J. C. Penney Company, Inc Annual Report 2013

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended February 1, 2014oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ______________ to ________________Commission File Number: 001-15274 J. C. PENNEY COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware 26-0037077(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 6501 Legacy Drive, Plano, Texas 75024-3698 (Address of principal executive offices) (Zip Code) (972)-431-1000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock of 50 cents par value New York Stock ExchangePreferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x 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 x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and postedpursuant 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 and post suchfiles). Yes x No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer xAccelerated filer oNon-accelerated filer oSmaller reporting company o (Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or theaverage bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (August 3, 2013). $2,462,547,444 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.304,693,329 shares of Common Stock of 50 cents par value, as of March 17, 2014.DOCUMENTS INCORPORATED BY REFERENCEDocuments from which portions are incorporated by reference Parts of the Form 10-K into which incorporatedJ. C. Penney Company, Inc. 2014 Proxy Statement Part IIITable of ContentsINDEX PagePart I Item 1. Business3 Item 1A. Risk Factors6 Item 1B. Unresolved Staff Comments 14 Item 2. Properties15 Item 3. Legal Proceedings17 Item 4. Mine Safety Disclosures18Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19 Item 6. Selected Financial Data21 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations25 Item 7A. Quantitative and Qualitative Disclosures about Market Risk48 Item 8. Financial Statements and Supplementary Data48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure48 Item 9A. Controls and Procedures49 Item 9B. Other Information51Part III Item 10. Directors, Executive Officers and Corporate Governance51 Item 11. Executive Compensation51 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters51 Item 13. Certain Relationships and Related Transactions, and Director Independence52 Item 14. Principal Accounting Fees and Services52Part IV Item 15. Exhibits, Financial Statement Schedules53 Signatures54 Index to Consolidated Financial Statements56 Exhibit Index1022Table of ContentsPART I Item 1. Business Business Overview J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated inDelaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The newholding company assumed the name J. C. Penney Company, Inc. (Company). The holding company has no independent assets or operations, and no directsubsidiaries other than JCP. Common stock of the Company is publicly traded under the symbol “JCP” on the New York Stock Exchange. The Company isa co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. The guarantee by the Companyof certain of JCP’s outstanding debt securities is full and unconditional. The holding company and its consolidated subsidiaries, including JCP, arecollectively referred to in this Annual Report on Form 10-K as “we,” “us,” “our,” “ourselves,” “Company” or “JCPenney.” Since our founding by James Cash Penney in 1902, we have grown to be a major retailer, operating 1,094 department stores in 49 states and Puerto Rico as ofFebruary 1, 2014. Our fiscal year ends on the Saturday closest to January 31. Unless otherwise stated, references to years in this report relate to fiscal years,rather than to calendar years. Fiscal year 2013 ended on February 1, 2014; fiscal year 2012 ended on February 2, 2013; and fiscal year 2011 ended onJanuary 28, 2012. Fiscal years 2013 and 2011 consisted of 52 weeks and fiscal year 2012 consisted of 53 weeks. Our business consists of selling merchandise and services to consumers through our department stores and through our Internet website at jcpenney.com.Department stores and Internet generally serve the same type of customers and provide virtually the same mix of merchandise, and department stores acceptreturns from sales made in stores and via the Internet. We sell family apparel and footwear, accessories, fine and fashion jewelry, beauty products throughSephora inside JCPenney and home furnishings. In addition, our department stores provide our customers with services such as styling salon, optical,portrait photography and custom decorating. Based on how we categorized our divisions in 2013, our merchandise mix of total net sales over the last three years was as follows: 2013 2012 2011Women’s apparel 24% 24% 23%Men’s apparel and accessories 22% 21% 20%Home 11% 12% 16%Women’s accessories, including Sephora 11% 10% 9%Children’s apparel 11% 12% 12%Family footwear 9% 9% 8%Fine jewelry 7% 7% 7%Services and other 5% 5% 5% 100% 100% 100%Fiscal 2013 was a transitional year in which we worked to stabilize our business and to rebuild the Company, working to create strategies for reconnectingwith our core customer. Our prior strategy focused on everyday low prices, substantially eliminated promotional activities, emphasized brands in a shopspresentation and introduced new merchandise brands. These merchandising and pricing strategies did not resonate with our customers. As a result, during2013 we began editing our merchandise assortments and undertaking several merchandise initiatives to make assortments more compelling to customers,including reintroducing some of our private brands. We also began shifting the majority of our business back to a promotional model at the beginning of 2013.Competition and Seasonality The business of marketing merchandise and services is highly competitive. We are one of the largest department store and e-commerce retailers in the UnitedStates, and we have numerous competitors, as further described in Item 1A, Risk Factors.3Table of ContentsMany factors enter into the competition for the consumer’s patronage, including price, quality, style, service, product mix, convenience, loyalty programs andcredit availability. Our annual earnings depend to a great extent on the results of operations for the last quarter of the fiscal year, which includes the holidayseason, when a significant portion of our sales and profits are recorded. Trademarks The JCPenney®, JCP®, monet®, Liz Claiborne®, Claiborne®, Okie Dokie®, Worthington®, a.n.a®, St. John’s Bay®, The Original Arizona Jean Company®,Ambrielle®, Decree®, Stafford®, J. Ferrar®, Xersion™, Total Girl™, JCPenney Home Collection® and Studio by JCPenney Home Collection® trademarks, aswell as certain other trademarks, have been registered, or are the subject of pending trademark applications with the United States Patent and TrademarkOffice and with the registries of many foreign countries and/or are protected by common law. We consider our marks and the accompanying name recognitionto be valuable to our business. Website Availability We maintain an Internet website at www.jcpenney.com and make available free of charge through this website our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and all related amendments to those reports, as soon as reasonably practicable after the materials areelectronically filed with or furnished to the Securities and Exchange Commission. In addition, our website provides press releases, access to webcasts ofmanagement presentations and other materials useful in evaluating our Company. Suppliers We have a diversified supplier base, both domestic and foreign, and are not dependent to any significant degree on any singlesupplier. We purchase our merchandise from approximately 2,700 domestic and foreign suppliers, many of which have done business with us for manyyears. In addition to our Plano, Texas home office, we, through our international purchasing subsidiary, maintained buying and quality assurance offices in11 foreign countries as of February 1, 2014. Employment The Company and its consolidated subsidiaries employed approximately 117,000 full-time and part-time employees as of February 1, 2014. Environmental Matters Environmental protection requirements did not have a material effect upon our operations during 2013. It is possible that compliance with such requirements(including any new requirements) would lengthen lead time in expansion or renovation plans and increase construction costs, and therefore operating costs,due in part to the expense and time required to conduct environmental and ecological studies and any required remediation. As of February 1, 2014, we estimated our total potential environmental liabilities to range from $17 million to $24 million and recorded our best estimate of$19 million in Other accounts payable and accrued expenses and Other liabilities in the Consolidated Balance Sheet as of that date. This estimate coveredpotential liabilities primarily related to underground storage tanks, remediation of environmental conditions involving our former drugstore locations andasbestos removal in connection with approved plans to renovate or dispose of our facilities. We continue to assess required remediation and the adequacy ofenvironmental reserves as new information becomes available and known conditions are further delineated. If we were to incur losses at the upper end of theestimated range, we do not believe that such losses would have a material effect on our financial condition, results of operations or liquidity. 4Table of ContentsExecutive Officers of the Registrant The following is a list, as of March 17, 2014, of the names and ages of the executive officers of J. C. Penney Company, Inc. and of the offices and otherpositions held by each such person with the Company. These officers hold identical positions with JCP. There is no family relationship between any of thenamed persons.Name Offices and Other Positions Held With the Company AgeMyron E. Ullman, III Chief Executive Officer 67Kenneth H. Hannah Executive Vice President and Chief Financial Officer 45Janet Dhillon Executive Vice President, General Counsel and Secretary 51Brynn L. Evanson Executive Vice President, Human Resources 44D. Scott Laverty Executive Vice President, Chief Information Officer 54Dennis P. Miller Senior Vice President and Controller 61Mr. Ullman has served as Chief Executive Officer of the Company since April 2013. He previously served as Chairman of the Board of Directors from 2004to January 2012 and Chief Executive Officer of the Company from 2004 to November 2011. He was Directeur General, Group Managing Director, LVMHMoët Hennessy Louis Vuitton (luxury goods manufacturer/retailer) from 1999 to 2002. He was President of LVMH Selective Retail Group from 1998 to1999. From 1995 to 1998, he was Chairman of the Board and Chief Executive Officer of DFS Group Ltd. From 1992 to 1995, he was Chairman of theBoard and Chief Executive Officer of R. H. Macy & Company, Inc. He has served as a director of the Company and as a director of JCP since 2013.Mr. Hannah has served as Executive Vice President and Chief Financial Officer since May 2012. Prior to joining the Company, he was Executive VicePresident and President-Solar Energy of MEMC Electronic Materials, Inc. and had previously served as Executive Vice President and President-SolarMaterials from 2009 to 2012 and Senior Vice President and Chief Financial Officer from 2006 to 2009. Mr. Hannah previously held key financial leadershippositions at The Home Depot, Inc., The Boeing Company and General Electric Company. He has served as a director of JCP since 2012. Ms. Dhillon has served as Executive Vice President, General Counsel and Secretary of the Company since 2009. Prior to joining the Company, she served asSenior Vice President and General Counsel and Chief Compliance Officer of US Airways Group, Inc. and US Airways, Inc. from 2006 to 2009. Ms. Dhillonjoined US Airways, Inc. in 2004 as Managing Director and Associate General Counsel and served as Vice President and Deputy General Counsel of USAirways Group, Inc. and US Airways, Inc. from 2005 to 2006. Ms. Dhillon was with the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from1991 to 2004. She has served as a director of JCP since 2009. Ms. Evanson has served as Executive Vice President, Human Resources since April 2013. She joined the Company in 2009 as Director of Compensation andbecame Vice President, Compensation, Benefits and Talent Operations in 2010. Prior to joining the Company, she worked at the Dayton Hudson Corporationfrom 1991 to 2009 (renamed Target Corporation in 2000). Ms. Evanson began her career with Marshall Field’s where she advanced through positions instores, finance, human resources and merchandising. She moved to the Target stores division in 2000, ultimately serving as Director of ExecutiveCompensation and Retirement Plans.Mr. Laverty has served as Executive Vice President, Chief Information Officer since September 2013 after serving as interim Chief Information Officer sinceJune 2013. He joined the Company as Senior Vice President, Business Solutions in 2012. Prior to joining the Company, Mr. Laverty served as the Americasretail practice leader for HCL Axon (technology consultancy) from 2011 to 2012. He served as Senior Vice President, Chief Information Officer of BordersGroup from May 2009 to January 2011. In February 2011, Borders Group and its subsidiaries filed voluntary petitions for relief under Chapter 11 of theU.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. Previously, Mr. Laverty held senior consulting roles with IBM,Deloitte, PricewaterhouseCoopers and Ernst & Young. Early in his career he led inventory management and planning at several retail companies, includingMichael’s Stores and Payless Shoesource.Mr. Miller has served as Senior Vice President and Controller of the Company since September 2013. He previously served as Senior Vice President andController from 2008 to September 2012 and was Senior Vice President, Finance with responsibility for the Company’s shared services center in Salt LakeCity from September 2012 to September 2013. Mr. Miller served as Vice President, Director of Procurement and Strategic Sourcing of JCP from 2004 to 2008.From 2001 to 2004, he served as Senior Vice President and Chief Financial Officer of Eckerd Corporation, a former subsidiary of the Company.5Table of ContentsItem 1A. Risk FactorsThe following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this AnnualReport on Form 10-K. Any of the following risks could materially adversely affect our business, operating results, financial condition and the actual outcomeof matters as to which forward-looking statements are made in this Annual Report on Form 10-K.Our ability to return to profitable growth is subject to both the risks affecting our business generally and the inherent difficulties associated withshifting our strategic plan.In fiscal 2013, we completed the first and second phases of our turnaround strategy as we stabilized our business and rebuilt the Company, working to createstrategies for reconnecting with our core customer. During fiscal 2014, we entered the “go-forward” phase of our turnaround as we position the Company forlong-term growth. However, it may take longer than expected to recover from our negative sales trends and operating results, and actual results may bematerially less than planned. Our ability to improve our operating results depends upon a significant number of factors, some of which are beyond ourcontrol, including:•customer response to our marketing and merchandise strategies;•our ability to achieve profitable sales and to make adjustments in response to changing conditions;•our ability to respond to competitive pressures in our industry;•our ability to effectively manage inventory;•the success of our omnichannel strategy;•our ability to benefit from capital improvements made to our store environment;•our ability to respond to any unanticipated changes in expected cash flows, liquidity and cash needs, including our ability to obtain any additionalfinancing or other liquidity enhancing transactions, if and when needed;•our ability to achieve positive cash flow;•our ability to access adequate and uninterrupted supply of merchandise from suppliers at expected levels and on acceptable terms; and•general economic conditions.There is no assurance that our pricing, branding, store layout, marketing and merchandising strategies, or any future adjustments to our strategies, willimprove 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 retailcommerce. Some competitors are larger than JCPenney, and/or have greater financial resources available to them, and, as a result, may be able to devote greaterresources to sourcing, promoting, selling their products and updating their store environment. Competition is characterized by many factors, includingmerchandise assortment, advertising, price, quality, service, location, reputation, credit availability and customer loyalty. We have experienced, and anticipatethat we will continue to experience for at least the foreseeable future, significant competition from our competitors. The performance of competitors as well aschanges in their pricing and promotional policies, marketing activities, customer loyalty programs, new store openings, store renovations, launches of Internetwebsites, brand launches and other merchandise and operational strategies could cause us to have lower sales, lower gross margin and/or higher operatingexpenses such as marketing costs and other selling, general and administrative expenses, which in turn could have an adverse impact on our profitability.Our sales and operating results depend on our ability to develop merchandise offerings that resonate with our existing customers and help toattract 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 mannerby consistently offering stylish, quality merchandise assortments at competitive prices. We continuously assess emerging styles and trends and focus ondeveloping a merchandise assortment to meet customer preferences. The merchandise assortment under our prior strategy did not resonate with customers sowe are re-establishing brands that our customers want. There is no assurance that these efforts will be successful or that we will be able to satisfy constantlychanging customer demands. To the extent our predictions regarding our merchandise differ from our customers’ preferences, we may be faced with reducedsales and excess inventories for some products and/or missed opportunities for6Table of Contentsothers. Any sustained failure to identify and respond to emerging trends in lifestyle and customer preferences and buying trends could have an adverse impacton our business. In addition, merchandise misjudgments may adversely impact the perception or reputation of our Company, which could result in declines incustomer loyalty and vendor relationship issues, and ultimately have a material adverse effect on our business, financial condition and results of operations.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 as well as present an appealing shopping environmentand experience to customers. Our strategies focus on increasing customer traffic and improving conversion in our stores and online; however, there can be noassurance that our efforts will be successful or will result in increased sales. A substantial majority of our stores are located in malls, which have beenexperiencing a decline in traffic. There is no assurance that this trend will reverse or that increases in off-mall and/or Internet traffic will offset the decline. Wemay need to respond to any declines in customer traffic or conversion rates by increasing markdowns or promotions to attract customers to our stores, whichcould adversely impact our gross margins, operating results and cash flows from operating activities.If we are unable to manage our inventory effectively, our gross 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 mustproperly execute our inventory management strategies by appropriately allocating merchandise among our stores and online, timely and efficiently distributinginventory to stores, maintaining an appropriate mix and level of inventory in stores, adjusting our merchandise mix between our private and exclusive brandsand national brands, appropriately changing the allocation of floor space of stores among product categories to respond to customer demand and effectivelymanaging pricing and markdowns. If we overestimate customer demand for our merchandise, we will likely need to record inventory markdowns and movethe excess inventory to be sold at clearance prices which would negatively impact our gross margins and operating results. If we underestimate customerdemand for our merchandise, we may experience inventory shortages which may result in missed sales opportunities and have a negative impact on customerloyalty.We must protect against security breaches or other unauthorized disclosures of confidential data about our customers as well as about ouremployees and other third parties.As part of our normal operations, we receive and maintain information about our customers (including credit/debit card information), our employees and otherthird parties. Confidential data must at all times be protected against security breaches or other unauthorized disclosure. We have physical, technical andprocedural safeguards in place that are designed to protect information and protect against security and data breaches as well as fraudulent transactions andother activities. Despite our safeguards and security processes and protections, we cannot be assured that all of our systems and processes are free fromvulnerability to security breaches or inadvertent data disclosure by third parties or us. Any failure to protect confidential data about our customers or ouremployees or other third parties could materially damage our brand and reputation as well as result in significant expenses and disruptions to our operations,any of which could have a material adverse impact on our business and results of operations.The failure to retain, attract and motivate our employees, including employees in key positions, could have an adverse impact on our results ofoperations.Our results depend on the contributions of our employees, including our senior management team and other key employees. This depends to a great extent onour 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 with historically high rates of turnover. As a result of restructuring activities taken during the past few years, we now operate with significantlyfewer individuals who have assumed additional duties and responsibilities, which could have an adverse impact on our operating performance and efficiency.Because of our lower than expected operating results during fiscal 2012 and fiscal 2013, we have not generally paid bonuses, and salary increases andincentive compensation opportunities have been limited. Any prolonged inability to provide meaningful salary increases or incentive compensationopportunities, or media reports regarding our financial condition, could have an adverse impact on our ability to attract, retain and motivate our employees. Ifwe are unable to retain, attract and motivate talented employees with the appropriate skill sets, we may not achieve our objectives and our results of operationscould be adversely impacted. Our ability to meet our changing labor needs while controlling our costs is also subject to external factors such as unemploymentlevels, competing wages and potential union organizing efforts. In addition, the loss of one or more of our key personnel or the inability to effectively identify asuitable successor to a key role in our senior management could have a material adverse effect on our business.7Table of ContentsDisruptions in our Internet website, or our inability to successfully execute our online strategy, could have an adverse impact on our sales andresults of operations.We sell merchandise over the Internet through our website, www.jcpenney.com. As a result of a significant decline in sales volume through our website infiscal 2012, we reorganized our Internet operations in fiscal 2013. Our Internet operations are subject to numerous risks, including rapid technological changeand the implementation of new systems and platforms; liability for online content; violations of state or federal laws, including those relating to online privacyand intellectual property rights; credit card fraud; problems associated with the operation of our website and related support systems; computer viruses;telecommunications failures; electronic break-ins and similar disruptions; and the allocation of inventory between our website and department stores. Thefailure of our website to perform as expected could result in disruptions and costs to our operations and make it more difficult for customers to purchasemerchandise online. In addition, our inability to successfully develop and maintain the necessary technological interfaces for our customers to purchasemerchandise through our website, including user friendly software applications for smart phones and tablets, could result in the loss in Internet sales and havean adverse impact on our results of operations.Our operations are dependent on information technology systems; disruptions in those systems or increased costs relating to theirimplementation 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 inthe stores, our Internet website, data centers that process transactions, communication systems and various software applications used throughout ourCompany to track inventory flow, process transactions, generate performance and financial reports and administer payroll and benefit plans.Beginning in fiscal 2013, we have implemented several products from third party vendors to simplify our processes and reduce our use of customized existinglegacy systems and expect to place additional applications into operation in the future. Implementing new systems carries substantial risk, includingimplementation delays, cost overruns, disruption of operations, potential loss of data or information, lower customer satisfaction resulting in lost customers orsales, inability to deliver merchandise to our stores or our customers, the potential inability to meet reporting requirements and unintentional securityvulnerabilities. There can be no assurances that we will successfully launch the new systems as planned, that the new systems will perform as expected orthat the new systems will be implemented without disruptions to our operations, any of which may cause critical information upon which we rely to bedelayed, 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 thosethird 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 resultin 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 resultin their inability to communicate with us or otherwise to process our transactions and could result in disruptions to our operations. Our vendors areresponsible for having systems and processes in place to safeguard against security and data breaches involving our information and access to ourinformation and systems. Any failure in their systems to operate or in their ability to protect our information or systems could have a material adverse impacton our business and results of operations.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, as a result of which we have experiencedmultiple corporate credit ratings downgrades. These downgrades, and any future downgrades, to our long-term credit ratings could result in reduced access tothe credit and capital markets and higher interest costs on future financings. The future availability of financing will depend on a variety of factors, such aseconomic and market conditions, the availability of credit and our credit ratings, as well as the possibility that lenders could develop a negative perception ofus. 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 atimely and efficient manner. Inflationary pressures on commodity prices and other input costs could increase our cost of goods, and an inability to pass suchcost increases on to our customers or a change in our merchandise mix8Table of Contentsas a result of such cost increases could have an adverse impact on our profitability. Additionally, the impact of current and future economic conditions on oursuppliers cannot be predicted and may cause our suppliers to be unable to access financing or become insolvent and thus become unable to supply us withproducts.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 vendorscould respond to any actual or apparent decrease in or any concern with our financial results or liquidity by requiring or conditioning their sale of merchandiseto us on more stringent or more costly payment terms, such as by requiring standby letters of credit, earlier or advance payment of invoices, payment upondelivery 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 andvendors may also be impacted by media reports regarding our financial position. Our need for additional liquidity could significantly increase and our supplyof merchandise could be materially disrupted if a significant portion of our key suppliers and vendors took one or more of the actions described above, whichcould have a material adverse effect on our sales, customer satisfaction, cash flows, liquidity and financial position.Our senior secured term loan credit facility is secured by certain of our real property and substantially all of our personal property, and suchproperty may be subject to foreclosure or other remedies in the event of our default. In addition, the term loan credit facility contains provisionsthat could restrict our operations and our ability to obtain additional financing.In May 2013, we entered into a $2.25 billion senior secured term loan credit facility that is secured by mortgages on certain real property of the Company, inaddition to liens on substantially all personal property of the Company, subject to certain exclusions set forth in the credit and security agreement governing theterm loan credit facility and related security documents.The real property subject to mortgages under the term loan credit facility includes our headquarters, distribution centers and certain of our stores.The credit and guaranty agreement governing the term loan credit facility contains operating restrictions which may impact our future alternatives by limiting,without lender consent, our ability to borrow additional funds, execute certain equity financings or enter into dispositions or other liquidity enhancing orstrategic transactions regarding certain of our assets, including our real property. Our ability to obtain additional or other financing or to dispose of certainassets could also be negatively impacted because a substantial portion of our owned assets have been pledged as collateral for repayment of our indebtednessunder the term loan credit facility.If an event of default occurs and is continuing, our outstanding obligations under the term loan credit facility could be declared immediately due and payableor the lenders could foreclose on or exercise other remedies with respect to the assets securing the term loan credit facility, including our headquarters,distribution centers and certain of our stores. If an event of default occurs, there is no assurance that we would have the cash resources available to repay suchaccelerated obligations or refinance such indebtedness on commercially reasonable terms, or at all. The occurrence of any one of these events could have amaterial adverse effect on our business, financial condition, results of operations and liquidity.Our revolving credit facility limits our borrowing capacity to the value of certain of our assets. In addition, our revolving credit facility is securedby certain of our personal property, and lenders may exercise remedies against the collateral in the event of our default.The Company has a revolving credit facility in the amount of $1.85 billion and has borrowed $650 million as of February 1, 2014. Our borrowing capacityunder 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 couldadversely impact our business and liquidity.Our revolving credit facility contains customary affirmative and negative covenants and certain restrictions on operations become applicable if our availabilityfalls below certain thresholds. These covenants could impose significant operating and financial limitations and restrictions on us, including restrictions onour ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. In addition, therevolving credit facility provides for a springing fixed charge coverage ratio if our availability falls below a specified threshold.Our obligations under the revolving credit facility are secured by liens with respect to inventory, accounts receivable, deposit accounts and certain relatedcollateral. In the event of a default that is not cured or waived within any applicable cure periods,9Table of Contentsthe lenders’ commitment to extend further credit under our revolving credit facility could be terminated, our outstanding obligations could become immediatelydue and payable, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral, which generallyconsists of the Company’s inventory, accounts receivable and deposit accounts and cash credited thereto. If we are unable to borrow under our revolving creditfacility, 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 thecash resources available to repay such accelerated obligations, refinance such indebtedness on commercially reasonable terms, or at all, or cash collateralizeour 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 tomeet repayment obligations, which could reduce the cash available for other purposes.As of February 1, 2014, we have $5.601 billion in total indebtedness and we are highly leveraged. Our level of indebtedness may limit our ability to obtainadditional financing, if needed, to fund additional projects, working capital requirements, capital expenditures, debt service, and other general corporate orother obligations, as well as increase the risks to our business associated with general adverse economic and industry conditions. Our level of indebtednessmay also place us at a competitive disadvantage to our competitors that are not as highly leveraged.We are required to make quarterly repayments in a principal amount equal to $5.625 million during the five-year term of the term loan credit facility, subjectto certain reductions for mandatory and optional prepayments.In addition, we are required to make prepayments of the term loan credit facility with the proceeds of certain asset sales, insurance proceeds and excess cashflow, which will reduce the cash available for other purposes, including capital expenditures for store improvements, and could impact our ability to reinvestin other areas of our business.We cannot assure that our internal and external sources of liquidity will at all times be sufficient for our cash requirements.We must have sufficient sources of liquidity to fund our working capital requirements, capital improvement plans, service our outstanding indebtedness andfinance 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 have sold a substantial amount of non-operating assets over the past two years. We expect our ability to generate cash through the sale of non-operating assets to diminish as the size of our portfolio ofnon-operating assets decreases. In addition, our recent operating losses have limited our capital resources. Our ability to achieve our business and cash flowplans is based on a number of assumptions which involve significant judgments and estimates of future performance, borrowing capacity and creditavailability, which cannot at all times be assured. Accordingly, we cannot assure that cash flows from operations and other internal and external sources ofliquidity 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 andmitigate any potential liquidity shortfall, such as modifying our business plan, pursuing additional financing to the extent available, reducing capitalexpenditures, pursuing and evaluating other alternatives and opportunities to obtain additional sources of liquidity and other potential actions to reduce costs.We cannot assure that any of these actions would be successful, sufficient or available on favorable terms. Any inability to generate or obtain sufficient levelsof 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 ofindebtedness and restrictions in our debt facilities, historical business performance, financial projections, prospects and creditworthiness and externaleconomic conditions and general liquidity in the credit and capital markets. Any additional debt, equity or equity-linked financing may require modification ofour existing debt agreements, which we cannot assure would be obtainable. Any additional financing or refinancing could also be extended only at higher costsand require us to satisfy more restrictive covenants, which could further limit or restrict our business and results of operations, or be dilutive to ourstockholders.10Table of ContentsOperating results and cash flows may cause us to incur asset impairment charges.Long-lived assets, primarily property and equipment, are reviewed at the store level at least annually for impairment, or whenever changes in circumstancesindicate that a full recovery of net asset values through future cash flows is in question. We also assess the recoverability of indefinite-lived intangible assetsat least annually or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Our impairment reviewrequires us to make estimates and projections regarding, but not limited to, sales, operating profit and future cash flows. If our operating performance reflectsa sustained decline, we may be exposed to significant asset impairment charges in future periods, which could be material to our results of operations.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 outside of the United States. All of our suppliers must comply with oursupplier legal compliance program and applicable laws, including consumer and product safety laws. Although we diversify our sourcing and production bycountry 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 safetyrequirements or to meet the requirements of our supplier compliance program or applicable laws, or our inability to flow merchandise to our stores or throughthe Internet channel in the right quantities at the right time could adversely affect our profitability 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 business in foreignmarkets and importing merchandise from abroad, there can be no assurance that suppliers and other third parties with whom we do business will not violatesuch laws and regulations or our policies, which could subject us 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 otherwisenoncompliant or alleged to be harmful;•concerns about human rights, working conditions and other labor rights and conditions and environmental impact in foreign countries wheremerchandise 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, transport capacity and costs, systems issues, problemsin third party distribution and warehousing and other interruptions of the supply chain, compliance with U.S. and foreign laws and regulations and otherfactors relating to international trade and imported merchandise beyond our control could affect the availability and the price of our inventory. These risks andother factors relating to foreign trade could subject us to liability or hinder our ability to access suitable merchandise on acceptable terms, which couldadversely impact 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 discretionaryspending. Many economic factors outside of our control, including the housing market, interest rates, recession, inflation and deflation, energy costs andavailability, consumer credit availability and terms, consumer debt levels, tax rates and policy, and unemployment trends influence consumer confidence andspending. The domestic and international political situation and actions also affect consumer confidence and spending. In particular, the moderate incomeconsumer, which is our core customer, has been under economic pressure for the past several years, and may have less disposable income11Table of Contentsfor items such as apparel and home goods. Additional events that could impact our performance include pandemics, terrorist threats and activities, worldwidemilitary and domestic disturbances and conflicts, political instability and civil unrest. Declines in the level of consumer spending could adversely affect ourgrowth 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 holidayseason. 