July
18, 2007
William
H. Thompson
Branch
Chief
Division
of Corporation Finance
U.
S. Securities and Exchange Commission
100
F Street, N.E.
Washington,
D.C. 20549
RE:
J. C. Penney Company, Inc.
Form
10-K for Fiscal Year Ended February 3, 2007
Filed
April 4, 2007
Form
10-Q for Fiscal Quarter Ended May 5, 2007
File
No. 1-15274
Dear
Mr. Thompson:
We
are in receipt of your letter dated June 19, 2007 regarding the above-referenced
filings for J. C. Penney Company, Inc. (the Company or JCPenney) and appreciate
the SEC staff’s prompt review of our most recent Form 10-K and 10-Q and in
assisting us with continuing to enhance the overall disclosures in our filings
with the Commission.
The
Company acknowledges its responsibility for the adequacy and accuracy of the
disclosures in its filings. We further acknowledge that staff comments or
changes to disclosures in response to staff comments do not foreclose the
Commission from taking any action with respect to the filing, and that the
Company may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
To
facilitate your review, we have provided below a specific response to each
of
your six numbered comments, with your comment in bold preceding the related
response.
Form
10-K for Fiscal Year Ended February 3, 2007
Consolidated
Statements of Cash Flows, page
F-6
| 1. |
Please
tell us in detail how you classify cash flows from discontinued operations
and your basis in GAAP for each of the classifications. In doing
so,
please specifically address taxes, fees, transaction costs and estimated
post-closing adjustments related to discontinued businesses, cash
payments
for the Eckerd-related reserves and tax
and
|
-1-
other
payments referred to in Note 2. Please also tell us why you believe your
classification of proceeds from the sale of discontinued operations as
an
investing activity of continuing operations is appropriate. In your response,
please explain the facts and circumstances that support a classification
other
than “discontinued operations” on a basis consistent with the classification of
income from discontinued operations in the consolidated statements of
operations.
Response
The
Company classifies cash flows from discontinued operations according to our
understanding of the SEC guidance that was issued in February 2006, based on
a
speech of an SEC staff member given at the AICPA 33rd
National Conference on Current SEC and PCAOB Developments held in December
2005.
That guidance specifically required discrete reporting of operating, investing,
and financing cash flows from discontinued operations by category. To comply
with this guidance, beginning with the fiscal 2005 Annual Report, we categorize
each cash inflow and outflow related to discontinued operations based on the
nature of the item and the guidance for classification set forth in SFAS
95,"Statement of Cash Flows." For example, cash flows related to income taxes
are generally considered an operating activity. Accordingly, we classified
cash
payments for income taxes on the Eckerd sale in the operating category of
discontinued operations. Other cash payments or receipts related to reserves
that were established for the Eckerd sale, such as property taxes and costs
to
exit the Colorado and New Mexico markets were classified in the investing
category of discontinued operations.
Prior
to the February 2006 SEC guidance, the Company historically presented cash
flows
related to discontinued operations as a separate single line item in the
consolidated statements of cash flows following the financing section, which
we
believed was consistent with footnote 10 of SFAS 95 that states "Separate
disclosure of cash flows pertaining to ….discontinued operations reflected in
those categories [operating, investing, and financing activities] is not
required. An Enterprise that nevertheless chooses to report separately operating
cash flows of discontinued operations shall do so consistently for all periods
affected…." Discrete presentation of cash flows from discontinued operations is
consistent with other authoritative accounting literature that requires the
separate presentation of assets and liabilities as well as operations of
discontinued operations, specifically paragraphs 43 and 46 of SFAS 144,"Disposal
of Long-Lived Assets."
To
comply with the February 2006 SEC guidance, we simply expanded the single line
item disclosure of cash flows related to discontinued operations into the three
categories set forth in SFAS 95.
Addressing
the classification of proceeds from the sale of discontinued operations, the
proceeds the Company received from the sale of Eckerd in 2004 and Lojas Renner,
S.A. in 2005 were generated from the sales of the Company’s investments in those
subsidiaries. The cash proceeds from those sales, which were clearly disclosed,
were used in the Company’s ongoing operations and redeployed to reduce debt and
repurchase common stock, both of which are part of continuing operations. The
presentation of proceeds from the sale of an investment in a subsidiary as
an
investing activity of continuing operations in the statement of cash flows
is
consistent with paragraph 16b and c of SFAS 95, which states that "Cash flows
from investing activities [include]… Receipts from sales of equity instruments
of other enterprises and
from returns of investment in those instruments and receipts from sales of
property, plant, and equipment and other productive assets." Additionally,
this
presentation is consistent with prevalent disclosure practices observed in
other
companies’ public filings.
