery;

consumer perceptions of the safety of imported merchandise;

product compliance with laws and regulations of the destination country;


product liability claims from customers or penalties from government agencies relating to products that are recalled, defective or otherwise noncompliant or alleged to be harmful;

concerns about human rights, working conditions and other labor rights and conditions and environmental impact in foreign countries where merchandise is produced and raw materials or components are sourced, and changing labor, environmental and other laws in these countries;

local business practice and political issues that may result in adverse publicity or threatened or actual adverse consumer actions, including boycotts;

compliance with laws and regulations concerning ethical business practices, such as the U.S. Foreign Corrupt Practices Act; and

economic, political or other problems in countries from or through which merchandise is imported.

Political or financial instability, trade restrictions, tariffs, currency exchange rates, labor conditions, congestion and labor issues at major ports, transport capacity and costs, systems issues, problems in third party distribution and warehousing and other interruptions of the supply chain, compliance with U.S. and foreign laws and regulations and other factors relating to international trade and imported merchandise beyond our control could affect the availability and the price of our inventory. These risks and other factors relating to foreign trade could subject us to liability or hinder ourOur ability to access suitable merchandise on acceptable terms, which could adversely impactuse our results of operations. In addition, developments in tax policy, such as the disallowance of tax deductions for imported merchandise, the imposition of tariffs on imported merchandise or changes to U.S. trade legislation, could have a material adverse effect on our results of operations and liquidity.
Disruptions and congestion at ports through which we import merchandise may increase our costs and/or delay the receipt of goods in our stores, which could adversely impact our profitability, financial position and cash flows.
We ship the majority of our private brand merchandise by ocean to ports in the United States. Our national brand suppliers also ship merchandise by ocean. Disruptions in the operations of ports through which we import our merchandise, including but not limited to labor disputes involving work slowdowns, lockouts or strikes, could require us and/or our vendors to ship merchandise by air freight or to alternative ports in the United States. Shipping by air is significantly more expensive than shipping by ocean, which could adversely affect our profitability. Similarly, shipping to alternative ports in the United States could result in increased lead times and transportation costs. Disruptions at ports through which we import our goods could also result in unanticipated inventory shortages, which could adversely impact our reputation and our results of operations.
Our Company’s growth and profitability depend on the levels of consumer confidence and spending.
Our results of operations are sensitive to changes in overall economic and political conditions that impact consumer spending, including discretionary spending. Many economic factors outside of our control, including the housing market, interest rates, recession, inflation and deflation, energy costs and availability, consumer credit availability and terms, consumer debt levels, tax rates and policy, and unemployment trends, influence consumer confidence and spending. The domestic and international political situation and actions also affect consumer confidence and spending. Additional events that could impact our performance include pandemics, terrorist threats and activities, worldwide military and domestic disturbances and conflicts, political instability and civil unrest. Declines in the level of consumer spending could adversely affect our growth and profitability.
Our business is seasonal, which impacts our results of operations.
Our annual earnings and cash flows depend to a great extent on the results of operations for the last quarter of our fiscal year, which includes the holiday season. Our fiscal fourth-quarter results may fluctuate significantly, based on many factors, including holiday spending patterns and weather conditions. This seasonality causes our operating results to vary considerably from quarter to quarter.
Our profitability may be impacted by weather conditions.
Our merchandise assortments reflect assumptions regarding expected weather patterns and our profitability depends on our ability to timely deliver seasonally appropriate inventory. Unseasonable or unexpected weather conditions such as warm temperatures during the winter season or prolonged or extreme periods of warm or cold temperatures could render a portion of our inventory incompatible with consumer needs. Extreme weather or natural disasters could also severely hinder our ability to timely deliver seasonally appropriate merchandise, preclude customers from traveling to our stores, delay capital improvements