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 seasonallyappropriate inventory. Unseasonable or unexpected weather conditions such as warm temperatures during the winter season or prolonged or extreme periods ofwarm or cold temperatures could render a portion of our inventory incompatible with consumer needs. Extreme weather or natural disasters could also severelyhinder our ability to timely deliver seasonally appropriate merchandise, delay capital improvements or cause us to close stores. A reduction in the demand foror supply of our seasonal merchandise could have an adverse effect on our inventory levels, gross margins 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. The current political environment, financial reform legislation, the current high level ofgovernment intervention and activism, regulatory reform and stockholder activism may result in substantial new regulations and disclosure obligations and/orchanges in the interpretation of existing laws and regulations, which may lead to additional compliance costs as well as the diversion of our management’s timeand attention from strategic initiatives. If we fail to comply with applicable laws and regulations we could be subject to legal risk, including governmentenforcement action and class action civil litigation that could disrupt our operations and increase our costs of doing business. Changes in the regulatoryenvironment regarding topics such as privacy and information security, product safety or environmental protection, including regulations in response toconcerns regarding climate change, collective bargaining activities and health care mandates, among others, could also cause our compliance costs to increaseand adversely affect our business 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 foraggressive application of laws and procedures against corporate defendants. We are impacted by trends in litigation, including class action litigation broughtunder various consumer protection, employment, and privacy and information security laws. In addition, litigation risks related to claims that technologies weuse 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 suchproceedings due to the inherent uncertainties of litigation. Regardless of the outcome or whether the claims are meritorious, legal and regulatory proceedings mayrequire 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, andpension 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 acceptedaccounting principles in the United States of America (GAAP) require that income or expense for the plan be calculated at the annual measurement date usingactuarial assumptions and calculations. The most significant assumptions relate to the capital markets, interest rates and other economic conditions. Changesin key economic indicators can change the assumptions. Two critical assumptions used to estimate pension income or expense for the year are the expectedlong-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 andliabilities) on the balance sheet, which may result in a significant change to equity through a reduction or increase to other comprehensive income. AlthoughGAAP expense and pension contributions are not directly12Table of Contentsrelated, 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 disclosuresconcerning us or any of our competitors, our strategic initiatives, our sales and profitability, our financial condition, any quarterly variations in actual oranticipated operating results or comparable sales, any failure to meet analysts’ expectations and sales of large blocks of our common stock, among otherfactors, could cause the market price of our common stock to fluctuate substantially. In addition, the stock market has experienced price and volumefluctuations that have affected the market price of many retail and other stocks that have often been unrelated or disproportionate to the operating performanceof 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 acompany’s securities. During October 2013, four purported class action complaints and two shareholder derivative actions were filed against the Companyand certain of our current and former members of the Board of Directors and executives following our announcement of an issuance of common stock onSeptember 26, 2013. Such litigation could result in substantial costs, divert our management’s attention and resources and have an adverse effect on ourbusiness, results of operations and financial condition.The Company’s ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes may be limited.The Company has a federal net operating loss (NOL) of $2.1 billion. This NOL carryforward (expiring in 2032 and 2033) is available to offset future taxableincome.Section 382 of the Internal Revenue Code of 1986, as amended (the Code) imposes an annual limitation on the amount of taxable income that may be offset ifa corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the Company’s “five-percentshareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the Company by more than 50 percentage points (by value) overa rolling three-year period. 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 which may be offset by a pre-change loss is subject to an annuallimitation that is cumulative to the extent it is not all utilized in a year. This limitation is derived by multiplying the fair market value of the Company stock asof the ownership change by the applicable federal long-term tax-exempt rate which was 3.5% at February 1, 2014. To the extent that a company has a netunrealized 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.The Company has an ongoing study of the rolling three-year testing periods. Based upon the elections the Company currently plans to make in filing its taxreturn and the information that has been filed with the Securities and Exchange Commission as of February 15, 2014, the Company has not had aSection 382 ownership change through February 1, 2014.If the Company were to make certain alternative elections, an ownership change could be established as occurring on September 26, 2013 when theCompany’s trading value would have been approximately $2.3 billion before adjustment for the value of any control premium. Under section 382 of the Code,as of September 26, 2013 the annual NOL limitations and built-in gain adjustments that would apply through the respective NOL and credit carryforwardperiods would total approximately $2.3 billion, and would exceed the total of the tax loss carryforwards (including carryover credits on a loss equated basis)recognizable as of September 26, 2013. Certain foreign tax credit carryforwards and unused charitable contribution tax benefits totaling $23 million would bewritten-off against the valuation allowance in a September 26, 2013 ownership change scenario due to their shorter carryforward periods.Effective October 22, 2013, the Internal Revenue Service made final certain proposed regulations under Section 382. These regulations are generally moretaxpayer favorable as to measuring the impact of an ownership shift and allow a corporate taxpayer to apply the new regulations to prior testing dates as longas an ownership change had not occurred under the old regulations in any testing period ending on or before October 22, 2013. The Company has revised itsongoing study of the rolling three-year testing periods so that all ownership shifts are determined under the new regulations.13Table of ContentsAvoiding an initial ownership shift by staying under a cumulative 50 percentage point shift in the rolling three year testing periods is preferable to beingsubject to the Section 382 NOL limitations. If an ownership change is encountered at some point, it is generally preferable that it be at a time when the value ofthe company and built-in gains to be recognized are such that the Section 382 limitations are at their highest levels as compared to the loss and creditcarryforwards. Losses incurred after an ownership change are not subject to limitation except where there is a new cumulative 50 percentage point changeunder the rolling three year testing periods. The Company plans to continue its analysis of the elections available to it in filing its federal income tax return andthe impact of the new regulations.If an ownership change should occur in the future, the Company’s ability to use the NOL to offset future taxable income will be subject to an annual limitationand 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 fullyutilize the NOL and the Company could be required to record an additional valuation allowance related to the amount of the NOL that may not be realized,which could impact the Company’s result of operations.We believe that these NOL carryforwards are a valuable asset for us. We have a stockholder rights plan, or the Amended Rights Agreement, in place to protectour stockholders from coercive takeover practices or takeover bids that are inconsistent with their best interests. On January 27, 2014, our Board of Directorsapproved the Amended Rights Agreement in an effort to protect our NOLs during the effective period of the Amended Rights Agreement. Further, on January27, 2014, our Board of Directors adopted certain amendments to the Company’s Restated Certificate of Incorporation, as amended, which are intended topreserve the Company’s NOLs by restricting certain transfers of our common stock (the Charter Amendments). The Amended Rights Agreement and theCharter Amendments will be submitted to a stockholder vote at the Company’s 2014 annual meeting of stockholders on May 16, 2014. If the Company’sstockholders do not approve the Amended Rights Agreement, it will expire. If the Company’s stockholders do not approve the Charter Amendments, they willnot become effective. Although the Amended Rights Agreement and the Charter Amendments are intended to reduce the likelihood of an “ownership change”that could adversely affect us, there is no assurance that the restrictions on transferability in the Amended Rights Agreement and the Charter Amendments willprevent all transfers that could result in such an “ownership change”. There also can be no assurance that the transfer restrictions in the Charter Amendmentswill be enforceable against all of our stockholders absent a court determination confirming such enforceability. The transfer restrictions may be subject tochallenge on legal or equitable grounds.The Amended Rights Agreement and the Charter Amendments could make it more difficult for a third party to acquire, or could discourage a third party fromacquiring, 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 substantialdilution of its ownership interest under the terms of the Amended Rights Agreement through the issuance of common stock or common stock equivalents to allstockholders other than the acquiring person. The acquisition may also be void under the Charter Amendments. The foregoing provisions may adversely affect the marketability of our common stock by discouraging potential investors from acquiring our stock. Inaddition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contestinvolving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders. Item 1B. Unresolved Staff Comments None. 14Table of ContentsItem 2. Properties At February 1, 2014, we operated 1,094 department stores throughout the continental United States, Alaska and Puerto Rico, of which 428 were owned,including 123 stores located on ground leases. The following table lists the number of stores operating by state as of February 1, 2014: Alabama 22 Maine 6 Oklahoma 19Alaska 1 Maryland 19 Oregon 14Arizona 22 Massachusetts 13 Pennsylvania 43Arkansas 16 Michigan 43 Rhode Island 3California 80 Minnesota 26 South Carolina 18Colorado 22 Mississippi 17 South Dakota 8Connecticut 9 Missouri 26 Tennessee 26Delaware 3 Montana 9 Texas 92Florida 57 Nebraska 11 Utah 9Georgia 30 Nevada 7 Vermont 6Idaho 9 New Hampshire 9 Virginia 28Illinois 41 New Jersey 17 Washington 23Indiana 30 New Mexico 10 West Virginia 9Iowa 19 New York 42 Wisconsin 22Kansas 19 North Carolina 34 Wyoming 5Kentucky 22 North Dakota 8 Puerto Rico 7Louisiana 16 Ohio 47 Total square feet 110.6 million In May 2013, we entered into a $2.25 billion five-year senior secured term loan that is secured by mortgages on certain real property of the Company, inaddition to liens on substantially all personal property of the Company, subject to certain exclusions set forth in the credit and security agreement governing theterm loan credit facility and related security documents. The real property subject to mortgages under the term loan credit facility includes our headquarters,distribution centers and certain of our stores.In January 2014, we announced a strategic initiative to close 33 underperforming stores, including one furniture outlet store, which was excluded from the listabove, as part of our turnaround efforts.15Table of ContentsAt February 1, 2014, our supply chain network operated 25 facilities at 14 locations, of which nine were owned, with multiple types of distribution activitieshoused in certain owned locations. Our network includes 11 store merchandise distribution centers, seven regional warehouses, three jcpenney.com fulfillmentcenters and four furniture distribution centers as indicated in the following table: Square FootageFacility / Location Leased/Owned (in thousands)Store Merchandise Distribution Centers Forest Park, Georgia Owned 560Buena Park, California Owned 702Cedar Hill, Texas Leased 433Columbus, Ohio Owned 386Lakeland, Florida Leased 360Lenexa, Kansas Owned 322Manchester, Connecticut Owned 898Wauwatosa, Wisconsin Owned 690Spanish Fork, Utah Leased 400Statesville, North Carolina Owned 313Sumner, Washington Leased 342Total store merchandise distribution centers 5,406 Regional Warehouses Haslet, Texas Owned 1,063Forest Park, Georgia Owned 780Buena Park, California Owned 233Lathrop, California Leased 436Reno, Nevada Owned 150Sumner, Washington Leased 8Statesville, North Carolina Owned 213Total regional warehouses 2,883 jcpenney.com Fulfillment Centers Columbus, Ohio Owned 1,516Lenexa, Kansas Owned 1,622Reno, Nevada Owned 1,510Total jcpenney.com fulfillment centers 4,648 Furniture Distribution Centers Forest Park, Georgia Owned 357Buena Park, California Owned 147Manchester, Connecticut Owned 291Wauwatosa, Wisconsin Owned 583Total furniture distribution centers 1,378Total supply chain network 14,315We also own our home office facility in Plano, Texas, and approximately 240 acres of property adjacent to the facility. Subsequent to our fiscal year end, wesold approximately 20 acres of land around our home office and entered into a new joint venture to develop the remaining acres of land.16Table of ContentsItem 3. Legal Proceedings Macy’s LitigationOn August 16, 2012, Macy’s, Inc. and Macy’s Merchandising Group, Inc. (together the Plaintiffs) filed suit against J. C. Penney Corporation, Inc. in theSupreme Court of the State of New York, County of New York, alleging that the Company tortiously interfered with, and engaged in unfair competitionrelating to a 2006 agreement between Macy’s and Martha Stewart Living Omnimedia, Inc. (MSLO) by entering into a partnership agreement with MSLO inDecember 2011. The Plaintiffs seek primarily to prevent the Company from implementing our partnership agreement with MSLO as it relates to products inthe bedding, bath, kitchen and cookware categories. The suit was consolidated with an already-existing breach of contract lawsuit by the Plaintiffs againstMSLO, and a bench trial commenced on February 20, 2013. On March 7, 2013, the judge adjourned the trial until April 8, 2013, and ordered the parties intomediation. The parties did not reach a settlement, and the trial continued on April 8, 2013. The parties concluded their presentations of evidence on April 26,2013, and completed post-trial briefs in late May, 2013. The court held closing arguments on August 1, 2013. The court has not yet issued a final decision inthe case. On October 21, 2013, the Company and MSLO entered into an amendment of the partnership agreement, providing in part that the Company willnot sell MSLO-designed merchandise in the bedding, bath, kitchen and cookware categories. On January 2, 2014, MSLO and Macy’s announced that theyhad settled the case as to each other, and MSLO was subsequently dismissed as a defendant. While no assurance can be given as to the ultimate outcome ofthis matter, we currently 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.Ozenne Derivative Lawsuit On January 19, 2012, a purported shareholder of the Company, Everett Ozenne, filed a shareholder derivative lawsuit in the 193rd District Court of DallasCounty, Texas, against certain of the Company’s Board of Directors and executives. The Company is a nominal defendant in the suit. The lawsuit allegesbreaches of fiduciary duties, corporate waste and unjust enrichment involving decisions regarding executive compensation, specifically that compensationpaid to certain executive officers from 2008 to 2011 was too high in light of the Company’s financial performance. The suit seeks damages includingunspecified compensatory damages, disgorgement by the former officers of allegedly excessive compensation, and equitable relief to reform the Company’scompensation practices. The Company and the named individuals filed an Answer and Special Exceptions to the lawsuit, arguing primarily that the plaintiffcould not proceed with his suit because he failed to make demand on the Company’s Board of Directors, and that because demand on the Board would not befutile, demand is not excused. The trial court heard arguments on the Special Exceptions on June 25, 2012, and denied them. The Company and namedindividuals filed a mandamus proceeding in the Fifth District Court of Appeals challenging the trial court’s decision. The parties have settled the litigation andthe appellate court stayed the appeal so that the trial court could review the proposed settlement. On August 5, 2013, the trial court preliminarily approved thesettlement, and notice was mailed to shareholders soon thereafter. The trial court finally approved the settlement at a hearing on October 28, 2013 and, despiteobjection, awarded the plaintiff $3.1 million in attorneys’ fees and costs. The Company and named individuals have appealed the award of attorneys’ feesand costs. While no assurance can be given as to the ultimate outcome of this matter, we currently believe that the final resolution of this action will not have amaterial adverse effect on our results of operations, financial position, liquidity or capital resources.Class Action Securities LitigationFrom October 1, 2013 through October 24, 2013, four purported class action complaints were filed naming the Company, Myron E. Ullman, III and KennethH. Hannah as defendants, by the following plaintiffs, individually and on behalf of all others similarly situated, in the U.S. District Court, Eastern Districtof Texas, Tyler Division: Marcus (filed October 1, 2013), Erdem (filed October 7, 2013), Murphy (filed October 21, 2013) and Gilbert (filed October 24,2013). The Marcus, Erdem and Gilbert complaints are purportedly brought on behalf of persons who acquired our common stock during the period fromAugust 20, 2013 through September 26, 2013. The complaint filed by Murphy was purportedly brought on behalf of persons who acquired our securities,including common stock, debt securities, and purchasers of call and sellers of put options, during the period from May 16, 2013 through September 26,2013, and also named William A. Ackman, a former member of the Board of Directors, as a defendant. The complaints assert claims for violations ofSections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs claim that the defendants made false andmisleading statements and/or omissions regarding the Company’s financial condition and business prospects that caused our common stock to trade atartificially inflated prices. The complaints seek class certification, unspecified compensatory damages, including interest, reasonable costs and expenses, andother relief as the court may deem just and proper. On December 2, 2013, various parties filed motions with the court seeking consolidation of the pendingcases and appointment of lead plaintiff. On December 17, 2013, Murphy filed a notice of dismissal of his case without prejudice. On February 28, 2014, theCourt entered an order consolidating the pending cases and appointed Plaintiff National Shopmen Pension Fund as lead plaintiff and the law firm RobbinsGeller Rudman & Dowd LLP as lead counsel for the class, with Ward & Smith Law Firm as liaison counsel. Plaintiff17Table of ContentsAletti Gestielle SGR S.p.A. has filed a motion for reconsideration of the appointment. We believe these class action complaints are without merit and we intendto vigorously defend these lawsuits. While no assurance can be given as to the ultimate outcome of this matter, we currently believe that the final resolution ofthese actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.Shareholder Derivative LitigationIn October 2013, two purported shareholder derivative actions were filed against certain present and former members of the Company’s Board of Directors andexecutives by the following parties in the U.S. District Court, Eastern District of Texas, Sherman Division: Weitzman (filed October 2, 2013) and Zauderer(filed October 3, 2013). The Company is named as a nominal defendant in both suits. The lawsuits assert claims for breaches of fiduciary duties and unjustenrichment based upon alleged false and misleading statements and/or omissions regarding the Company’s financial condition. The lawsuits seek unspecifiedcompensatory damages, restitution, disgorgement by the defendants of all profits, benefits and other compensation, equitable relief to reform the Company’scorporate governance and internal procedures, reasonable costs and expenses, and other relief as the court may deem just and proper. On October 28, 2013,the Court consolidated the derivative cases. On January 15, 2014, the Court entered an order staying the derivative suits pending certain events in the classaction securities litigation described above. While no assurance can be given as to the ultimate outcome of this matter, we currently believe that the finalresolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources. Other Legal ProceedingsOn October 7, 2013, the Company received a letter of inquiry from the Securities and Exchange Commission (SEC) requesting information regarding theCompany’s liquidity, cash position, and debt and equity financing, as well as the Company’s underwritten public offering of common stock announced onSeptember 26, 2013. On February 13, 2014, the Company received a Termination Letter from the SEC’s Fort Worth office stating that it had concluded itsinvestigation and was not recommending SEC action. On November 9, 2013, the Company received a demand from a purported shareholder of the Company, Troy M. J. Baker, to conduct an investigationregarding potential claims that certain present and former members of the Company’s Board of Directors and executives breached their fiduciary duties to theCompany under Texas and/or Delaware law based upon allegations similar to those in the class action securities litigation and shareholder derivative litigationfiled in October 2013 and to commence a civil action to recover for the Company’s benefit the amount of damages allegedly sustained by the Company as aresult of any such potential misconduct. The Company sent a letter in response to the demand.On January 3, 2014, the Company received a demand for production of the Company’s books and records pursuant to Section 220 of the Delaware GeneralCorporation Law from the law firm Wolf Haldenstein Adler Freeman & Herz LLP on behalf of Bruce Murphy as Trustee of the Bruce G. Murphy Trust. Thealleged purpose of the demand is to investigate potential mismanagement and breaches of fiduciary duties by the Company’s senior officers and directors inconnection with their oversight of the Company’s operations and business prospects, including the Company’s liquidity profile and capital requirements. TheCompany has exchanged correspondence with the law firm concerning the demand. Item 4. Mine Safety Disclosures Not applicable. 18Table of ContentsPART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for Registrant’s Common Equity Our common stock is traded principally on the New York Stock Exchange (NYSE) under the symbol “JCP.” The number of stockholders of record atMarch 17, 2014, was 27,404. In addition to common stock, we have authorized 25 million shares of preferred stock, of which no shares were issued andoutstanding at February 1, 2014. The table below sets forth the quoted high and low market prices of our common stock on the NYSE for each quarterly period indicated, the quarter-endclosing market price of our common stock, as well as the quarterly cash dividends declared per share of common stock: Fiscal Year 2013 First Quarter Second Quarter Third Quarter Fourth QuarterPer share: Dividend $— $— $— $—Market price: High $22.47 $19.39 $14.47 $10.19Low $13.93 $14.28 $6.42 $5.77Close $17.26 $14.28 $8.14 $5.92Fiscal Year 2012 First Quarter Second Quarter Third Quarter Fourth QuarterPer share: Dividend $0.20 $— $— $—Market price: High $43.18 $36.75 $32.55 $25.61Low $32.51 $19.06 $20.40 $15.69Close $36.72 $23.00 $25.46 $19.88 Our Board of Directors (Board) periodically reviews the dividend policy, taking into consideration the overall financial and strategic outlook for our earnings,liquidity and cash flow projections, as well as competitive factors. Since May 2012, the Company has not paid a dividend. Additional information relating to the common stock and preferred stock is included in this Annual Report on Form 10-K in the Consolidated Statements ofStockholders’ Equity and in Note 12 to the Consolidated Financial Statements. Issuer Purchases of Securities No repurchases of common stock were made during the fourth quarter of 2013 and no amounts remained authorized for share repurchases as of February 1,2014.19Table of ContentsFive-Year Total Stockholder Return Comparison The following presentation compares our cumulative stockholder returns for the past five fiscal years with the returns of the S&P 500 Stock Index and theS&P 500 Retail Index for Department Stores over the same period. A list of these companies follows the graph below. The graph assumes $100 invested at theclosing price of our common stock on the NYSE and each index as of the last trading day of our fiscal year 2008 and assumes that all dividends werereinvested on the date paid. The points on the graph represent fiscal year-end amounts based on the last trading day of each fiscal year. The following graphand related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information beincorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that wespecifically incorporate it by reference into such filing.S&P Department Stores:JCPenney, Dillard’s, Macy’s, Kohl’s, Nordstrom, Sears 2008 2009 2010 2011 2012 2013JCPenney $100 $153 $204 $268 $129 $39S&P 500 100 133 161 170 200 240S&P Department Stores 100 167 192 217 223 259 The stockholder returns shown are neither determinative nor indicative of future performance.20Table of ContentsItem 6. Selected Financial Data Five-Year Financial Summary($ in millions, except per share data)2013 2012 2011 2010 2009Results for the year Total net sales$11,859 $12,985 $17,260 $17,759 $17,556Sales percent increase/(decrease): Total net sales(8.7)%(1) (24.8)%(1) (2.8)% 1.2% (5.0)%Comparable store sales(2)(7.4)% (25.2)% 0.2 % 2.5% (6.3)%Operating income/(loss)(1,420) (1,310) (2) 832 663As a percent of sales(12.0)% (10.1)% 0.0 % 4.7% 3.8 %Adjusted operating income/(loss) (non-GAAP)(3)(1,237) (939) 536 1,085 961As a percent of sales (non-GAAP)(3)(10.4)% (7.2)% 3.1 % 6.1% 5.5 %Income/(loss) from continuing operations(1,388) (985) (152) 378 249Adjusted income/(loss) (non-GAAP) from continuingoperations(3)(1,431) (766) 207 533 433Per common share Earnings/(loss) per share from continuing operations,diluted$(5.57) $(4.49) $(0.70) $1.59 $1.07Adjusted earnings/(loss) per share from continuingoperations, diluted (non-GAAP)(3)$(5.74) $(3.49) $0.94(4) $2.24 $1.86Dividends declared(5)— 0.20 0.80 0.80 0.80Financial position and cash flow Total assets$11,801 $9,781 $11,424 $13,068 $12,609Cash and cash equivalents1,515 930 1,507 2,622 3,011Total debt, including capital leases and note payable5,601 2,982 3,102 3,099 3,392Free cash flow (non-GAAP)(3)(2,746) (906) 23 158 677 (1)Includes the effect of the 53rd week in 2012. Excluding sales of $163 million for the 53rd week in 2012, total net sales decreased 7.5% and 25.7% in2013 and 2012, respectively.(2)Comparable store sales are presented on a 52-week basis and include sales from new and relocated stores that have been opened for 12 consecutivefull fiscal months and Internet sales. Stores closed for an extended period are not included in comparable store sales calculations, while storesremodeled and minor expansions not requiring store closures remain in the calculations. Our definition and calculation of comparable store sales maydiffer from other companies in the retail industry.(3)See Non-GAAP Financial Measures beginning on the following page for additional information and reconciliation to the most directly comparableGAAP financial measure.(4)Weighted average shares–diluted of 220.7 million was used for this calculation as adjusted income/(loss) from continuing operations was positive. 3.3million shares were added to weighted average shares–basic of 217.4 million for assumed dilution for stock options, restricted stock awards and stockwarrant.(5)On May 15, 2012, we announced that we had discontinued the quarterly $0.20 per share dividend. 21Table of ContentsFive-Year Operations Summary 2013 2012 2011 2010 2009Number of department stores: Beginning of year 1,104 1,102 1,106 1,108 1,093Openings(1) — 9 3 2 17Closings(1) (10) (7) (7) (4) (2)End of year 1,094 1,104 1,102 1,106 1,108Gross selling space (square feet in millions) 110.6 111.6 111.2 111.6 111.7Sales per gross square foot(2) 107 116 154 153 149Sales per net selling square foot(2) 147 161 212 210 206 Number of the Foundry Big and Tall Supply Co. stores(3) 10 10 10 — — (1)Includes relocations of -, 3, -, -, and 1, respectively.(2)Calculation includes the sales and square footage of JCPenney department stores that were open for the full fiscal year and sales for jcpenney.com.(3)All stores opened during 2011. Gross selling space was 51 thousand square feet as of the end of 2013, 2012 and 2011.Non-GAAP Financial Measures We report our financial information in accordance with generally accepted accounting principles in the United States (GAAP). However, we present certainfinancial measures and ratios identified as non-GAAP under the rules of the Securities and Exchange Commission (SEC) to assess our results. We believe thepresentation of these non-GAAP financial measures and ratios is useful in order to better understand our financial performance as well as to facilitate thecomparison of our results to the results of our peer companies. In addition, management uses these non-GAAP financial measures and ratios to assess theresults of our operations. It is important to view non-GAAP financial measures in addition to, rather than as a substitute for, those measures and ratiosprepared in accordance with GAAP. We have provided reconciliations of the most directly comparable GAAP measures to our non-GAAP financial measurespresented. Non-GAAP Measures Excluding Markdowns Related to the Alignment of Inventory with Our Prior Strategy, Restructuring and ManagementTransition Charges, the Impact of Our Qualified Defined Benefit Pension Plan (Primary Pension Plan) Expense, the Loss on Extinguishment ofDebt, the Net Gain on the Sale or Redemption of Non-Operating Assets and the Tax Benefit from Income Related to Actuarial Gains Included inOther Comprehensive IncomeThe following non-GAAP financial measures are adjusted to exclude the impact of markdowns related to the alignment of inventory with our prior strategy,restructuring and management transition charges, the impact of our Primary Pension Plan expense, the loss on extinguishment of debt, the net gain on sale orredemption of non-operating assets and the tax benefit from income related to actuarial gains included in other comprehensive income. Unlike other operatingexpenses, these items are not directly related to our ongoing core business operations. Primary Pension Plan expense is determined using numerous complexassumptions about changes in pension assets and liabilities that are subject to factors beyond our control, such as market volatility. Accordingly, we eliminateour Primary Pension Plan expense in its entirety as we view all components of net periodic benefit expense as a single, net amount, consistent with itspresentation in our Consolidated Financial Statements. We believe it is useful for investors to understand the impact on our financial results of markdownsrelated to the alignment of inventory with our prior strategy, restructuring and management transition charges, the impact of our Primary Pension Plan expense,the loss on extinguishment of debt, the net gain on the sale or redemption of non-operating assets and the tax benefit from income related to actuarial gainsincluded in other comprehensive income and therefore are presenting the following non-GAAP financial measures: (1) adjusted operating income/(loss);(2) adjusted income/(loss) from continuing operations; and (3) adjusted diluted earning/(loss) per share (EPS) from continuing operations.22Table of ContentsAdjusted Operating Income/(Loss). The following table reconciles operating income/(loss), the most directly comparable GAAP financial measure, toadjusted operating income/(loss), a non-GAAP financial measure: ($ in millions) 2013 2012 2011 2010 2009Operating income/(loss) (GAAP) $(1,420) $(1,310) $(2) $832 $663As a percent of sales (12.0)% (10.1)% (0.0)% 4.7% 3.8%Add: markdowns - inventory strategy alignment — 155 — — —Add: restructuring and management transition charges 215 298 451 32 —Add/(deduct): primary pension plan expense/(income) 100 315 87 221 298Less: Net gain on sale or redemption of non-operating assets (132) (397) — — —Adjusted operating income/(loss) (non-GAAP) $(1,237) $(939) $536 $1,085 $961As a percent of sales (10.4)% (7.2)% 3.1 % 6.1% 5.5%Adjusted Income/(Loss) and Adjusted Diluted EPS from Continuing Operations. The following table reconciles income/(loss) and diluted EPS fromcontinuing operations, the most directly comparable GAAP financial measures, to adjusted income/(loss) and adjusted diluted EPS from continuingoperations, non-GAAP financial measures: ($ in millions, except per share data)2013 2012 2011 2010 2009 Income/(loss) (GAAP) from continuing operations$(1,388) $(985) $(152) $378 $249 Diluted EPS (GAAP) from continuing operations$(5.57) $(4.49) $(0.70) $1.59 $1.07 Add: markdowns - inventory strategy alignment, net of taxof $-, $60, $-, $- and $-— 95(1) — — — Add: restructuring and management transition charges, netof tax of $28, $116, $145, $12 and $-187(2) 182(1) 306(3) 20(1) — Add/(deduct): primary pension plan expense/(income), netof tax of $10, $122, $34, $86, and $11490(4)(5) 193(1) 53(1) 135(1) 184(1) Add: Loss on extinguishment of debt, net of tax of $-, $-,$-, $- and $-114(6) — — — — Less: Net gain on sale or redemption of non-operatingassets, net of tax of $1, $146, $-, $- and $-(131)(7) (251)(3) — — — Less: Tax benefit resulting from other comprehensiveincome allocation(303)(8) — — — — Adjusted income/(loss) (non-GAAP) from continuingoperations$(1,431) $(766) $207 $533 $433 Adjusted diluted EPS (non-GAAP) from continuingoperations$(5.74) $(3.49) $0.94(9) $2.24 $1.86 (1)Tax effect was calculated using the Company's statutory rate of 38.82%.(2)Tax effect for the three months ended May 4, 2013 was calculated using the Company's statutory rate of 38.82%. The last nine months of 2013 reflectsno tax effect due to the impact of the Company's tax valuation allowance.(3)Tax effect was calculated using the effective tax rate for the transactions.(4)Tax benefit for the last nine months of 2013 is included in the line item Tax benefit resulting from other comprehensive income allocation. See footnote8 below.(5)Tax effect for the three months ended May 4, 2013 was calculated using the Company's statutory rate of 38.82%.(6)Reflects no tax effect due to the impact of the Company's tax valuation allowance.(7)Tax effect represents state taxes payable in separately filing states related to the sale of the non-operating assets.(8)Represents the tax benefit for the last nine months of 2013 related to the Company's income tax benefit from income resulting from actuarial gainsincluded in other comprehensive income. This tax benefit was offset by tax expense recorded for such gains in other comprehensive income.(9)Weighted average shares–diluted of 220.7 million was used for this calculation as 2011 adjusted income/(loss) from continuing operations waspositive. 3.3 million shares were added to weighted average shares–basic of 217.4 million for assumed dilution for stock options, restricted stockawards and stock warrant. 23Table of ContentsFree Cash FlowFree cash flow is a key financial measure of our ability to generate additional cash from operating our business. We define free cash flow as cash flow fromoperating activities, less capital expenditures and dividends paid, plus the proceeds from the sale of operating assets. Free cash flow is a relevant indicator ofour 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 isconsidered a non-GAAP financial measure under the rules of the SEC. Free cash flow is limited and does not represent remaining cash flow available fordiscretionary expenditures due to the fact that the measure does not deduct payments required for debt maturities, pay-down of pension debt, and otherobligations or payments made for business acquisitions. Therefore, it is important to view free cash flow in addition to, rather than as a substitute for, ourentire statement of cash flows and those measures prepared in accordance with GAAP.The following table reconciles net cash provided by/(used in) operating activities, the most directly comparable GAAP measure, to free cash flow, a non-GAAPfinancial measure. ($ in millions) 2013 2012 2011 2010 2009 Net cash provided by/(used in) operating activities (GAAP) $(1,814) $(10) $820 $592 $1,573 Less: Capital expenditures (951) (810) (634) (499) (600) Dividends paid, common stock — (86) (178) (189) (183) Tax benefit from pension contribution — — — (152) (126)(1) Plus: Discretionary cash pension contribution — — — 392 — Proceeds from sale of operating assets 19 — 15 14 13 Free cash flow (non-GAAP) $(2,746) $(906) $23 $158 $677 (1)Related to the discretionary contribution of $340 million of Company common stock in 2009.24Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion, which presents our results, should be read in conjunction with the accompanying Consolidated Financial Statements and notesthereto, along with the Five-Year Financial and Operations Summaries, the risk factors and the cautionary statement regarding forward-looking information.Unless otherwise indicated, all references in this Management’s Discussion and Analysis (MD&A) related to earnings/(loss) per share (EPS) are on a dilutedbasis and all references to years relate to fiscal years rather than to calendar years.Executive Overview Fiscal 2013 was a transitional year in which we worked to stabilize our business and to rebuild the Company, working to create strategies for reconnectingwith our core customer. Our prior strategy focused on everyday low prices, substantially eliminated promotional activities, emphasized brands in a shopspresentation and introduced new merchandise brands. These pricing and merchandising strategies did not resonate with our customers. As a result, in April2013, the Board of Directors brought back Myron E. Ullman, III as Chief Executive Officer of the Company. Under his leadership, we began editing ourmerchandise assortments and undertaking several merchandise initiatives to make assortments more compelling to customers, reintroducing some of ourprivate brands and returning the majority of our business to a promotional model. We have seen a positive response to these efforts as our 2013 comparablestore sales sequentially improved each quarter, with the fourth quarter delivering our first quarterly comparable store sales gain since the second quarter of2011.Summarized financial performance for 2013 is as follows: ▪For 2013, sales were $11,859 million, a decrease of 8.7% as compared to 2012, which contained a 53rd week. Excluding sales of $163 million forthe 53rd week in 2012, total net sales for 2013 decreased 7.5%. Comparable store sales decreased 7.4% for 2013. ▪For 2013, gross margin as a percentage of sales was 29.4% compared to 31.3% last year. The decrease in gross margin as a percentage of sales isprimarily due to sales of clearance merchandise at lower margins as compared to 2012, including additional markdowns taken to sell throughinventory associated with our previous strategy, as well as our transition back to a promotional pricing strategy.▪Selling, general and administrative (SG&A) expenses decreased $392 million, or 8.7%, for 2013 as compared to 2012.▪Our net loss in 2013 was $1,388 million, or $5.57 per share, compared to a net loss of $985 million, or $4.49 per share, in 2012 and a net loss of$152 million, or $0.70 per share, in 2011. Results for 2013 included $215 million, or $0.75 per share, of restructuring and management transitioncharges; $100 million, or $0.36 per share, for the impact of our qualified defined benefit pension plan (Primary Pension Plan) expense, $114million, or $0.46 per share, for the loss on extinguishment of debt, $132 million, or $0.53 per share, for the net gain on the sale or redemption ofnon-operating assets and $303 million, or $1.21 per share, for the tax benefit from income related to actuarial gains included in other comprehensiveincome.Current Developments▪On February 6, 2014, we announced that we entered into a new joint venture to develop approximately 220 acres around our Plano, Texas homeoffice in the Legacy Business Park. The new joint venture will be managed by Team Legacy, a venture of the Karahan Companies, ColumbusRealty, and KDC. The new project, Legacy West, is located at the southwest corner of the Dallas North Tollway and State Highway 121, and isconsidered a prime office and mixed-use development site in the center of Legacy Business Park.▪On February 13, 2014, we announced that Edward J. Record would be succeeding Kenneth H. Hannah as Executive Vice President and ChiefFinancial Officer of the Company, effective March 24, 2014.25Table of ContentsResults of Operations Three-Year Comparison of Operating Performance(in millions, except per share data)2013 2012 2011 Total net sales$11,859 $12,985 $17,260 Percent increase/(decrease) from prior year(8.7)%(1) (24.8)%(1) (2.8)% Comparable store sales increase/(decrease)(2)(7.4)% (25.2)% 0.2 % Gross margin3,492 4,066 6,218 Operating expenses/(income): Selling, general and administrative4,114 4,506 5,109 Pension137 353 121 Depreciation and amortization601 543 518 Real estate and other, net(155) (324) 21 Restructuring and management transition215 298 451 Total operating expenses4,912 5,376 6,220 Operating income/(loss)(1,420) (1,310) (2) As a percent of sales(12.0)% (10.1)% 0.0 % Adjusted operating income/(loss) (non-GAAP)(3)(1,237) (939) 536 As a percent of sales(10.4)% (7.2)% 3.1 % Loss on extinguishment of debt114 — — Net interest expense352 226 227 Income/(loss) before income taxes(1,886) (1,536) (229) Income tax (benefit)/expense(498) (551) (77) Net income/(loss)$(1,388) $(985) $(152) Adjusted net income/(loss) (non-GAAP)(3)$(1,431) $(766) $207 Diluted EPS$(5.57) $(4.49) $(0.70) Adjusted diluted EPS (non-GAAP)(3)$(5.74) $(3.49) $0.94(4) Weighted average shares used for diluted EPS249.3 219.2 217.4 (1)Includes the effect of the 53rd week in 2012. Excluding sales of $163 million for the 53rd week in 2012, total net sales decreased 7.5% and 25.7% in2013 and 2012, respectively. (2)Comparable store sales are presented on a 52-week basis and include sales from new and relocated stores that have been opened for 12 consecutivefull fiscal months and Internet sales. Stores closed for an extended period are not included in comparable store sales calculations, while storesremodeled and minor expansions not requiring store closures remain in the calculations. Our definition and calculation of comparable store sales maydiffer from other companies in the retail industry.