-2-
The
accounting for the sale transactions as well as the presentation in the
consolidated statements of cash flows and other financial statements were
audited by KPMG who concurred with the Company’s treatment and classifications.
Accordingly, we believe our presentation was in accordance with GAAP and
industry practice.
Our
intent is always to provide clear and useful disclosures to our investors.
We
believe that from the time that Eckerd and other subsidiaries were initially
classified as held for sale, the disclosures surrounding the Company’s sales of
its investments in subsidiaries were complete and reflected an accurate
presentation of the effect on the Company’s financial position, liquidity and
results of operations.
Note
1. Nature of Operations and Summary of Significant Accounting Policies, page
F-7
Vendor
Allowances, page F-9
| 2. |
Please
disclose the amount of cooperative advertising payments and other
vendor
allowances offset against each operating expense line item for the
years
presented. Also, to the extent material to an understanding of your
operating results, please include a discussion and analysis of vendor
allowances in managements' discussion and analysis of financial condition
and results of operations.
|
Response
The
amounts of cooperative advertising payments offset against selling, general
and
administrative expenses for 2006, 2005, and 2004 were $164 million, $139
million, and $174 million, respectively. Other vendor allowances recorded as
offsets to operating expenses, such as various merchandise training and service
programs, and selling salary reimbursements, totaled approximately $8 million,
$7 million and $3 million for 2006, 2005, and 2004, respectively.
In
future filings, we will disclose the amount of cooperative advertising
reimbursements netted against gross advertising costs for all years presented.
Also, to the extent material to an understanding of our operating results,
we
will include a discussion and analysis of vendor allowances in management’s
discussion and analysis of financial condition and results of
operations.
Leases,
page F-12
| 3. |
Please
tell us your basis for amortizing developer/tenant allowances referred
to
in the second paragraph upon receipt of the allowances as opposed
to the
date of initial possession of leased premises. In addition, please
clarify
your disclosure as
appropriate.
|
Response
Our
policy for accounting for developer/tenant allowances is based on Question
2 of
FASB Technical Bulletin 88-1 (As Amended), "Issues Relating to Accounting for
Leases," paragraph 15 of SFAS 13,"Accounting for Leases," along with
clarifications of certain accounting issues
-3-
and
their application under GAAP relating to operating leases provided by the
SEC in
its letter from the Chief Accountant to the AICPA dated February 7, 2005.
The
Company receives developer/tenant allowances to renovate or reconfigure
department stores and/or access thereto when a developer is planning on making
various site plan modifications to their mall property such as expanding the
shopping mall or center resulting in the addition of new tenants, adding new
or
renovating mall entrances, adding various entertainment venues, such as a movie
theatre or ice skating rink, and expanding parking space. These allowances
are
sometimes received at the commencement of a lease, but more often the allowance
is provided on existing stores that the Company has operated for several years.
Additional lease renewal options are oftentimes negotiated at the time a
developer offers an allowance as they want the Company to continue operating
the
department store.
Consistent
with our accounting policy, on the date that we receive the allowance, we record
the amount as a deferred rent liability and amortize it over the remaining
term
of the lease. We do not record a large credit to the income statement to
retroactively apply the allowance to prior periods during which we controlled
or
operated the store.
In
future filings, we will clarify this disclosure to explain that upon receipt
of
developer/tenant allowances, the Company records a deferred rent liability
in
Other Liabilities in the Consolidated Balance Sheet and amortizes such amount
over the remaining
term of the corresponding lease as a reduction of rent expense.
Note
20. Litigation, Other Contingencies and Guarantees, page
F-39
| 4. |
Please
tell us the significance of the potential environmental liabilities
disclosed in the second and third paragraphs. Please address the
range of
reasonably possible outcomes that could have a material effect on
your
financial condition, results of operations or liquidity. In addition,
tell
us the significant assumptions and judgments underlying the recognition
and measurement of the liabilities. If there is at least a reasonable
possibility that a loss exceeding amounts recognized may have been
incurred please disclose estimates of the possible loss or range
of loss
or state that such estimates cannot be made. Refer to SAB Topic 5:
Y and
SFAS 5.
|
Response
As
of the fiscal year ended February 3, 2007, the Company estimated its total
potential environmental liabilities to range from $52 million to $87
million and recorded management’s best estimate of $63 million in Other
Liabilities in the consolidated balance sheet as of that date. This estimate
covered potential liabilities primarily related to underground storage tanks,
remediation of environmental conditions involving the Company’s former Eckerd
drugstore operations, and asbestos removal in connection with approved plans
to
renovate or dispose of Company facilities. Even if the Company were to incur
losses at the upper end of the estimated range, we do not believe that such
losses would have a material effect on the Company’s financial condition,
results of operations, or liquidity.
