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.

This discussion is intended to provide information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, how operating results affect the financial condition and results of operations of our Company as a whole, as well as how certain accounting principles affect the financial statements. It should be read in conjunction with our consolidated financial statements as of 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). Unless otherwise indicated, this MD&A relates only to results from continuing operations, 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.

Second Quarter Highlights
· Despite the continuation of the difficult consumer climate, we achieved breakeven earnings per share for the second quarter, exceeding our expectations in both sales and profits.

o Gross margin as a percent of sales was 100 basis points better than last year principally as a result of inventory management.

o Selling, general and administrative (SG&A) expenses declined $28 million compared to the second quarter of last year, reflecting both effective expense management as well as planned shifts of certain expenses from the second quarter to the second half of the year.

· We opened five new stores during the quarter, including our first-ever store in Manhattan.

· We opened 38 Sephora inside JCPenney locations to bring our total to 143 locations.

· Free cash flow improved by $397 million during the first half of the year compared to the first half of last year, and we ended the half with $2.3 billion of cash and cash equivalents, which was $69 million higher than last year.

· We further improved the funded status of our primary pension plan by voluntarily contributing approximately 13.4 million shares of JCPenney common stock valued at $340 million.

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

Results of Operations

In the second quarter, we continued to execute our Bridge Plan strategy to align inventory levels with expected sales trends and control our expenses. Our second quarter results benefited from sales trends at better-than-expected levels throughout the quarter and, along with the benefit of our inventory position, led to an improvement in the gross margin rate. The better-than-planned gross margin and a continuation of a reduction in SG&A expenses enabled us to exceed our operating income expectations and led to breakeven results on a per share basis for the quarter.

($ in millions, except       Three Months Ended
EPS)                                                      Six Months Ended
                            Aug. 1,        Aug. 2,       Aug. 1,      Aug. 2,
                               2009           2008          2009         2008

Total net sales          $    3,943     $    4,282     $   7,827   $    8,409
Percent (decrease) from
prior year                   (7.9)%         (2.5)%        (6.9)%       (3.8)%
Comparable store sales
(decrease)(1)                (9.5)%         (4.3)%        (8.5)%       (5.8)%
Gross margin                  1,520          1,606         3,094        3,256
Operating expenses:
Selling, general and
administrative (SG&A)         1,242          1,270         2,497        2,587
Primary pension plan
expense/(income)                 73            (33 )         154          (66 )
Supplemental pension
plans expense                    10             11            19           22
   Total pension
expense/(income)                 83            (22 )         173          (44 )
Depreciation and
amortization                    121            115           241          225
Pre-opening                      14              9            23           15
Real estate and other
(income), net                    (7 )           (9 )         (13 )        (18 )
  Total operating
expenses                      1,453          1,363         2,921        2,765
Operating income                 67            243           173          491
Net interest expense             68             55           131          108
(Loss)/income from
continuing operations
  before income taxes           (1)            188            42          383
Income tax expense                -             72            18          147
(Loss)/income from
continuing operations    $      (1)     $      116     $      24   $      236

Diluted EPS              $        -     $     0.52     $    0.11   $     1.06

Ratios as a percent of
sales:
Gross margin                  38.5%          37.5%         39.5%        38.7%
SG&A                          31.5%          29.7%         31.9%        30.8%
Total operating expenses      36.8%          31.8%         37.3%        32.9%
Operating income               1.7%           5.7%          2.2%         5.8%

Adjusted operating
income
 (non-GAAP financial                          4.9%
measure)                       3.6%                         4.2%         5.1%

(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 second quarter of 2009, we reported a net loss from continuing operations of $1 million, or $0.00 per share, compared with income from continuing operations of $116 million, or $0.52 per share, for the same 2008 period. Our 2009 results were impacted by the negative swing in non-cash primary pension plan expense of $106 million, or $0.28 per share, on an after-tax basis. Although sales continued to decline versus last year, we experienced better-than-expected sales throughout the quarter, which together with the alignment of inventory levels to the current sales trend, resulted in a 100 basis-point improvement in gross margin. SG&A expenses decreased $28 million from last year's second quarter, reflecting both effective expense management as well as a planned shift of certain expenses out of the second quarter into the second half of the year. Operating income declined to 1.7% of sales as a result of higher non-cash primary pension plan expense and the deleveraging of other operating costs due to the lower sales volume. Excluding the non-cash impact of the primary pension plan, adjusted operating income was 3.6% of sales for the second quarter of 2009 versus 4.9% last year. (See Operating Income for a discussion of this non-GAAP financial measure).