(3)See Item 6, Selected Financial Data, for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAPfinancial measure.(4)Weighted average shares–diluted of 220.7 million was used for this calculation as adjusted net income/loss was positive. 3.3 million shares were addedto weighted average shares–basic of 217.4 million for assumed dilution for stock options, restricted stock awards and stock warrant.2013 Compared to 2012 Total Net SalesOur year-to-year change in total net sales is comprised of (a) sales from new stores net of closings and relocations and sales from our catalog outlet stores,which were sold in October 2011, referred to as non-comparable store sales and (b) sales of stores opened in both years as well as Internet sales, referred to ascomparable store sales. We consider comparable store sales to be a key indicator of our current performance measuring the growth in sales and salesproductivity of existing stores. Positive comparable store sales contribute to greater leveraging of operating costs, particularly payroll and occupancy costs,while negative comparable store sales contribute to de-leveraging of costs. Comparable store sales also have a direct impact on our total net sales and the level ofcash flow.26Table of Contents 2013 2012Total net sales (in millions)$11,859 $12,985Sales percent increase/(decrease) Total net sales(1)(8.7)% (24.8)%Comparable store sales(2)(7.4)% (25.2)%Sales per gross square foot(3)$107 $116(1)Includes the effect of the 53rd week in 2012. Excluding sales of $163 million for the 53rd week in 2012, total net sales decreased 7.5% and 25.7% in2013 and 2012, respectively.(2)Comparable store sales are presented on a 52-week basis and include sales from new and relocated stores that have been opened for 12 consecutivefull fiscal months and Internet sales. Stores closed for an extended period are not included in comparable store sales calculations, while storesremodeled and minor expansions not requiring store closures remain in the calculations. Our definition and calculation of comparable store sales maydiffer from other companies in the retail industry.(3)Calculation includes the sales and square footage of department stores that were open for the full fiscal year, as well as Internet sales. Total net sales decreased $1,126 million in 2013 compared to 2012. The following table provides the components of the net sales decrease: ($ in millions)2013Comparable store sales, including Internet$(943)Sales of closed (non-comparable) stores, net(183)2013 total net sales decrease$(1,126)In 2013, comparable store sales decreased 7.4%. Total net sales decreased 8.7% to $11,859 million compared with $12,985 million in 2012 and Internetsales increased 5.5% to $1,079 million. Excluding sales of $163 million for the 53rd week in 2012, total net sales decreased 7.5%. Internet sales experiencedan increase during the year primarily as a result of better in-stock merchandise positions, improvements in site performance and a favorable response to ourpromotional activity.The decline in total net sales was primarily related to our prior strategy that did not resonate with our customers. The prior strategy focused on everyday lowprices, substantially eliminated promotional activities, emphasized brands in a shops presentation and introduced new merchandise brands. Fiscal 2013 wasa transitional year in which we worked to stabilize our business and to rebuild the Company, working to create strategies for reconnecting with our corecustomer. During 2013, we began editing our merchandise assortments and undertaking several merchandise initiatives to make assortments more compellingto customers, reintroducing some of our private brands and returning the majority of our business to a promotional model. We have seen a positive response tothese efforts as our 2013 comparable store sales have sequentially improved each quarter, with the fourth quarter delivering a comparable store sales gain of2.0%, which was our first quarterly comparable store sales gain since the second quarter of 2011.Based on a sample of our mall and off-mall stores, our store traffic and conversion rate decreased compared to last year. The number of store transactions andthe total number of units decreased while the average number of units per transaction increased slightly during the year as compared to the prior year. Allgeographic regions experienced sales declines for 2013 compared to the prior year. During 2013, the women's accessories division, including Sephora, whichreflected the addition of 60 Sephora inside JCPenney locations, experienced a slight sales increase. All other divisions experienced sales declines with men'sand women's apparel, jewelry and footwear experiencing the smallest declines and home and children's experiencing the largest declines.Gross MarginGross margin is a measure of profitability of a retail company at the most fundamental level of buying and selling merchandise and measures a company’sability to effectively manage the total costs of sourcing and allocating merchandise against the corresponding retail pricing. Gross margins not only covermarketing, selling and other operating expenses, but also must include a profit element to reinvest back into the business. Gross margin is the differencebetween total net sales and cost of the merchandise sold and is typically expressed as a percentage of total net sales. The cost of merchandise sold includes alldirect costs of bringing merchandise to its final selling destination.27Table of ContentsThese costs include: • cost of the merchandise (net of discounts or allowances earned)• freight• warehousing• sourcing and procurement• buying and brand development costs including buyers’ salaries and related expenses• royalties and brand design fees• merchandise examination• inspection and testing• merchandise distribution center expenses• shipping and handling costs incurred related to sales to customers ($ in millions) 2013 2012Gross margin $3,492 $4,066As a percent of sales 29.4% 31.3%Gross margin decreased to 29.4% of sales in 2013, or 190 basis points, compared to 2012. On a dollar basis, gross margin decreased $574 million, or14.1%, to $3,492 million in 2013 compared to $4,066 million in the prior year. The net 190 basis point decrease resulted from the following:▪change in merchandise mix sold primarily related to sales of clearance merchandise at lower margins as compared to 2012, including additionalmarkdowns taken to sell through inventory associated with our previous strategy, as well as our transition back to a promotional pricing strategy (-217 basis points);▪lower markdown accruals and permanent markdowns in inventory at year-end (+30 basis points);▪re-ticketing costs as a result of moving back to a promotional strategy on selected merchandise (-27 basis points);▪reduced vendor cost concessions (-6 basis points); and▪net change in other miscellaneous items (+30 basis points). SG&A ExpensesThe following costs are included in SG&A expenses, except if related to merchandise buying, sourcing, warehousing or distribution activities: • salaries• marketing• occupancy and rent• utilities and maintenance• information technology• administrative costs related to our home office, district and regional operations• credit/debit card fees• real property, personal property and other taxes (excluding income taxes)($ in millions) 2013 2012SG&A $4,114 $4,506As a percent of sales 34.7% 34.7%28Table of ContentsSG&A expenses declined $392 million to $4,114 million in 2013 compared to $4,506 million in 2012. As a percent of sales, SG&A expenses were flat withlast year at 34.7%. The net savings resulted from the following:▪savings from salaries and related benefits (-$146 million);▪higher income from the JCPenney private label credit card activities, which is recorded as a reduction of our SG&A expenses (-$107 million);▪savings from lower utilities (-$64 million);▪lower advertising expenses (-$14 million);▪savings from general store expense, support costs and rent (-$10 million); and▪net decrease in other miscellaneous items (-$51 million).Pension Expense($ in millions) 2013 2012Primary pension plan expense $100 $167Primary pension plan settlement expense — 148Total primary pension plan expense 100 315Supplemental pension plans expense 37 38Total pension expense $137 $353Total pension expense, which consists of our Primary Pension Plan expense and our supplemental pension plans expense, is based on our prior year-endmeasurement of pension plan assets and benefit obligations. Primary Pension Plan expense for 2013 decreased $67 million to $100 million, compared with$167 million in 2012, excluding the settlement charge of $148 million incurred during the fourth quarter of 2012. The decrease in Primary Pension Planexpense for 2013 is a result of lower amortization of our actuarial loss due to certain lump-sum settlements in 2012, lower service cost due to a decrease in thenumber of participants accruing benefits and strong asset performance in 2012. These decreases were partially offset by an approximately 60 basis pointdecrease in our discount rate and a 50 basis point decrease in our assumed expected return on assets. During the fourth quarter of 2012, werecognized settlement expense of $148 million for unrecognized actuarial losses related to participants who separated from service and had a deferred vestedbenefit as of August 31, 2012 who elected to receive a lump-sum settlement payment as a result of a plan amendment. During 2013 and 2012, supplementalpension plans expense was $37 million and $38 million, respectively.Based on our 2013 year-end measurement of Primary Pension Plan assets and benefit obligations, our 2014 Primary Pension Plan expense will change toincome of $19 million compared to expense of $100 million in 2013. The flip to income for our Primary Pension Plan is primarily a result of strong assetperformance and a 70 basis point increase in our discount rate.Depreciation and Amortization ExpensesDepreciation and amortization expense in 2013 increased $58 million to $601 million, or approximately 10.7%, compared to $543 million in 2012. Thisincrease is a result of our investment and replacement of store fixtures in connection with the implementation of our prior strategy. Depreciation andamortization expense for 2013 and 2012 excludes $37 million and $25 million, respectively, of increased depreciation as a result of shortening the useful livesof department store fixtures that were replaced during 2013 with the build out of our home department and other attractions. These amounts are included in theline Restructuring and management transition in the Consolidated Statements of Operations.Real Estate and Other, NetReal estate and other consists of ongoing operating income from our real estate subsidiaries whose investments are in real estate investment trusts (REITs), aswell as investments in joint ventures that own regional mall properties. Real estate and other also includes net gains from the sale of facilities and equipmentthat are no longer used in operations, asset impairments and other non-operating charges and credits. 29Table of ContentsThe composition of real estate and other, net was as follows: ($ in millions) 2013 2012Gain on sale or redemption of non-operating assets, net: Sale or Redemption of Simon Property Group, L.P. (SPG) REIT units $(24) $(200)Sale of CBL & Associates Properties, Inc. (CBL) REIT shares — (15)Sale of leveraged lease assets — (28)Sale of investments in joint ventures (85) (151)Sale of other non-operating assets (23) (3)Net gain on sale or redemption of non-operating assets (132) (397)Dividend income from REITs (1) (6)Investment income from joint ventures (6) (11)Net gain from sale of operating assets (17) —Store impairments 18 26Intangible asset impairment 9 —Operating asset impairments — 60Other (26) 4Total expense/(income) $(155) $(324)Monetization of Non-operating AssetsAs part of our strategy to monetize assets that are not core to our operations, during 2013 we generated $143 million of cash and recognized a net gain of $132million from the sale of several non-operating assets. During 2012, we generated $526 million of cash and recognized a net gain of $397 million. Themonetization of non-operating assets primarily included the following:REIT AssetsOn July 20, 2012, SPG redeemed two million of our REIT units at a price of $124.00 per unit for a total redemption price of $246 million, net of fees. As ofthe market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit. In connection with the redemption, we realized a netgain of $200 million determined using the first-in-first-out method for determining the cost of REIT units sold. Following the transaction, we continued to holdapproximately 205,000 REIT units in SPG. In November 2013, we converted our remaining 205,000 REIT units into SPG shares, which were sold inDecember 2013 at an average price of $151.97 per share for a total price of $31 million, net of fees, and a realized net gain of $24 million. On October 23, 2012, we sold all of our CBL REIT shares at a price of $21.35 per share for a total price of $40 million, net of fees. In connection with thesale, we realized a net gain of $15 million. Leveraged LeasesDuring the third quarter of 2012, we sold all of our leveraged lease assets for $146 million, net of fees. The investments in the leveraged lease assets as of thedates of the sales were $118 million and were recorded in Other assets in the Consolidated Balance Sheets. In connection with the sales, we recorded a net gainof $28 million. Joint VenturesDuring the third quarter of 2013, we sold our investment in three joint ventures for $32 million, resulting in a net gain of $23 million. During the secondquarter of 2013, we sold our investment in one joint venture for $55 million, resulting in a net gain of $62 million. The gain for this transaction exceeded thecash proceeds as a result of distributions of cash related to refinancing activities in prior periods that were recorded as net reductions in the carrying amount ofthe investment. The net book value of the joint venture investment was a negative $7 million and was included in Other liabilities in the Consolidated BalanceSheets.During the third quarter of 2012, we sold our investments in four joint ventures that own regional mall properties for $90 million, resulting in net gainstotaling $151 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing activities in prior periods that wererecorded as net reductions in the carrying amount of the investments. The cumulative net book value of the joint venture investments was a negative $61million and was included in Other liabilities in the Consolidated Balance Sheets. 30Table of ContentsOther Non-Operating AssetsDuring the fourth quarter of 2013, we sold 10 properties used in our former auto center operations for net proceeds of $25 million, resulting in net gainstotaling $22 million. During the third quarter of 2013, we sold approximately 10 acres of excess land for net proceeds and gain of $1 million.During the third quarter of 2012, we sold a building used in our former drugstore operations with a net book value of zero for $3 million, resulting in a netgain of $3 million. Operating AssetsDuring the first quarter of 2013, we sold our leasehold interest of a former department store location with a net book value of $2 million for net proceeds of$18 million, realizing a gain of $16 million. During the second quarter of 2013, we sold two properties for total net proceeds and a gain of $1 million.ImpairmentsIn 2013, store impairments totaled $18 million and related to 25 underperforming department stores that continued to operate. In addition, during the fourthquarter of 2013, we recorded a $9 million impairment charge for our ownership of the U.S. and Puerto Rico rights of the monet® trade name. See restructuringand management transition charges below for additional impairments related to stores scheduled to be closed in 2014.In 2012, store impairments totaled $26 million and related to 13 underperforming department stores that continued to operate. In addition, during the fourthquarter of 2012, we wrote off $60 million of store-related operating assets that were no longer being used in our operations.Restructuring and Management Transition ChargesThe composition of restructuring and management transition charges was as follows: ($ in millions) 2013 2012Supply chain $— $19Home office and stores 48 109Software and systems — 36Store fixtures 55 78Management transition 37 41Other 75 15Total $215 $298Supply chainAs a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011, we recorded charges of $19million in 2012 related to increased depreciation, termination benefits and unit closing costs. Increased depreciation resulted from shortening the useful lives ofassets related to the closing and consolidating of selected facilities. This restructuring activity was completed during the third quarter of 2012. Home office and storesIn 2013 and 2012, we recorded $48 million and $109 million, respectively, of costs to reduce our store and home office expenses. During the first threequarters of 2013, we recorded $26 million of employee termination benefits for both store and home office associates. In addition, in January 2014, weannounced a strategic initiative to close 33 underperforming stores as part of our turnaround efforts. In conjunction with this initiative, during the fourthquarter of 2013 we incurred charges of $21 million related to asset impairments and $1 million of employee termination benefit costs. We expect to incurapproximately $20 million of additional costs associated with this initiative primarily during the first quarter of 2014.In 2012, charges of $116 million associated with employee termination benefits for both store and home office associates were offset by a net curtailment gainof $7 million related to our retirement benefit plans, which was incurred during the third quarter of 2012 when substantially all employee exits related to 2012were completed, for a net charge of $109 million.Software and systemsDuring 2012, we recorded a charge of $36 million related to the disposal of software and systems that based on our evaluation no longer supported ouroperations. This amount included $3 million of consulting fees related to that evaluation.31Table of ContentsStore FixturesDuring 2013, we recorded a total charge of $55 million related to store fixtures which consisted of $37 million of increased depreciation as a result ofshortening the useful lives of department store fixtures that were replaced throughout 2013, $11 million of charges for the impairment of certain store fixturesrelated to our former shops strategy that had been used in our prototype department store and a $7 million asset write down of store fixtures related to therenovations in our home department.During 2012, we recorded a total charge of $78 million related to store fixtures which consisted of a $53 million asset write-off related to the removal of storefixtures in our department stores and $25 million of increased depreciation as a result of shortening the useful lives of department store fixtures that werereplaced throughout 2013 with the build out of additional shops.Management transition During 2013 and 2012, we implemented several changes within our management leadership team that resulted in management transition costs of $37 millionand $41 million, respectively, for both incoming and outgoing members of management. OtherDuring 2013 and 2012, we recorded $75 million and $15 million, respectively, of miscellaneous restructuring charges. The charges during 2013 wereprimarily related to contract termination costs and other costs associated with our previous marketing and shops strategy, including a non-cash charge of $36million during the third quarter related to the return of shares of Martha Stewart Living Omnimedia, Inc. previously acquired by the Company, which wasaccounted for as a cost investment. The charges in 2012 were primarily related to the exit of our specialty websites CLAD™ and Gifting Grace™ in the firstquarter of 2012, and costs associated with the closing of our Pittsburgh, Pennsylvania customer call center in the second quarter of 2012. Operating Income/(Loss) and Adjusted Operating Income/(Loss)For 2013, we reported an operating loss of $1,420 million compared to an operating loss of $1,310 million in 2012. Excluding markdowns related to thealignment of inventory with our prior strategy, restructuring and management transition charges, the impact of our Primary Pension Plan expense and the netgain on the sale or redemption of non-operating assets, adjusted operating income/(loss) (non-GAAP) for 2013 was a loss of $1,237 million, $298 millionhigher than the loss of $939 million in 2012.Loss on Extinguishment of DebtDuring the second quarter of 2013, we paid $355 million to complete a cash tender offer and consent solicitation with respect to substantially all of ouroutstanding 7.125% Debentures due 2023. In doing so, we also recognized a loss on extinguishment of debt of $114 million, which included the premiumpaid over face value of the debentures of $110 million, reacquisition costs of $2 million and the write-off of unamortized debt issuance costs of $2 million. Net Interest ExpenseNet interest expense consists principally of interest expense on long-term debt, net of interest income earned on cash and cash equivalents. Net interest expensewas $352 million, an increase of $126 million, or 55.8%, from $226 million in 2012. The increase in net interest expense is primarily related to theincreased interest expense associated with the borrowings under our revolving credit facility which bears interest at a rate of LIBOR plus 3.0% and the $2.25billion five-year senior secured term loan that was entered into on May 22, 2013 which bears interest at a rate of LIBOR plus 5.0%. Income TaxesBeginning in the second quarter of 2013, as a result of our net deferred tax position changing from a net deferred tax liability to a net deferred tax asset(exclusive of any valuation allowance), we determined that an increase in the valuation allowance was needed. In assessing the need for the valuationallowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our assessment, weconcluded that our estimate of the realization of deferred tax assets would be based solely on the future reversals of existing taxable temporary differences andtax planning strategies that we would make use of to accelerate taxable income to utilize expiring net operating loss (NOL) and tax credit carryforwards. As ofFebruary 1, 2014, a valuation allowance of $304 million was recorded against our deferred tax assets. For the year ended February 1, 2014, we recorded a nettax benefit of $498 million resulting in an effective tax rate of (26.4)%. The net tax benefit consisted of net federal, foreign and state tax benefits of $197million, a $303 million tax benefit resulting from actuarial gains in other comprehensive income, offset by $2 million of tax expense related to the amortizationof certain indefinite-lived intangible assets. In accordance with accounting standards, we are required to allocate a portion of our tax provision betweenoperating losses and accumulated other comprehensive income. As a result, the Company recorded a tax benefit on the loss for the year, which was offset byincome tax expense in other comprehensive income of $303 million.32Table of ContentsIn 2012, we recorded an income tax benefit of $551 million, resulting in an effective tax rate of (35.9)%. Our income tax benefit for 2012 was impacted by theestablishment of a $66 million valuation allowance relating to state NOL carryforwards in certain separate filing states. Net Income/(Loss) and Adjusted Net Income/(Loss)In 2013, we reported a loss of $1,388 million, or $5.57 per share, compared with a loss of $985 million, or $4.49 per share, last year. Excluding the impactof markdowns related to the alignment of inventory with our prior strategy, restructuring and management transition charges, the impact of our PrimaryPension Plan expense, the loss on extinguishment of debt, the net gain on sale or redemption of non-operating assets and the tax benefit from income related toactuarial gains included in other comprehensive income, adjusted net income/(loss) (non-GAAP) went from a loss of $766 million, or $3.49 per share, in2012 to a loss of $1,431 million, or $5.74 per share, in 2013.2012 Compared to 2011 Total Net Sales 2012 2011Total net sales (in millions)$12,985 $17,260Sales percent increase/(decrease) Total net sales(24.8)%(1) (2.8)%Comparable store sales(2)(25.2)% 0.2 %Sales per gross square foot(3)$116 $154(1)Includes the effect of the 53rd week in 2012. Excluding sales of $163 million for the 53rd week in 2012, total net sales decreased 25.7%. (2)Comparable store sales are presented on a 52-week basis and include sales from new and relocated stores that have been opened for 12 consecutivefull fiscal months and Internet sales. Stores closed for an extended period are not included in comparable store sales calculations, while storesremodeled and minor expansions not requiring store closures remain in the calculations. Our definition and calculation of comparable store sales maydiffer from other companies in the retail industry. (3)Calculation includes the sales and square footage of department stores that were open for the full fiscal year, as well as Internet sales. Total net sales decreased $4,275 million in 2012 compared to 2011. The following table provides the components of the net sales decrease:($ in millions)2012Comparable store sales, including Internet$(4,303)Sales for the 53rd week163Sales of new and closed (non-comparable) stores, net11Sales decline from exit of catalog outlet stores(146)2012 total net sales decrease$(4,275)In 2012, we completed the first year of what was anticipated to be a multi-year transformational strategy. We underwent tremendous change as we beganshifting our business model from a promotional department store to a specialty department store. 2012 was a difficult year, as our comparable store salesdecreased 25.2%. Internet sales, which are included in comparable store sales, decreased 33.0%, to $1,023 million. Total net sales decreased 24.8% to$12,985 million compared with $17,260 million in 2011. The decrease in total net sales included the impact of our exit from our catalog outlet businesses inOctober 2011. Based on a sample of our mall and off-mall stores, our store traffic and conversion rate decreased in 2012 compared to 2011. Both the number of storetransactions and the number of units sold decreased in 2012 as compared to the prior year. Although we sold more items at our everyday prices at a higheraverage unit retail during 2012, the increase in clearance merchandise sold at a lower average unit retail and the increase in clearance merchandise sold as apercentage of total sales more than offset that benefit. All merchandise divisions experienced comparable store sales declines in 2012 compared to 2011. Men’s and women’s apparel and footwear experienced thesmallest declines while the home division experienced the largest decline. All geographic regions also experienced comparable store sales declines. 33Table of ContentsGross Margin($ in millions) 2012 2011Gross margin $4,066 $6,218As a percent of sales 31.3% 36.0%Gross margin for 2012 was $4,066 million, a decrease of $2,152 million compared to $6,218 million in 2011. Gross margin as a percentage of sales in2012 was 31.3% compared to 36.0% in 2011. The net 470 basis point decrease resulted from the following:•higher margins realized on “everyday value” priced merchandise sales, despite a lower percentage of sales sold as “everyday value” (+240 basispoints);•lower margins achieved on clearance merchandise sales combined with a greater penetration of clearance sales (-460 basis points);•lower margins on services and other activities, which included the impact of free haircuts and promotionally priced photography services during2012 (-130 basis points);•higher markdown accruals and permanent markdowns in inventory at year-end (-70 basis points); and•reduced vendor cost concessions in connection with our simplified pricing strategy (-50 basis points). SG&A Expenses($ in millions) 2012 2011SG&A $4,506 $5,109As a percent of sales 34.7% 29.6% For 2012, SG&A expenses declined $603 million to $4,506 million compared to $5,109 million in 2011 primarily as a result of our cost savingsinitiatives. As a percent of sales, SG&A expenses increased to 34.7% compared to 29.6% in 2011, as we were not able to leverage our expense reductionsagainst lower sales. The net decrease resulted from the following:•reduced salaries and related benefits (-$386 million);•increased income from the JCPenney private label credit card activities which is recorded as a reduction of our SG&A expenses (-$95 million);•reduced advertising expenses (-$106 million);•reduced costs from the exit from our catalog outlet stores and our specialty websites CLAD™ and Gifting Grace™ (-$71 million);•increased spending primarily related to enhancing information technology in our stores (+$25 million); and•net increase in other miscellaneous items (+$30 million). Pension Expense($ in millions) 2012 2011Primary pension plan expense $167 $87Primary pension plan settlement expense 148 —Total primary pension plan expense 315 87Supplemental pension plans expense 38 34Total pension expense $353 $121Total pension expense consists of our Primary Pension Plan expense and our supplemental pension plans expense. During the third quarter of 2012, as aresult of previous actions taken to reduce our workforce, we remeasured our pension plans as of September 30th. For the Primary Pension Plan, theremeasurement resulted in a reduction of $27 million to our full year 2012 Primary Pension Plan expense, bringing Primary Pension Plan expense to $167million, excluding the settlement charge of $148 million incurred during the fourth quarter of 2012. The decline relates primarily to the decrease in the numberof employees accruing benefits under the plan following the reductions in our workforce. The remeasurement did not materially impact the pension expense forour supplemental pension plans. 34Table of ContentsFor the first eight months of fiscal 2012, our total pension expense was based on our 2011 year-end measurement of pension plan assets and benefitobligations. The 2011 year-end measurement resulted in an increase in 2012 pension plan expense as compared to 2011 primarily as a result of anapproximately 80 basis point decrease in our discount rate, an increase in the pension liability resulting from our voluntary early retirement program offeredduring the third quarter of 2011 and a decrease in the value of plan assets due to unfavorable capital market returns in 2011. In September 2012, as a result of a plan amendment, we offered approximately 35,000 participants in the Primary Pension Plan who separated from serviceand had a deferred vested benefit as of August 31, 2012 the option to receive a lump-sum settlement payment. These participants had until November 30, 2012to elect to receive the lump-sum settlement payment with the payments made by the Company beginning on December 4, 2012 using assets from the PrimaryPension Plan. As a result of the approximately 25,000 participants who elected the lump-sum settlements, we made payments totaling $439 million from thePrimary Pension Plan’s assets and recognized settlement expense of $148 million for unrecognized actuarial losses. We also amended the Primary Pension Planto allow participants that separate from the Company on or after September 1, 2012 the option of a lump-sum settlement payment from the plan. Theamendment also provided for automatic lump-sum settlement payments for participants with vested balances less than $5,000. Depreciation and Amortization ExpenseDepreciation and amortization expense in 2012 increased $25 million to $543 million from $518 million in 2011 as a result of our investment in our shopsinside our JCPenney department stores in addition to the opening of 9 department stores in 2012. Depreciation and amortization expense for 2012 excludes$25 million of increased depreciation as a result of shortening the useful lives of department store fixtures that were replaced throughout 2013 with the buildout of additional shops. This amount was included in the line Restructuring and management transition on the Consolidated Statements of Operations.Real Estate and Other, NetThe composition of real estate and other, net was as follows: ($ in millions) 2012 2011Gain on sale or redemption of non-operating assets, net Redemption of Simon Property Group, L.P. (SPG) REIT units $(200) $—Sale of CBL & Associates Properties, Inc. (CBL) REIT shares (15) —Sale of leveraged lease assets (28) —Sale of investment in joint ventures (151) —Sale of other non-operating assets (3) —Net gain on sale or redemption of non-operating assets (397) —Dividend income from REITs (6) (10)Investment income from joint ventures (11) (13)Net gain from sale of operating assets — (6)Store impairments 26 58Operating asset impairments 60 —Other 4 (8)Total expense/(income) $(324) $21Monetization of Non-operating Assets As part of our strategy to monetize assets that are not core to our operations, we generated $526 million of cash and recognized a net gain of $397 million fromthe sale or redemption of several non-operating assets during 2012. The monetization of non-operating assets primarily included the following:REIT AssetsOn July 20, 2012, SPG redeemed two million of our REIT units at a price of $124.00 per unit for a total redemption price of $246 million, net of fees. As ofthe market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit. In connection with the redemption, we realized a net gainof $200 million determined using the first-in-first-out method for determining the cost of REIT units sold. Following this transaction, we still heldapproximately 205,000 REIT units in SPG. On October 23, 2012, we sold all of our CBL REIT shares at a price of $21.35 per share for a total price of $40 million, net of fees. In connection with thesale, we realized a net gain of $15 million. 35Table of ContentsLeveraged LeasesDuring the third quarter of 2012, we sold all of our leveraged lease assets for $146 million, net of fees. The investments in the leveraged lease assets as of thedates of the sales were $118 million and we recorded a net gain of $28 million. Joint VenturesDuring the third quarter of 2012, we sold our investments in four joint ventures that own regional mall properties for $90 million, resulting in net gainstotaling $151 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing transactions in prior periods that wererecorded as net reductions in the carrying amount of the investments. The cumulative net book value of the joint venture investments was a negative $61million. Other Non-Operating AssetsDuring the third quarter of 2012, we sold a building used in our former drugstore operations with a net book value of zero for $3 million resulting in a net gainof $3 million. ImpairmentsIn 2012, store impairments totaled $26 million and related to 13 underperforming department stores that continued to operate. In addition, during the fourthquarter of 2012, we wrote off $60 million of store-related operating assets that were no longer being used in our operations. In 2011, store impairments totaled$58 million and related to eight underperforming department stores, of which seven continued to operate.Restructuring and Management TransitionThe composition of restructuring and management transition charges was as follows: ($ in millions) 2012 2011Supply chain $19 $41Catalog and catalog outlet stores — 34Home office and stores 109 41Software and systems 36 —Store fixtures 78 —Management transition 41 130Voluntary early retirement program (VERP) — 179Other 15 26Total $298 $451Supply chainAs a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011, during 2012 and 2011, werecorded charges of $19 million and $41 million, respectively, related to increased depreciation, termination benefits and unit closing costs. Increaseddepreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. This restructuring activity wascompleted during the third quarter of 2012. Catalog and catalog outlet storesOn October 16, 2011, we sold the assets related to the operations of our catalog outlet stores. We sold fixed assets andinventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted in a loss of $24 million.During 2011, we also recorded $10 million of severance costs related to the sale of our outlet stores. This restructuring activity was completed in 2011. Home office and storesDuring 2012 and 2011, we recorded $109 million and $41 million, respectively, of net charges associated with employee terminationbenefits for actions to reduce our store and home office expenses. During the third quarter of 2012, when substantially all employee exits related to 2012 werecompleted, we recorded a net curtailment gain of $7 million. The net curtailment gain was more than offset by 2012 charges associated withemployee termination benefits of $116 million. 36Table of ContentsSoftware and systemsDuring 2012, we recorded a charge of $36 million related to the disposal of software and systems that based on our evaluation no longer supported our operations.This amount included $3 million of consulting fees related to that evaluation. Store fixturesDuring 2012, we recorded a $53 million asset write-off related to the removal of store fixtures in our department stores. In addition, we recorded $25 million ofincreased depreciation as a result of shortening the useful lives of department store fixtures that were replaced throughout 2013 with the build out of additionalshops. Management transitionDuring 2012 and 2011, we implemented several changes within our management leadership team that resulted in management transition costs of $41 millionand $130 million, respectively, for both incoming and outgoing members of management. Ronald B. Johnson became Chief Executive Officer inNovember 2011, succeeding Myron E. Ullman, III. Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, at which time heretired from the Company until his return in April 2013 when he replaced Mr. Johnson as Chief Executive Officer. During 2011, we incurred transitioncharges of $53 million and $29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointed Presidentuntil his departure in June 2012; in November 2011, Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and Chief TalentOfficer, respectively, until their departures in April 2013. Collectively, in 2011 these three officers were paid sign-on bonuses of $24 million as part of theiremployment packages. In 2012 and 2011, we recorded $41 million and $24 million, respectively, of management transition charges related to other membersof management. VERPAs a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August 2011 we announced aVERP which was offered to approximately 8,000 eligible associates. In the third quarter of 2011, we incurred a total charge of $179 million related to theVERP. Charges included $176 million related to enhanced retirement benefits for the approximately 4,000 employees who accepted the VERP, $1 millionrelated to curtailment charges for our non-qualified supplemental pension plans as a result of the reduction in the expected years of future service related tothese plans, and $2 million of costs associated with administering the VERP. This restructuring activity was completed in 2011. OtherDuring 2012 and 2011, we recorded miscellaneous restructuring charges of $15 million and $26 million, respectively. These charges were primarily relatedto the closing and consolidating of facilities related to optimizing our custom decorating operations, the exit of our specialty websites CLAD and GiftingGrace and the closure of our Pittsburgh, Pennsylvania customer call center. These restructuring activities were completed in 2012 and 2011. Operating Income/(Loss) and Adjusted Operating Income/(Loss)For 2012, we reported an operating loss of $1,310 million compared to an operating loss of $2 million in 2011. Excluding markdowns related to thealignment of inventory with our prior strategy, restructuring and management transition charges, the impact of our Primary Pension Plan expense and the netgain on the sale or redemption of non-operating assets, adjusted operating income/(loss) (non-GAAP) for 2012 was an operating loss of $939 million, adecrease of $1,475 million from operating income of $536 million in 2011. Net Interest ExpenseNet interest expense for 2012 was $226 million, a decrease of $1 million from $227 million in 2011. The decrease relates primarily to lower overall debtoutstanding as a result of our $230 million debt repayment at maturity in August 2012. Income TaxesThe effective income tax rate was (35.9)% and (33.6)% for 2012 and 2011, respectively. Our income tax benefit for 2012 was positively impacted by federalwage tax credits, state law changes, state audit settlements and the sale and redemption of non-operating assets and negatively impacted by the discontinuationof our quarterly dividend and a valuation allowance for certain state NOLs.Net Income/Loss and Adjusted Net Income/(Loss)In 2012, we reported a loss of $985 million, or $4.49 per share, compared with a loss of $152 million, or $0.70 per share, in 2011. Excluding the impact ofmarkdowns related to the alignment of inventory with our prior strategy, restructuring and management transition charges, the impact of our Primary PensionPlan expense and the net gain on sale or redemption of non-operating assets, adjusted net income/(loss) (non-GAAP) went from net income of $207 million, or$0.94 per share, in 2011 to a loss of $766 million, or $3.49 per share, in 2012.37Table of ContentsFinancial Condition and Liquidity OverviewOur primary sources of liquidity are cash generated from operations, available cash and cash equivalents and access to our revolving credit facility. During2013, we completed the following transactions to enhance our liquidity:•On February 8, 2013, we entered into an amended and restated credit facility (2013 Credit Facility) in an amount up to $1,850 million and duringthe first quarter of 2013, we borrowed $850 million under our 2013 Credit Facility of which $200 million was repaid during the third quarter of2013. At the end of 2013, $650 million remained outstanding under our 2013 Credit Facility. The 2013 Credit Facility is an asset-based revolvingcredit facility that is guaranteed by J. C. Penney Company, Inc., and is secured by a perfected first-priority security interest in substantially all ofour eligible credit card receivables, accounts receivable and inventory.