General

J. C. Penney Company, Inc. is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). JCP was incorporated in Delaware in 1924, and J. C. Penney Company, Inc. was incorporated in Delaware in 2002, when the holding company structure was implemented. The holding company has no independent assets or operations and no direct subsidiaries other than JCP. The holding company and its consolidated subsidiaries, including JCP, are collectively referred to in this quarterly report as "we," "us," "our," "ourselves," "JCPenney" or the "Company," unless otherwise indicated.

The holding company is a co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on JCP's outstanding debt securities. The guarantee of certain of JCP's outstanding debt securities by the holding company is full and unconditional.

The following discussion, which presents our results, should be read in conjunction with our consolidated financial statements as of January 31, 2009, and for the year then ended, and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), all contained in the Annual Report on Form 10-K for the year ended January 31, 2009 (2008 Form 10-K). This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. Unless otherwise indicated all references to earnings per share (EPS) are on a diluted basis and all references to years relate to fiscal years rather than to calendar years.

Key Items
· Although the difficult economic environment persisted during the first quarter of 2009, both sales and operating income exceeded our expectations at the beginning of the quarter.

· First quarter results reflected positive customer response to the style and newness in our spring merchandise assortment, which together with the alignment of inventory levels to current sales trends, led to improved sales and gross margin rate and had a positive impact on operating income. Aggressive management of our operating expenses also contributed to higher-than-expected operating income.

o Comparable store sales were better than initial guidance by more than 400 basis points.

o Gross margin rate improved 50 basis points over the same period last year.

o Selling general and administrative (SG&A) expenses declined $62 million from last year's first quarter.

· During the quarter, we continued executing our Bridge Plan under which we accelerate, maintain and moderate key initiatives in order to put us back in position for retail growth and leadership when the economic environment improves.

o We accelerated the effective communication of our value proposition - style, quality, price - through our spring marketing campaign, which launched during the Academy Awards in February; and continued our roll-out of Sephora inside JCPenney.

o We maintained our newness and innovation in our merchandise offerings with the launch of new brands, such as Allen B® by Allen Schwartz and I "Heart" Ronson™ by Charlotte Ronson and further strengthened and improved assortments of some of our private and exclusive brands, including a.n.a®, Worthington® and St. John's Bay®, as well as American Living®, which experienced better sales and gross margin.

o We moderated our level of inventory, by reducing it by over 15% on a comparable store basis, and reduced our capital expenditures, both of which contributed significantly to our ability to generate free cash flow (a non-GAAP financial measure) for the quarter.

· We strengthened our liquidity position by improving free cash flow by $308 million versus last year's first quarter. We ended the quarter with $2.1 billion of cash and cash equivalents and we negotiated a new $750 million revolving credit agreement.

· During the first quarter, we opened 9 new stores all of which in the off-mall format and one of which was a relocation. We also opened 14 Sephora inside JCPenney locations, which brought the total to 105 locations.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Results of Operations

Our first quarter 2009 results continued to be impacted by the weakened worldwide economic environment that has negatively affected consumer spending in the United States and fostered uncertainty in the global capital markets. Accordingly, we are executing our Bridge Plan strategy to improve our assortments, manage inventory levels to reflect current sales trends, and control our expenses. Our performance in the first quarter benefited from better-than-expected sales throughout the quarter and, along with better alignment of inventory levels, led to an improved gross margin rate. This, coupled with a reduction in SG&A expenses, enabled us to exceed our operating income expectations for the quarter.

($ in millions, except EPS)                                 13 weeks ended
                                                           May 2,      May 3,
                                                              2009       2008

Total net sales                                          $   3,884   $  4,127
Percent (decrease) from prior year                          (5.9)%     (5.1)%
Comparable store sales (decrease)(1)                        (7.5)%     (7.4)%
Gross margin                                                 1,574      1,650
Operating expenses:
Selling, general and administrative (SG&A)                   1,255      1,317
Qualified pension plan expense/(income)                         81        (33 )
Supplemental pension plans expense                               9         11
   Total pension expense/(income)                               90        (22 )
Depreciation and amortization                                  120        110
Pre-opening                                                      9          6
Real estate and other (income), net                             (6 )       (9 )
  Total operating expenses                                   1,468      1,402
Operating income                                               106        248
Net interest expense                                            63         53
Income before income taxes                                      43        195
Income tax expense                                              18         75
Net income                                               $      25   $    120

Diluted EPS                                              $    0.11   $   0.54

Ratios as a percent of sales:
Gross margin                                                 40.5%      40.0%
SG&A                                                         32.3%      31.9%
Total operating expenses                                     37.8%      34.0%
Operating income                                              2.7%       6.0%
Operating income adjusted to exclude qualified pension
   plan expense/(income) (non-GAAP financial measure)         4.8%       5.2%