For the first half of 2009, income from continuing operations was $24 million, or $0.11 per share, compared with $236 million, or $1.06 per share, for the first half of 2008. Operating income was $173 million for the first half of 2009 compared with $491 million for the same period last year.

Total Net Sales
($ in millions)             Three Months Ended       Six Months Ended
                             Aug. 1,     Aug. 2,     Aug. 1,     Aug. 2,
                                2009        2008        2009        2008
Total net sales            $   3,943   $   4,282   $   7,827   $   8,409
Sales percent (decrease):
Total net sales               (7.9)%      (2.5)%      (6.9)%      (3.8)%
Comparable store sales        (9.5)%      (4.3)%      (8.5)%      (5.8)%

Total net sales decreased $339 million, or 7.9%, to $3,943 million compared to last year's second quarter. Total net sales included sales from 23 net new stores (net of closings and relocations) opened subsequent to last year's second quarter, including 5 net new stores opened in this year's second quarter. Comparable store sales decreased 9.5%, compared to last year's decrease of 4.3%. JCPenney mall store traffic was down approximately 6.4% for the quarter. The number of transactions and number of units sold declined for the quarter. For the quarter, the average unit retail increased due to a greater proportion of merchandise sold at regular promotional prices versus clearance pricing. Geographically, the best performance was in the southwest region, particularly California, and the weakest was in the southeast region, particularly Florida, where the consumer continues to be negatively impacted by the real estate market decline. Online sales, through jcp.com decreased 1.6% for the second quarter of 2009, compared to last year's increase of 5.6%.

While sales in most merchandise categories continued to decline versus last year, our best performing divisions for the quarter were shoes and women's apparel. Children's apparel experienced the weakest results for the quarter. Private brands, including exclusive brands found only at JCPenney, comprised 54% of total merchandise sales for the second quarter of 2009, an increase of about two percentage points over the second quarter of 2008.

We continue to be pleased with the results of Sephora inside JCPenney. At the end of the second quarter of 2009, we had 143 Sephora inside JCPenney locations compared to 81 at the end of the second quarter of 2008. We expect to reach our planned 2009 goal of 155 Sephora inside JCPenney locations by the end of the year.

For the first half of 2009, total net sales decreased $582 million, or 6.9%, to $7,827 million compared to $8,409 million in the first half of 2008. Comparable store sales decreased 8.5% in the first half of 2009 compared to a 5.8% decrease in last year's second half. Internet sales decreased 2.8% in the first half compared to an increase of 7.2% in last year's first half.

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

New Stores
In the second quarter of 2009, we opened 5 new stores, including our first-ever
store in Manhattan in New York City. The following table provides the number of
JCPenney department stores and gross selling space for the second quarter and
first half of 2009 and 2008.

                                  Three Months Ended     Six Months Ended
                                   Aug. 1,    Aug. 2,    Aug. 1,   Aug. 2,
                                      2009       2008       2009      2008
Number of department stores
Beginning of period                  1,101      1,074      1,093     1,067

Stores opened(1)                         5         12         14        23
Closed stores(1)                         -         (3 )       (1 )      (7 )

End of period                        1,106      1,083      1,106     1,083


Gross selling space
(square feet in millions)
Beginning of period                    111        108        110       107

Stores opened                            1          1          2         2
Closed stores                            -          -          -         -

End of period                          112        109        112       109
(1) Includes relocations of -,
3, 1 and 6 stores, respectively.

Marketing Initiatives
On July 14, 2009, we launched our back-to-school marketing campaign, "Schooled in Style-Smart Looks for LessTM", that includes digital, social, mobile and traditional media with special events and promotions to support the merchandise in our portfolio of exclusive and private brands.