•On May 22, 2013, we entered into a $2.25 billion five-year senior secured term loan that is guaranteed by J. C. Penney Company, Inc. and certainsubsidiaries of JCP, and is secured by mortgages on certain real estate of JCP and the guarantors, in addition to substantially all other assets of JCPand the guarantors.•On October 1, 2013, we issued 84 million shares of common stock with a par value of $0.50 per share for net proceeds of $786 million.•We generated $143 million of cash from the sale of several non-operating assets.During 2013, we used a portion of the proceeds from these financing initiatives to repay $256 million in long-term debt, invested $951 million in ouroperations through capital expenditures and used $594 million to restore inventory levels in basics and private branded categories during the year in supportof the return to a promotional pricing strategy. We ended the year with $1,515 million of cash and cash equivalents, an increase of $585 million from theprior year. We have $694 million available under our 2013 Credit Facility for future borrowing, of which $509 million is currently accessible due to thelimitation of the fixed charge coverage ratio. As of the end of 2013, our total available liquidity was in excess of $2.0 billion. The following table provides a summary of our key components and ratios of financial condition and liquidity:($ in millions) 2013 2012 2011Cash and cash equivalents$1,515 $930 $1,507Merchandise inventory2,935 2,341 2,916Property and equipment, net5,619 5,353 5,176Total debt(1)5,601 2,982 3,102Stockholders’ equity3,087 3,171 4,010Total capital8,688 6,153 7,112Maximum capacity under our credit agreement1,850(2) 1,750 1,250Cash flow from operating activities(1,814) (10) 820Free cash flow (non-GAAP)(3)(2,746) (906) 23Capital expenditures951 810 634Dividends paid— 86 178Ratios: Debt-to-total capital(4)64.5% 48.5% 43.6% Cash-to-debt(5)27.0% 31.2% 48.6% (1)Total debt includes long-term debt, including current maturities, capital leases, note payable and our current borrowing under our 2013 CreditFacility.(2)On February 8, 2013, we entered into an amended and restated credit agreement which increased the size of our revolving credit facility to $1,850million and provides an accordion feature that could potentially increase the size of the facility by an amount up to$400 million.(3)See Item 6, Selected Financial Data, for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAPfinancial measure.(4)Total debt divided by total capitalization.(5)Cash and cash equivalents divided by total debt.38Table of ContentsFree Cash Flow (Non-GAAP)During 2013, free cash flow decreased $1,840 million to an outflow of $2,746 million compared to an outflow of $906 million in 2012. The decrease wasprimarily due to the decline in sales and resulting use of cash from operating activities during the period, increase in our inventory to restore inventory levels inbasics and private branded categories during the year and increased capital expenditures slightly offset by the sale of operating assets. Operating ActivitiesWhile a significant portion of our sales, profit and operating cash flows have historically been realized in the fourth quarter, our quarterly results of operationsmay fluctuate significantly as a result of many factors, including seasonal fluctuations in customer demand, product offerings, inventory levels and theimpact of our strategy to return to profitable growth. In 2013, cash flow from operating activities was an outflow of $1,814 million, a decrease of $1,804 million compared to an outflow of $10 million during thesame period last year. The overall increased cash outflow from operations for 2013 related to a larger net loss for the period, the increase in cash used to restoreinventory levels in basics and private branded categories during the year and cash used for the corresponding merchandise accounts payable. Our net loss asof the end of fiscal 2013 of $1,388 million included significant expenses and charges that did not impact operating cash flow including depreciation andamortization, restructuring and management transition charges, pension expense, loss on extinguishment of debt, an income tax benefit from income resultingfrom actuarial gains in other comprehensive income and asset impairments and other charges.Merchandise inventory increased $594 million to $2,935 million, or 25.4%, as of the end of 2013 compared to $2,341 million as of the end of last year.Merchandise inventory increased due to re-stocking of basics and private branded categories during the year and to support the return of our promotionalpricing strategy. Inventory turns for 2013, 2012 and 2011 were 2.65, 3.03 and 3.09 respectively. Merchandise accounts payable decreased $214 million at theend of 2013 compared to 2012.In 2012, cash flow from operating activities was an outflow of $10 million, a decrease of $830 million from the prior year. The decrease in operating cash flowwas reflective of significantly reduced operating performance. Our total year 2012 net loss of $985 million included significant expenses and charges that didnot impact operating cash flow including depreciation and amortization, pension expense, and restructuring and management transition. We realized positiveoperating cash flow impacts from reduced operating expenses, reduced inventory levels, and specific steps taken to improve overall working capital. In 2012, we realigned our merchandise and non-merchandise vendor payment schedule by changing the standard payment dates for most of our U.S.domestic vendors from approximately the fifth, fifteenth and twenty-fifth calendar days of each month to the first, second and third Mondays of each fourweek fiscal month and the first, third and fourth Mondays of each five week fiscal month. January 2013 was a five week fiscal month; consequently, thechange in payment schedule resulted in the payment that would have been made in the last week of fiscal January 2013 being made in the first week of fiscalFebruary 2013. We made this change to improve our cash position and align our vendor payment process to the process expected to be used afterimplementation of our new accounts payable system effective in the second quarter of 2013. The positive effect of this vendor payment schedule change on2012 operating cash flow was $129 million. We also deferred $85 million of payments to selected merchandise vendors from the fourth quarter of 2012 tothe first quarter of 2013. In addition, in the fourth quarter of 2012, we extended our private label credit card agreement and received a signing bonus and anadvance of our 2013 gain share totaling $75 million in cash.In 2011, cash flow from operating activities was an inflow of $820 million, an increase of $228 million from the prior year. In 2010, our cash flow fromoperating activities was impacted by a $392 million discretionary pension contribution which resulted in a tax benefit of $152 million, for a net use of cash of$240 million. Although operating performance was lower in 2011 as compared to 2010, this was offset as we managed inventories at lower levels during 2011. Investing ActivitiesIn 2013, investing activities was a cash outflow of $789 million compared to an outflow of $293 million for 2012. The increase in the cash outflow frominvesting activities was primarily a result of increased capital expenditures and a decrease in proceeds from the sale or redemption of non-operating andoperating assets.For 2013, capital expenditures were $951 million. At the end of the year, we also had an additional $25 million of accrued capital expenditures, which will bepaid in subsequent periods. The capital expenditures for 2013 related primarily to the opening of the women’s and kid’s Joe Fresh® attractions in nearly 700 ofour department stores, the opening of Disney® and giggleBabyTM in approximately 560 stores and extensive renovations in our home department inapproximately 500 of our department stores. In addition, during 2013 we opened 60 Sephora inside JCPenney stores bringing the total to 446.39Table of ContentsDuring 2013, we sold several non-operating assets for total net proceeds of $143 million consisting primarily of our investments in four real estate jointventures, our remaining Simon REIT units, ten properties used in our former auto center operations and a leasehold interest in a former department storelocation.In 2012, cash flow from investing activities was an outflow of $293 million compared to an outflow of $870 million for the same period in 2011. Thedecrease in the cash outflow from investing activities was primarily a result of increased capital expenditures offset by proceeds from the sale or redemption ofnon-operating assets. In 2012, capital expenditures were $810 million. Capital expenditures in 2012 included furniture and fixtures relating to men’s and women’s The OriginalArizona Jean Co. shops, Levi’s shops and jcp shops; women’s Liz Claiborne shops and men’s Izod shops that launched in the third quarter of 2012. Duringthe year, we also opened 78 Sephora inside JCPenney stores and nine new department stores. In 2012, we received net proceeds of $526 million from the sale or redemption of non-operating assets including REIT shares or units, leveraged lease assets,investments in real estate joint ventures and a building used in our former drugstore operations. In 2011, we invested $634 million in capital expenditures for renewals and modernizations, three new JCPenney department stores, 77 Sephora insideJCPenney locations, 423 MNG by Mango shops, 502 Call it Spring shops and the opening of 10 The Foundry Big and Tall Supply Co. stores. In 2011, we purchased the worldwide rights for the Liz Claiborne® family of trademarks and related intellectual property and the U.S. and Puerto Rico rightsfor the monet family of trademarks and related intellectual property for a total purchase price of $268 million and invested $39 million through the purchaseof 11 million newly issued shares of Class A common stock of Martha Stewart Living Omnimedia, Inc. (MSLO) and one share of MSLO preferred stockwhich gave us the right to designate two members of MSLO’s Board of Directors. These uses of cash were partially offset by the receipt of a $53 million cashdistribution from one of our real estate joint ventures as a result of a refinancing transaction and a $3 million cash distribution from MSLO that was recordedas a return of investment. The following provides a breakdown of capital expenditures:($ in millions)2013 2012 2011Store renewals and updates$875 $617 $410Capitalized software29 65 120New and relocated stores10 63 33Technology and other37 65 71Total$951 $810 $634We expect our investment in capital expenditures for 2014 to be approximately $250 million and will relate primarily to the investment in a new departmentstore, our continued roll-out of 46 new Sephora inside JCPenney locations and investments in our store environment and technology. Our plan is to fund theseexpenditures with cash flow from operations, existing cash and cash equivalents, and, if required, the access to our revolving credit facility. Financing ActivitiesIn 2013, cash flows from financing activities were an inflow of $3,188 million compared to an outflow of $274 million for the same period last year. Duringthe third quarter of 2013, we issued 84 million shares of common stock with a par value of $0.50 per share for net proceeds of $786 million. During thesecond quarter of 2013, we received net proceeds of $2.18 billion from our senior secured term loan facility and completed the cash tender offer and consentsolicitation with respect to our outstanding 7.125% Debentures due 2023 for $355 million. During the first quarter of 2013, we borrowed $850 million underour revolving credit facility of which $200 million was repaid during the third quarter of 2013.In 2012, cash flows from financing activities were an outflow of $274 million compared to an outflow of $1,065 million in the prior year. On August 1,2012, we repaid at maturity $230 million principal amount of 9% Notes Due 2012. Additionally, we made capital lease, note payable and financingpayments totaling $24 million. As authorized by the Board, we paid quarterly dividends of $0.20 per share during the first half of 2012 for dividendsdeclared during the fourth quarter of 2011 and the first quarter of 2012. On May 15, 2012, we announced that we had discontinued the quarterly $0.20 pershare dividend. 40Table of ContentsDuring the first half of 2011, we completed our share buyback program authorized by the Board of Directors in February 2011. Through open markettransactions we repurchased approximately 24.4 million shares at a cost of $900 million and an average price of $36.98. In June 2011, we received proceedsof approximately $50 million from the sale of a warrant on 7.3 million shares of J. C. Penney Company, Inc. common stock to Ronald B. Johnson prior to thecommencement of his employment. In April 2011, we paid $15 million in fees to renew our revolving credit facility and in January 2012, we paid $5 millionin fees for an amendment and restatement of our credit facility, for a total of $20 million. In 2011, we maintained our quarterly dividend on common stock at$0.20 per share and returned $178 million to stockholders through dividend payments. Cash Flow and Financing OutlookOur primary sources of liquidity are cash generated from operations, available cash and cash equivalents and access to our revolving credit facility. Our cashflows may be impacted by many factors including the economic environment, consumer confidence, competitive conditions in the retail industry and thesuccess of our turnaround strategy. Fiscal 2013 was a transitional year in which we worked to stabilize our business. Our prior strategy did not resonate withour customers and adversely affected our sales and profitability over the past two years. During 2013 we began editing our merchandise assortments andundertaking several merchandise initiatives to make assortments more compelling to customers, reintroducing some of our private brands and returning themajority of our business to a promotional model. We have seen a positive response to these efforts and believe we have adequate resources to fund our capitalexpenditures and working capital needs for 2014 and to complete the turnaround. Going forward, we will continue to focus on improving sales and grossmargin and strengthening our balance sheet. In addition, in accordance with our long-term financing strategy, we may access the capital marketsopportunistically. Credit Facility On February 8, 2013, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation (Purchasing) entered into an amended and restatedrevolving credit agreement in the amount up to $1,850 million (2013 Credit Facility), which replaces the Company’s prior credit agreement entered into inJanuary 2012, with largely the same syndicate of lenders under the previous agreement, with JPMorgan Chase Bank, N.A., as administrative agent. The 2013Credit Facility matures on April 29, 2016, increases the letter of credit sublimit to $750 million and provides an accordion feature that could potentiallyincrease the size of the facility by an additional amount not to exceed $400 million.The 2013 Credit Facility is an asset-based revolving credit facility and is secured by a perfected first-priority security interest in substantially all of our eligiblecredit card receivables, accounts receivable and inventory. The 2013 Credit Facility is available for general corporate purposes, including the issuance of lettersof credit. Pricing under the 2013 Credit Facility is tiered based on JCP’s senior unsecured long-term credit ratings issued by Moody’s Investors Service, Inc.and Standard & Poor’s Ratings Services. JCP’s obligations under the 2013 Credit Facility are guaranteed by J. C. Penney Company, Inc.Availability under the 2013 Credit Facility is limited to a borrowing base which allows us to borrow up to 85% of eligible accounts receivable, plus 90% ofeligible credit card receivables, plus 85% of the liquidation value of our inventory, net of certain reserves. Letters of credit reduce the amount available toborrow by their face value. In the event that availability under the 2013 Credit Facility is at any time less than the greater of (1) $125 million or (2) 10% of thelesser of the total facility or the borrowing base then in effect, for a period of at least 30 days, the Company will be subject to a fixed charge coverage ratiocovenant of 1.0 to 1.0 which is calculated as of the last day of the quarter and measured on a trailing four-quarter basis.On April 12, 2013, we borrowed $850 million under the 2013 Credit Facility of which $200 million was repaid during the third quarter of 2013. As of the endof 2013, $650 million of the borrowing remains outstanding. The borrowing bears interest at a rate of LIBOR plus 3.0%. As of the end of 2013, we had $506million in standby and import letters of credit outstanding under the 2013 Credit Facility, the majority of which are standby letters of credit that support ourmerchandise initiatives and workers’ compensation. None of the standby or import letters of credit have been drawn on. As of the end of 2013, we had $694million available for future borrowing, of which $509 million is currently accessible due to the limitation of the fixed charge coverage ratio.Credit RatingsOur credit ratings and outlook as of March 17, 2014 were as follows: Corporate OutlookFitch RatingsCCC NegativeMoody’s Investors Service, Inc.Caa1 NegativeStandard & Poor’s Ratings ServicesCCC+ Stable 41Table of ContentsCredit rating agencies periodically review our capital structure and the quality and stability of our earnings. Rating agencies consider, among other things,changes in operating performance, comparable store sales, the economic environment, conditions in the retail industry, financial leverage and changes in ourbusiness strategy in their rating decisions. Downgrades to our long-term credit ratings could result in reduced access to the credit and capital markets andhigher interest costs on future financings. Contractual Obligations and CommitmentsAggregated information about our obligations and commitments to make future contractual payments, such as debt and lease agreements, and contingentcommitments as of February 1, 2014 is presented in the following table. Less Than 1 1 - 3 3 - 5 More Than 5($ in millions)Total Years Years Years YearsRecorded contractual obligations: Long-term debt$4,862 $23 $446 $2,755 $1,638Short-term borrowing650 650 — — —Capital leases and note payable96 30 57 9 —Unrecognized tax benefits(1)70 2 — — 68Contributions to non-qualified supplemental retirement andpostretirement medical plans(2)247 46 94 37 70 $5,925 $751 $597 $2,801 $1,776Unrecorded contractual obligations: Interest payments on long-term and short-term debt(3) (4)$5,334 $327(5) $614 $457 $3,936Operating leases(6)2,909 258 417 296 1,938Standby and import letters of credit(7)506 506 — — —Surety bonds(8)83 83 — — —Contractual obligations(9)909 342 538 29 —Purchase orders(10)2,247 2,247 — — —Guarantees(11)27 2 3 1 21 $12,015 $3,765 $1,572 $783 $5,895Total$17,940 $4,516 $2,169 $3,584 $7,671 (1)Represents management’s best estimate of the payments related to tax reserves for uncertain income tax positions. Based on the nature of theseliabilities, the actual payments in any given year could vary significantly from these amounts. See Note 18 to the Consolidated Financial Statements.(2)Represents expected cash payments through 2023. (3)Includes $4 million of interest related to the $650 million of borrowings outstanding under our variable rate credit facility that was calculated usingan interest rate of 3.25% from February 1, 2014 through the next maturity date of April 3, 2014. Also includes $8 million of interest expense on theundrawn portion of the facility which was calculated using an interest of 0.5%, assuming that the $650 million borrowing under the facility remainsoutstanding only through the next maturity date of April 3, 2014 and no outstanding standby or import letters of credit.(4)Includes $600 million of interest related to our 2013 Term Loan that was calculated using the interest rate as of February 1, 2014 for the amountsoutstanding each period and assumes principal payments remain at $5.625 million quarterly.(5)Includes $91 million of accrued interest that is included in our Consolidated Balance Sheet at February 1, 2014.(6)Represents future minimum lease payments for non-cancelable operating leases, including renewals determined to be reasonably assured. Futureminimum lease payments have not been reduced for sublease income.(7)Standby letters of credit, which totaled $481 million, are issued as collateral to a third-party administrator for self-insured workers’ compensation andgeneral liability claims. The remaining $25 million are outstanding import letters of credit.(8)Surety bonds are primarily for previously incurred and expensed obligations related to workers’ compensation and general liability claims.(9)Consists primarily of (a) minimum purchase requirements for exclusive merchandise and fixtures; (b) royalty obligations; and (c) minimum obligationsfor professional services, energy services, software maintenance and network services.(10)Amounts committed under open purchase orders for merchandise inventory of which a significant portion are cancelable without penalty prior to adate that precedes the vendor’s scheduled shipment date.(11)Relates to third-party guarantees. See Note 20 to the Consolidated Financial Statements.42Table of ContentsOff-Balance Sheet Arrangements Management considers all on- and off-balance sheet debt in evaluating our overall liquidity position and capital structure. Other than operating leases, whichare included in the Contractual Obligations and Commitments table, we do not have any material off-balance sheet financing. See detailed disclosure regardingoperating leases and their off-balance sheet present value in Note 14 to the Consolidated Financial Statements.We do not have any additional arrangements or relationships with entities that are not consolidated into the financial statements. InflationOur business is affected by general economic conditions, including changes in prices for labor and commodities such as petroleum, energy and cotton. Overthe past few years, the retail industry has experienced some inflationary cost increases. Inflation impacted our results of operations during the first quarter of2012, driven primarily by rising costs for cotton and petroleum based textiles for 2011 holiday and early 2012 spring goods. Beginning in the second quarterof 2012 and continuing through the end of fiscal 2012, these pressures eased. During 2013, we did not experience any inflationary cost increases; however, weanticipate inflationary pressures in 2014 from both labor increases and currency fluctuations.Critical Accounting Policies The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimatesand use assumptions that in some instances may materially affect amounts reported in the accompanying Consolidated Financial Statements. In preparingthese financial statements, we have made our best estimates and judgments based on history and current trends, as well as other factors that we believe arerelevant at the time of the preparation of our Consolidated Financial Statements. Historically, actual results have not differed materially from estimates;however, future events and their effects cannot be determined with certainty and as a result, actual results could differ from our assumptions and estimates. See Note 2 to the Consolidated Financial Statements for a description of our significant accounting policies. Inventory Valuation under the Retail MethodInventories are valued primarily at the lower of cost (using the first-in, first-out or “FIFO” method) or market, determined under the Retail Inventory Method(RIM) for department stores, store distribution centers and regional warehouses and standard cost, representing average vendor cost, for merchandise we sellthrough the Internet at jcpenney.com. Under RIM, retail values are converted to a cost basis by applying specific average cost factors to groupings ofmerchandise. RIM inherently requires management judgment and certain estimates that may significantly impact the ending inventory valuation at cost, aswell as gross margin. The most significant estimates are permanent reductions to retail prices (markdowns) and permanent devaluation of inventory(markdown accruals) used primarily to clear seasonal merchandise or otherwise slow-moving inventory and inventory shortage (shrinkage). Permanent markdowns and markdown accruals are designated for clearance activity and are recorded at the point of decision, when the utility of inventoryhas diminished, versus the point of sale. Factors considered in the determination of permanent markdowns and markdown accruals include current andanticipated demand, customer preferences, age of the merchandise and style trends. Under RIM, permanent markdowns and markdown accruals result in thedevaluation of inventory and the corresponding reduction to gross margin is recognized in the period the decision to markdown is made. Shrinkage isestimated as a percent of sales for the period from the last physical inventory date to the end of the fiscal period. Physical inventories are taken at leastannually and inventory records are adjusted accordingly. The shrinkage rate from the most recent physical inventory, in combination with current events andhistorical experience, is used as the standard for the shrinkage accrual rate for the next inventory cycle. Historically, our actual physical inventory countresults have shown our estimates to be reliable. Based on prior experience, we do not believe that the actual results will differ significantly from theassumptions used in these estimates. A 10% increase or decrease in markdowns and markdown accruals reflected in our inventory as of the end of the yearwould have impacted our net loss by approximately $27 million, which reflects no tax impact due to the valuation allowance that we began recording duringthe second quarter of 2013. A 10% increase or decrease in the estimated inventory shrinkage accrued as of the end of the year would have impacted net incomeby approximately $7 million, which also reflects no tax impact. Valuation of Long-Lived and Indefinite-Lived AssetsLong-Lived AssetsWe evaluate recoverability of long-lived assets, such as property and equipment, whenever events or changes in circumstances indicate that the carrying valuemay not be recoverable, such as historical operating losses or plans to close stores and dispose43Table of Contentsof or sell long-lived assets before the end of their previously estimated useful lives. Additionally, for store assets, in the fourth quarter of each fiscal year, weseparately test the performance of individual stores, and underperforming stores are selected for further evaluation of the recoverability of the carryingamounts. If the evaluation, performed on an undiscounted cash flow basis, indicates that the carrying amount of the asset may not be recoverable, the potentialimpairment is measured as the excess of carrying value over the fair value of the impaired asset. The impairment calculation requires us to apply estimates forfuture cash flows and use judgments for qualitative factors such as local market conditions, operating environment, mall performance and other trends. Weestimate fair value based on either a projected discounted cash flow method using a discount rate that is considered commensurate with the risk inherent in ourcurrent business model or appraised value, as appropriate. We recognize impairment losses in the earliest period that it is determined a loss has occurred. The carrying value is adjusted to the new carrying value andany subsequent increases in fair value are not recorded. If it is determined that the estimated remaining useful life of the asset should be decreased, the periodicdepreciation expense is adjusted based on the new carrying value of the asset. Impairment losses totaling $18 million, $26 million and $58 million in 2013,2012 and 2011, respectively, were recorded in the Consolidated Statement of Operations in the line item Real estate and other, net. Fiscal 2013 was a transitional year in which we worked to stabilize our business and to rebuild the Company, working to create strategies for reconnectingwith our core customer. Our former strategy focused on everyday low prices, substantially eliminated promotional activities, emphasized brands in a shopspresentation and introduced new merchandise brands. These pricing and merchandising strategies did not resonate with our customers, as reflected in thedecline in our operating performance. During 2013, we began editing our merchandise assortments and undertaking several merchandise initiatives to makeassortments more compelling to customers, reintroducing some of our private brands and returning the majority of our business to a promotional model. Wehave seen a positive response to these efforts as our 2013 comparable store sales have sequentially improved each quarter, with the fourth quarter delivering acomparable store sales gain of 2.0%, which was our first quarterly comparable store sales gain since the second quarter of 2011. Since we returned themajority of our business to a promotional model in 2013 and as we work to complete our merchandising initiatives, we expect our sales, operating profit andcash flows to improve. Future cash flows used in our impairment analysis reflects these assumptions. In 2013, we wrote the carrying value of assets of 25 underperforming department stores that continued to operate down to their fair value and recorded animpairment charge of $18 million. If operating performance begins to reflect an other than temporary decline and actual results are not consistent with ourcurrent estimates and assumptions, we may be exposed to additional impairment charges in the future, which could be material to our results of operations. Indefinite-Lived AssetsWe assess the recoverability of indefinite-lived intangible assets at least annually during the fourth quarter of our fiscal year or whenever events or changes incircumstances indicate that the carrying amount of the indefinite-lived intangible asset may not be fully recoverable. Examples of a change in events orcircumstances include, but are not limited to, a decrease in the market price of the asset, a history of cash flow losses related to the use of the asset or asignificant adverse change in the extent or manner in which an asset is being used. During the fourth quarter of 2012, we early adopted the FinancialAccounting Standards Board’s (FASB) new guidance on impairment testing of indefinite-lived intangible assets. Under the new guidance, we have the optionto first perform a qualitative assessment in our evaluation of our indefinite-lived intangible assets in order to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. Due to the continued decline in our sales during 2013, we decided not to perform a qualitative analysisfor our 2013 annual impairment test. As such, for our 2013 annual impairment test, we tested our indefinite-lived intangible assets utilizing the relief fromroyalty method to determine the estimated fair value for each indefinite-lived intangible asset. The relief from royalty method estimates our theoretical royaltysavings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, sales projections andterminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as theyrequire significant management judgment. Discount rates used are similar to the rates estimated by the weighted average cost of capital considering anydifferences in company-specific risk factors. Royalty rates are established by management based on comparable trademark licensing agreements in themarket. Operational management, considering industry and company-specific historical and projected data, develops growth rates and sales projectionsassociated with each indefinite-lived intangible asset. Terminal value rate determination follows common methodology of capturing the present value ofperpetual sales estimates beyond the last projected period assuming a constant weighted average cost of capital and long-term growth rates. Our Liz Claiborne and monet trade names are our only indefinite-lived intangibles assets. For our Liz Claiborne trade name, the estimated fair value of theasset exceeded the carrying value of the asset by an approximate 12% margin at the date of the most recent impairment test. For our monet trade name, as aresult of sales performance below our expectations, during the fourth quarter of 2013, we decided to reduce our product offerings under the monet trade name.As such, during the fourth44Table of Contentsquarter of 2013, we recorded an impairment charge of $9 million for our monet trade name in the line item Real estate and other, net in the ConsolidatedStatements of Operations.While we do not believe there is a reasonable likelihood that there will be a material change in our estimates or assumptions used to calculate indefinite-livedasset impairments, if actual results are not consistent with our current estimates and assumptions, we may be exposed to additional impairment charges,which could be material to our results of operations. Reserves and Valuation AllowancesInsurance ReservesWe are primarily self-insured for costs related to workers’ compensation and general liability claims. The liabilities represent our best estimate, using generallyaccepted actuarial reserving methods through which we record a provision for workers’ compensation and general liability risk based on historical experience,current claims data and independent actuarial best estimates, including incurred but not reported claims and projected loss development factors. Theseestimates are subject to the frequency, lag and severity of claims. We target this provision above the midpoint of the actuarial range, and total estimated claimliability amounts are discounted using a risk-free rate. We do not anticipate any significant change in loss trends, settlements or other costs that would cause asignificant fluctuation in net income. However, a 10% variance in the workers’ compensation and general liability reserves at year-end 2013 would haveaffected our net loss by approximately $23 million, which reflects no tax impact due to the valuation allowance that we began recording during the secondquarter of 2013.Valuation of Deferred Tax AssetsWe account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributableto differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely thannot such assets will be realized.In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of the realization of the deferred taxassets based on future events. Our accounting for deferred tax consequences represents our best estimate of those future events. If based on the weight ofavailable evidence, it is more likely than not (defined as a likelihood of more than 50%) the deferred tax assets will not be realized, we record a valuationallowance. The weight given to both positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such,it is generally difficult for positive evidence regarding projected future taxable income, exclusive of reversing taxable temporary differences, to outweighobjective negative evidence of recent losses. Cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome indetermining that a valuation allowance is not needed against deferred tax assets.This assessment is completed on a taxing jurisdiction basis and takes into account several types of evidence, including the following:•Nature, frequency, and severity of current and cumulative financial reporting losses. A pattern of recent losses is heavily weighted as a source ofnegative evidence. In certain circumstances, historical information may not be as relevant due to a change in circumstances.•Sources of future taxable income. Future reversals of existing temporary differences are heavily weighted sources of objectively verifiable positiveevidence. Projections of future taxable income, exclusive of reversing temporary differences, are a source of positive evidence only when theprojections are combined with a history of recent profits and can be reasonably estimated. Otherwise, these projections are considered inherentlysubjective and generally will not be sufficient to overcome negative evidence that includes cumulative losses in recent years, particularly if theprojected future taxable income is dependent on an anticipated turnaround to profitability that has not yet been achieved. In such cases, we generallygive these projections of future taxable income no weight for the purposes of our valuation allowance assessment.•Tax planning strategies. If necessary and available, tax-planning strategies would be implemented to accelerate taxable amounts to utilize expiring netoperating loss carryforwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavilyweighted.45Table of ContentsIn the second quarter, our net deferred tax position, exclusive of any valuation allowance, changed from a net deferred tax liability to a net deferred tax asset. Inour assessment of the need for a valuation allowance, we heavily weighted the negative evidence of cumulative losses in recent periods and the positive evidenceof future reversals of existing temporary differences. Although a sizable portion of our losses in recent years were the result of charges incurred forrestructuring and other special items, even without these charges we still would have incurred significant losses. Accordingly, we considered our pattern ofrecent losses to be relevant to our analysis. Considering this pattern of recent losses and the uncertainties associated with projected future taxable incomeexclusive of reversing temporary differences, we gave no weight to projections showing future U.S. taxable income for purposes of assessing the need for avaluation allowance. As a result of our assessment, we concluded that, beginning in the second quarter of 2013, our estimate of the realization of deferred taxassets would be based solely on future reversals of existing taxable temporary differences and tax planning strategies that we would make use of to acceleratetaxable income to utilize expiring carryforwards.Future book pre-tax losses will require additional valuation allowances to offset the deferred tax assets created. A sustained period of profitability is requiredbefore we would change our need for a valuation allowance against our net deferred tax assets.See Note 18 to the Consolidated Financial Statements for more information regarding income taxes and also Risk Factors, Item 1A.Environmental Reserves In establishing our reserves for liabilities associated with underground storage tanks, we maintain and periodically update an inventory listing of potentiallyimpacted sites. The estimated cost of remediation efforts is based on our historical experience, as well as industry and other published data. With respect toour former drugstore operations, we accessed extensive databases of environmental matters, including data from the Environmental Protection Agency, toestimate the cost of remediation. Our experience, as well as relevant data, was used to develop a range of potential liabilities, and a reserve was established atthe time of the sale of our drugstore business. The reserve is adjusted as payments are made or new information becomes known. In 2010, we lowered thereserve due to the affirmation of another responsible party to one of the known sites involving a warehouse facility and review of our actual experience over thepast several years. Reserves for asbestos removal are based on our known liabilities in connection with approved plans for store modernization, renovations ordispositions of store locations. We believe the established reserves, as adjusted, are adequate to cover estimated potential liabilities. PensionPension AccountingWe maintain a qualified funded defined benefit pension plan (Primary Pension Plan) and smaller non-qualified unfunded supplemental defined benefit plans.The determination of pension expense is the result of actuarial calculations that are based on important assumptions about pension assets and liabilities. Themost important of these are the rate of return on assets and the discount rate assumptions. These assumptions require significant judgment and a change inany one of them could have a material impact on pension expense reported in our Consolidated Statements of Operations and Consolidated Statements ofComprehensive Income/(Loss), as well as in the assets, liability and equity sections of the Consolidated Balance Sheets. 46Table of ContentsThe following table reflects our rate of return and discount rate assumptions: 2013 2012 2011 Expected return on plan assets7.0% 7.5% 7.5% Discount rate for pension expense4.19% 4.82%(1) 5.65%(2) Discount rate for pension obligation4.89% 4.19% 4.82% (1)The discount rate used was revised to 4.25% on the remeasurement date of September 30, 2012 as a result of a curtailment.