(1) Comparable store sales are presented on a 52-week basis and include sales from new and relocated stores that have been opened for 12 consecutive full fiscal months and online sales through jcp.com. Stores closed for an extended period are not included in comparable store sales calculations, while stores remodeled and minor expansions not requiring store closures remain in the calculations.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Operating Performance Summary
For the first quarter of 2009, we reported net income of $25 million, or $0.11 per share, compared with $120 million, or $0.54 per share, for the same 2008 period. Our first quarter results were impacted by the pre-tax negative swing in non-cash qualified pension plan expense of $114 million, or $0.32 per share, on an after-tax basis. Despite the persistence of the worldwide economic challenges, we experienced better-than-expected sales throughout the quarter from the positive customer response to the newness in our merchandise assortments, which together with the alignment of inventory levels to the current sales trend, resulted in a 50 basis point improvement in gross margin. SG&A expenses were well managed and decreased $62 million from last year's first quarter. Operating income declined to 2.7% of sales as a result of higher qualified pension plan non-cash expense and the deleveraging of other operating costs due to the lower sales volume. On an adjusted basis, excluding the non-cash qualified pension plan expense from the quarter and the non-cash pension plan credit from last year's quarter, operating income was 4.8% of sales versus 5.2%. (See Operating Income for a discussion of this non-GAAP financial measure).

Store Growth
The following table compares the number of JCPenney department stores and gross
selling space for the first quarter of 2009 and 2008.

                                                               13 weeks ended
                                                               May 2,   May 3,
                                                                 2009     2008
    Number of JCPenney department stores
    Beginning of period                                         1,093    1,067

    Stores opened(1)                                                9       11
    Closed stores(1)                                               (1 )     (4 )

    End of period                                               1,101    1,074


    Gross selling space
    (square feet in millions)
    Beginning of period                                           110      107

    Stores opened                                                   1        1
    Closed stores                                                   -        -

    End of period                                                 111      108
    (1) Includes relocations of 1 and 3 stores, respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations-(Continued)


Total Net Sales
($ in millions)               13 weeks ended
                              May 2,     May 3,
                                2009       2008
Total net sales             $  3,884   $  4,127
Sales percent (decrease):
Total net sales               (5.9)%     (5.1)%
Comparable store sales        (7.5)%     (7.4)%

Total net sales decreased $243 million, or 5.9%, to $3,884 million compared to last year's first quarter. Total net sales reflected sales of 27 net new stores (net of closings and relocations) opened subsequent to last year's first quarter, including 8 net new stores opened in this year's first quarter. Comparable store sales, which decreased 7.5%, exceeded our expectations of a double-digit decline as of the beginning of the quarter. Last year's comparable store sales decreased 7.4%. JCPenney mall store traffic, which experienced an improvement from recent trends, was down approximately 3.3% for the quarter, but exceeded the overall mall traffic trends. The number of transactions and number of units sold declined for the quarter, consistent with the difficult retail environment. For the quarter, the average unit retail was up slightly. Geographically, the best performance was in the southwest region, and the weakest was in the southeast region. Online sales, through jcp.com, which are included in comparable stores sales, decreased 3.9% for the first quarter of 2009.

The decline in sales for the quarter was better than initial expectations due in part to positive customer response to our spring merchandise assortment. Although sales weakness was broad-based across most merchandise categories, our best performing division was women's apparel. Fine jewelry experienced the weakest results for the quarter. Private brands, including exclusive brands found only at JCPenney, comprised approximately 50% of total merchandise sales for the first quarter of 2009, consistent with last year's first quarter. Fine jewelry continues to experience weakness in consumer demand.

The first quarter results reflect important merchandise initiatives for the spring selling season. Customers responded well to our new spring offerings from our exclusive designers portfolio, which include nicole® by Nicole Miller, Bisou Bisou® by Michele Bohbot, ALLEN B.® by Allen B. Schwartz, Fabulosity™ by Kimora Lee Simmons and I "Heart" Ronson™ by Charlotte Ronson. Additionally, our better-than-expected results were benefited by the customer response to our recently updated and leading women's private brands such as a.n.a®, Worthington® and St. John's Bay®. Our results also reflect the improved performance of American Living®, which is increased over last year both in sales and gross margin.

Management continues to be pleased with the results of Sephora inside JCPenney. At the end of the first quarter of 2009, we had 105 Sephora inside JCPenney locations compared to 72 Sephora inside JCPenney locations at the end of the 2008 first quarter. The number of Sephora inside JCPenney locations is expected to be 155 by the end of 2009.