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

Gross Margin
The gross margin rate increased 100 basis points to 38.5% of sales for the second quarter of 2009, or $1,520 million, compared to 37.5% of sales, or $1,606 million, for the comparable 2008 period. Gross margin dollars declined by $86 million as a result of lower levels of sales. The gross margin rate improved primarily due to a greater proportion of merchandise sold at regular promotional prices and less at clearance prices. Gross margin also benefited from overall lower levels of clearance merchandise this year compared to last year. Through the first half of 2009, gross margin increased 80 basis points to 39.5% of sales, or $3,094 million, compared with 38.7% of sales, or $3,256 million, for the comparable 2008 period.

SG&A Expenses
Despite the addition of 23 net new stores since the end of last year's second quarter, SG&A expenses for the second quarter of 2009 decreased $28 million to $1,242 million compared to $1,270 million in last year's second quarter. The expense decline reflected both effective expense management and planned shifts of certain expenses out of the second quarter and into the second half of the year. Lower advertising expenses were a key driver of improved SG&A expenses for the quarter, as we shifted some of our advertising resources from the second quarter to the third quarter to devote more resources to the Back-to-School season, which falls in our third quarter for 2009. Store expenses, which continue to benefit from the initiatives of work force and time management, were essentially flat with last year, despite the impact of incremental expenses associated with new stores. Home office administrative expenses declined compared to last year, but were somewhat offset by higher incentive compensation expense due to better-than-planned sales and operating income. While SG&A expense dollars declined, expenses increased 180 basis points as a percent of sales due to this year's lower sales volumes. For the first half of 2009, SG&A expenses decreased $90 million to $2,497 million compared to $2,587 million last year.

Pension Expense/(Income)
For the second quarter of 2009, total pension expense was $83 million compared to total pension income of $22 million in last year's second quarter. Included in total pension expense was $73 million of expense in this year's second quarter relating to the primary pension plan versus $33 million of income in the same period last year, resulting in a negative swing of $106 million, or $0.28 per share on an after-tax basis. This expense is primarily the result of the amortization of the primary pension plan's unrealized loss due to last year's significant decline in plan assets. During the quarter, we voluntarily contributed Company common stock valued at $340 million to the primary pension plan. We remeasured the plan's assets and obligations as of the date of the contribution, which was May 18, 2009. Based on this new measurement, the net periodic pension plan expense estimate for 2009 was reduced by $24 million to $298 million from the original estimate of $322 million. Total pension expense was $173 million in the first half of 2009 versus a credit of $44 million in the first half of 2008. Included in total pension expense was $154 million of expense for this year's first half relating to the primary pension plan versus income of $66 million in last year's first half, resulting in a negative swing of $220 million, or $0.59 per share on an after-tax basis.

Depreciation and Amortization Expenses
As expected with the addition of new stores and investments in renovating existing stores, depreciation and amortization expenses in the second quarter of 2009 increased 5% to $121 million from $115 million for the comparable 2008 period. Depreciation and amortization expenses increased to $241 million for the first half of 2009, compared with $225 million for the same 2008 period.

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 $14 million and $9 million in the second quarter of 2009 and 2008, respectively. We opened five stores during the second quarter of 2009 and 12 stores during the second quarter of 2008. Pre-opening expenses were higher this year primarily due to the recognition of rent expense (level rent) during the construction period associated with the Manhattan store in New York City, which opened on July 31, 2009. Through the first half of 2009 and 2008, pre-opening expenses were $23 million and $15 million, respectively.

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

Real Estate and Other (Income)/Expense
In the second quarter of 2009, real estate and other was a net credit of $7 million versus $9 million in the second quarter of 2008. For the first half of 2009 and 2008, real estate and other was a net credit of $13 million and $18 million, respectively. 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 from last year in both the quarter and first half was primarily attributable to write downs to reflect the fair value of certain corporate assets held for sale 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 second quarter of 2009 operating income declined 72.4% to $67 million, or 1.7% of sales, from $243 million in the second quarter of last year, or 5.7% of sales. Excluding the impact of non-cash primary pension plan expense in 2009 and excluding the non-cash credit from last year's second quarter, adjusted operating income (non-GAAP) declined by 33%, and as a percent of sales was 3.6% in 2009 versus 4.9% in 2008. Operating income was $173 million, or 2.2% of sales, for the first half of 2009 compared with $491 million, or 5.8% of sales, for the first half of 2008. Adjusted operating income declined by 23%, and as a percent of sales was 4.2% in 2009 versus 5.1% in 2008.