(2)The discount rate used for the Supplemental Retirement Program and Benefit Restoration Plan was revised to 5.06% on the remeasurement date ofOctober 15, 2011 as a result of the VERP. Return on Plan Assets and Impact on EarningsFor the Primary Pension Plan, we apply our expected return on plan assets using fair market value as of the annual measurement date. The fair market valuemethod results in greater volatility to our pension expense than the more commonly used calculated value method (referred to as smoothing of assets). OurPrimary Pension Plan asset base is well diversified with an asset allocation mix of equities (U.S., non-U.S. and private), fixed income (investment-grade andhigh-yield), real estate (private and public) and alternative asset classes. The expected return on plan assets is based on the plan’s long-term asset allocation policy, historical returns for plan assets and overall capital market returns,taking into account current and expected market conditions. In 2012 and 2011, the expected return on plan assets was 7.5%, which was reduced from the2010 rate of 8.4% to align our expected rate of return with our new asset allocation targets. The expected return assumption for 2013 and 2014 is furtherreduced from 7.5% to 7.0% given our new asset allocation targets and updated expected capital markets return assumptions. Discount RateThe discount rate used to measure pension expense each year is the rate as of the beginning of the year (i.e., the prior measurement date). In 2011, the discountrate used was based on an externally published yield curve determined by the plan’s actuary. The yield curve is a hypothetical AA yield curve represented by aseries of bonds maturing from six months to 30 years, designed to match the corresponding pension benefit cash payments to retirees. Beginning with theremeasurement on September 30, 2012, the discount rate used, determined by the plan actuary, was based on a hypothetical AA yield curve represented by aseries of bonds maturing over the next 30 years, designed to match the corresponding pension benefit cash payments to retirees. For 2013, the discount rate to measure pension expense was 4.19% compared to 4.82% in 2012. The discount rate to measure the pension obligations increasedto 4.89% as of February 1, 2014 from 4.19% as of February 2, 2013. SensitivityFor 2013, the sensitivity analysis was calculated using no tax impact due to the valuation allowance that we began recording during the second quarter of 2013.The sensitivity of the pension expense to a plus or minus one-half of one percent of expected return on assets is a decrease or increase in expense ofapproximately $0.08 per share. An increase or decrease in the discount rate of one-half of one percent would decrease or increase the expense by approximately$0.08 per share. Pension FundingFunding requirements for our Primary Pension Plan are determined under Employee Retirement Income Security Act of 1974 (ERISA) rules, as amended bythe Pension Protection Act of 2006. As a result of the funded status of the Primary Pension Plan, we are not required to make cash contributions in 2014.Recent Accounting Pronouncements Refer to Note 3 to the Consolidated Financial Statements.Cautionary Statement Regarding Forward-Looking InformationThis Annual Report on Form 10-K contains forward-looking statements made 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-lookingstatements, which include, but are not limited to, statements regarding sales trends, gross margin, liquidity and cost savings. Forward-looking statements arebased only on the Company's current assumptions and views of future events and financial performance. They are subject to known and unknown risks and47Table of Contentsuncertainties, many of which are outside of the Company's control, that may cause the Company's actual results to be materially different from planned orexpected results. Those risks and uncertainties include, but are not limited to, general economic conditions, including inflation, recession, unemploymentlevels, consumer confidence and spending patterns, credit availability and debt levels, changes in store traffic trends, maintaining an appropriate mix andlevel of inventory, the cost of goods, more stringent or costly payment terms and/or the decision by a significant number of vendors not to sell us merchandiseon a timely basis or at all, trade restrictions, the ability to monetize non-core assets on acceptable terms, the ability to implement our turnaround strategy,customer acceptance of our strategies, our ability to attract, motivate and retain key executives and other associates, the impact of cost reduction initiatives, ourability to generate or maintain liquidity, implementation of new systems and platforms, changes in tariff, freight and shipping rates, changes in the cost offuel and other energy and transportation costs, increases in wage and benefit costs, competition and retail industry consolidations, interest rate fluctuations,dollar and other currency valuations, the impact of weather conditions, risks associated with war, an act of terrorism or pandemic, the ability of the federalgovernment to fund and conduct its operations, a systems failure and/or security breach that results in the theft, transfer or unauthorized disclosure ofcustomer, employee or Company information, legal and regulatory proceedings, significant changes in discount rates, actual investment return on pensionassets and other factors related to our qualified pension plan, the volatility of our stock price and our ability to use net operating loss carryforwards to offsetfuture taxable income for U.S. federal income tax purposes. There can be no assurances that the Company will achieve expected results, and actual resultsmay be materially less than expectations. While we believe that our assumptions are reasonable, we caution that it is impossible to predict the degree to whichany such factors could cause actual results to differ materially from predicted results. For additional discussion on risks and uncertainties, see Item 1A, RiskFactors. We intend the forward-looking statements in this Annual Report on Form 10-K to speak only as of the date of this report and do not undertake toupdate or revise these projections as more information becomes available.Item 7A. Quantitative and Qualitative Disclosures about Market RiskWe maintain a majority of our cash and cash equivalents in financial instruments with original maturities of three months or less. Such investments aresubject to interest rate risk and may have a small decline in value if interest rates increase. Since the financial instruments are of short duration, a change of100 basis points in interest rates would not have a material effect on our financial condition.All of our outstanding notes and debentures as of February 1, 2014 are at fixed interest rates and would not be affected by interest rate changes. Borrowingsunder our multi-year revolving credit facility, to the extent that fluctuating rate loans are used, would be affected by interest rate changes. In addition, in May2013, we entered into a $2.25 billion senior secured term loan facility (2013 Term Loan Facility), which bears interest at a rate of LIBOR plus 5.0%. As ofFebruary 1, 2014, we had $650 million of borrowings outstanding under the revolving credit facility and $2.239 billion outstanding under the 2013 TermLoan Facility, which are both subject to fluctuating interest rates. Accordingly, a 100 basis point increase in interest rates would result in additional annualinterest expense of $7 million under the revolving credit facility and $22 million under the 2013 Term Loan Facility. The fair value of long-term debt is estimated by obtaining quotes from brokers or is based on current rates offered for similar debt. As of February 1, 2014,long-term debt had a carrying value of $4.9 billion and a fair value of $4.2 billion. As of February 2, 2013, long-term debt, including current maturities, hada carrying value of $2.9 billion and a fair value of $2.5 billion. The effects of changes in the U.S. equity and bond markets serve to increase or decrease the value of assets in our Primary Pension Plan. We seek to manageexposure to adverse equity and bond returns by maintaining diversified investment portfolios and utilizing professional investment managers.Item 8. Financial Statements and Supplementary Data See the Index to Consolidated Financial Statements on Page 56. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 48Table of ContentsItem 9A. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures The management of our company, under the supervision and with the participation of our principal executive officer and principal financial officer, conductedan evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, ourprincipal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information requiredto be disclosed by us in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to management, including our principalexecutive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.Management’s Report on Internal Control over Financial Reporting The management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in ExchangeAct Rules 13a-15(f) and 15d-15(f). The management of our Company has assessed the effectiveness of our Company’s internal control over financialreporting as of February 1, 2014. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control–Integrated Framework (1992). Based on its assessment, the management of our Company believesthat, as of February 1, 2014, our Company’s internal control over financial reporting is effective based on those criteria. The Company’s independent registered public accounting firm, KPMG LLP, has audited the financial statements included in this Annual Report on Form 10-K and has issued an audit report on the effectiveness of our Company’s internal control over financial reporting. Their report follows. There were no changes in our Company’s internal control over financial reporting during the fourth quarter ended February 1, 2014, that have materiallyaffected, or are reasonably likely to materially affect, our Company’s internal control over financial reporting.49Table of ContentsReport of Independent Registered Public Accounting Firm The Board of Directors and StockholdersJ. C. Penney Company, Inc.: We have audited J. C. Penney Company, Inc.’s internal control over financial reporting as of February 1, 2014, based on criteria established in InternalControl–Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). J. C. PenneyCompany, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, J. C. Penney Company, Inc. maintained, in all material respects, effective internal control over financial reporting as of February 1, 2014,based on criteria established in Internal Control–Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the TreadwayCommission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof J. C. Penney Company, Inc. and subsidiaries as of February 1, 2014 and February 2, 2013, and the related consolidated statements of operations,comprehensive income/(loss), stockholders’ equity and cash flows for each of the years in the three-year period ended February 1, 2014, and our report datedMarch 21, 2014 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Dallas, TexasMarch 21, 201450Table of ContentsItem 9B. Other InformationNone. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by Item 10 with respect to executive officers is included within Item 1 in Part I of this Annual Report on Form 10-K under the caption“Executive Officers of the Registrant.”The information required by Item 10 with respect to directors, audit committee, audit committee financial experts and Section 16(a) beneficial ownershipreporting compliance is included under the captions “Board Committees–Audit Committee,” “Section 16(a) Beneficial Ownership Reporting Compliance,”and “Election of Directors” in our Company’s definitive proxy statement for 2014, which will be filed with the Securities and Exchange Commission pursuantto Regulation 14A and is incorporated herein by reference. Code of Ethics, Corporate Governance Guidelines and Committee Charters Our Company has adopted a code of ethics for officers and employees, which applies to, among others, our Company’s principal executive officer, principalfinancial officer, and principal accounting officer, and which is known as the “Statement of Business Ethics.” We have also adopted certain ethical principlesand policies for our directors, which are set forth in Article V of our Corporate Governance Guidelines. The Statement of Business Ethics and CorporateGovernance Guidelines are available on our website at www.jcpenney.com. Additionally, we will provide copies of these documents without charge uponrequest made to: J. C. Penney Company, Inc.Office of Investor Relations6501 Legacy DrivePlano, Texas 75024(Telephone 972-431-5500) Our Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to or waiver of any provision of theStatement of Business Ethics that applies to any officer of our Company by posting such information on our website at www.jcpenney.com. Copies of our Company’s Audit Committee, Human Resources and Compensation Committee, the Committee of the Whole and Corporate GovernanceCommittee Charters are also available on our website at www.jcpenney.com. Copies of these documents will likewise be provided without charge upon requestmade to the address or telephone number provided above.Item 11. Executive Compensation The information required by Item 11 is included under the captions “Compensation Committee Interlocks and Insider Participation,” “CompensationDiscussion and Analysis,” “Report of the Human Resources and Compensation Committee,” “Summary Compensation Table,” “Grants of Plan-BasedAwards for Fiscal 2013,” “Outstanding Equity Awards at Fiscal Year-End 2013,” “Option Exercises and Stock Vested for Fiscal 2013,” “Pension Benefits,”“Nonqualified Deferred Compensation for Fiscal 2013,” “Potential Payments and Benefits on Termination of Employment,” and “Director Compensation forFiscal 2013” in our Company’s definitive proxy statement for 2014, which will be filed with the Securities and Exchange Commission pursuant to Regulation14A and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by Item 12 with respect to beneficial ownership of our Company’s common stock is included under the caption “BeneficialOwnership of Common Stock” and with respect to equity compensation plans is included under the caption “Equity Compensation Plan(s) Information” inour Company’s definitive proxy statement for 2014, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and isincorporated herein by reference.51Table of ContentsItem 13. Certain Relationships and Related Transactions, and Director Independence The information required by Item 13 is included under the captions “Policies and Procedures with Respect to Related Person Transactions” and “BoardIndependence” in our Company’s definitive proxy statement for 2014, which will be filed with the Securities and Exchange Commission pursuant toRegulation 14A and is incorporated herein by reference.Item 14. Principal Accounting Fees and Services The information required by Item 14 is included under the captions “Audit and Other Fees” and “Audit Committee’s Pre-Approval Policies and Procedures” inour Company’s definitive proxy statement for 2014, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and isincorporated herein by reference.52Table of ContentsPART IV Item 15. Exhibits, Financial Statement Schedules (a) Documents filed as part of this report: 1. Consolidated Financial Statements: The Consolidated Financial Statements of J. C. Penney Company, Inc. and subsidiaries are listed in the accompanying "Index toConsolidated Financial Statements" on page 56.2. Financial Statement Schedules: Schedules have been omitted as they are inapplicable or not required under the rules, or the information has been submitted in theConsolidated Financial Statements and related financial information contained otherwise in this Annual Report on Form 10-K. 3. Exhibits: See separate Exhibit Index beginning on page 102. Each management contract or compensatory plan or arrangement required to be filed as anexhibit to this Annual Report on Form 10-K is specifically identified in the separate Exhibit Index beginning on page102 and filed with orincorporated by reference in this report.(b) See separate Exhibit Index beginning on page 102. (c) Other Financial Statement Schedules. None. 53Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized. J. C. PENNEY COMPANY, INC. (Registrant) By /s/ Kenneth H. Hannah Kenneth H. Hannah Executive Vice President and Chief Financial Officer Date:March 21, 2014 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated. 54Table of ContentsSignatures Title Date Myron E. Ullman, III* Chief Executive Officer(principal executive officer);Director March 21, 2014Myron E. Ullman, III Kenneth H. Hannah* Executive Vice President andChief Financial Officer(principal financial officer) March 21, 2014Kenneth H. Hannah /s/ Dennis P. Miller Senior Vice President andController (principalaccounting officer) March 21, 2014Dennis P. Miller Thomas J. Engibous* Chairman of the Board;Director March 21, 2014Thomas J. Engibous Colleen C. Barrett* Director March 21, 2014Colleen C. Barrett Kent B. Foster* Director March 21, 2014Kent B. Foster Leonard H. Roberts* Director March 21, 2014Leonard H. Roberts Stephen I. Sadove* Director March 21, 2014Stephen I. Sadove Javier G. Teruel* Director March 21, 2014Javier G. Teruel R. Gerald Turner* Director March 21, 2014R. Gerald Turner Ronald W. Tysoe* Director March 21, 2014Ronald W. Tysoe Mary Beth West* Director March 21, 2014Mary Beth West *By: /s/ Dennis P. Miller Dennis P. Miller Attorney-in-fact55Table of ContentsJ. C. PENNEY COMPANY, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm57Consolidated Statements of Operations for the Fiscal Years Ended February 1, 2014, February 2, 2013 and January 28, 201258Consolidated Statements of Comprehensive Income/(Loss) for the Fiscal Years Ended February 1, 2014, February 2, 2013 and January 28,201259Consolidated Balance Sheets as of February 1, 2014 and February 2, 201360Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended February 1, 2014, February 2, 2013 and January 28, 201261Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1, 2014, February 2, 2013 and January 28, 201262Notes to Consolidated Financial Statements 1. Basis of Presentation and Consolidation642. Significant Accounting Policies643. Effect of New Accounting Standards684. Acquisition685. Earnings/(Loss) per Share696. Other Assets697. Other Accounts Payable and Accrued Expenses708. Other Liabilities709. Fair Value Disclosures7010. Credit Facility7211. Long-Term Debt7312. Stockholders’ Equity7513. Stock-Based Compensation7814. Leases8015. Retirement Benefit Plans8116. Restructuring and Management Transition9317. Real Estate and Other, Net9518. Income Taxes9619. Supplemental Cash Flow Information9920. Litigation, Other Contingencies and Guarantees9921. Quarterly Results of Operations (Unaudited)10056Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders J. C. Penney Company, Inc.: We have audited the accompanying consolidated balance sheets of J. C. Penney Company, Inc. and subsidiaries as of February 1, 2014 and February 2,2013, and the related consolidated statements of operations, comprehensive income/(loss), stockholders’ equity and cash flows for each of the years in thethree-year period ended February 1, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility isto express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of J. C. Penney Company,Inc. and subsidiaries as of February 1, 2014 and February 2, 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended February 1, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), J. C. Penney Company, Inc.’ sinternal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control–Integrated Framework (1992) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 21, 2014 expressed an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP Dallas, Texas March 21, 2014 57Table of ContentsCONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share data) 2013 2012 2011Total net sales $11,859 $12,985 $17,260Cost of goods sold 8,367 8,919 11,042Gross margin 3,492 4,066 6,218Operating expenses/(income): Selling, general and administrative (SG&A) 4,114 4,506 5,109Pension 137 353 121Depreciation and amortization 601 543 518Real estate and other, net (155) (324) 21Restructuring and management transition 215 298 451Total operating expenses 4,912 5,376 6,220Operating income/(loss) (1,420) (1,310) (2)Loss on extinguishment of debt 114 — —Net interest expense 352 226 227Income/(loss) before income taxes (1,886) (1,536) (229)Income tax expense/(benefit) (498) (551) (77)Net income/(loss) $(1,388) $(985) $(152)Earnings/(loss) per share: Basic $(5.57) $(4.49) $(0.70)Diluted (5.57) (4.49) (0.70)Weighted average shares – basic 249.3 219.2 217.4Weighted average shares – diluted 249.3 219.2 217.4 See the accompanying notes to the Consolidated Financial Statements.58Table of ContentsCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) ($ in millions) 2013 2012 2011Net income/(loss) $(1,388) $(985) $(152)Other comprehensive income/(loss), net of tax: Real estate investment trusts (REITs) Unrealized gain/(loss) (1) 36 53Reclassification adjustment for realized (gain)/loss (16) (184) —Retirement benefit plans Net actuarial gain/(loss) arising during the period 404 37 (534)Prior service credit/(cost) arising during the period (4) (26) (3)Reclassification of net prior service (credit)/cost from a curtailment — (3) 1Reclassification of net actuarial (gain)/loss from a settlement — 91 —Reclassification for amortization of net actuarial (gain)/loss 108 148 94Reclassification for amortization of prior service (credit)/cost (1) (8) (15)Total other comprehensive income/(loss), net of tax 490 91 (404)Total comprehensive income/(loss), net of tax $(898) $(894) $(556) See the accompanying notes to the Consolidated Financial Statements.59Table of ContentsCONSOLIDATED BALANCE SHEETS(In millions, except per share data) 2013 2012Assets Current assets: Cash in banks and in transit $113 $121Cash short-term investments 1,402 809Cash and cash equivalents 1,515 930Merchandise inventory 2,935 2,341Income tax receivable 4 57Deferred taxes 193 106Prepaid expenses and other 186 249Total current assets 4,833 3,683Property and equipment 5,619 5,353Prepaid pension 663 —Other assets 686 745Total Assets $11,801 $9,781Liabilities and Stockholders’ Equity Current liabilities: Merchandise accounts payable $948 $1,162Other accounts payable and accrued expenses 1,198 1,380Short-term borrowings 650 —Current portion of capital leases and note payable 27 26Current maturities of long-term debt 23 —Total current liabilities 2,846 2,568Long-term capital leases and note payable 62 88Long-term debt 4,839 2,868Deferred taxes 335 388Other liabilities 632 698Total Liabilities 8,714 6,610Stockholders' Equity Common stock(1) 152 110Additional paid-in capital 4,571 3,799Reinvested earnings/(accumulated deficit) (1,008) 380Accumulated other comprehensive income/(loss) (628) (1,118)Total Stockholders’ Equity 3,087 3,171Total Liabilities and Stockholders’ Equity $11,801 $9,781(1)1,250 million shares of common stock are authorized with a par value of $0.50 per share. The total shares issued and outstanding were 304.6 millionand 219.3 million as of February 1, 2014 and February 2, 2013, respectively.See the accompanying notes to the Consolidated Financial Statements.60Table of ContentsCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in millions) Number ofCommonShares CommonStock AdditionalPaid-inCapital ReinvestedEarnings/(Loss) Accumulated OtherComprehensiveIncome/(Loss) Total Stockholders'EquityJanuary 29, 2011 236.7 $118 $3,925 $2,222 $(805) $5,460Net income/(loss) — — — (152) — (152)Other comprehensive income/(loss) — — — — (404) (404)Dividends declared, common — — — (174) — (174)Stock warrant issued — — 50 — — 50Common stock repurchased and retired (24.4) (12) (404) (484) — (900)Stock-based compensation 3.6 2 128 — — 130January 28, 2012 215.9 $108 $3,699 $1,412 $(1,209) $4,010Net income/(loss) — — — (985) — (985)Other comprehensive income/(loss) — — — — 91 91Dividends declared, common — — — (47) — (47)Stock-based compensation 3.4 2 100 — — 102February 2, 2013 219.3 $110 $3,799 $380 $(1,118) $3,171Net income/(loss) — — — (1,388) — (1,388)Other comprehensive income/(loss) — — — — 490 490Common stock issued 84.0 42 744 — — 786Stock-based compensation 1.3 — 28 — — 28February 1, 2014 304.6 $152 $4,571 $(1,008) $(628) $3,087See the accompanying notes to the Consolidated Financial Statements.61Table of ContentsCONSOLIDATED STATEMENTS OF CASH FLOWS($ in millions)2013 2012 2011Cash flows from operating activities Net income/(loss)$(1,388) $(985) $(152)Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operatingactivities: Restructuring and management transition132 121 314Asset impairments and other charges30 117 67Net gain on sale or redemption of non-operating assets(132) (397) —Net gain on sale of operating assets(17) — (6)Loss on extinguishment of debt114 — —Depreciation and amortization601 543 518Benefit plans70 272 55Stock-based compensation28 50 46Excess tax benefits from stock-based compensation— (12) (10)Other comprehensive income tax benefits(303) — —Deferred taxes(164) (467) (153)Change in cash from: Inventory(594) 575 297Prepaid expenses and other assets74 (5) (67)Merchandise accounts payable(214) 140 (111)Current income taxes50 117 (15)Accrued expenses and other(101) (79) 37Net cash provided by/(used in) operating activities(1,814) (10) 820Cash flows from investing activities Capital expenditures(951) (810) (634)Proceeds from sale or redemption of non-operating assets143 526 —Acquisition— (9) (268)Proceeds from sale of operating assets19 — 15Cost investment, net— — (36)Proceeds from joint venture cash distribution— — 53Net cash provided by/(used in) investing activities(789) (293) (870)Cash flows from financing activities Proceeds from short-term borrowings850 — —Payment on short-term borrowings(200) — —Net proceeds from issuance of long-term debt2,180 — —Premium on early retirement of debt(110) — —Payments of capital leases and note payable(29) (20) —Payments of long-term debt(256) (230) —Financing costs(31) (4) (20)Net proceeds from common stock issued786 — —Dividends paid, common— (86) (178)Stock repurchase program— — (900)Proceeds from issuance of stock warrant— — 50Proceeds from stock options exercised7 71 18Excess tax benefits from stock-based compensation— 12 10Tax withholding payments for vested restricted stock(9) (17) (45)62Table of ContentsNet cash provided by/(used in) financing activities3,188 (274) (1,065)Net increase/(decrease) in cash and cash equivalents585 (577) (1,115)Cash and cash equivalents at beginning of period930 1,507 2,622Cash and cash equivalents at end of period$1,515 $930 $1,507See the accompanying notes to the Consolidated Financial Statements. 63Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Basis of Presentation and Consolidation Nature of Operations Our Company was founded by James Cash Penney in 1902 and has grown to be a major national retailer, operating 1,094 department stores in 49 states andPuerto Rico, as well as through our Internet website at jcpenney.com. We sell family apparel and footwear, accessories, fine and fashion jewelry, beautyproducts through Sephora inside JCPenney, and home furnishings. In addition, our department stores provide services, such as styling salon, optical, portraitphotography and custom decorating, to customers.Basis of Presentation and ConsolidationThe Consolidated Financial Statements present the results of J. C. Penney Company, Inc. and our subsidiaries (the Company or JCPenney). All significantintercompany transactions and balances have been eliminated in consolidation. We are 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 directsubsidiaries other than JCP, and has no independent assets or operations. The Company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP’s outstanding debt securities. We guaranteecertain of JCP’s outstanding debt securities fully and unconditionally. Fiscal YearOur fiscal year ends on the Saturday closest to January 31. Unless otherwise stated, references to years in this report relate to fiscal years rather than tocalendar years. Fiscal Year Ended Weeks2013 February 1, 2014 522012 February 2, 2013 532011 January 28, 2012 52 Use of Estimates and AssumptionsThe preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America (GAAP), requires us tomake assumptions and use estimates that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to: inventory valuation underthe retail method, specifically permanent reductions to retail prices (markdowns), permanent devaluation of inventory (markdown accruals) and adjustmentsfor shortages (shrinkage); valuation of long-lived assets and indefinite-lived intangible assets for impairments; reserves for closed stores, workers’compensation and general liability (insurance), environmental contingencies, income taxes and litigation; and pension and other post retirement benefitsaccounting. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts. ReclassificationsCertain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected ournet income/(loss) in any period. 2. Significant Accounting Policies Merchandise and Services Revenue Recognition Total net sales, which exclude sales taxes and are net of estimated returns, are recorded at the point of sale when payment is received and the customer takespossession of the merchandise in department stores, at the point of shipment of merchandise ordered through the Internet, or, in the case of services, at the timethe customer receives the benefit of the service, such as salon, portrait, optical or custom decorating. Commissions earned on sales generated by licenseddepartments are included as a component of total net sales. Shipping and handling fees charged to customers are also included in total net sales with64Table of Contentscorresponding costs recorded as cost of goods sold. We provide for estimated future returns based primarily on historical return rates and sales levels. Gift Card Revenue RecognitionAt the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the card. The liability remains recorded untilthe earlier of redemption, escheatment or 60 months. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise. Weescheat a portion of unredeemed gift cards according to Delaware escheatment requirements that govern remittance of the cost of the merchandise portion ofunredeemed gift cards over five years old. After reflecting the amount escheated, any remaining liability (referred to as breakage) is relieved and recognized as areduction of SG&A expenses as an offset to the costs of administering the gift card program. Though our gift cards do not expire, it is our historical experiencethat the likelihood of redemption after 60 months is remote. The liability for gift cards is recorded in other accounts payable and accrued expenses on theConsolidated Balance Sheets. Customer Loyalty ProgramCustomers who spend a certain amount with us using our private label card or registered third party credit cards receive JCP Rewards® certificates,redeemable for goods or services in our stores the following two months. We estimate the net cost of the rewards that will be redeemed and record this as cost ofgoods sold as rewards points are accumulated. Other administrative costs of the loyalty program are recorded in SG&A expenses as incurred. Cost of Goods SoldCost of goods sold includes all costs directly related to bringing merchandise to its final selling destination. These costs include the cost of the merchandise(net of discounts or allowances earned), sourcing and procurement costs, buying and brand development costs, including buyers’ salaries and relatedexpenses, royalties and design fees, freight costs, warehouse operating expenses, merchandise examination, inspection and testing, store merchandisedistribution center expenses, including rent, and shipping and handling costs incurred on sales via the Internet. Vendor AllowancesWe receive vendor support in the form of cash payments or allowances for a variety of reimbursements such as cooperative advertising, markdowns, vendorshipping and packaging compliance, defective merchandise and the purchase of vendor specific fixtures. We have agreements in place with each vendor settingforth the specific conditions for each allowance or payment. Depending on the arrangement, we either recognize the allowance as a reduction of current costs ordefer the payment over the period the related merchandise is sold. If the payment is a reimbursement for costs incurred, it is generally offset against thoserelated costs; otherwise, it is treated as a reduction to the cost of merchandise. Markdown reimbursements related to merchandise that has been sold are negotiated and documented by our buying teams and are credited directly to cost ofgoods sold in the period received. Vendor allowances received prior to merchandise being sold are deferred and recognized as a reduction of inventory andcredited to cost of goods sold based on an inventory turnover rate. Vendor compliance charges reimburse us for incremental merchandise handling expenses incurred due to a vendor’s failure to comply with our establishedshipping or merchandise preparation requirements. Vendor compliance charges are recorded as a reduction of merchandise handling costs. Selling, General and Administrative ExpensesSG&A expenses include the following costs, except as related to merchandise buying, sourcing, warehousing or distribution activities: salaries, marketingcosts, occupancy and rent expense, utilities and maintenance, pre-opening expenses, costs related to information technology, administrative costs related to ourhome office and district and regional operations, real and personal property and other taxes (excluding income taxes) and credit card fees. AdvertisingAdvertising costs, which include newspaper, television, Internet search marketing, radio and other media advertising, are expensed either as incurred or thefirst time the advertisement occurs. For cooperative advertising programs offered by national brands that require proof-of-advertising to be provided to thevendor to support the reimbursement of the incurred cost, we offset the allowances against the related advertising expense. Programs that do not require proof-of-advertising are monitored to ensure that the allowance provided by each vendor is a reimbursement of costs incurred to advertise for that particular vendor’slabel. Total advertising costs, net of cooperative advertising vendor reimbursements of $4 million, $2 million and $118 million for 2013, 2012 and 2011,respectively, were $919 million, $933 million and $1,039 million, respectively. 65Table of ContentsIncome TaxesWe account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributableto differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely thannot such assets will be realized. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense in our ConsolidatedStatements of Operations. Earnings/(Loss) per ShareBasic earnings/(loss) per share (EPS) is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during theperiod. Diluted EPS is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during the period plus thenumber of additional common shares that would have been outstanding if the potentially dilutive shares had been issued. Potentially dilutive shares includestock options, unvested restricted stock units and awards and a warrant outstanding during the period, using the treasury stock method. Potentially dilutiveshares are excluded from the computations of diluted EPS if their effect would be anti-dilutive. Cash and Cash EquivalentsCash and cash equivalents include cash short-term investments that are highly liquid investments with original maturities of three months or less. Cash short-term investments consist primarily of short-term U.S. Treasury money market funds and a portfolio of highly rated bank deposits and are stated at cost,which approximates fair market value due to the short-term maturity. Cash in banks and in transit also include credit card sales transactions that are settledearly in the following period. Merchandise InventoryInventories are valued at the lower of cost (using the first-in, first-out or “FIFO” method) or market. For department stores, regional warehouses and storedistribution centers, we value inventories using the retail method. Under the retail method, retail values are converted to a cost basis by applying specificaverage cost factors to groupings of merchandise. For Internet, we use standard cost, representing average vendor cost, to determine lower of cost or market. Physical inventories are taken on a staggered basis at least once per year at all store and supply chain locations, inventory records are adjusted to reflect actualinventory counts and any resulting shortage (shrinkage) is recognized. Following inventory counts, shrinkage is estimated as a percent of sales, based on themost recent physical inventory, in combination with current events and historical experience. We have loss prevention programs and policies in place that areintended to mitigate shrinkage. Property and Equipment, Net EstimatedUseful Lives ($ in millions) (Years) 2013 2012Land N/A $309 $310Buildings 50 4,951 4,641Furniture and equipment 3-20 2,356 2,132Leasehold improvements 1,318 1,150Accumulated depreciation (3,315) (2,880)Property and equipment, net $5,619 $5,353Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed primarily by using the straight-line method over the estimateduseful lives of the related assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the term of thelease, including renewals determined to be reasonably assured. We expense routine maintenance and repairs when incurred. We capitalize major replacements and improvements. We remove the cost of assets sold or retiredand the related accumulated depreciation or amortization from the accounts and include any resulting gain or loss in net income/(loss).66Table of Contents We recognize a liability for the fair value of our conditional asset retirement obligations, which are primarily related to asbestos removal, when incurred if theliability’s fair value can be reasonably estimated. Capitalized Software CostsWe capitalize costs associated with the acquisition or development of major software for internal use in other assets in our Consolidated Balance Sheets andamortize the asset over the expected useful life of the software, generally between three and seven years. We only capitalize subsequent additions, modificationsor upgrades to internal-use software to the extent that such changes allow the software to perform a task it previously did not perform. We expense softwaremaintenance and training costs as incurred.Impairment of Long-Lived and Indefinite-Lived AssetsWe evaluate long-lived assets such as store property and equipment and other corporate assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of those assets may not be recoverable. Factors considered important that could trigger an impairment review include, but arenot limited to, significant underperformance relative to historical or projected future operating results and significant changes in the manner of use of the assetsor our overall business strategies. Potential impairment exists if the estimated undiscounted cash flows expected to result from the use of the asset plus any netproceeds expected from disposition of the asset are less than the carrying value of the asset. The amount of the impairment loss represents the excess of thecarrying value of the asset over its fair value and is included in Real estate and other, net on the Consolidated Statements of Operations. We estimate fair valuebased on either a projected discounted cash flow method using a discount rate that is considered commensurate with the risk inherent in our current businessmodel or appraised value, as appropriate. We also take other factors into consideration in estimating the fair value of our stores, such as local marketconditions, operating environment, mall performance and other trends. We assess the recoverability of indefinite-lived intangible assets at least annually during the fourth quarter of our fiscal year or whenever events or changes incircumstances indicate that the carrying amount of the indefinite-lived intangible asset may not be fully recoverable. Examples of a change in events orcircumstances include, but are not limited to, a decrease in the market price of the asset, a history of cash flow losses related to the use of the asset or asignificant adverse change in the extent or manner in which an asset is being used. During the fourth quarter of 2012, we early adopted the FinancialAccounting Standards Board’s (FASB) new guidance on impairment testing of indefinite-lived intangible assets. Under the new guidance, we have the optionto first perform a qualitative assessment in our evaluation of our indefinite-lived intangible assets in order to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired. When a quantitative analysis is performed, we test our indefinite-lived intangible assets utilizing therelief from royalty method to determine the estimated fair value for each indefinite-lived intangible asset. The relief from royalty method estimates ourtheoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates,sales projections and terminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptibleto change as they require significant management judgment. Discount rates used are similar to the rates estimated by the weighted average cost of capitalconsidering any differences in company-specific risk factors. Royalty rates are established by management based on comparable trademark licensingagreements in the market. Operational management, considering industry and company-specific historical and projected data, develops growth rates and salesprojections associated with each indefinite-lived intangible asset. Terminal value rate determination follows common methodology of capturing the present valueof perpetual sales estimates beyond the last projected period assuming a constant weighted average cost of capital and low long-term growth rates. LeasesWe use a consistent lease term when calculating amortization of leasehold improvements, determining straight-line rent expense and determining classificationof leases as either operating or capital. For purposes of recognizing incentives, premiums, rent holidays and minimum rental expenses on a straight-line basisover the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we take control of the property. Renewaloptions determined to be reasonably assured are also included in the lease term. Some leases require additional payments based on sales and are recorded inrent expense when the contingent rent is probable. Some of our lease agreements contain developer/tenant allowances. Upon receipt of such allowances, we record a deferred rent liability in other liabilities on theConsolidated Balance Sheets. The allowances are then amortized on a straight-line basis over the remaining terms of the corresponding leases as a reduction ofrent expense. Exit or Disposal Activity CostsCosts associated with exit or disposal activities are recorded at their fair values when a liability has been incurred. Reserves for operating leases are establishedat the time of closure for the present value of any remaining operating lease obligations67Table of Contents(PVOL), net of estimated sublease income. Severance is recorded over the service period required to be rendered in order to receive the termination benefits or, ifemployees will not be retained to render future service, a reserve is established when communication has occurred to the affected employees. Other exit costs areaccrued either at the point of decision or the communication date, depending on the nature of the item. Retirement-Related BenefitsWe recognize the funded status – the difference between the fair value of plan assets and the plan’s benefit obligation – of our defined benefit pension andpostretirement plans directly on the Consolidated Balance Sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as aliability. We adjust other comprehensive income/(loss) to reflect prior service cost or credits and actuarial gain or loss amounts arising during the period andreclassification adjustments for amounts being recognized as components of net periodic pension/postretirement cost, net of tax. Other comprehensiveincome/(loss) is amortized over the average remaining service period, a period of about eight years for the primary plan. We measure the plan assets and obligations annually at the adopted measurement date of January 31 to determine pension expense for the subsequent year. Thefactors and assumptions affecting the measurement are the characteristics of the population and salary increases, with the most important being the expectedreturn on plan assets and the discount rate for the pension obligation. We use actuarial calculations for the assumptions, which require significant judgment. Stock-Based CompensationWe record compensation expense for time-vested awards on a straight-line basis over the associates’ service period, to the earlier of the retirement eligibilitydate, if the grant contains provisions such that the award becomes fully vested upon retirement, or the stated vesting period (the non-substantive vesting periodapproach).3. Effect of New Accounting StandardsIn July 2013, the FASB issued Accounting Standards Update (ASU) 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefitwhen a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. This update provides that an entity’s unrecognized tax benefit, or a portionof its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, asimilar tax loss, or a tax credit carryforward, with one exception. That exception states that, to the extent a net operating loss carryforward, a similar tax loss,or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that wouldresult from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend touse, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not becombined with deferred tax assets. This update applies prospectively to all entities that have unrecognized tax benefits when a net operating loss carryforward,a similar tax loss, or a tax credit carryforward exists at the reporting date. Retrospective application is also permitted. This update is effective for annualperiods, and interim periods within those years, beginning after December 15, 2013. We do not anticipate the adoption will have a material impact on ourconsolidated results operations, cash flows or financial position.4. AcquisitionOn November 2, 2011, we completed an acquisition, pursuant to the asset purchase agreement dated October 12, 2011 (Purchase Agreement), to acquire theworldwide rights for the Liz Claiborne® family of trademarks and related intellectual property, as well as the U.S. and Puerto Rico rights for the monet®trademarks and related intellectual property. On February 27, 2012, we acquired the right to source and sell Liz Claiborne branded shoes. We have been theprimary exclusive licensee for all Liz Claiborne and Claiborne branded merchandise in the U.S. and Puerto Rico since August 2010 under an original licenseagreement dated October 5, 2009. As a result of these acquisitions, we permanently added a number of well-established trademarks to our private andexclusive brands.We allocated the purchase price of the acquisitions to identifiable intangible assets based on their estimated fair values. Intangible assets were valued using therelief from royalty and discounted cash flow methodologies which are considered Level 3 fair value measurements. The relief from royalty method estimatesour theoretical royalty savings from ownership of the intangible assets. Key assumptions used in this model include discount rates, royalty rates, growth ratesand sales projections. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as theyrequire significant management judgment. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates andcash flow projections. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significantmanagement judgment.68Table of ContentsThe consideration paid for the brands was $277 million with the entire purchase price allocated to the calculated fair values of the acquired trade names andrecorded as intangible assets with indefinite lives at the acquisition dates. We incurred an insignificant amount of direct transaction costs as a result of theseacquisitions. Pro forma financial information has not been provided as the acquisitions did not have a material impact on our financial information. See Note6 and Note 9 for the results of our annual impairment analysis in connection with these indefinite-lived intangible assets.5. Earnings/(Loss) per Share Net income/(loss) and shares used to compute basic and diluted EPS are reconciled below:(in millions, except per share data) 2013 2012 2011Earnings/(loss) Net income/(loss) $(1,388) $(985) $(152)Shares Weighted average common shares outstanding (basic shares) 249.3 219.2 217.4Adjustment for assumed dilution: Stock options, restricted stock awards and warrant — — —Weighted average shares assuming dilution (diluted shares) 249.3 219.2 217.4EPS Basic $(5.57) $(4.49) $(0.70)Diluted $(5.57) $(4.49) $(0.70) The following average potential shares of common stock were excluded from the diluted EPS calculation because their effect would have been anti-dilutive:(Shares in millions) 2013 2012 2011Stock options, restricted stock awards and warrant 24.3 25.0 24.16. Other Assets($ in millions) 2013 2012REITs $— $33Capitalized software, net 267 310Intangible assets, net (Note 4) 268 277Cost investment (Note 9 and Note 16) — 36Debt issuance costs, net 92 20Other 59 69Total $686 $745 The market value of our investment in public REITs were accounted for as available for sale securities and were carried at fair value. See Note 9 for the relatedfair value disclosures, Note 12 for the net unrealized gains and Note 17 for the net realized gains on our REITs.Our intangible assets consist of our trade name Liz Claiborne and our ownership of the U.S. and Puerto Rico rights of the monet trade name. During the fourthquarter of 2013, as a result of sales performance below our expectations, we decided to reduce our future product offerings under the monet trade name, and assuch, we recorded an impairment loss of $9 million (see Note 9 and Note 16) in the line item Real estate and other in the Consolidated Statements ofOperations. In connection with our annual indefinite-lived intangible assets impairment tests performed during the fourth quarter of 2013, we did not record animpairment for our Liz Claiborne trade name as the estimated fair value exceeded the carrying value of the underlying asset.69Table of Contents7. Other Accounts Payable and Accrued Expenses($ in millions) 2013 2012Accrued salaries, vacation and bonus $209 $225Customer gift cards 218 230Taxes other than income taxes 89 78Occupancy and rent-related 115 114Interest 91 65Advertising 49 68Current portion of workers’ compensation and general liability insurance 59 58Restructuring and management transition (Note 16) 29 10Current portion of retirement plan liabilities (Note 15) 46 55Capital expenditures 25 65Unrecognized tax benefits (Note 18) 2 2Other 266 410Total $1,198 $1,3808. Other Liabilities($ in millions) 2013 2012Supplemental pension and other postretirement benefit plan liabilities (Note 15) $187 $266Long-term portion of workers’ compensation and general liability insurance 169 167Deferred developer/tenant allowances 116 128Primary pension plan (Note 15) — 7Unrecognized tax benefits (Note 18) 68 74Restructuring and management transition (Note 16) 4 8Other 88 48Total $632 $6989. Fair Value Disclosures In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:•Level 1 — Quoted prices in active markets for identical assets or liabilities.•Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices foridentical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable marketdata.•Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other marketparticipants. REIT Assets Measured on a Recurring BasisDuring 2013 and 2012, we sold all of our investments in public REIT assets (see Note 17). The market values of our investment in public REIT assets wereaccounted for as available-for-sale securities and were carried at fair value on an ongoing basis in Other assets in the Consolidated Balance Sheets. Wedetermined the fair value of our investment in public REIT assets using quoted market prices. There were no transfers in or out of any levels during anyperiod presented.70Table of ContentsOur REIT assets measured at fair value are as follows: REIT Assets - Fair Value Measurements at Reporting Date Using($ in millions) Cost Basis Quoted Prices in Active Markets ofIdentical Assets (Level 1) Significant OtherObservable Inputs (Level2) Significant UnobservableInputs (Level 3)As of February 1, 2014 $— $— $— $—As of February 2, 2013 7 33 — —Other Non-Financial Assets Measured on a non-Recurring BasisThe following table presents fair values for those assets measured at fair values and gains or losses during 2013 and 2012 on a non-recurring basis, andremaining on our Consolidated Balance Sheet: Fair Value Measurements at Reporting Date Using ($ in millions) CarryingValue Quoted Prices in ActiveMarkets of IdenticalAssets (Level 1) Significant OtherObservable Inputs (Level2) Significant UnobservableInputs (Level 3) TotalGains(Losses)As of February 1, 2014 Store assets $2 $— $— $2 $(18)Intangible asset (Note 6) 5 — — 5 (9)Total $7 $— $— $7 $(27)As of February 2, 2013 Store assets 8 — — 8 (26)Total $8 $— $— $8 $(26)In 2013, assets of 25 underpeforming department stores that continued to operate with carrying values of $20 million were written down to their estimated fairvalues of $2 million resulting in impairment charges of $18 million. In 2012, assets of 13 underpeforming department stores that continued to operate withcarrying values of $34 million were written down to their estimated fair values of $8 million, resulting in impairment charges of $26 million. Theseimpairment charges are recorded in the line item Real estate and other, net in the Consolidated Statements of Operations. Key assumptions used to determinefair values were future cash flows including, among other things, expected future operating performance and changes in economic conditions as well as othermarket information obtained from brokers. During the fourth quarter of 2013, as a result of sales performance below our expectations, we decided to reduce our future product offerings under the monettrade name, indicating a possible impairment. We tested our indefinite-lived intangible asset monet utilizing the relief from royalty method to determine theestimated fair value. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible asset. Key assumptions indetermining relief from royalty include, among other things, discount rates, royalty rates, growth rates, sales projections and terminal value rates. In 2013, ourownership of the U.S. and Puerto Rico rights of the monet trade name, with a carrying amount of $14 million, was written down to its estimated fair value of$5 million, resulting in an impairment charge of $9 million recorded in the line item Real estate and other, net in the Consolidated Statements of Operations.Other Financial InstrumentsCarrying values and fair values of financial instruments that are not carried at fair value in the Consolidated Balance Sheets are as follows: As of February 1, 2014 As of February 2, 2013($ in millions) Carrying Amount Fair Value CarryingAmount Fair ValueLong-term debt, including current maturities $4,862 $4,209 $2,868 $2,456Cost investment (Note 16) — — 36 — 71Table of ContentsThe fair value of long-term debt is estimated by obtaining quotes from brokers or is based on current rates offered for similar debt. The cost investment wasfor equity securities that were not registered and freely tradable shares and their fair values were not readily determinable; however, we believe the carryingvalue approximated or was less than the fair value. As of February 1, 2014 and February 2, 2013, the fair values of cash and cash equivalents, accounts payable and short-term borrowings approximate theircarrying values due to the short-term nature of these instruments. In addition, the fair values of the capital lease commitments and the note payableapproximate their carrying values. These items have been excluded from the table above. Concentrations of Credit Risk We have no significant concentrations of credit risk.10. Credit Facility On February 8, 2013, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation (Purchasing) entered into an amended and restatedrevolving credit agreement in the amount up to $1,850 million (2013 Credit Facility), which replaced the Company’s prior credit agreement entered into inJanuary 2012, with largely the same syndicate of lenders under the previous agreement, with JPMorgan Chase Bank, N.A., as administrative agent. The 2013Credit Facility matures on April 29, 2016 and increases the letter of credit sublimit to $750 million and provides an accordion feature that could potentiallyincrease the size of the facility by an amount up to $400 million.The 2013 Credit Facility is an asset-based revolving credit facility and is secured by a perfected first-priority security interest in substantially all of our eligiblecredit card receivables, accounts receivable and inventory. The 2013 Credit Facility is available for general corporate purposes, including the issuance of lettersof credit. Pricing under the 2013 Credit Facility is tiered based on JCP’s senior unsecured long-term credit ratings issued by Moody’s Investors Service, Inc.and Standard & Poor’s Ratings Services. JCP’s obligations under the 2013 Credit Facility are guaranteed by J. C. Penney Company, Inc. Availability under the 2013 Credit Facility is limited to a borrowing base which allows us to borrow up to 85% of eligible accounts receivable, plus 90% ofeligible credit card receivables, plus 85% of the liquidation value of our inventory, net of certain reserves. Letters of credit reduce the amount available toborrow by their face value. In the event that availability under the 2013 Credit Facility is at any time less than the greater of (1) $125 million or (2) 10% of thelesser of the total facility or the borrowing base then in effect, for a period of at least 30 days, the Company will be subject to a fixed charge coverage ratiocovenant of 1.0 to 1.0 which is calculated as of the last day of the quarter and measured on a trailing four-quarter basis.On April 12, 2013, we borrowed $850 million under the 2013 Credit Facility of which $200 million was repaid during the third quarter of 2013. As of the endof 2013, $650 million of the borrowing remains outstanding. The borrowing bears interest at a rate of LIBOR plus 3.0%. As of the end of 2013, we had $506million in standby and import letters of credit outstanding under the 2013 Credit Facility, the majority of which are standby letters of credit that support ourmerchandise initiatives and workers’ compensation. None of the standby or import letters of credit have been drawn on. The applicable rate for standby andimport letters of credit was 3.00% and 1.50%, respectively, while the required commitment fee was 0.50% for the unused portion of the 2013 Credit Facility. Asof the end of 2013, we had $694 million available for future borrowing, of which $509 million is currently accessible due to the limitation of the fixed chargecoverage ratio.72Table of Contents11. Long-Term Debt ($ in millions) 2013 2012Issue: 5.65% Senior Notes Due 2020(1) $400 $4005.75% Senior Notes Due 2018(1) 300 3006.375% Senior Notes Due 2036(1) 400 4006.875% Medium-Term Notes Due 2015 200 2006.9% Notes Due 2026 2 27.125% Debentures Due 2023 10 2557.4% Debentures Due 2037 326 3267.625% Notes Due 2097 500 5007.65% Debentures Due 2016 200 2007.95% Debentures Due 2017 285 285Term Loan 2,239 —Total notes and debentures 4,862 2,868Less: current maturities 23 —Total long-term debt $4,839 $2,868Weighted-average interest rate at year end 6.5% 6.9%Weighted-average maturity 15 years (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%.These provisions trigger if there were a beneficial ownership change of 50% or more of our common stock. Tender OfferOn April 30, 2013 we announced the commencement of a cash tender offer (Tender Offer) and consent solicitation for our 7.125% Debentures Due 2023(Notes) for total consideration consisting of an amount equal to $1,350 per $1,000 principal amount of Notes, including a consent payment in the amountequal to $50 per $1,000 principal amount of Notes. We solicited consents to effect certain proposed amendments to the indenture, as amended andsupplemented, governing the Notes (the Indenture) that would eliminate most of the restrictive covenants and certain events of default and other provisions inthe Indenture (Proposed Amendments).On May 14, 2013, we announced that we had amended our previously announced Tender Offer (Amended Tender Offer) and related solicitation of consents toextend the expiration date of the consent solicitation and to increase the tender consideration. The Amended Tender Offer increased the total consideration from$1,350 to $1,450 per $1,000 principal amount of the Notes (Amended Tender Offer Consideration); extended the expiration date of the consent solicitationfrom May 13, 2013 to May 20, 2013 (Consent Expiration) and extended the expiration of the tender offer from May 28, 2013 to June 4, 2013 (ExpirationTime).Holders that validly tendered their Notes prior to the Consent Expiration, as extended, received the Amended Tender Offer Consideration. Holders that validlytendered their Notes after the Consent Expiration, as extended, but prior to the Expiration Time, as extended, received only the tender offer consideration of$1,400 per $1,000 principal amount of the Notes (Tender Offer Consideration). Holders whose Notes were accepted for purchase in the Amended Tender Offeralso received accrued and unpaid interest to, but not including, the applicable payment date for the Notes. On May 22, 2013, we accepted for purchase $243million in aggregate principal amount of the Notes, representing 95.41% of the outstanding principal amount, for aggregate Amended Tender OfferConsideration of $352 million. On June 5, 2013, we accepted for purchase an additional $2 million in aggregate principal amount of the Notes, for aggregateTender Offer Consideration of $3 million. The Tender Offer resulted in a loss on the extinguishment of debt of $114 million which includes the premium paidover face value of the Notes of $110 million, reacquisition costs of $2 million and the write-off of unamortized debt issue costs of $2 million. As a result ofreceiving the requisite consent of the Holders of at least 66 2/3% of aggregate principal amount of Notes outstanding, the Proposed Amendments were approvedand became operative.73Table of ContentsTerm Loan FacilityOn May 22, 2013, JCP entered into a $2.25 billion five-year senior secured term loan facility (2013 Term Loan Facility). The 2013 Term Loan Facility isguaranteed by J. C. Penney Company, Inc. and certain subsidiaries of JCP, and is secured by mortgages on certain real estate of JCP and the guarantors, inaddition to substantially all other assets of JCP and the guarantors. Proceeds of the 2013 Term Loan Facility were used to fund the Amended Tender Offer andwill be used to fund ongoing working capital requirements and general corporate purposes. The 2013 Term Loan Facility bears interest at a rate of LIBOR plus5.0%. We are required to make quarterly repayments in a principal amount equal to $5.625 million during the five-year term, beginning September 30, 2013,subject to certain reductions for mandatory and optional prepayments.Scheduled Debt RepaymentIn August 2012, we repaid $230 million of 9.0% Notes at maturity. Scheduled Annual Principal Payments on Long-Term Debt($ in millions) 2014$2320152232016223201730820182,447Thereafter1,638Total$4,86274Table of Contents12. Stockholders’ Equity Other Comprehensive Income/(Loss) The tax effects allocated to each component of other comprehensive income/(loss) are as follows: 2013 2012 2011($ in millions)GrossAmount Income Tax(Expense)/Benefit NetAmount GrossAmount Income Tax(Expense)/Benefit Net Amount GrossAmount Income Tax(Expense)/Benefit Net AmountREITs Unrealizedgain/(loss)$(2) $1 $(1) $56 $(20) $36 $82 $(29) $53Reclassificationadjustmentfor (gain)/loss(24) 8 (16) (285)(2) 101 (184) — — —Retirementbenefit plans Net actuarialgain/(loss)arising duringthe period659 (255)(1) 404 60 (23) 37 (872) 338 (534)Prior servicecredit/(cost)arising duringthe period(7) 3(1) (4) (42) 16 (26) (4) 1 (3)Reclassificationof net priorservice(credit)/costfrom acurtailment— — — (5) 2 (3) 1 — 1Reclassificationof net actuarial(gain)/lossfrom asettlement— — — 148 (57) 91 — — —Reclassificationforamortizationof net actuarial(gain)/loss175 (67)(1) 108 242 (94) 148 154 (60) 94Reclassificationforamortizationof priorservice(credit)/cost(1) — (1) (13) 5 (8) (24) 9 (15)Total$800 $(310) $490 $161 $(70) $91 $(663) $259 $(404) (1)In accordance with accounting standards, we are required to allocate a portion of our tax provision between operating losses and accumulated othercomprehensive income. As a result, the Company recorded income tax expense in other comprehensive income/(loss)which is offset by a tax benefit onthe loss for the year. See Note 18.(2)During the second quarter of 2012, the reclassification adjustment for the Simon Property Group, L.P. (SPG) units of $270 million was calculated byusing the closing fair market value per SPG unit of $158.13 on July 19, 2012 for the two million REIT units that were redeemed on July 20,2012. The REIT units were redeemed at a price of $124.00 per unit (see Note 17). 75Table of ContentsAccumulated Other Comprehensive Income/(Loss) The following table shows the changes in accumulated other comprehensive income/(loss) balances for 2013 and 2012:($ in millions) Unrealized Gain/(Loss) onREITs Net ActuarialGain/(Loss) Prior ServiceCredit/(Cost) Accumulated OtherComprehensiveIncome/(Loss)January 28, 2012 $165 $(1,397) $23 $(1,209)Current period change (148) 276 (37) 91February 2, 2013 $17 $(1,121) $(14) $(1,118)Current period change (17) 512 (5) 490February 1, 2014 $— $(609) $(19) $(628)Reclassifications out of accumulated other comprehensive income/(loss) are as follows: Amount Reclassified from Accumulated OtherComprehensive Income/(Loss) Line Item in the ConsolidatedStatements of Operations ($ in millions)2013 2012 2011 Realized (gain)/loss on REITs Sale or redemption of SPG REIT units$(24) $(270) $— Real estate and other, netSale of CBL REIT shares— (15) — Real estate and other, netTax (expense)/benefit8 101 — Income tax expense/(benefit)Total, net of tax(16) (184) — Retirement benefit plans Amortization of actuarial (gain)/loss(1)176 243 155 PensionAmortization of prior service (credit)/cost(1)7 1 1 PensionAmortization of actuarial (gain)/loss(1)(1) (1) (1) SG&AAmortization of prior service (credit)/cost(1)(8) (14) (25) SG&APrior service (credit)/cost from a curtailment— (5) 1 Restructuring and managementtransition (Note 16)Actuarial (gain)/loss from a settlement(1)— 148 — PensionTax (expense)/benefit(67) (144) (51) Income tax expense/(benefit)Total, net of tax107 228 80 Total reclassifications$91 $44 $80 (1)These accumulated other comprehensive components are included in the computation of net periodic benefits expense/(income). See Note 15 foradditional details.Common Stock On a combined basis, our 401(k) savings plan, including our employee stock ownership plan (ESOP), held approximately 13 million shares, orapproximately 4.0% of outstanding Company common stock, at February 1, 2014. For the years 2013, 2012 and 2011, we declared dividends of $0.00, $0.20and $0.80 per share, respectively.Issuance of Common StockOn October 1, 2013, we issued 84 million shares of common stock with a par value of $0.50 per share for $9.65 per share for total net proceeds of $786million after $24 million of fees. Preferred Stock We have authorized 25 million shares of preferred stock; no shares of preferred stock were issued and outstanding as of February 1, 2014 or February 2,2013. Stock Warrant On June 13, 2011, prior to his employment, we entered into a warrant purchase agreement with Ronald B. Johnson pursuant to which Mr. Johnson made apersonal investment in the Company by purchasing a warrant to acquire approximately 7.3 million76Table of Contentsshares of J. C. Penney Company, Inc. common stock for a purchase price of approximately $50 million at a mutually determined fair value of $6.89 pershare. The warrant has an exercise price of $29.92 per share, subject to customary adjustments resulting from a stock split, reverse stock split, or otherextraordinary distribution with respect to J. C. Penney Company, Inc. common stock. The warrant has a term of seven and one-half years and was initiallyexercisable after the sixth anniversary, or June 13, 2017; however, the warrant became immediately exercisable upon the termination of Mr. Johnson’semployment with us in April 2013. The warrant is also subject to transfer restrictions. The proceeds from the sale of the warrant were recorded as additionalpaid-in capital and the dilutive effect of the warrant has been included in the EPS calculation from the date of issuance.The fair value of the warrant was determined on the date of the warrant purchase agreement using a Monte Carlo simulation methodology with the followingassumptions: Expected term7.5 yearsExpected volatility37%Risk-free interest rate2.47%Expected dividend yield2.67% Valuation Method. The fair value of the stock warrant was determined on the date of the warrant purchase agreement using a Monte Carlo simulation methodthat reflected the impact of the key features of the warrant using different simulations and probability weighting. Expected Term. The expected term was determined based on the maturity determined period that both parties expect the warrant to be outstanding. Expected Volatility. The expected volatility was based on implied volatility. Risk-free Interest Rate. The risk-free interest rate was based on zero-coupon U.S. Treasury yields in effect at the date of the agreement with the same maturityas the expected warrant term. Expected Dividend Yield. The dividend assumption was based on expectations about the Company’s dividend policy. Common Stock Repurchase Program In February 2011, our Board of Directors authorized a program to repurchase up to $900 million of Company common stock using existing cash and cashequivalents. In the first quarter of 2011, through open market transactions, we repurchased approximately 21 million shares for $787 million. In the secondquarter of 2011, we purchased an additional three million shares for $113 million and completed the program on May 6, 2011. As a result of this repurchaseprogram, approximately 24 million total shares were purchased for a total of $900 million at an average share price of $36.98, including commission.Repurchased shares were retired on the date of purchase, and the excess of the purchase price over par value was allocated between reinvested earnings andadditional paid-in capital. Stockholders' Rights AgreementAs authorized by our Company’s Board of Directors (the Board), on January 27, 2014, the Company entered into an Amended and Restated Rights Agreement(Amended Rights Agreement) with Computershare Inc., as Rights Agent (Rights Agent), amending, restating and replacing the Rights Agreement, dated as ofAugust 22, 2013 (Original Rights Agreement), between the Company and the Rights Agent. Pursuant to the terms of the Original Rights Agreement, onepreferred stock purchase right (a Right) was attached to each outstanding share of Common Stock of $0.50 par value of the Company (Common Stock) heldby holders of record as of the close of business on September 3, 2013. The Company has issued one Right in respect of each new share of Common Stockissued since the record date. The Rights, registered on August 23, 2013, trade with and are inseparable from our Common Stock and will not be evidenced byseparate certificates unless they become exercisable.The purpose of the Amended Rights Agreement is to diminish the risk that the Company's ability to use its net operating losses and other tax assets to reducepotential future federal income tax obligations would become subject to limitations by reason of the Company's experiencing an "ownership change" as definedunder Section 382 of the Internal Revenue Code. Ownership changes under Section 382 generally relate to the cumulative change in ownership amongstockholders with an ownership interest of 5% or more (as determined under Section 382's rules) over a rolling three year period. The Amended RightsAgreement is intended to reduce the likelihood of an ownership change under Section 382 by deterring any person or group77Table of Contentsfrom acquiring beneficial ownership of 4.9% or more of the outstanding Common Stock. The amendments to the Original Rights Agreement also extended theexpiration date of the Rights from August 20, 2014 to January 26, 2017 and amended certain other provisions, including the definition of "beneficialownership" to include terms appropriate for the purpose of preserving tax benefits. We are submitting the Amended Rights Agreement for stockholder approvalat our 2014 annual meeting and the Rights will immediately expire if stockholder approval is not received.Each Right entitles its holder to purchase from the Company 1/1000th of a share of a newly authorized series of participating preferred stock at an exerciseprice of $55.00, subject to adjustment in accordance with the terms of the Amended Rights Agreement, once the Rights become exercisable. In general terms,under the Amended Rights Agreement, the Rights become exercisable if any person or group acquires 4.9% or more of the Common Stock or, in the case of anyperson or group that owned 4.9% or more of the Common Stock as of January 27, 2014, upon the acquisition of any additional shares by such person orgroup. In addition, the Company, its subsidiaries, employee benefit plans of the Company or any of its subsidiaries, and any entity holding Common Stockfor or pursuant to the terms of any such plan, are excepted. Upon exercise of the Right in accordance with the Amended Rights Agreement, the holder would beable to purchase a number of shares of Common Stock from the Company having an aggregate market value (as defined in the Amended Rights Agreement)equal to twice the then-current exercise price for an amount in cash equal to the then-current exercise price. The Rights will not prevent an ownership changefrom occurring under Section 382 of the Code or a takeover of the Company, but may cause substantial dilution to a person that acquires 4.9% or more of ourCommon Stock.13. Stock-Based Compensation We grant stock-based compensation awards to employees and non-employee directors under our equity compensation plan. On May 18, 2012, ourstockholders approved the J. C. Penney Company, Inc. 2012 Long-Term Incentive Plan (2012 Plan), reserving 7 million shares for future grants (1.5 millionnewly authorized shares plus up to 5.5 million reserved but unissued shares from our prior 2009 Long-Term Incentive Plan (2009 Plan)). In addition, sharesunderlying any outstanding stock award or stock option grant cancelled prior to vesting or exercise become available for use under the 2012 Plan. The 2009Plan terminated on May 18, 2012, except for outstanding awards, and all subsequent awards have been granted under the 2012 Plan. As of the end of 2013,there were approximately 7.3 million shares of stock available for future grant under the 2012 Plan. Employee stock options and time-based and performance-based restricted stock awards typically vest over periods ranging from one to three years. Thenumber of performance-based restricted stock awards that ultimately vest is dependent on the achievement of an internal profitability target. The exercise priceof stock options and the market value of time-based and performance-based restricted stock awards are determined based on the closing market price of ourcommon stock on the date of grant. The 2012 Plan does not permit awarding stock options below grant-date market value nor does it allow any repricingsubsequent to the date of grant. Employee stock options have a maximum term of 10 years.In February 2012, the Company approved an equity inducement award plan for 900,000 shares. No shares have been issued from the inducement award planas of February 1, 2014.Our stock option and restricted stock award grants have averaged about 2.5% of outstanding stock over the past three years. We issue new shares upon theexercise of stock options, granting of restricted shares and vesting of restricted stock units. Stock-based Compensation CostThe components of total stock-based compensation costs are as follows:($ in millions)2013 2012 2011Stock awards$14 $33 $22Stock options14 17 24Total stock-based compensation(1)$28 $50 $46 Total income tax benefit recognized for stock-based compensation arrangements$— $19 $18(1)Excludes $18 million, $11 million and $79 million for 2013, 2012 and 2011, respectively, of stock-based compensation costs reported in restructuringand management transition charges (see Note 16).78Table of ContentsStock Options The following table summarizes stock option activity during the year ended February 1, 2014: Shares (inthousands) Weighted - AverageExercise Price PerShare Weighted - AverageRemaining ContractualTerm (in years) AggregateIntrinsic Value ($ inmillions)(1) Outstanding at February 2, 2013 13,593 $40 Granted 3,448 15 Exercised (397) 16 Forfeited/canceled (2,615) 30 Outstanding at February 1, 2014 14,029 36 4.4 $—Exercisable at February 1, 2014 10,617 41 3.0 $— (1)The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option at yearend. As of February 1, 2014, all outstanding stock options had an exercise price above the closing price of JCPenney common stock of $5.92. If all outstanding options were exercised, common stock outstanding would increase by 4.6%. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised are provided in the following table: ($ in millions) 2013 2012 2011Proceeds from stock options exercised $7 $71 $18Intrinsic value of stock options exercised 2 38 28Tax benefit related to stock-based compensation — 15 11Excess tax benefits realized on stock-based compensation — 12 10 As of February 1, 2014, we had $18 million of unrecognized and unearned compensation expense, net of estimated forfeitures, for stock options not yetvested, which will be recognized as expense over the remaining weighted-average vesting period of approximately two years. Stock Option Valuation Valuation Method. We estimate the fair value of stock option awards on the date of grant using primarily the binomial lattice model. We believe that thebinomial lattice model is a more accurate model for valuing employee stock options since it better reflects the impact of stock price changes on option exercisebehavior. Expected Term. Our expected option term represents the average period that we expect stock options to be outstanding and is determined based on our historicalexperience, giving consideration to contractual terms, vesting schedules, anticipated stock prices and expected future behavior of option holders. Expected Volatility. Our expected volatility is based on a blend of the historical volatility of JCPenney stock combined with an estimate of the implied volatilityderived from exchange traded options. Risk-Free Interest Rate. Our risk-free interest rate is based on zero-coupon U.S. Treasury yields in effect at the date of grant with the same period as theexpected option life.Expected Dividend Yield. The dividend assumption is based on our current expectations about our dividend policy.79Table of ContentsOur weighted-average fair value of stock options at grant date was $7.15 in 2013, $11.49 in 2012 and $11.37 in 2011 using the binomial lattice valuationmodel and the following assumptions: 2013 2012 2011Weighted-average expected option term 4.4 years 4.9 years 4.5 yearsWeighted-average expected volatility 62.00% 45.30% 41.20%Weighted-average risk-free interest rate 0.64% 0.87% 1.75%Weighted-average expected dividend yield —% 1.40% 2.20%Expected dividend yield range —% 2.0% – 2.1% 1.8% – 2.2% Stock AwardsThe following table summarizes our non-vested stock awards activity during the year ended February 1, 2014: Time-Based Stock Awards Performance-Based Stock Awards(shares in thousands)Number of Units Weighted-Date Fair Value Number of Units Weighted-Date Fair ValueNon-vested at February 2, 20133,418 $31 44 $31Granted971 15 1,082 14Vested(1,344) 29 (155) 19Forfeited/canceled(1,688) 29 (898) 14Non-vested at February 1, 20141,357 23 73 7 As of February 1, 2014, we had $18 million of unrecognized compensation expense related to unearned employee stock awards, which will be recognized overthe remaining weighted-average vesting period of approximately two years. The aggregate market value of shares vested during 2013, 2012 and 2011 was $25million, $26 million and $145 million, respectively, compared to an aggregate grant date fair value of $42 million, $29 million and $111 million,respectively.14. Leases We conduct a major part of our operations from leased premises that include retail stores, store distribution centers, warehouses, offices and other facilities.Almost all leases will expire during the next 20 years; however, most leases will be renewed, primarily through an option exercise, or replaced by leases onother premises. We also lease data processing equipment and other personal property under operating leases of primarily three to five years. Rent expense, net ofsublease income, was as follows:($ in millions) 2013 2012 2011Real property base rent and straight-lined step rent expense $230 $233 $243Real property contingent rent expense (based on sales) 5 10 16Personal property rent expense 65 67 64Total rent expense $300 $310 $323Less: sublease income(1) (16) (16) (18)Net rent expense $284 $294 $305 (1)Sublease income is reported in Real estate and other, net.80Table of ContentsAs of February 1, 2014, future minimum lease payments for non-cancelable operating leases, including lease renewals determined to be reasonably assuredand capital leases, including our note payable, were as follows: ($ in millions)Operating Leases2014$2582015222201619520171632018133Thereafter1,938Less: sublease income(80)Total minimum lease payments$2,829($ in millions)Capital Leases and NotePayable2014$30201540201617201792018—Thereafter—Less: sublease income—Total minimum lease payments96Less: amounts representing interest(7)Present value of net minimum lease obligations$8915. Retirement Benefit Plans We provide retirement pension benefits, postretirement health and welfare benefits, as well as 401(k) savings, profit-sharing and stock ownership plan benefitsto various segments of our workforce. Retirement benefits are an important part of our total compensation and benefits program designed to retain and attractqualified, talented employees. Pension benefits are provided through defined benefit pension plans consisting of a non-contributory qualified pension plan(Primary Pension Plan) and, for certain management employees, non-contributory supplemental retirement plans, including a 1997 voluntary early retirementplan. Retirement and other benefits include: Defined Benefit Pension PlansPrimary Pension Plan – fundedSupplemental retirement plans – unfunded Other Benefit PlansPostretirement benefits – medical and dentalDefined contribution plans:401(k) savings, profit-sharing and stock ownership planDeferred compensation plan Defined Benefit Pension PlansPrimary Pension Plan — FundedThe Primary Pension Plan is a funded non-contributory qualified pension plan, initiated in 1966 and closed to new entrants on January 1, 2007. The plan isfunded by Company contributions to a trust fund, which are held for the sole benefit of participants and beneficiaries.81Table of Contents Supplemental Retirement Plans — UnfundedWe have unfunded supplemental retirement plans, which provide retirement benefits to certain management employees. We pay ongoing benefits from operatingcash flow and cash investments. The plans are a Supplemental Retirement Program and a Benefit Restoration Plan. Participation in the SupplementalRetirement Program is limited to employees who were annual incentive-eligible management employees as of December 31, 1995. Benefits for these plans arebased on length of service and final average compensation. The Benefit Restoration Plan is intended to make up benefits that could not be paid by the PrimaryPension Plan due to governmental limits on the amount of benefits and the level of pay considered in the calculation of benefits. The Supplemental RetirementProgram is a non-qualified plan that was designed to allow eligible management employees to retire at age 60 with retirement income comparable to the age 65benefit provided under the Primary Pension Plan and Benefit Restoration Plan. In addition, the Supplemental Retirement Program offers participants who leavebetween ages 60 and 62 benefits equal to the estimated social security benefits payable at age 62. The Supplemental Retirement Program also continuesCompany-paid term life insurance at a declining rate until it is phased out at age 70. Employee-paid term life insurance through age 65 is continued under aseparate plan (Supplemental Term Life Insurance Plan for Management Profit-Sharing Employees). Voluntary Early Retirement Program (VERP)In August 2011, we announced a VERP under which approximately 8,000 eligible employees had between September 1, 2011 and October 15, 2011 to elect toparticipate. For the approximately 4,000 employees who elected to accept the VERP, we incurred a total charge of $176 million for enhanced retirement benefitswhich was recorded in the line item Restructuring and management transition in the Consolidated Statements of Operations (see Note 16). Enhanced retirementbenefits of $133 million related to our Primary Pension Plan decreased our overfunded status of the plan. Enhanced retirement benefits of $36 million and $7million related to our unfunded Supplemental Retirement Program and Benefit Restoration Plan, respectively, increased the projected benefit obligation (PBO)of these plans. In addition, we also incurred curtailment charges totaling $1 million related to our Supplemental Retirement Program and Benefit RestorationPlan as a result of the reduction in the expected years of future service related to these plans. These curtailment charges were recorded in the line itemRestructuring and management transition in the Consolidated Statements of Operations (see Note 16). As a result of these curtailments, the liabilities for ourSupplemental Retirement Program and Benefit Restoration Plan were remeasured as of October 15, 2011. The discount rate used for the October 15remeasurements was 5.06% as compared to the year-end 2010 discount rate of 5.65%. As of October 15, 2011, the PBOs of our Supplemental RetirementProgram and Benefit Restoration Plan were increased by $71 million and $24 million, respectively. CurtailmentsDuring the first half of 2012, we took actions to reduce our work force. During the third quarter of 2012, when substantially all employee exits werecompleted, we recorded a net curtailment gain of $7 million due to the reduction in the expected years of future service related to our retirement benefitplans. The net curtailment gain is included in the line item Restructuring and management transition in the Consolidated Statements of Operations (see Note16). The curtailments resulted in reductions in the PBOs of our Primary Pension Plan, non-qualified supplemental plans and the postretirement health andwelfare plan of $80 million, $13 million and $2 million, respectively. As a result of these curtailments, the liabilities for our retirement benefit plans wereremeasured as of September 30, 2012 using a discount rate of 4.25% compared to the year-end 2011 discount rate of 4.82%. As a result of theremeasurements, the PBOs of our Primary Pension Plan and the non-qualified supplemental plans were increased by $166 million and $55 million,respectively, which was offset by a decrease in our PBO for our post-retirement health and welfare plan by $5 million. As of September 30, 2012, the PBO’sof our Primary Pension Plan, non-qualified supplemental plans and postretirement health and welfare plan were $5,550 million, $300 million and $18million, respectively. Primary Pension Plan Lump-Sum Payment OfferIn September 2012, as a result of a plan amendment, we offered approximately 35,000 participants in the Primary Pension Plan who separated from serviceand had a deferred vested benefit as of August 31, 2012 the option to receive a lump-sum settlement payment. These participants had until November 30, 2012to elect to receive the lump-sum settlement payment with the payments to be made by the Company beginning on December 4, 2012 using assets from thePrimary Pension Plan. As a result of the approximately 25,000 participants who elected the lump-sum settlements, we made payments totaling $439 millionfrom the Primary Pension Plan’s assets and recognized settlement expense of $148 million for unrecognized actuarial losses. We also amended the PrimaryPension Plan to allow for participants that separate from the Company on or after September 1, 2012 the option of a lump-sum settlement payment from theplan. The amendment also provided for automatic lump-sum settlement payments for participants with vested balances less than $5,000. 