or cause us to close stores. A reduction in the demand for or supply of our seasonal merchandise could have an adverse effect on our inventory levels and results of operations.
Changes in federal, state or local laws and regulations could increase our expenses and adversely affect our results of operations.
Our business is subject to a wide array of laws and regulations. Government intervention and activism and/or regulatory reform may result in substantial new regulations and disclosure obligations and/or changes in the interpretation of existing laws and regulations, which may lead to additional compliance costs as well as the diversion of our management’s time and attention from strategic initiatives. If we fail to comply with applicable laws and regulations, we could be subject to legal risk, including government enforcement action and class action civil litigation that could disrupt our operations and increase our costs of doing business. Changes in the regulatory environment regarding topics such as privacy and information security, tax policy, product safety, environmental protection, including regulations in response to concerns regarding climate change, collective bargaining activities, minimum wage, wage and hour, and health care mandates, among others, as well as changes to applicable accounting rules and regulations, such as changes to lease accounting standards, could also cause our compliance costs to increase and adversely affect our business, financial condition and results of operations.
Legal and regulatory proceedings could have an adverse impact on our results of operations.
Our Company is subject to various legal and regulatory proceedings relating to our business, certain of which may involve jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. We are impacted by trends in litigation, including class action litigation brought under various consumer protection, employment, and privacy and information security laws. In addition, litigation risks related to claims that technologies we use infringe intellectual property rights of third parties have been amplified by the increase in third parties whose primary business is to assert such claims. Reserves are established based on our best estimates of our potential liability. However, we cannot accurately predict the ultimate outcome of any such proceedings due to the inherent uncertainties of litigation. Regardless of the outcome or whether the claims are meritorious, legal and regulatory proceedings may require that we devote substantial time and expense to defend our Company. Unfavorable rulings could result in a material adverse impact on our business, financial condition or results of operations.
Significant changes in discount rates, actual investment return on pension assets, and other factors could affect our earnings, equity, and pension contributions in future periods.
Our earnings may be positively or negatively impacted by the amount of income or expense recorded for our qualified pension plan. Generally accepted accounting principles in the United States of America (GAAP) require that income or expense for the plan be calculated at the annual measurement date using actuarial assumptions and calculations. The most significant assumptions relate to the capital markets, interest rates and other economic conditions. Changes in key economic indicators can change the assumptions. Two critical assumptions used to estimate pension income or expense for the year are the expected long-term rate of return on plan assets and the discount rate. In addition, at the measurement date, we must also reflect the funded status of the plan (assets and liabilities) on the balance sheet, which may result in a significant change to equity through a reduction or increase to other comprehensive income. We may also experience volatility in the amount of the annual actuarial gains or losses recognized as income or expense because we have elected to recognize pension expense using mark-to-market accounting. Although GAAP expense and pension contributions are not directly related, the key economic factors that affect GAAP expense would also likely affect the amount of cash we could be required to contribute to the pension plan. Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve a plan’s funded status.
Our stock price has been and may continue to be volatile.
The market price of our common stock has fluctuated substantially and may continue to fluctuate significantly. Future announcements or disclosures concerning us or any of our competitors, our strategic initiatives, our sales and profitability, our financial condition, any quarterly variations in actual or anticipated operating results or comparable sales, any failure to meet analysts’ expectations and sales of large blocks of our common stock, among other factors, could cause the market price of our common stock to fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks that have often been unrelated or disproportionate to the operating performance of these companies. This volatility could affect the price at which you could sell shares of our common stock.
Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation could result in substantial costs, divert our management’s attention and resources and have an adverse effect on our business, results of operations and financial condition.