-4-
In
establishing its reserves for liabilities associated with underground storage
tanks, the Company maintains and periodically updates an inventory listing
of
potentially impacted sites. This updated information is provided to an outside
environmental consulting firm who estimates the cost of remediation efforts
based on the Company’s historical experience as well as the firm’s professional
experience and knowledge of industry data. With respect to its former Eckerd
operations, the Company provided information regarding known and potentially
impacted sites to an outside environmental consulting firm having access to
extensive databases of environmental matters, including data from the
Environmental Protection Agency, to estimate the cost of remediation. The
combined experience of the Company and the consulting firm, as well as relevant
data, was used to develop a range of potential liabilities, and a reserve was
established at the time of the Eckerd sale. The Eckerd reserve is adjusted
as
payments are made or new information becomes known. Reserves for asbestos
removal are based on the Company’s known liabilities in connection with approved
plans for store modernization, renovations, or dispositions of store
locations.
The
Company believes that its reserves are adequate to cover estimated potential
liabilities and that any additional losses, or range of losses, are not
currently capable of estimation.
| 5. |
We
note your references to the independent engineering firm and outside
consultant in regard to environmental matters. Please name and file
the
written consent of the independent engineering firm and outside consultant
to whom you refer. Alternatively, please remove the references to
these
persons. If you do not believe consents are required, please explain
in
detail. Refer to Section 436(b) of Regulation C, Section 7(a) of
the
Securities Act of 1933 and Item 601(b)(23) of Regulation
S-K.
|
Response
In
future filings, we will delete the references to the independent engineering
firm and the outside consultant in regard to environmental matters.
Form
10-Q for the Quarterly Period Ended May 5, 2007
Notes
to Unaudited Interim Consolidated Financial Statements
Note
1) Nature of Operations and Summary of Significant Accounting Policies, page
4
| 6. |
We
note that you may be the guarantor of certain outstanding debt securities
of JCP. Please advise. Also, tell us in detail why your disclosure
complies with Rule 3-10 of Regulation S-X, including paragraphs (i)(9)
and
(i)(10). In doing so, please address the disclosure included in your
most
recent annual report as
well.
|
Response
As
noted in the Form 10-K for the fiscal year ended February 3, 2007 and the Form
10-Q for the quarterly period ended May 5, 2007, the Company is a holding
company whose principal operating subsidiary is J. C. Penney Corporation, Inc.
(JCP). JCP is 100% owned (as defined in Rule 3-10(h)(1) of Regulation S-X)
by
the Company. The Company has no independent assets or operations and no direct
subsidiaries other than JCP.
-5-
In
connection with the implementation of the holding company structure in 2002,
the
Company became the guarantor of JCP’s 7⅝% Debentures due 2097. The guarantee by
the Company of the Debentures is full and unconditional (as defined in Rule
3-10(h)(2) of Regulation S-X). In addition, the Company is the co-obligor on
all
other outstanding debt securities of JCP. No other subsidiary of the Company
is
a guarantor or co-obligor regarding the payment of principal and interest on
JCP’s outstanding debt securities.
Accordingly,
in reliance on the exception under paragraph (c) of Rule 3-10 of Regulation
S-X,
separate financial statements for JCP are not included in the Company’s Annual
Report on Form 10-K or Quarterly Report on Form 10-Q. Additionally, there are
no
restrictions on the ability of the Company to obtain funds from JCP by dividend
or loan, which would require disclosure under paragraphs (i)(9) or (i)(10)
of
Rule 3-10 of Regulation S-X.
We
look forward to working with you to address your comments and welcome any
questions or additional comments you may have after reviewing our responses.
The
Company remains committed to continuously improving the transparency of its
financial reporting, by providing investors with useful and clear financial
disclosures and presenting an accurate view of the Company’s financial position
and operating results to permit all users of our financial statements to make
informed investment decisions.
Please
contact Sal Saggese, Chief Accountant, at (972) 431-2204 or ssaggese@jcpenney.com
with any specific questions on our responses related to the financial statements
and related items or Salil Virkar, Senior Managing Counsel, at (972) 431-1211
or
svirkar@jcpenney.com
with any other questions.
Respectfully,
/s/
Robert B. Cavanaugh
Robert
B. Cavanaugh
Executive
Vice President and Chief Financial Officer
J.
C. Penney Company, Inc.
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