82Table of ContentsPension Expense/(Income) for Defined Benefit Pension PlansPension expense is based upon the annual service cost of benefits (the actuarial cost of benefits attributed to a period) and the interest cost on plan liabilities,less the expected return on plan assets for the Primary Pension Plan. Differences in actual experience in relation to assumptions are not recognized immediatelybut are deferred and amortized over the average remaining service period of approximately eight years for the Primary Pension Plan, subject to a corridor aspermitted under GAAP pension plan accounting. The components of net periodic benefit expense/(income) for our Primary Pension Plan and our non-contributory supplemental pension plans are as follows: ($ in millions) Primary Pension Plan 2013 2012 2011Service cost $78 $87 $88Interest cost 204 242 247Expected return on plan assets (340) (382) (385)Amortization of actuarial loss/(gain) 152 220 137Amortization of prior service cost/(credit) 6 — —Settlement expense — 148 —Net periodic benefit expense/(income) $100 $315 $87 Supplemental Pension Plans Service cost $— $1 $2Interest cost 12 13 13Amortization of actuarial loss/(gain) 24 23 18Amortization of prior service cost/(credit) 1 1 1Net periodic benefit expense/(income) $37 $38 $34 Primary and Supplemental Pension Plans Total Service cost $78 $88 $90Interest cost 216 255 260Expected return on plan assets (340) (382) (385)Amortization of actuarial loss/(gain) 176 243 155Amortization of prior service cost/(credit) 7 1 1Settlement charge — 148 —Net periodic benefit expense/(income) $137 $353 $121 The defined benefit plan pension expense shown in the above table is included as a separate line item in the Consolidated Statements of Operations. Assumptions The weighted-average actuarial assumptions used to determine expense were as follows: 2013 2012 2011 Expected return on plan assets7.0% 7.5% 7.5% Discount rate4.19% 4.82%(1) 5.65%(2) Salary increase4.7% 4.7% 4.7% (1)The discount rate used was revised to 4.25% on the remeasurement date of September 30, 2012 as a result of the curtailments.(2)The discount rate used for the Supplemental Retirement Program and Benefit Restoration Plan was revised to 5.06% on the remeasurement date ofOctober 15, 2011 as a result of the VERP. 83Table of ContentsThe expected return on plan assets is based on the plan’s long-term asset allocation policy, historical returns for plan assets and overall capital market returns,taking into account current and expected market conditions. In 2012 and 2011, the expected return on plan assets was 7.5%, which was reduced from the2010 rate of 8.4% to align our expected rate of return with our new asset allocation targets. The expected return assumption for 2013 and 2014 was furtherreduced from 7.5% to 7.0% given our new asset allocation targets and updated expected capital markets return assumptions. The discount rate used to measure pension expense each year is the rate as of the beginning of the year (i.e., the prior measurement date). In 2011, the discountrate used was based on an externally published yield curve determined by the plan’s actuary. The yield curve is a hypothetical AA yield curve represented by aseries of bonds maturing from six months to 30 years, designed to match the corresponding pension benefit cash payments to retirees. Beginning with theremeasurement on September 30, 2012, the discount rate used, determined by the plan actuary, was based on a hypothetical AA yield curve represented by aseries of bonds maturing over the next 30 years, designed to match the corresponding pension benefit cash payments to retirees.The salary progression rate to measure pension expense was based on age ranges and projected forward. Funded StatusAs of the end of 2013, the funded status of the Primary Pension Plan was 115%. The PBO is the present value of benefits earned to date by plan participants,including the effect of assumed future salary increases. Under the Employee Retirement Income Security Act of 1974 (ERISA), the funded status of the planexceeded 100% as of December 31, 2013 and 2012, the qualified pension plan’s year end. The following table provides a reconciliation of benefit obligations,plan assets and the funded status of the Primary Pension Plan and supplemental pension plans: Primary Pension Plan Supplemental Plans ($ in millions)2013 2012 2013 2012 Change in PBO Beginning balance$5,042$5,297$303$309 Service cost78 87 — 1 Interest cost204 242 12 13 Special termination benefits— — — — Amendments17 42 (8) — Curtailments— (80) — (13) Settlements— (439) — — Actuarial loss/(gain)(442) 204 (34) 59 Benefits (paid)(422) (311) (54) (66) Balance at measurement date$4,477 $5,042 $219 $303 Change in fair value of plan assets Beginning balance$5,035 $5,176 $— $— Company contributions— — 54 66 Actual return on assets(1)527 609 — — Settlements— (439) — — Benefits (paid)(422) (311) (54) (66) Balance at measurement date$5,140 $5,035 $— $— Funded status of the plan$663(2) $(7)(3) $(219)(4) $(303)(4) (1)Includes plan administrative expenses.(2)Presented as Prepaid pension in the Consolidated Balance Sheets.(3)Included in Other liabilities in the Consolidated Balance Sheets.(4)$44 million in 2013 and $53 million in 2012 were included in Other accounts payable and accrued expenses on the Consolidated Balance Sheets,and the remaining amounts were included in Other liabilities. 84Table of ContentsIn 2013, the funded status of the Primary Pension Plan improved by $670 million primarily due to strong asset performance and an increase in the discountrate. The actual one-year return on pension plan assets at the measurement date was 11.1% in 2013, bringing the cumulative return since inception of the planto 9.0%. The following pre-tax amounts were recognized in Accumulated other comprehensive income/(loss) in the Consolidated Balance Sheets as of the end of 2013and 2012: Primary Pension Plan Supplemental Plans($ in millions)2013 2012 2013 2012Net actuarial loss/(gain)$898 $1,679 $127 $185Prior service cost/(credit)53 42 (6) 3Total$951(1) $1,721 $121(1) $188 (1)In 2014, approximately $57 million for the Primary Pension Plan and $15 million for the supplemental plans are expected to be amortized fromAccumulated other comprehensive income/(loss) into net periodic benefit expense/(income) included in Pension in the Consolidated Statement ofOperations.Assumptions to Determine ObligationsThe weighted-average actuarial assumptions used to determine benefit obligations for each of the years below were as follows: 2013 2012 2011Discount rate 4.89% 4.19% 4.82%Salary progression rate 3.5% 4.7% 4.7% We use the Retirement Plans 2000 Table of Combined Healthy Lives (RP 2000 Table), projected using Scale AA to forecast mortality improvements into thefuture to 2020 for annuitants and 2028 for non-annuitants. Accumulated Benefit Obligation (ABO)The ABO is the present value of benefits earned to date, assuming no future salary growth. The ABO for our Primary Pension Plan was $4.2 billion and $4.7billion as of the end of 2013 and 2012, respectively. At the end of 2013, plan assets of $5.1 billion for the Primary Pension Plan were above the ABO. TheABO for our unfunded supplemental pension plans was $200 million and $268 million as of the end of 2013 and 2012, respectively. Primary Pension Plan Asset AllocationThe target allocation ranges for each asset class as of the end of 2013 and the fair value of each asset class as a percent of the total fair value of pension planassets were as follows: 2013 Target Plan AssetsAsset Class Allocation Ranges 2013 2012Equity 40% -60% 44% 48%Fixed income 35% -50% 42% 43%Real estate, cash and other investments 0% - 10% 14% 9%Total 100% 100% Asset Allocation StrategyThe Primary Pension Plan’s investment strategy is designed to provide a rate of return that, over the long term, increases the ratio of plan assets to liabilities bymaximizing investment return on assets, at an appropriate level of volatility risk. The plan’s asset portfolio is actively managed and invested in equitysecurities, which have historically provided higher returns than debt portfolios, balanced with fixed income (i.e., debt securities) and other asset classes tomaintain an efficient risk/return diversification profile. In 2011 and 2012, we shifted 15% and 5%, respectively, of the plan’s target allocation from equitiesinto fixed income. In 2013, we added an allocation to low volatility hedge fund strategies through a fund of funds approach. These shifts in allocation areadditional steps towards lowering the plan’s volatility risk and matching the plan’s investment strategy with a maturing liability profile. The risk of loss in theplan’s equity portfolio is mitigated by investing in a broad range of equity types. Equity diversification includes large-capitalization and small-capitalizationcompanies, growth-oriented and85Table of Contentsvalue-oriented investments and U.S. and non-U.S. securities. Investment types, including high-yield versus investment-grade debt securities, illiquid assetssuch as real estate, the use of derivatives and Company securities are set forth in written guidelines established for each investment manager and monitored bythe plan’s management team. In 2011, the plan exited all of the remaining Company’s stock associated with the 2009 voluntary contribution of JCPenneycommon stock to the plan. ERISA rules allow plans to invest up to 10% of a plan’s assets in their company’s stock. The plan’s asset allocation policy isdesigned to meet the plan’s future pension benefit obligations. Under the policy, asset classes are periodically reviewed and rebalanced as necessary, to ensurethat the mix continues to be appropriate relative to established targets and ranges. We have an internal Benefit Plans Investment Committee (BPIC), which consists of senior executives who have established a review process of asset allocationand investment strategies and oversee risk management practices associated with the management of the plan’s assets. Key risk management practices includehaving an established and broad decision-making framework in place, focused on long-term plan objectives. This framework consists of the BPIC andvarious third parties, including investment managers, an investment consultant, an actuary and a trustee/custodian. The funded status of the plan ismonitored on a continuous basis, including quarterly reviews with updated market and liability information. Actual asset allocations are monitored monthlyand rebalancing actions are executed at least quarterly, if needed. To manage the risk associated with an actively managed portfolio, the plan’s managementteam reviews each manager’s portfolio on a quarterly basis and has written manager guidelines in place, which are adjusted as necessary to ensure appropriatediversification levels. Also, annual audits of the investment managers are conducted by independent auditors. Finally, to minimize operational risk, we utilizea master custodian for all plan assets, and each investment manager reconciles its account with the custodian at least quarterly.86Table of ContentsFair Value of Primary Pension Plan AssetsThe tables below provide the fair values of the Primary Pension Plan’s assets as of the end of 2013 and 2012, by major class of asset. Investments at Fair Value at February 1, 2014($ in millions) Level 1(1) Level 2(1) Level 3 TotalAssets Cash $158 $— $— $158Common collective trusts — 32 — 32Cash and cash equivalents total 158 32 — 190Common collective trusts – domestic — 224 — 224Common collective trusts – international — 335 — 335Equity securities – domestic 1,206 — — 1,206Equity securities – international 197 6 — 203Private equity — — 298 298Equity securities total 1,403 565 298 2,266Common collective trusts — 1,099 — 1,099Corporate bonds — 838 11 849Swaps — 238 — 238Government securities — 106 — 106Corporate loans — 27 6 33Municipal bonds — 50 — 50Mortgage backed securities — 6 — 6Other fixed income 1 12 — 13Fixed income total 1 2,376 17 2,394Public REITs 118 — — 118Private real estate — 19 204 223Real estate total 118 19 204 341Hedge funds — — 153 153Other investments total — — 153 153Total investment assets at fair value $1,680 $2,992 $672 $5,344Liabilities Swaps $— $(237) $— $(237)Other fixed income (2) (2) — (4)Fixed income total (2) (239) — (241)Total liabilities at fair value $(2) $(239) $— $(241)Accounts payable, net 37Total net assets $5,140 (1)There were no significant transfers in or out of level 1 or 2 investments.87Table of Contents Investments at Fair Value at February 2, 2013($ in millions) Level 1(1) Level 2(1) Level 3 TotalAssets Cash $31 $— $— $31Common collective trusts — 47 — 47Cash and cash equivalents total 31 47 — 78Common collective trusts – domestic — 161 — 161Common collective trusts – international — 407 — 407Equity securities – domestic 1,325 — — 1,325Equity securities – international 210 6 — 216Private equity — — 297 297Equity securities total 1,535 574 297 2,406Common collective trusts — 1,171 — 1,171Corporate bonds — 871 10 881Swaps — 216 — 216Municipal bonds — 49 — 49Mortgage backed securities — 26 12 38Corporate loans — 54 — 54Government securities — 8 — 8Other fixed income 3 35 — 38Fixed income total 3 2,430 22 2,455Public REITs 133 — — 133Private real estate — 17 231 248Real estate total 133 17 231 381Total investment assets at fair value $1,702 $3,068 $550 $5,320Liabilities Swaps $— $(216) $— $(216)Other fixed income — (54) — (54)Fixed income total — (270) — (270)Total liabilities at fair value $— $(270) $— $(270)Accounts payable, net (15)Total net assets $5,035(1)There were no significant transfers in or out of level 1 or 2 investments. Following is a description of the valuation methodologies used for Primary Pension Plan assets measured at fair value. Cash – Cash is valued at cost which approximates fair value, and is classified as level 1 of the fair value hierarchy. Common Collective Trusts – Common collective trusts are pools of investments within cash equivalents, equity and fixed income that are benchmarkedrelative to a comparable index. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets. Theunderlying assets are valued at net asset value (NAV) and are classified as level 2 of the fair value hierarchy. Equity Securities – Equity securities are common stocks and preferred stocks valued based on the price of the security as listed on an open active exchangeand classified as level 1 of the fair value hierarchy, as well as warrants and preferred stock that are valued at a price, which is based on a broker quote in anover-the-counter market, and are classified as level 2 of the fair value hierarchy. 88Table of ContentsPrivate Equity – Private equity is composed of interests in private equity funds valued on the basis of the relative interest of each participating investor in thefair value of the underlying assets and/or common stock of privately held companies. There are no observable market values for private equity funds. Thevaluations for the funds are derived using a combination of different methodologies including (1) the market approach, which consists of analyzing markettransactions for comparable assets, (2) the income approach using the discounted cash flow model, or (3) cost method. Private equity funds also provideaudited financial statements. Private equity investments are classified as level 3 of the fair value hierarchy.Corporate Bonds – Corporate bonds and Corporate loans are valued at a price which is based on observable market information in primary markets or abroker quote in an over-the-counter market, and are classified as level 2 or level 3 of the fair value hierarchy. Swaps – swap contracts are based on broker quotes in an over-the-counter market and are classified as level 2 of the fair value hierarchy. Government, Municipal Bonds and Mortgaged Backed Securities – Government and municipal securities are valued at a price based on a broker quote inan over-the-counter market and classified as level 2 of the fair value hierarchy. Mortgage backed securities are valued at a price based on observable marketinformation or a broker quote in an over-the-counter market and classified as level 2 of the fair value hierarchy. Other fixed income – non-mortgage asset backed securities, collateral held in short-term investments for derivative contract and derivatives composed offutures contracts, option contracts and other fix income derivatives valued at a price based on observable market information or a broker quote in an over-the-counter market and classified as level 2 of the fair value hierarchy. Real Estate – Real estate is comprised of public and private real estate investments. Real estate investments through registered investment companies that tradeon an exchange are classified as level 1 of the fair value hierarchy. Investments through open end private real estate funds that are valued at the reported NAVare classified as level 2 of the fair value hierarchy. Private real estate investments through partnership interests that are valued based on different methodologiesincluding discounted cash flow, direct capitalization and market comparable analysis are classified as level 3 of the fair value hierarchy.Hedge Fund – Hedge funds exposure is through fund of funds, which are made up of over 30 different hedge fund managers diversified over different hedgestrategies. The fair value of the hedge fund is determined by the fund's administrator using valuation provided by the third party administrator for each of theunderlying funds. The following tables set forth a summary of changes in the fair value of the Primary Pension Plan’s level 3 investment assets: 2013($ in millions) Private Equity Real Estate Corporate Loans Corporate Bonds Hedge FundsBalance, beginning of year $297 $231 $12 $10 $—Transfers, net — — — — —Realized gains/(loss) 38 5 — — —Unrealized (losses)/gains 3 11 — (1) 3Purchases and issuances 33 4 2 2 150Sales, maturities and settlements (73) (47) (8) — —Balance, end of year $298 $204 $6 $11 $153 89Table of Contents 2012($ in millions) Private Equity Real Estate Corporate Loans Corporate BondsBalance, beginning of year $299 $255 $27 $9Transfers, net — 3 — —Realized gains/(loss) 33 — (1) (1)Unrealized (losses)/gains (5) 7 — —Purchases and issuances 47 6 3 6Sales, maturities and settlements (77) (40) (17) (4)Balance, end of year $297 $231 $12 $10 ContributionsOur policy with respect to funding the Primary Pension Plan is to fund at least the minimum required by ERISA rules, as amended by the Pension ProtectionAct of 2006, and not more than the maximum amount deductible for tax purposes. Due to our past funding of the pension plan and overall positive growth inplan assets since plan inception, there will not be any required cash contribution for funding of plan assets in 2014 under ERISA, as amended by the PensionProtection Act of 2006.Our contributions to the unfunded non-qualified supplemental retirement plans are equal to the amount of benefit payments made to retirees throughout the yearand for 2014 are anticipated to be approximately $44 million. Benefits are paid in the form of five equal annual installments to participants and no election asto the form of benefit is provided for in the unfunded plans. The following sets forth our estimated future benefit payments: ($ in millions) Primary Plan Benefits Supplemental Plan Benefits2014 $342 $442015 331 482016 330 422017 330 202018 331 132019-2023 1,652 64 Other Benefit Plans Postretirement Benefits — Medical and DentalWe provide medical and dental benefits to retirees through a contributory medical and dental plan based on age and years of service. We provide a defineddollar commitment toward retiree medical premiums. Effective June 7, 2005, we amended the medical plan to reduce our subsidy to post-age 65 retirees and spouses by 45% beginning January 1, 2006, and thenfully eliminated the subsidy after December 31, 2006. As disclosed previously, the postretirement benefit plan was amended in 2001 to reduce and cap the percapita dollar amount of the benefit costs that would be paid by the plan. Thus, changes in the assumed or actual health care cost trend rates do not materiallyaffect the accumulated postretirement benefit obligation or our annual expense. Postretirement Plan (Income) ($ in millions) 2013 2012 2011Interest cost $1 $1 $1Amortization of actuarial loss/(gain) (1) (1) (1)Amortization of prior service cost/(credit) (8) (14) (25)Net periodic benefit expense/(income) $(8) $(14) $(25) 90Table of ContentsThe net periodic postretirement benefit is included in SG&A expenses in the Consolidated Statements of Operations. The discount rates used for thepostretirement plan are the same as those used for the defined benefit plans, as disclosed on page 83 for all periods presented.Funded StatusThe table below provides a reconciliation of benefit obligations, plan assets and the funded status of the postretirement plan. The accumulated postretirementbenefit obligation (APBO) is the present value of benefits earned to date by plan participants. Obligations and Funded Status ($ in millions) 2013 2012 Change in APBO Beginning balance $18 $24 Interest cost 1 1 Participant contributions 13 14 Curtailments — (2) Actuarial (gain)/loss — (3) Benefits (paid) (17) (16) Balance at measurement date $15 $18 Change in fair value of plan assets Beginning balance $— $— Participant contributions 13 14 Company contributions 4 2 Benefits (paid) (17) (16) Balance at measurement date $— $— Funded status of the plan $(15) (1) $(18) (1) (1)Of the total accrued liability, $2 million for 2013 and $2 million for 2012 was included in Other accounts payable and accrued expenses in theConsolidated Balance Sheets, and the remaining amounts were included in Other liabilities. The following pre-tax amounts were recognized in Accumulated other comprehensive income/(loss) in the Consolidated Balance Sheets as of the end of 2013and 2012: ($ in millions) 2013 2012Net actuarial loss/(gain) $(6) $(7)Prior service cost/(credit) (15) (23)Total $(21) (1) $(30) (1) In 2014, approximately $(1) million of net actuarial loss/(gain) and $(8) million of prior service cost/(credit) for the postretirement plan are expected tobe amortized from Accumulated other comprehensive income/(loss) into net periodic postretirement benefit (income) included in SG&A in the ConsolidatedStatement of Operations. Cash ContributionsThe postretirement benefit plan is not funded and is not subject to any minimum regulatory funding requirements. We estimate that in 2014 we will contribute$2 million toward retiree medical premiums. 91Table of ContentsEstimated Future Benefit Payments ($ in millions)Other Postretirement Benefits2014$2201522016220172201822019-20236 Defined Contribution Plans The Savings, Profit-Sharing and Stock Ownership Plan (Savings Plan) is a qualified defined contribution plan, a 401(k) plan, available to all eligibleemployees. Effective January 1, 2007, all employees who are age 21 or older are immediately eligible to participate in and contribute a percentage of their pay tothe Savings Plan. Eligible employees, who have completed one year and at least 1,000 hours of service within an eligibility period, are offered a fixed matchingcontribution each pay period equal to 50% of up to 6% of pay contributed by the employee. Matching contributions are credited to employees’ accounts inaccordance with their investment elections and fully vest after three years. We may make additional discretionary matching contributions. The Savings Plan includes a non-contributory retirement account. Participants who are hired or rehired on or after January 1, 2007 and who have completed atleast 1,000 hours of service within an eligibility period receive a Company contribution in an amount equal to 2% of the participants’ annual pay. ThisCompany contribution is in lieu of the primary pension benefit that was closed to employees hired or rehired on or after that date. Participating employees arefully vested after three years. In addition to the Savings Plan, we sponsor the Mirror Savings Plan, which is a non-qualified contributory unfunded defined contribution plan offered tocertain management employees. This plan supplements retirement savings under the Savings Plan for eligible management employees who choose to participatein it. The plan’s investment options generally mirror the traditional Savings Plan investment options. As of the end of 2013, the unamortized pre-tax balancewithin Accumulated other comprehensive income/(loss) for the plan was $17 million. Similar to the supplemental retirement plans, the Mirror Savings Planbenefits are paid from our operating cash flow and cash investments. The expense for these plans, which was predominantly included in SG&A expenses on the Consolidated Statements of Operations, was as follows: ($ in millions) 2013 2012 2011Savings Plan – 401(k) $38 $43 $52Savings Plan – retirement account 11 11 11Mirror Savings Plan 3 3 4Total $52 $57 $6792Table of Contents16. Restructuring and Management Transition The composition of restructuring and management transition charges was as follows: Cumulative AmountThrough($ in millions) 2013 2012 2011 2013Supply chain $— $19 $41 $60Catalog and catalog outlet stores — — 34 55Home office and stores 48 109 41 202Software and systems — 36 — 36Store fixtures 55 78 — 133Management transition 37 41 130 208VERP — — 179 179Other 75 15 26 123Total $215 $298 $451 $996 Supply chainAs a result of consolidating and streamlining our supply chain organization as part of a restructuring program that began in 2011, we recorded charges of $19million and $41 million in 2012 and 2011, respectively, related to increased depreciation, termination benefits and unit closing costs. Increased depreciationresulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. This restructuring activity was completedduring the third quarter of 2012. Catalog and catalog outlet storesIn the fourth quarter of 2010, we announced our plan to exit our catalog outlet stores, and, in October 2011, we sold the assets related to this operation. Wesold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted in a lossof $24 million. During 2011, we also recorded $10 million of severance costs related to the sale of our outlet stores. This restructuring activity was completedin 2011.Home office and storesDuring 2013, 2012 and 2011, we recorded $48 million, $109 million and $41 million, respectively, of costs to reduce our store and home officeexpenses. During the first three quarters of 2013, we recorded $26 million of employee termination benefits for both store and home office associates. Inaddition, in January 2014, we announced a strategic initiative to close 33 underperforming stores as part of our turnaround efforts. In conjunction with thisinitiative, during the fourth quarter of 2013, we incurred charges of $21 million related to asset impairments and $1 million of employee termination benefitcosts.In 2012, charges of $116 million associated with employee termination benefits for both store and home office associates were offset by a net curtailment gainof $7 million (see Note 15) related to our retirement benefit plans, which was incurred during the third quarter of 2012 when substantially all employee exitsrelated to 2012 were completed, for a net charge of $109 million. In 2011, we recorded $41 million of employee termination benefits. Software and systemsDuring 2012, we recorded a charge of $36 million related to the disposal of software and systems that based on our evaluation no longer supported ouroperations. This amount included $3 million of consulting fees related to that evaluation. Store fixturesDuring 2013, we recorded a total charge of $55 million related to store fixtures which consisted of $37 million of increased depreciation as a result ofshortening the useful lives of department store fixtures that were replaced throughout 2013, $11 million of charges for the impairment of certain store fixturesrelated to our former shops strategy that had been used in our prototype department store and a $7 million asset write down of store fixtures related to therenovations in our home department.During 2012, we recorded a total charge of $78 million related to store fixtures which consisted of a $53 million asset write-off related to the removal of storefixtures in our department stores and $25 million of increased depreciation as a result of93Table of Contentsshortening the useful lives of department store fixtures that were replaced throughout 2013 with the build out of additional shops. Management transitionDuring 2013, 2012 and 2011, we implemented several changes within our management leadership team that resulted in management transition costs of $37million, $41 million and $130 million, respectively, for both incoming and outgoing members of management. Ronald B. Johnson became Chief ExecutiveOfficer in November 2011, succeeding Myron E. Ullman, III. Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, atwhich time he retired from the Company until his return in April 2013 when he replaced Mr. Johnson as Chief Executive Officer. During 2011, we incurredtransition charges of $53 million and $29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointedPresident until his departure in June 2012; in November 2011, Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and ChiefTalent Officer, respectively, until their departures in April 2013. Collectively, in 2011 these three officers were paid sign-on bonuses of $24 million as part oftheir employment packages. In 2013, 2012 and 2011, we recorded $37 million, $41 million and $24 million, respectively, of management transition chargesrelated to other members of senior management. VERPAs a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August of 2011 weannounced a VERP which was offered to approximately 8,000 eligible employees. In the third quarter of 2011, we incurred a total charge of $179 millionrelated to the VERP. Charges included $176 million related to enhanced retirement benefits for the approximately 4,000 employees who accepted the VERP, $1million related to curtailment charges for our non-qualified supplemental pension plans as a result of the reduction in the expected years of future service relatedto these plans, and $2 million of costs associated with administering the VERP. This restructuring activity was completed in 2011. OtherDuring 2013, 2012 and 2011, we recorded miscellaneous restructuring charges of $75 million, $15 million and $26 million, respectively. The chargesduring 2013 were primarily related to contract termination costs and other costs associated with our previous marketing and shops strategy, including a non-cash charge of $36 million during the third quarter related to the return of shares of Martha Stewart Living Omnimedia, Inc. (MSLO) previously acquired bythe Company, which was accounted for as a cost investment (see Note 6). The 2012 and 2011 charges were primarily related to the closing and consolidatingof facilities related to optimizing our custom decorating operations, the exit of our specialty websites CLAD™ and Gifting Grace™ and the closure of ourPittsburgh, Pennsylvania customer call center. Activity for the restructuring and management transition liability for 2013 and 2012 was as follows: ($ in millions) SupplyChain Home Officeand Stores Software andSystems Store Fixtures ManagementTransition Other TotalJanuary 28, 2012 $3 $28 $— $— $10 $19 $60Charges 19 109 36 78 41 15 298Cash payments (18) (137) (3) — (42) (19) (219)Non-cash (2) 4 (33) (78) (9) (3) (121)February 2, 2013 2 4 — — — 12 18Charges — 48 — 55 37 75 215Cash payments (2) (29) — — (18) (19) (68)Non-cash — (23) — (55) (16) (38) (132)February 1, 2014 $— $— $— $— $3 $30 $33Non-cash amounts represent charges that do not result in cash expenditures including increased depreciation and write-off of store fixtures and IT software andsystems, stock-based compensation, non-cash charge for the return of shares of MSLO and curtailment gains related to our retirement benefit plans.94Table of Contents17. Real Estate and Other, Net Real estate and other consists of ongoing operating income from our real estate subsidiaries whose investments are in REITs, as well as investments in jointventures that own regional mall properties. Real estate and other also includes net gains from the sale of facilities and equipment that are no longer used inoperations, asset impairments and other non-operating charges and credits.The composition of Real estate and other, net was as follows: ($ in millions) 2013 2012 2011Gain on sale or redemption of non-operating assets, net: Sale or Redemption of Simon Property Group, L.P. (SPG) REIT units $(24) $(200) $—Sale of CBL & Associates Properties, Inc. (CBL) REIT shares — (15) —Sale of leveraged lease assets — (28) —Sale of investments in joint ventures (85) (151) —Sale of non-operating assets (23) (3) —Net gain on sale or redemption of non-operating assets (132) (397) —Dividend income from REITs (1) (6) (10)Investment income from joint ventures (6) (11) (13)Net gain from sale of operating assets (17) — (6)Store impairments 18 26 58Intangible asset impairment 9 — —Operating asset impairments — 60 —Other (26) 4 (8)Real estate and other (income)/expense, net $(155) $(324) $21 REIT AssetsOn July 20, 2012, SPG redeemed two million of our REIT units at a price of $124.00 per unit for a total redemption price of $246 million, net of fees. As ofthe market close on July 19, 2012, the SPG REIT units had a fair market value of $158.13 per unit. In connection with the redemption, we realized a netgain of $200 million determined using the first-in-first-out method for determining the cost of REIT units sold. Following the transaction, we continued to holdapproximately 205,000 REIT units in SPG. In November 2013, we converted our remaining 205,000 REIT units into SPG shares, which were sold inDecember 2013 at an average price of $151.97 per share for a total price of $31 million, net of fees, and a realized net gain of $24 million. On October 23, 2012, we sold all of our CBL REIT shares at a price of $21.35 per share for a total price of $40 million, net of fees. In connection with thesale, we realized a net gain of $15 million. See Note 9 for the related fair value disclosures and Note 12 for the net unrealized gains on our REIT assets. Leveraged LeasesDuring the third quarter of 2012, we sold all of our leveraged lease assets for $146 million, net of fees. The investments in the leveraged lease assets as of thedates of the sales were $118 million and were recorded in Other assets in the Consolidated Balance Sheets. In connection with the sales, we recorded a net gainof $28 million. Joint VenturesDuring the third quarter of 2013, we sold our investment in three joint ventures for $32 million, resulting in a net gain of $23 million. During the secondquarter of 2013, we sold our investment in one joint venture for $55 million, resulting in a net gain of $62 million. The gain for this transaction exceeded thecash proceeds as a result of distributions of cash related to refinancing activities in prior periods that were recorded as net reductions in the carrying amount ofthe investment. The net book value of the joint venture investment was a negative $7 million and was included in Other liabilities in the Consolidated BalanceSheets.During the third quarter of 2012, we sold our investments in four joint ventures that own regional mall properties for $90 million, resulting in net gainstotaling $151 million. The gain exceeded the cash proceeds as a result of distributions of cash related to refinancing activities in prior periods that wererecorded as net reductions in the carrying amount of the investments.95Table of ContentsThe cumulative net book value of the joint venture investments was a negative $61 million and was included in Other liabilities in the Consolidated BalanceSheets. Non-operating AssetsDuring the fourth quarter of 2013, we sold 10 properties used in our former auto center operations for net proceeds of $25 million, resulting in net gainstotaling $22 million. During the third quarter of 2013, we sold approximately 10 acres of excess land for net proceeds and gain of $1 million.During the third quarter of 2012, we sold a building used in our former drugstore operations with a net book value of zero for $3 million resulting in a net gainof $3 million. Operating AssetsDuring the first quarter of 2013, we sold our leasehold interest of a former department store location with a net book value of $2 million for net proceeds of$18 million, realizing a gain of $16 million. During the second quarter of 2013, we sold two properties for total net proceeds and gain of $1 million.ImpairmentsIn 2013, store impairments totaled $18 million and related to 25 underperforming department stores that continued to operate. In addition, during the fourthquarter of 2013, we recorded a $9 million impairment charge for our ownership of the U.S. and Puerto Rico rights of the monet trade name. (See Note 9). In 2012, store impairments totaled $26 million and related to 13 underperforming department stores that continued to operate (See Note 9). In addition, duringthe fourth quarter of 2012, we wrote off $60 million of store-related operating assets that were no longer being used in our operations.In 2011, store impairments totaled $58 million and related to eight underperforming department stores of which seven continued to operate.18. Income Taxes The components of our income tax expense/(benefit) were as follows:($ in millions) 2013 2012 2011Current Federal and foreign $(16) $(95) $60State and local (8) 79 16Total current (24) (16) 76Deferred