If we cannot meet the continued listing requirements of the NYSE, the NYSE may delist our common stock.
On August 6, 2019, we received written notification from the New York Stock Exchange (“NYSE”) that the average closing price of our common stock had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average closing share price required to maintain listing under Section 802.01C of the NYSE Listed Company Manual. The notice has no immediate impact on the listing of our common stock, which will continue to be listed and traded on the NYSE during the period allowed to regain compliance, subject to our compliance with other listing standards. Our common stock is permitted to continue to trade on the NYSE under the symbol “JCP,” but will have an added designation of “.BC” to indicate the status of the common stock as “below compliance.”
We informed the NYSE that we intend to cure the deficiency and to return to compliance with the NYSE continued listing requirements. We can regain compliance at any time during the six-month period following receipt of the notification if our common stock has a closing share price of at least $1.00 on the last trading day of any calendar month during the six-month period and also has an average closing share price of at least $1.00 over the 30-trading day period ending on the last trading day of that month.
Notwithstanding the foregoing, if we were to determine that we must cure the deficiency by taking an action that would require approval of our stockholders (such as a reverse stock split), we could also regain compliance by (i) obtaining the requisite stockholder approval by no later than our next annual meeting and (ii) implementing the action promptly thereafter, such that the price of our common stock would promptly exceed $1.00 per share, provided that the price must remain above that level for at least the following 30 trading days. However, there is no assurance that our stockholders would vote for such proposal.
While we are considering various options to cure the deficiency, it may take a significant effort to regain compliance with this continued listing standard, and there can be no assurance that we will be successful.
Our common stock could also be delisted if (i) our average market capitalization over a consecutive 30 trading-day period is less than $15 million, or (ii) our common stock trades at an “abnormally low” price. In either case, we would not have an opportunity to cure the deficiency, and, as a result, our common stock would be suspended from trading on the NYSE immediately, and the NYSE would begin the process to delist our common stock, subject to our right to appeal under NYSE rules. There is no assurance that any appeal we undertake in these or other circumstances would be successful, nor is there any assurance that we will continue to comply with the other NYSE continued listing standards.
Failure to maintain our NYSE listing could negatively impact us and our stockholders by reducing the willingness of investors to hold our common stock because of the resulting decreased price, liquidity and trading of our common stock, limited availability of price quotations, and reduced news and analyst coverage. These developments may also require brokers trading in our common stock to adhere to more stringent rules and may limit our ability to raise capital by issuing additional shares in the future. Delisting may adversely impact the perception of our financial condition and cause reputational harm with investors and parties conducting business with us. In addition, the perceived decreased value of employee equity incentive awards may reduce their effectiveness in encouraging performance and retention.
The Company’s ability to use net operating loss carryforwards (“NOLs”) may become subject to offsetlimitation, or may be reduced or eliminated, in connection with the implementation of a plan of reorganization. We have adopted a stockholders’ rights agreement and the Bankruptcy Court has entered an order that are each designed to protect our NOLs until a plan of reorganization is consummated.

Generally, a company generates NOLs if the operating expenses it has incurred exceed the revenues it has earned during a single tax year. A company may apply, or “carry forward,” NOLs to reduce future taxable income fortax payments (subject to certain conditions and limitations). We currently estimate that, as of May 2, 2020, we had U.S. federal income tax purposes may be limited.
NOLs of approximately $2.5 billion. The Company has a federal net operating loss (NOL) of $2.1 billion as of August 3, 2019. Nearly allmajority of these NOL carryforwardsNOLs (expiring in 2032 through 2034) arose prior to December 31, 2017 and are available to offset future taxable income in full.without limitation. NOLs recognizedarising after December 31, 2017 are only available to offset up to 80% of the Company’sour future taxable income.income in any given taxable year beginning after 2020.

Section 382 of the Internal Revenue Code of 1986, as amended (the Code)“Code”), imposes an annual limitation on the amount of taxable income that may be offset by a corporation's NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. AnGenerally, an ownership change occurs whenif the Company’s “five-percent shareholders” (as defined in Section 382 of the Code) have collectively increaseincreased their ownership in the Company by more than 50 percentage points (by
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value) overat any time during a rolling three-year period.period ending on the date of the ownership change. Additionally, various states have similar limitations on the use of state NOLs following an ownership change.

If an ownership change occurs, the amount of the taxable income for any post-change year that may be offset by a pre-change loss is subject to an annual limitation that is cumulative to the extent it is not all utilized in a year.limitation. This limitation is derived by multiplying the fair market value of the Company stock as ofimmediately prior to the ownership change by the applicable federal long-term tax-exempt rate, which was 2.09% at August 3, 2019.is .89% for an ownership change occurring in July 2020. To the extent that a company has a net unrealized built-in gain at the time of an ownership change, which is realized or deemed recognized during the five-year period following the ownership change, there is an increase in the annual limitation for each of the first five-years that is cumulative to the extent it is not all utilized in a year.

five years. The Company does not believe it has an ongoing study of the rolling three-year testing periods. Based upon the elections the Company has made and the information that has been filed with the Securities and Exchange Commission through August 3, 2019, the Company has not had a Section 382 ownership change through August 3, 2019.
If an ownership change should occur in the future, the Company’s ability to use the NOL to offset future taxable incomebased on all available information.