Merchandise Initiatives
In April 2009, we announced the launch of Cindy Crawford Style, a new brand of home furnishings and accessories. Launching exclusively at JCPenney in September 2009, the collection will include bedding, window coverings, bath, decorative accessories, table top, area rugs, lighting and wall décor. Furniture will also be available in select markets.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

In April 2009, we announced the launch of three new brands for young men, RS By Sheckler, Rusty surf apparel and Third Rail a Zoo York Production. Catering to the action sports lifestyle, these new surf and skate-inspired brands will be available in JCPenney stores and jcp.com starting in July, arriving in time for the back to school shopping season.

Also in April 2009, we announced the launch of JOE Joseph Abboud, a comprehensive collection of men's sportswear, shirts, ties, tailored clothing, outerwear and footwear. Launching at our stores in September 2009, JOE Joseph Abboud - owned by JA Apparel Corp., owners of global lifestyle brand Joseph Abboud - creates a "neo-traditional" lifestyle category in Men's that caters to customers seeking designer casual, business casual and dressy attire at affordable prices.

Marketing Initiatives
In February 2009, we announced our official sponsorship of the "Rascal Flatts American Living Unstoppable Tour" presented by JCPenney. The tour will promote American Living, our affordable, all-American lifestyle brand developed exclusively for our customers by Polo Ralph Lauren's Global Brand Concepts with offerings across 40 merchandise categories. The fully integrated two-year sponsorship will kick off in early June 2009, with the tour hitting about 60 cities across the nation each year.

Gross Margin
The gross margin rate increased 50 basis points to 40.5% of sales for the first quarter of 2009, or $1,574 million, compared to 40.0% of sales, or $1,650 million, for the comparable 2008 period. Gross margin improved as a percentage of sales through better-than-expected sales as customers responded favorably to our spring assortment. Better alignment of inventory levels to current sales trends resulted in more sales of merchandise at regular promotional prices and less clearance selling, which contributed importantly to the improved margin rate.

SG&A Expenses
Our first quarter SG&A expenses remained controlled across the entire organization, decreasing $62 million to $1,255 million compared to $1,317 million in last year's first quarter, despite the addition of 27 net new stores opened since the end of the first quarter last year. The reduction in SG&A expenses was mainly attributable to lower marketing primarily resulting from realignment of advertising resources in order to better leverage media to reach our customers and a reduction of catalog book costs. Store expenses, which benefited from the initiatives of work force and time management as well as CustomerFirst, were essentially flat with last year, despite the impact of incremental expenses associated with new stores. Additionally, home office administrative expenses declined compared to last year. Somewhat offsetting the decline in SG&A expenses was a higher accrual of incentive compensation expense driven by the better-than-planned sales and operating income. While SG&A expense dollars declined, we experienced a deleveraging of 40 basis points compared to last year's first quarter due to lower sales volume.

Pension Expense/(Income)
As expected for the first quarter of 2009, total pension expense was $90 million compared to total pension income of $22 million in last year's first quarter. Total pension expense is comprised of $81 million of non-cash qualified pension plan (primary plan) expense and $9 million supplemental pension plan expense. Our first quarter results reflected a negative swing in primary plan non-cash expense of $114 million, or $0.32 per share on an after-tax basis, that resulted mainly from the amortization of the primary plan's unrealized loss from the sharp decline in plan assets during 2008.

Depreciation and Amortization Expenses
As expected with the new store growth and investments in renovating existing stores, depreciation and amortization expenses in the first quarter of 2009 increased 9% to $120 million from $110 million for the comparable 2008 period.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Pre-Opening Expenses
Pre-opening expenses include costs such as advertising, hiring and training new associates, processing and stocking initial merchandise inventory and rental costs. Pre-opening expenses were $9 million and $6 million in the first quarter of 2009 and 2008, respectively. We opened 9 stores during the first quarter of 2009 and 11 stores during the first quarter of 2008. The increase to pre-opening expenses in the first quarter was mainly due to the recognition of rent expense (level rent) during the construction period associated with the Manhattan store in New York City, which is expected to open in late July 2009.

Real Estate and Other (Income)/Expense
In the first quarter of 2009, real estate and other was a net credit of $6 million versus $9 million in the first quarter of 2008. Real estate and other consists primarily of ongoing operating income from our real estate subsidiaries, as well as net gains from the sale of facilities and equipment that are no longer used in our operations, other non-operating corporate charges and credits and asset impairments. The reduction of $3 million from last year's net credit was primarily attributable to a write down of a corporate asset held for disposal to reflect fair value and a decline in our ongoing real estate joint venture and REIT investment income as a result of the weakened retail real estate market.