Federal and foreign (428) (465) (130)State and local (46) (70) (23)Total deferred (474) (535) (153)Total $(498) $(551) $(77)96Table of ContentsA reconciliation of the statutory federal income tax rate to our effective rate is as follows:(percent of pre-tax income/(loss)) 2013 2012 2011Federal income tax at statutory rate (35.0)% (35.0)% (35.0)%State and local income tax, less federal income tax benefit (4.1) (3.7) (1.8)Increase in valuation allowance federal and state 28.6 4.3 —Tax benefit resulting from OCI allocation (16.1) — —Tax effect of dividends on ESOP shares — (0.1) (1.9)Non-deductible management transition costs — — 11.3Other, including permanent differences and credits 0.2 (1.4) (6.2)Effective tax rate (26.4)% (35.9)% (33.6)%Our deferred tax assets and liabilities were as follows:($ in millions) 2013 2012Assets Merchandise inventory $62 $42Accrued vacation pay 28 28Gift cards 69 46Stock-based compensation 69 78State taxes 36 39Workers’ compensation/general liability 93 92Accrued rent 32 29Mirror savings plan 21 22Pension and other retiree obligations — 135Net operating loss and tax credit carryforwards 918 600Other 96 69Total deferred tax assets 1,424 1,180Valuation allowance (304) (66)Total net deferred tax assets 1,120 1,114Liabilities Depreciation and amortization (1,024) (1,314)Pension and other retiree obligations (172) —Leveraged leases/tax benefit transfers (63) (63)Capitalized Advertising (3) (4)Unrealized gain on REITs — (9)Other — (6)Total deferred tax liabilities (1,262) (1,396)Total net deferred tax liabilities $(142) $(282)Deferred tax assets and liabilities included in our Consolidated Balance Sheets were as follows:($ in millions) 2013 2012Other current assets $193 $106Other long-term liabilities (335) (388)Total net deferred tax liabilities $(142) $(282)As of February 1, 2014, a valuation allowance of $304 million has been recorded against our deferred tax assets. In assessing the need for the valuationallowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. As a result of our assessment, weconcluded that, beginning in the second quarter of 2013, our97Table of Contentsestimate of the realization of deferred tax assets would be based solely on the future reversals of existing taxable temporary differences and tax planningstrategies that we would make use of to accelerate taxable income to utilize expiring net operating loss (NOL) and tax credit carryforwards.For the year ended February 1, 2014, we recorded a net tax benefit of $498 million that reflects the increase in the valuation allowance. The net tax benefitconsists of net federal, foreign and state tax benefits of $197 million, $303 million tax benefit resulting from actuarial gains in other comprehensive income,offset by $2 million of tax expense related to the amortization of certain indefinite-lived intangible assets. In accordance with accounting standards, we arerequired to allocate a portion of our tax provision between operating losses and accumulated other comprehensive income. As a result, the Company recorded atax benefit on the loss for the year, which is offset by income tax expense in other comprehensive income/(loss). However, while the income tax benefit isreported on the income statement, the income tax expense on other comprehensive income is recorded directly to accumulated other comprehensiveincome/(loss), which is a component of stockholders' equity.For U.S. federal income tax purposes, we have $2.1 billion of NOL carryforwards that expire in 2032 and 2033 and $33 million of tax credit carryforwardsthat expire at various dates through 2033. For these U.S. federal NOL and tax credit carryforwards a net deferred tax asset of $563 million has been recorded(net of $179 million valuation allowance). A net deferred tax asset of $51 million (net of $125 million valuation allowance) has been recorded for state NOLsthat expire at various dates through 2033. While these carryforwards have a potential to be used to offset future ordinary taxable income and reduce future cashtax liabilities by approximately $918 million, the Company’s ability to utilize these carryforwards will depend upon the availability of future taxable incomeduring the carryforward period and, as such, there is no assurance the Company will be able to realize such tax savings.The Company’s ability to utilize NOL carryforwards could be further limited if it were to experience an “ownership change,” as defined in Section 382 of theInternal Revenue Code and similar state provisions. An ownership change can occur whenever there is a cumulative shift in the ownership of a company bymore than 50 percentage points by one or more “5% stockholders” within a three-year period. The occurrence of such a change generally limits the amount ofNOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company’s common stock immediately prior to theownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change.As discussed in Note 12, on January 27, 2014, the Board adopted the Amended Rights Agreement to help prevent acquisitions of the Company’s commonstock that could result in an ownership change under Section 382 which helps preserve the Company’s ability to use its NOL and tax credit carryforwards.The Amended Rights Agreement and a related amendment to the Company's Articles of Incorporation are to be submitted to the Company’s Stockholders inMay 2014 for approval and are designed to prevent acquisitions of the Company’s common stock that would result in a stockholder owning 4.9% or more ofthe Company’s common stock (as calculated under Section 382), or any existing holder of 4.9% or more of the Company’s common stock acquiringadditional shares, by substantially diluting the ownership interest of any such stockholder unless the stockholder obtains an exemption from the Board. A reconciliation of unrecognized tax benefits is as follows:($ in millions) 2013 2012 2011Beginning balance $76 $110 $162Additions for tax positions related to the current year — — —Additions for tax positions of prior years 6 5 10Reductions for tax positions of prior years (1) (11) (14)Settlements and effective settlements with tax authorities (9) (24) (45)Expirations of statute (2) (4) (3)Balance at end of year $70 $76 $110As of the end of 2013, 2012 and 2011, the unrecognized tax benefits balance included $49 million, $54 million and $61 million, respectively, that, ifrecognized, would be a benefit in the income tax provision after giving consideration to the offsetting effect of $17 million, $19 million and $21 million,respectively, related to the federal tax deduction of state taxes. The remaining amounts reflect tax positions for which the ultimate deductibility is highly certain,but for which there is uncertainty about the timing. Over the next 12 months, it is reasonably possible that the amount of unrecognized tax benefits could bereduced by $2 million if our tax position is sustained upon audit, the controlling statute of limitations expires or we agree to a settlement. Accrued interest andpenalties related to unrecognized tax benefits included in income tax expense as of the end of 2013, 2012 and 2011 were $6 million, $4 million and $4 million,respectively.98Table of Contents We file income tax returns in U.S. federal and state jurisdictions and certain foreign jurisdictions. Our U.S. federal returns have been examined through 2011.We are audited by the taxing authorities of many states and certain foreign countries and are subject to examination by these taxing jurisdictions for yearsgenerally after 2008. The tax authorities may have the right to examine prior periods where federal and state NOL and tax credit carryforwards were generated,and make adjustments up to the amount of the NOL and credit carryforward amounts.19. Supplemental Cash Flow Information ($ in millions) 2013 2012 2011Supplemental cash flow information Income taxes received/(paid), net $81 $202 $(91)Interest received/(paid), net (414) (230) (225)Supplemental non-cash investing and financing activity Increase/(decrease) in other accounts payable related to purchases of property andequipment (29) 12 8Financing costs withheld from proceeds of long-term debt 70 — —Purchase of property and equipment and software through capital leases and a note payable 4 129 4Issuance costs withheld from proceeds of common stock issued 24 — —Return of shares of Martha Stewart Living Omnimedia, Inc. previously acquired by theCompany 36 — — 20. Litigation, Other Contingencies and Guarantees Litigation Macy’s LitigationOn August 16, 2012, Macy’s, Inc. and Macy’s Merchandising Group, Inc. (together the Plaintiffs) filed suit against J. C. Penney Corporation, Inc. in theSupreme Court of the State of New York, County of New York, alleging that the Company tortiously interfered with, and engaged in unfair competitionrelating to a 2006 agreement between Macy’s and Martha Stewart Living Omnimedia, Inc. (MSLO) by entering into a partnership agreement with MSLO inDecember 2011. The Plaintiffs seek primarily to prevent the Company from implementing our partnership agreement with MSLO as it relates to products inthe bedding, bath, kitchen and cookware categories. The suit was consolidated with an already-existing breach of contract lawsuit by the Plaintiffs againstMSLO, and a bench trial commenced on February 20, 2013. On March 7, 2013, the judge adjourned the trial until April 8, 2013, and ordered the parties intomediation. The parties did not reach a settlement, and the trial continued on April 8, 2013. The parties concluded their presentations of evidence on April 26,2013, and completed post-trial briefs in late May, 2013. The court held closing arguments on August 1, 2013. The court has not yet issued a final decision inthe case. On October 21, 2013, the Company and MSLO entered into an amendment of the partnership agreement, providing in part that the Company willnot sell MSLO-designed merchandise in the bedding, bath, kitchen and cookware categories. On January 2, 2014, MSLO and Macy’s announced that theyhad settled the case as to each other, and MSLO was subsequently dismissed as a defendant. While no assurance can be given as to the ultimate outcome ofthis matter, we currently 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 ProceedingsWe are subject to various other legal and governmental proceedings involving routine litigation incidental to our business. Reserves have been established basedon our best estimates of our potential liability in certain of these matters. These estimates have been developed in consultation with in-house and outsidecounsel. While no assurance can be given as to the ultimate outcome of these matters, management currently believes 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. ContingenciesAs of February 1, 2014, we estimated our total potential environmental liabilities to range from $17 million to $24 million and recorded our best estimate of$19 million in Other accounts payable and accrued expenses and Other liabilities in the Consolidated Balance Sheet as of that date. This estimate coveredpotential liabilities primarily related to underground storage tanks, remediation of environmental conditions involving our former drugstore locations andasbestos removal in connection99Table of Contentswith approved plans to renovate or dispose of our facilities. We continue to assess required remediation and the adequacy of environmental reserves as newinformation becomes available and known conditions are further delineated. If we were to incur losses at the upper end of the estimated range, we do not believethat such losses would have a material effect on our financial condition, results of operations or liquidity. GuaranteesAs of February 1, 2014, we had a guarantee totaling $20 million for the maximum exposure on insurance reserves established by a former subsidiary includedin the sale of our Direct Marketing Services business. In connection with the sale of the operations of our outlet stores, we assigned leases on certain outlet store locations to the purchaser. In the event that thepurchaser fails to make the required lease payments, we continue for a period of time to be liable for lease payments to the landlords of several of the leasedstores. The purchaser's obligations under the lease are guaranteed to us by certain principals and affiliates of the purchaser. However, the purchaser has electedto exit the outlet business and is attempting to terminate the leases with the landlords. Consequently, we expect that our continuing obligations under each leasewill be extinguished in connection with each termination. As of February 1, 2014, our maximum liability in connection with the assigned leases is $7 million. In connection with the redemption of two million of our SPG REIT units in 2012 (see Note 17), we agreed to make future capital contributions to SPG undercertain circumstances. Capital contributions would be required only if (i) one or more unsecured senior notes or term loans of SPG are in default and (ii) theaggregate amount received and/or realized by the lenders with respect to such notes or loans upon the exhaustion of all other remedies available to them is lessthan the maximum total amount of all capital contribution commitments up to a maximum of the aggregate amount due under such notes or loans at the time ofsuch default and demand under the capital contribution commitment agreements. Our contribution obligation was subject to a maximum aggregate amount of$360 million, and was proportionate to all similar commitments provided by the Company and other parties. On November 19, 2013 (Conversion Date), ourSPG REIT units were converted to shares and in December 2013, we sold our remaining SPG REIT shares. The capital contribution obligation terminated 90days from the Conversion Date on February 17, 2014.21. Quarterly Results of Operations (Unaudited) The following is a summary of our quarterly unaudited consolidated results of operations for 2013 and 2012: 2013 ($ in millions, except EPS)First Quarter Second Quarter Third Quarter Fourth Quarter Total net sales$2,635 $2,663 $2,779 $3,782 Gross margin812 787 819 1,074(1) SG&A expenses1,078 1,026 1,006 1,004 Restructuring and managementtransition(2)72 47 46 50 Net income/(loss)(348) (586)(3) (489)(3) 35(3) Diluted earnings/(loss) per share(4)$(1.58) $(2.66) $(1.94) $0.11 2012 ($ in millions, except EPS)First Quarter Second Quarter Third Quarter Fourth Quarter Total net sales$3,152 $3,022 $2,927 $3,884(5) Gross margin1,186(6) 1,004(6) 952 924SG&A expenses1,160 1,050 1,087 1,209 Restructuring and managementtransition(7)76 159 34 29 Net income/(loss)(163) (147)(8) (123)(9) (552)(10) Diluted earnings/(loss) per share(4)$(0.75) $(0.67) $(0.56) $(2.51) (1)Includes a negative impact of $72 million related to the discontinuation of brands that are not part of our go-forward merchandising strategy.(2)Restructuring and management transition charges (See Note 16) by quarter for 2013 consisted of the following:100Table of Contents($ in million)First Quarter Second Quarter Third Quarter Fourth QuarterHome office and stores28 4 (6) 22Store fixtures28 17 10 —Management transition16 13 3 5Other— 13 39 23Total$72 $47 $46 $50 (3)The second and third quarters of 2013 contained increases to our tax valuation allowance of $218 million and $184 million, respectively and adecrease of $178 million to our valuation allowance in the fourth quarter. The second, third and fourth quarters of 2013 contained gains from non-operating assets sales (see Note 17) of $62 million, $24 million and $46 million, respectively. The fourth quarter of 2013 includes $12 million of storeimpairments charges and a $9 million impairment to our monet trade name recorded in Real estate and other, net (see Note 17) Additionally, duringthe fourth quarter of 2013 we recognized a tax benefit of $270 million from income related to actuarial gains included in other comprehensive income.This tax benefit was offset by tax expense recorded for such gains in other comprehensive income.(4)EPS is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact ofchanges in average quarterly shares outstanding. (5)Sales for the 53rd week were $163 million.(6)The first and second quarters of 2012 include $53 million and $102 million, respectively, of markdowns related to the alignment of inventory with ourprior strategy.(7)Restructuring and management transition charges (See Note 16) by quarter for 2012 consisted of the following:($ in millions)First Quarter Second Quarter Third Quarter Fourth QuarterSupply chain$6 $10 $3 $—Home office and stores45 56 4 4Software and systems— 36 — —Store fixtures— 42 18 18Management transition20 10 6 5Other5 5 3 2Total$76 $159 $34 $29(8)Includes a gain of $200 million related to the redemption of REIT units, net of fees, included in Real estate and other, net (see Note 17).(9)Includes a net gain of $197 million related to the sale of non-operating assets, net of fees, included in Real estate and other, net (see Note 17). (10)Includes $26 million of store impairments charges and the write-off of $60 million of operating assets that were no longer being used in our operationsrecorded in Real estate and other, net (see Note 17). 101Table of ContentsExhibit Index Incorporated by Reference Filed (†) SEC Filing HerewithExhibit No. Exhibit Description Form File No. Exhibit Date (as indicated)2.1 Agreement and Plan of Merger dated as of January 23,2002, between JCP and Company 8-K 001-15274 2 1/28/2002 3.1 Restated Certificate of Incorporation of the Company, asamended to May 20, 2011 10-Q 001-15274 3.1 6/8/2011 3.2 Bylaws of Company, as amended to July 23, 2013 8-K 001-15274 3.1 7/26/2013 3.3 Certificate of Designation, Preferences and Rights of SeriesC Junior Participating Preferred Stock 8-K 001-15274 3.1 8/22/2013 4.1 Indenture, dated as of October 1, 1982, between JCP andU.S. Bank National Association, Trustee (formerly FirstTrust of California, National Association, as SuccessorTrustee to Bank of America National Trust and SavingsAssociation) 10-K 001-00777 4(a) 4/19/1994 4.2 First Supplemental Indenture, dated as of March 15, 1983,between JCP and U.S. Bank National Association, Trustee(formerly First Trust of California, National Association, asSuccessor Trustee to Bank of America National Trust andSavings Association) 10-K 001-00777 4(b) 4/19/1994 4.3 Second Supplemental Indenture, dated as of May 1, 1984,between JCP and U.S. Bank National Association, Trustee(formerly First Trust of California, National Association, asSuccessor Trustee to Bank of America National Trust andSavings Association) 10-K 001-00777 4(c) 4/19/1994 4.4 Third Supplemental Indenture, dated as of March 7, 1986,between JCP and U.S. Bank National Association, Trustee(formerly First Trust of California, National Association, asSuccessor Trustee to Bank of America National Trust andSavings Association) S-3 033-03882 4(d) 3/11/1986 4.5 Fourth Supplemental Indenture, dated as of June 7, 1991,between JCP and U.S. Bank National Association, Trustee(formerly First Trust of California, National Association, asSuccessor Trustee to Bank of America National Trust andSavings Association) S-3 033-41186 4(e) 6/13/1991 4.6 Fifth Supplemental Indenture, dated as of January 27,2002, among the Company, JCP and U.S. Bank NationalAssociation, Trustee (formerly First Trust of California,National Association, as Successor Trustee to Bank ofAmerica National Trust and Savings Association) toIndenture dated as of October 1, 1982 10-K 001-15274 4(o) 4/25/2002 4.7 Sixth Supplemental Indenture, dated as of May 20, 2013,among J. C. Penney Corporation, Inc., J. C. PenneyCompany, Inc., as co-obligor, and Wilmington Trust,National Association, as successor trustee 8-K 001-15274 4.1 5/24/2013 102Table of Contents Incorporated by Reference Filed (†) SEC Filing HerewithExhibit No. Exhibit Description Form File No. Exhibit Date (as indicated)4.8 Indenture, dated as of April 1, 1994, between JCP and U.S.Bank National Association, Trustee (formerly First Trust ofCalifornia, National Association, as Successor Trustee to Bankof America National Trust and Savings Association) S-3 033-53275 4(a) 4/26/1994 4.9 First Supplemental Indenture dated as of January 27, 2002,among the Company, JCP and U.S. Bank National Association,Trustee (formerly Bank of America National Trust and SavingsAssociation) to Indenture dated as of April 1, 1994 10-K 001-15274 4(p) 4/25/2002 4.10 Second Supplemental Indenture dated as of July 26, 2002,among the Company, JCP and U.S. Bank National Association,Trustee (formerly Bank of America National Trust and SavingsInstitution) to Indenture dated as of April 1, 1994 10-Q 001-15274 4 9/6/2002 4.11 Warrant Purchase Agreement dated June 13, 2011 between J.C. Penney Company, Inc. and Ronald B. Johnson 8-K 001-15274 4.1 6/14/2011 4.12 Warrant dated as of June 13, 2011 between J. C. PenneyCompany, Inc. and Ronald B. Johnson 8-K 001-15274 4.2 6/14/2011 4.13 Amended and Restated Rights Agreement, dated as of January27, 2014, by and between J. C. Penney Company, Inc. andComputershare Inc., as Rights Agent 8-K 001-15274 4.1 1/28/2014 10.1 Amendment and Restatement Agreement dated as of February8, 2013 among J. C. Penney Company, Inc., J. C. PenneyCorporation, Inc., J. C. Penney Purchasing Corporation, theLenders party thereto, JPMorgan Chase Bank, N.A., asAdministrative Agent, and Wells Fargo Bank, NationalAssociation, as LC Agent 8-K 001-15274 10.1 2/12/2013 10.2 First Amendment, dated as of May 20, 2013, to the Amendedand Restated Credit Agreement, dated as of January 27, 2012,as further amended and restated as of February 8, 2013, amongJ. C. Penney Company, Inc., J. C. Penney Corporation, Inc.,J. C. Penney Purchasing Corporation, the lenders party thereto,JPMorgan Chase Bank, N.A., as administrative agent, andWells Fargo Bank, National Association, as LC agent 8-K 001-15274 10.1 5/24/2013 10.3 Reaffirmation Agreement dated February 8, 2013 among J. C.Penney Company, Inc., J. C. Penney Corporation, Inc., J. C.Penney Purchasing Corporation, the Subsidiaries party thereto,and JPMorgan Chase Bank, N.A., as Administrative Agent 8-K 001-15274 10.2 2/12/2013 10.4 Amended and Restated Guarantee and Collateral Agreementdated as of January 27, 2012 among J. C. Penney Company,Inc., J. C. Penney Corporation, Inc., J. C. Penney PurchasingCorporation, the Subsidiaries of J. C. Penney Company, Inc.identified therein, and JPMorgan Chase Bank, N. A., asAdministrative Agent 8-K 001-15274 10.2 2/2/2012 Other instruments evidencing long-term debt have not been filed as exhibits hereto because none of the debt authorized under any such instrument exceeds 10% of the total assets of theRegistrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any of its long-term debt instruments to the Securities and Exchange Commission uponrequest.103Table of Contents Incorporated by Reference Filed (†) SEC Filing HerewithExhibit No. Exhibit Description Form File No. Exhibit Date (as indicated)10.5 Credit and Guaranty Agreement, dated as of May 22, 2013,among J. C. Penney Company, Inc., J. C. Penney Corporation,Inc., the subsidiary guarantors party thereto, the financialinstitutions party thereto as lenders, Goldman Sachs BankUSA, as administrative agent, collateral agent and lead arranger,the other joint arrangers and joint bookrunners party thereto andthe other agents party thereto 10-Q 001-15274 10.3 9/10/2013 10.6 Pledge and Security Agreement, dated as of May 22, 2013,among J. C. Penney Company, Inc., J. C. Penney Corporation,Inc., the subsidiary guarantors party thereto and GoldmanSachs Bank USA, as collateral agent 10-Q 001-15274 10.4 9/10/2013 10.7 Intercreditor and Collateral Cooperation Agreement, dated as ofMay 22, 2013, among JPMorgan Chase Bank, N.A., asrepresentative with respect to the ABL credit agreement,Goldman Sachs Bank USA, as representative with respect tothe term loan agreement, J. C. Penney Company, Inc.,J. C. Penney Corporation, Inc. and the subsidiary guarantorsparty thereto 10-Q 001-15274 10.5 9/10/2013 10.8 Asset Purchase Agreement dated as of April 4, 2004, among J.C. Penney Company, Inc., Eckerd Corporation, Thrift Drug,Inc., Genovese Drug Stores, Inc., Eckerd Fleet, Inc., CVSPharmacy, Inc. and CVS Corporation 10-K 001-15274 10(i)(e) 4/8/2004 10.9 Stock Purchase Agreement dated as of April 4, 2004, among J.C. Penney Company, Inc., TDI Consolidated Corporation, andThe Jean Coutu Group (PJC) Inc. 10-K 001-15274 10(i)(f) 4/8/2004 10.10 Amendment and Waiver No. 1 to Asset Purchase Agreementdated as of July 30, 2004, among CVS Pharmacy, Inc., CVSCorporation, J. C. Penney Company, Inc., Eckerd Corporation,Thrift Drug, Inc., Genovese Drug Stores, Inc., and EckerdFleet, Inc. 10-Q 001-15274 10.1 9/8/2004 10.11 First Amendment to Stock Purchase Agreement dated as of July30, 2004, among The Jean Coutu Group (PJC) Inc., J. C.Penney Company, Inc., and TDI Consolidated Corporation 10-Q 001-15274 10.2 9/8/2004 10.12 CN Rescission Agreement dated as of August 25, 2004, amongCVS Corporation, CVS Pharmacy, Inc., certain CVS affiliates,and J.C. Penney Company, Inc. 10-Q 001-15274 10.3 9/8/2004 10.13** J. C. Penney Company, Inc. Directors’ Equity Program TandemRestricted Stock Award/Stock Option Plan 10-K 001-00777 10(k) 4/24/1989 10.14** J. C. Penney Company, Inc. 1989 Equity Compensation Plan Def. ProxyStmt. 001-00777 A 4/18/1989 10.15** J. C. Penney Company, Inc. 1993 Non-Associate Directors’Equity Plan Def. ProxyStmt. 001-00777 B 4/20/1993 10.16** February 1995 Amendment to J. C. Penney Company, Inc.1989 Equity Compensation Plan 10-K 001-00777 10(ii)(k) 4/18/1995 10.17** February 1996 Amendment to J. C. Penney Company, Inc.1989 Equity Compensation Plan, as amended 10-K 001-00777 10(ii)(k) 4/16/1996 10.18** February 1995 Amendment to J. C. Penney Company, Inc.1993 Non-Associate Directors’ Equity Plan 10-K 001-00777 10(ii)(m) 4/18/1995 10.19** Directors’ Charitable Award Program 10-K 001-00777 10(r) 4/25/1990 10.20** J. C. Penney Company, Inc. 1997 Equity Compensation Plan Def. ProxyStmt. 001-00777 A 4/11/1997 10.21** J. C. Penney Company, Inc. 2001 Equity Compensation Plan Def. ProxyStmt. 001-00777 B 4/11/2001 10.22** J. C. Penney Company, Inc. 2009 Long-Term Incentive Plan Def. ProxyStmt. 001-15274 Annex A 3/31/2009 10.23** J. C. Penney Company, Inc. 2012 Long-Term Incentive Plan Def. ProxyStmt. 001-15274 Annex A 3/28/2012 ** Indicates a management contract or compensatory plan or arrangement.104Table of Contents Incorporated by Reference Filed (†) SEC Filing HerewithExhibit No. Exhibit Description Form File No. Exhibit Date (as indicated)10.24** JCP Supplemental Term Life Insurance Plan for ManagementProfit-Sharing Associates, as amended and restated effectiveJuly 1, 2007 10-Q 001-15274 10.1 9/12/2007 10.25** Form of Notice of Restricted Stock Unit Award under the J. C.Penney Company, Inc. 2001 Equity Compensation Plan 8-K 001-15274 10.1 2/15/2005 10.26** Form of Notice of Restricted Stock Award under the J. C.Penney Company, Inc. 2001 Equity Compensation Plan 8-K 001-15274 10.2 2/15/2005 10.27** Form of Notice of Grant of Stock Option(s) under the J. C.Penney Company, Inc. 2001 Equity Compensation Plan 8-K 001-15274 10.3 2/15/2005 10.28** Form of Director’s election to receive all/portion of annual cashretainer in J. C. Penney Company, Inc. common stock (J. C.Penney Company, Inc. 2001 Equity Compensation Plan) 8-K 001-15274 10.4 2/15/2005 10.29** Form of Notice of Restricted Stock Award – Non-AssociateDirector Annual Grant under the J. C. Penney Company, Inc.2001 Equity Compensation Plan 8-K 001-15274 10.5 2/15/2005 10.30** Form of Notice of Election to Defer under the J. C. PenneyCompany, Inc. Deferred Compensation Plan for Directors 8-K 001-15274 10.6 2/15/2005 10.31** Form of Notice of Change in the Amount of Fees Deferred underthe J. C. Penney Company, Inc. Deferred Compensation Planfor Directors 8-K 001-15274 10.7 2/15/2005 10.32** Form of Notice of Change of Factor for Deferral Account underthe J. C. Penney Company, Inc. Deferred Compensation Planfor Directors 8-K 001-15274 10.8 2/15/2005 10.33** Form of Notice of Termination of Election to Defer under the J.C. Penney Company, Inc. Deferred Compensation Plan forDirectors 8-K 001-15274 10.9 2/15/2005 10.34** Form of Notice of Non-Associate Director Restricted Stock UnitAward under the J. C. Penney Company, Inc. 2001 EquityCompensation Plan 8-K 001-15274 10.1 5/24/2005 10.35** Form of Notice of Grant of Stock Option(s), Special StockOption Grant under the J. C. Penney Company, Inc. 2005Equity Compensation Plan 8-K 001-15274 10.1 5/31/2005 10.36** Form of Notice of Restricted Stock Unit Award under the J. C.Penney Company, Inc. 2005 Equity Compensation Plan 8-K 001-15274 10.2 5/31/2005 10.37** Form of Notice of Non-Associate Director Restricted Stock UnitAward under the J. C. Penney Company, Inc. 2005 EquityCompensation Plan 8-K 001-15274 10.1 11/18/2005 10.38** JCP Form of Executive Termination Pay Agreement, as amendedand restated effective September 21, 2007 8-K 001-15274 10.1 9/26/2007 10.39** JCP Form of Executive Termination Pay Agreement, as amendedand restated effective December 3, 2013 10-Q 001-15274 10.3 12/5/2013 10.40** Form of Notice of Grant of Stock Options under the J. C.Penney Company, Inc. 2005 Equity Compensation Plan 8-K 001-15274 10.4 3/27/2006 ** Indicates a management contract or compensatory plan or arrangement.105Table of Contents Incorporated by Reference Filed (†) SEC Filing HerewithExhibit No. Exhibit Description Form File No. Exhibit Date (as indicated)10.41** Form of Election to Receive Stock in Lieu of Cash Retainer(s)(J. C. Penney Company, Inc. 2005 Equity Compensation Plan) 8-K 001-15274 10.1 5/19/2006 10.42** Form of Notice of Election to Defer under the J. C. PenneyCompany, Inc. Deferred Compensation Plan for Directors 8-K 001-15274 10.2 5/19/2006 10.43** Form of Notice of Change in the Amount of Fees Deferred underthe J. C. Penney Company, Inc. Deferred Compensation Planfor Directors 8-K 001-15274 10.3 5/19/2006 10.44** Form of Notice of Termination of Election to Defer under the J.C. Penney Company, Inc. Deferred Compensation Plan forDirectors 8-K 001-15274 10.4 5/19/2006 10.45** Form of Notice of Grant of Stock Options for Executive Officerssubject to Executive Termination Pay Agreements under the J.C. Penney Company, Inc. 2005 Equity Compensation Plan 8-K 001-15274 10.1 8/7/2006 10.46** Form of Notice of Grant of Stock Options under the J. C.Penney Company, Inc. 2005 Equity Compensation Plan 8-K 001-15274 10.1 3/15/2007 10.47** Form of Notice of Special Restricted Stock Unit Award underthe J. C. Penney Company, Inc. 2005 Equity CompensationPlan 8-K 001-15274 10.2 3/15/2007 10.48** 2008 Form of Notice of Grant of Stock Options under the J. C.Penney Company, Inc. 2005 Equity Compensation Plan 8-K 001-15274 10.1 3/7/2008 10.49** 2008 Form of Notice of Special Restricted Stock Unit Awardunder the J. C. Penney Company, Inc. 2005 EquityCompensation Plan 8-K 001-15274 10.2 3/7/2008 10.50** JCP Change in Control Plan, as amended and restated effectiveMarch 27, 2008 8-K 001-15274 10.1 4/2/2008 10.51** JCP 2009 Change in Control Plan 10-K 001-15274 10.60 3/31/2009 10.52** J. C. Penney Corporation, Inc. Change in Control Plan,effective January 10, 2011 8-K 001-15274 10.1 6/14/2011 10.53** Form of Notice of Election to Defer under the J. C. PenneyCompany, Inc. Deferred Compensation Plan for Directors 8-K 001-15274 10.2 5/19/2006 10.54** Form of Indemnification Trust Agreement between JCP andJPMorgan Chase Bank (formerly Chemical Bank) dated as ofJuly 30, 1986, as amended March 30, 1987 Def. ProxyStmt. 001-00777 Exhibit 1toExhibit B 4/24/1987 10.55** Second Amendment to Indemnification Trust Agreement betweenJCP and JPMorgan Chase Bank, effective as of January 27,2002 10-K 001-15274 10.53 3/31/2009 10.56** Third Amendment to Indemnification Trust Agreement betweenCompany, JCP and JPMorgan Chase Bank, effective as of June1, 2008 10-Q 001-15274 10.2 9/10/2008 10.57** Form of Indemnification Agreement between Company, JCP andindividual Indemnities, as amended through January 27, 2002 10-K 001-15274 10(ii)(ab) 4/25/2002 10.58** Special Rules for Reimbursements Subject to Code Section409A under Indemnification Agreement between Company, JCPand individual Indemnities, adopted December 9, 2008 10-K 001-15274 10.56 3/31/2009 10.59** JCP Mirror Savings Plan, amended and restated effectiveDecember 31, 2007 and as further amended through December9, 2008 10-K 001-15274 10.60 3/31/2009 10.60** J. C. Penney Company, Inc. Deferred Compensation Plan forDirectors, as amended and restated effective February 27, 2008and as further amended through December 10, 2008 10-K 001-15274 10.62 3/31/2009 10.61** J. C. Penney Company, Inc. 2005 Equity Compensation Plan,as amended through 12/10/2008 10-K 001-15274 10.65 3/31/2009 ** Indicates a management contract or compensatory plan or arrangement.106Table of Contents Incorporated by Reference Filed (†) SEC Filing HerewithExhibit No. Exhibit Description Form File No. Exhibit Date (as indicated)10.62** Form of Notice of Grant of Stock Options under the J. C.Penney Company, Inc. 2009 Long-Term Incentive Plan 10-Q 001-15274 10.2 9/9/2009 10.63** Form of Notice of Restricted Stock Unit Grant under the J. C.Penney Company, Inc. 2009 Long-Term Incentive Plan 10-Q 001-15274 10.3 9/9/2009 10.64** Form of Notice of Non-Associate Director Restricted Stock UnitAward under the J. C. Penney Company, Inc. 2009 Long-TermIncentive Plan 10-Q 001-15274 10.4 9/9/2009 10.65 Consumer Credit Card Program Agreement by and between JCPand GE Money Bank, as amended and restated as of November5, 2009 8-K 001-15274 10.1 11/6/2009 10.66 First Amendment, dated as of October 29, 2010, to ConsumerCredit Card Program Agreement by and between J. C. PenneyCorporation, Inc. and GE Money Bank, as amended andrestated as of November 5, 2009 8-K 001-15274 10.1 10/29/2010 10.67 Second Amendment dated as of January 30, 2013 to ConsumerCredit Card Program Agreement by and between J. C. PenneyCorporation, Inc. and GE Capital Retail Bank, as amended andrestated as of November 5, 2009 and as amended by the FirstAmendment thereto dated as of October 29, 2010 8-K 001-15274 10.1 2/4/2013 10.68 Third Amendment dated as of October 11, 2013 to ConsumerCredit Card Program Agreement by and between J. C. PenneyCorporation, Inc. and GE Capital Retail Bank, as amended andrestated as of November 5, 2009, as amended by the FirstAmendment thereto dated as of October 29, 2010 and theSecond Amendment thereto dated as of January 30, 2013 8-K 001-15274 10.1 10/15/2013 10.69 Registration Rights Agreement dated August 13, 2013, among J.C. Penney Company, Inc., Pershing Square CapitalManagement, L.P., PS Management GP, LLC, PershingSquare GP, LLC, William A. Ackman and certain affiliatedPershing Square funds 8-K 001-15274 10.1 8/16/2013 10.70** J. C. Penney Corporation, Inc., Management IncentiveCompensation Program, effective January 30, 2011 8-K 001-15274 10.1 1/10/2011 10.71** Executive Termination Pay Agreement between J. C. PenneyCorporation, Inc. and Kenneth H. Hannah 10-Q 001-15274 10.2 9/4/2012 10.72** Letter Agreement between J. C. Penney Company, Inc. andKenneth H. Hannah 10-Q 001-15274 10.1 9/4/2012 10.73** Notice of Restricted Stock Unit Grant for Kenneth H. Hannah 10-K 001-15274 10.79 3/20/2013 10.74** Form of Notice of Grant of Stock Options under the J. C.Penney Company, Inc. 2012 Long-Term Incentive Plan 10-K 001-15274 10.80 3/20/2013 10.75** Form of Notice of Restricted Stock Unit Grant under the J. C.Penney Company, Inc. 2012 Long-Term Incentive Plan 10-K 001-15274 10.81 3/20/2013 10.76** Form of Notice of Non-Associate Director Restricted Stock UnitAward under the J. C. Penney Company, Inc. 2012 Long-TermIncentive Plan 10-K 001-15274 10.82 3/20/2013 10.77** Form of Notice of 2013 Performance Unit Grant under the J. C.Penney Company, Inc. 2012 Long-Term Incentive Plan 8-K 001-15274 10.1 4/4/2013 12 Computation of Ratios of Earnings to Fixed Charges †21 Subsidiaries of the Registrant †23 Consent of Independent Registered Public Accounting Firm † ** Indicates a management contract or compensatory plan or arrangement.107Table of Contents Incorporated by Reference Filed (†) SEC Filing HerewithExhibit No. Exhibit Description Form File No. Exhibit Date (as indicated)24 Power of Attorney †31.1 Certification by CEO pursuant to 15 U.S.C. 78m(a) or 780(d),as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 †31.2 Certification by CFO pursuant to 15 U.S.C. 78m(a) or 780(d),as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 †32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002 †32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002 †101.INS XBRL Instance 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 †108Exhibit 12J.C. Penney Company, Inc.Computation of Ratios of Earnings to Fixed Charges(Unaudited) 52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks Ended Ended Ended Ended Ended($ in millions)2/1/2014 2/2/2013 1/28/2012 1/29/2011 1/30/2010Income/(loss) from continuing operations before income taxes$(1,886) $(1,536) $(229) $581 $403Fixed charges: Net interest expense352 226 227 231 260Interest income included in net interest1 6 8 11 10Loss on extinguishment of debt, bond premiums andunamortized costs114 — — 20 —Estimated interest within rental expense99 101 104 102 98Capitalized interest— — — — 4Total fixed charges566 333 339 364 372Capitalized interest— — — — (4)Total earnings available for fixed charges$(1,320) $(1,203) $110 $945 $771Ratio of earnings to fixed charges(2.3) (3.6) 0.3 2.6 2.1Coverage deficiency1,886 1,536 229 — —EXHIBIT 21SUBSIDIARIES OF THE REGISTRANTSet forth below is a direct subsidiary of the Company as of March 21, 2014. All of the voting securities of this subsidiary are owned by the Company.SubsidiariesJ. C. Penney Corporation, Inc. (Delaware)The names of other subsidiaries have been omitted because these unnamed subsidiaries, considered in the aggregate as a single subsidiary, do not constitute asignificant subsidiary.Exhibit 23Consent of Independent Registered Public Accounting FirmThe Board of DirectorsJ. C. Penney Company, Inc.:We consent to the incorporation by reference in the registration statements on Form S-8 (Registration Nos. 33-28390, 33-66070, 333-33343,333-27329, 333-62066, 333-125356, 333-159349, 333-182202 and 333-182825) and Form S-3 (Registration No. 333-188106-01) of J.C. Penney Company, Inc. of our reports dated March 21, 2014, with respect to the consolidated balance sheets of J. C. Penney Company, Inc. andsubsidiaries as of February 1, 2014 and February 2, 2013, and the related consolidated statements of operations, comprehensive income/(loss);stockholders’ equity, and cash flows for each of the years in the three-year period ended February 1, 2014, and the effectiveness of internal controlover financial reporting as of February 1, 2014, which reports appear in the February 1, 2014 annual report on Form 10-K of J. C. Penney Company,Inc./s/ KPMG LLPDallas, TexasMarch 21, 2014Exhibit 24POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS THAT each of the undersigned directors and officers of J. C. PENNEY COMPANY, INC., a Delawarecorporation, which will file with the Securities and Exchange Commission, Washington, D.C. (“Commission”), under the provisions of the SecuritiesExchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended February 1, 2014 (“Annual Report”), hereby constitutes andappoints Janet Dhillon, Kenneth Hannah, and Dennis Miller, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power to eachof them to act without the others, for him or her and in his or her name, place, and stead, in any and all capacities, to sign said Annual Report, which is aboutto be filed, and any and all subsequent amendments to said Annual Report, and to file said Annual Report so signed, and any and all subsequent amendmentsthereto so signed, with all exhibits thereto, and any and all documents in connection therewith, and to appear before the Commission in connection with anymatter relating to said Annual Report, hereby granting to the attorneys-in-fact and agents, and each of them, full power and authority to do and perform anyand all acts and things requisite and necessary to be done in and about the premises as fully and to all intents and purposes as he or she might or could do inperson, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of the 21st day of March, 2014. /s/ Myron E. Ullman, III /s/ Kenneth HannahMyron E. Ullman, IIIChief Executive Officer(principal executive officer); Director Kenneth HannahExecutive Vice President andChief Financial Officer(principal financial officer) /s/ Dennis Miller /s/ Colleen BarrettDennis MillerSenior Vice President and Controller(principal accounting officer) Colleen BarrettDirector /s/ Thomas Engibous /s/ Kent FosterThomas EngibousChairman of the Board; Director Kent FosterDirector /s/ Leonard Roberts /s/ Stephen SadoveLeonard RobertsDirector Stephen SadoveDirector /s/ Javier Teruel /s/ Gerald TurnerJavier TeruelDirector Gerald TurnerDirector /s/ Ronald Tysoe /s/ Mary Beth WestRonald TysoeDirector Mary Beth WestDirectorExhibit 31.1 CERTIFICATION I, Myron E. Ullman, III, certify that:1.I have reviewed this annual report on Form 10-K of J. C. Penney Company, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 21, 2014 /s/ Myron E. Ullman, III Myron E. Ullman, III Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Kenneth Hannah, certify that:1.I have reviewed this annual report on Form 10-K of J. C. Penney Company, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 21, 2014 /s/ Kenneth Hannah Kenneth Hannah Executive Vice President and Chief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of J. C. Penney Company, Inc. (the “Company”) on Form 10-K for the period ending February 1, 2014 (the “Report”), I,Myron E. Ullman, III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that to my knowledge: (1)the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.DATED this 21st day of March 2014. /s/ Myron E. Ullman, IIIMyron E. Ullman, IIIChief Executive OfficerExhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of J. C. Penney Company, Inc. (the “Company”) on Form 10-K for the period ending February 1, 2014 (the “Report”), I,Kenneth Hannah, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1)the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.DATED this 21st day of March 2014. /s/ Kenneth HannahKenneth HannahExecutive Vice President andChief Financial Officer

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