We expect that we will be subject toundergo an annual limitation and will depend on the amount of taxable income generated by the Company in future periods. There is no assurance that the Company will be able to fully utilize the NOL and the Company could be required to record an additional valuation allowance related to the amountownership change under Section 382 of the NOL that may not be realized, which could impactCode in connection with the Company’s resultconsummation of operations.
Wea plan of reorganization. Nevertheless, we believe that these NOL carryforwardsNOLs are a valuable asset for us. Consequently,us, particularly in the context of the Chapter 11 Cases. Prior to the Chapter 11 Cases, we haveput a stockholderstockholders’ rights planagreement in place which(the “Rights Agreement”). The Rights Agreement was approved bydesigned to make it more difficult for a third party to acquire, and to discourage a third party from acquiring, a large block of our common stock that could put us at risk of undergoing an ownership change. On May 16, 2020, the Company’s stockholders,Bankruptcy Court entered an order that sets forth procedures (including notice requirements) that certain shareholders and potential shareholders must comply with regarding transfers of, or declarations of worthlessness with respect to, protect our NOLs duringcommon stock, as well as certain obligations with respect to notifying us of current share ownership (the “Procedures”). The Rights Agreement and the effective period of the rights plan. Although the rights plan is intendedProcedures are each designed to reduce the likelihood of an “ownership change” occurring prior to the consummation of a bankruptcy plan of reorganization, both to ensure that could adversely affect us,our NOLs (and other tax attributes) are available to address the immediate tax consequences of any such bankruptcy plan of reorganization and to preserve the potential ability to rely on certain rules that apply to ownership changes occurring as a result of a bankruptcy plan of reorganization. However, there is no assurance that the restrictions on transferability inRights Agreement or the rights planProcedures will prevent all transfers that could result in such an “ownership change”.change.”
The rights plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our Company or a large block of our common stock. A third party that acquires 4.9% or more of our common stock could suffer substantial dilution of its ownership interest under the terms of the rights plan through the issuance of common stock or common stock equivalents to all stockholders other than the acquiring person.
The foregoing provisions may adversely affect the marketability of our common stock by discouraging potential investors from acquiring our stock. In addition, these provisions could delayour NOLs (and other tax attributes) may be subject to use in connection with the implementation of any bankruptcy plan of reorganization or frustratereduction as a result of any cancellation of indebtedness income arising in connection with the removalimplementation of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attemptany bankruptcy plan of reorganization. As such, at this time, there can be no assurance that we will have NOLs to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders.offset future taxable income.




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Table of Contents
Item 6. Exhibits
Exhibit Index 
 Incorporated by Reference 
Exhibit No.Exhibit DescriptionFormSEC
File No.		ExhibitFiling
Date		Filed (†)
Herewith
(as indicated)
3.110-Q001-152743.16/8/2011
3.28-K001-152743.17/21/2016
3.38-K001-152743.18/22/2013
31.1†
31.2†
32.1†
32.2†
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document†
101.SCHXBRL Taxonomy Extension Schema Document†
101.CALXBRL Taxonomy Extension Calculation Linkbase Document†
101.DEFXBRL Taxonomy Extension Definition Linkbase Document†
101.LABXBRL Taxonomy Extension Label Linkbase Document†
101.PREXBRL Taxonomy Extension Presentation Linkbase Document†


33
    Incorporated by Reference  
Exhibit No. Exhibit Description Form 
SEC
File No.
 Exhibit 
Filing
Date
 
Filed (†)
Herewith
(as indicated)
3.1 
Restated Certificate of Incorporation of J. C. Penney Company, Inc., as amended to May 20, 2011
 10-Q 001-15274 3.1 6/8/2011  
3.2 
J. C. Penney Company, Inc. Bylaws, as amended to July 20, 2016
 8-K 001-15274 3.1 7/21/2016  
3.3 
Certificate of Designation, Preferences and Rights of Series C Junior Participating Preferred Stock
 8-K 001-15274 3.1 8/22/2013  
10.1 
J. C. Penney Company, Inc. 2019 Long-Term Incentive Plan


 8-K 001-15274 10.1 5/24/2019  
10.2 
Form of Notice of Non-Associate Director Restricted Stock Unit Award under the J. C. Penney Company, Inc. 2019 Long-Term Incentive Plan
         †
31.1 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
         †
31.2 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
         †
32.1 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         †
32.2 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
         †
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document         †
101.SCH XBRL Taxonomy Extension Schema Document         †
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document         †
101.DEF XBRL Taxonomy Extension Definition Linkbase Document         †
101.LAB XBRL Taxonomy Extension Label Linkbase Document         †
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document         †

Table of Contents


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
J. C. PENNEY COMPANY, INC.
By/s/ Steve Whaley
Steve Whaley

Senior Vice President, Principal Accounting Officer and Controller

(Principal Accounting Officer)
Date: August 28, 2019

July 21, 2020
45
34