Operating Income
For the first quarter of 2009 and mostly impacted by our non-cash primary plan pension expense, operating income declined 57.3% to $106 million, or 2.7% of sales, from $248 million in the first quarter of last year, or 6.0% of sales. On an adjusted basis (non-GAAP), excluding the impact of non-cash primary plan expense in 2009 and excluding the non-cash credit from last year's first quarter, adjusted operating income declined by 13%, and as a percent of sales was 4.8% in 2009 versus 5.2% in 2008.

Adjusted operating income, which excludes primary plan expense/(income), is considered a non-GAAP financial measure under the rules of the Securities and Exchange Commission. We believe that the presentation of adjusted operating income, which our management uses to assess our operating results, is useful in order to better understand the operating performance of our core business, provide enhanced visibility in our SG&A expense structure and to facilitate the comparison of our results to the results of our peer companies. Unlike our primary operating expenses, primary plan expense is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors, such as market volatility, that are beyond our control. We believe it is useful to investors to understand the impact of the non-cash primary plan expense to our results of operations through better year-over-year comparisons.

Accordingly, we believe it is important to view this non-GAAP financial measure in addition to, rather than as a substitute for, the GAAP financial measure of operating income. Adjusted operating income is limited as a financial measure since it does not include all operating expenses.

The following table reconciles operating income, the most directly comparable GAAP financial measure, to adjusted operating income, a non-GAAP financial measure.

                                                                13 weeks ended
($ in millions)                                                 May 2,        May 3,    % Inc.
                                                                  2009          2008    (Dec.)
Operating income                                           $       106    $      248    (57.3)%
            As a percent of sales                                 2.7%          6.0%
Add/(deduct): Qualified pension plan                                81           (33 )
expense/(income)
Adjusted operating income (non-GAAP)                       $       187    $      215    (13.0)%
            As a percent of sales                                 4.8%          5.2%

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Net Interest Expense
Net interest expense consists principally of interest expense on long-term debt, net of interest income earned on cash and cash equivalents. Net interest expense was $63 million for the first quarter of 2009 compared to $53 million for the first quarter of 2008. The increase in net interest expense in the first quarter was due primarily to a decrease in the weighted-average annual interest rate earned on short-term investment balances from 2.4% in the first quarter of 2008 to 0.2% in the first quarter of 2009, combined with a decrease in short-term investments.

Income Taxes
Our effective income tax rate was 41.9% and 38.5% for the first quarters of 2009 and 2008, respectively. In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on our expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Subsequent recognition, de-recognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur. The tax rate for the first quarter of 2009 was negatively impacted primarily by state income tax legislative changes enacted during the quarter, which increased our tax liability by $1.6 million dollars.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-(Continued)

Liquidity and Capital Resources

Although the economic environment remains challenging and unpredictable, we continue to maintain our strong financial position, improve our cash flow metrics and retain flexibility to support the execution of our Bridge Plan initiatives.

Our Bridge Plan is designed to enable us to effectively navigate through the economic downturn. The Bridge Plan includes initiatives that we continue to accelerate, maintain or moderate until such time as we can get back on the trajectory of our Long-Range Plan for retail growth and leadership when the economic situation improves. Under the Bridge Plan we continue to tightly manage aspects of our business that are within our control, in particular matching inventory levels with sales trends; implementing stronger expense control throughout the Company, and opening stores at a slower rate while improving our existing locations.

The foundation of our strong liquidity position is our cash and cash equivalents balance, our new $750 million revolving credit facility agreement entered into in April 2009 and our ability to improve free cash flow (non-GAAP financial measure).

The following table provides a summary of our key components and ratios of financial condition and liquidity:

($ in millions)                                                May 2,      May 3,
                                                                  2009       2008

Cash and cash equivalents                                    $   2,138   $  2,044
Merchandise inventory                                            3,237      3,694

Long-term debt, including current maturities                     3,505      3,707
Stockholders' equity                                             4,196      5,093
  Total capital                                                  7,701      8,800
Additional amounts available under our credit agreement(1)         750      1,200
  Cash flow from operating activities                               66       (131 )
Free cash flow (non-GAAP financial measure)(2)                    (179 )     (487 )
Capital expenditures                                               156        269
Dividends paid                                                      89         87
Ratios:
  Debt-to-total capital(3)                                        45.5 %     42.1 %
  Cash-to-debt(4)                                                 61.0 %     55.1 %

(1) During the first quarter of 2009, we replaced our 2005 Credit Agreement with a new $750 million credit agreement.

(2) See page 23 for a reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure and further information on its uses and limitations.

(3) Long-term debt, including current maturities divided by total capitalization.

(4) Cash and cash equivalents divided by long-term debt, including current maturities.

Cash and Cash Equivalents . . .