Adjusted operating income, which excludes non-cash qualified primary pension 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 we use to assess our operating results, is useful in order to better understand the operating performance of our core business and to facilitate the comparison of our results to the results of our peer companies. Unlike other operating expenses, primary pension plan expense/(income) 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 pension plan on our results of operations. 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:

($ in millions)                Three Months Ended                  Six Months Ended
                         Aug. 1,     Aug. 2,     % Inc.      Aug. 1,     Aug. 2,     % Inc.
                            2009        2008     (Dec.)         2009        2008     (Dec.)
Operating income       $      67   $     243     (72.4)%   $     173   $     491     (64.8)%
As a percent of sales       1.7%        5.7%                    2.2%        5.8%
Add/(deduct) Primary
pension plan
     expense/(income)         73         (33 )                   154         (66 )
Adjusted operating
income (non-GAAP)      $     140   $     210     (33.3)%   $     327   $     425     (23.1%)
As a percent of sales       3.6%        4.9%                    4.2%        5.1%

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 $68 million for the second quarter of 2009 compared to $55 million for the second quarter of 2008. The increase in net interest expense in the second quarter was due primarily to a decrease in the weighted-average annual interest rate earned on short-term investment balances from 2.20% in the second quarter of 2008 to 0.15% in the second quarter of 2009, combined with a decrease in short-term investments. Net interest expense was $131 million for the first half of 2009 compared with $108 million for the first half of 2008.

Income Taxes
Due to the insignificant pre-tax loss from continuing operations, there was no provision for income taxes in the second quarter of 2009, versus a provision of $72 million, or an effective tax rate of 38.3%, in the comparable prior year period. 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. Our effective income tax rate for continuing operations for the first half of 2009 was 42.9% compared with 38.4% for the first half of 2008. The tax rate for the first half of 2009 was higher due to the lower level of pre-tax income and state income tax legislative changes enacted during the first quarter. We expect the full year effective income tax rate to be 38.2% for 2009 as compared with 37.7% for 2008.

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, we continue to improve our cash flow metrics and retain financial flexibility to support the execution of our Bridge Plan initiatives.

Our Bridge Plan includes initiatives to accelerate, maintain or moderate our operating and capital resources as we manage through the economic downturn. Under the Bridge Plan we continue to tightly manage aspects of our business that are within our control, in particular reducing inventory levels; implementing stronger expense control throughout the Company; and moderating capital expenditures by opening stores at a slower rate and shifting resources to modernize our existing locations.

The principal elements of our liquidity position continue to be our cash and cash equivalents balance, our $750 million revolving credit facility 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)                                                  Aug. 1,     Aug. 2,
                                                                    2009        2008

Cash and cash equivalents                                      $   2,312   $   2,243
Merchandise inventory                                              3,258       3,693

Long-term debt, including current maturities                       3,392       3,706
Stockholders' equity                                               4,536       5,151
  Total capital                                                    7,928       8,857

Additional amounts available under our credit agreement              750       1,200
Cash flow from operating activities of continuing operations         503         343
Free cash flow (non-GAAP financial measure)(1)                       110        (287 )
Capital expenditures                                                 304         496
Dividends paid                                                        89         134
Ratios:
  Debt-to-total capital(2)                                          42.8 %      41.8 %
  Cash-to-debt(3)                                                   68.2 %      60.5 %

(1) See page 24 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.

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

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

Cash and Cash Equivalents
Cash and cash equivalents totaled $2,312 million at the end of the second quarter of 2009 compared to $2,243 million at the end of the second quarter of 2008. During the past 12 months, we used $314 million of cash balances to reduce long-term debt through payments at maturity, a debt tender offer and open market purchases. Throughout this same period, we generated strong cash flow and on a net basis increased cash and cash equivalents by $69 million. Cash and cash equivalents at the end of the second quarter of 2009 represented 68.2% of our outstanding long-term debt including current maturities, an improvement from last year's 60.5%.

. . .