Stock Pitch

Jared Ziment, Tommy Chen, DiAn Zhu, Derek Chait, Alec Mazzuckelli

September 21, 2014

2

Table of Contents

I. Investment Thesis

II. Macro/Industry Overview

III. Company Story

IV. Company Analysis

V. Appendix

I. Investment Thesis

4

J.C. Penney Co., Inc. (NYSE: JCP)

Recommendation: Buy Current Price: $10.23 1Y Price Target:$11.24 (+9.87%)

JCP’s market-share, turnaround strategy, and stabilizing margins present a favorable profile for a value opportunity

from a previously distressed company.

Strong Q2 results, three straight quarters of SSS growth and margin expansion support JCP’s turnaround story

Trading at a steep discount relative its peers on a sales and market share basis

Credit markets have been very accommodative; analyst day on 10/8 can be a driver of near turn price appreciation

CATALYSTS

RISKS

Weak consumer spending can severely affect top-line performance

Negative operating income and earnings likely over the medium term

Rising rates could make future refinancing harder and put a strain on liquidity

II. Macro / Industry Overview

6

Macroeconomic Conditions

Sources: US Census Bureau, the Federal Reserve

CONSUMER CREDIT LENDING (ex. Real-estate backed loans)

Personal consumption has potential to grow

Recent decline in personal expenditures is due to decreases in disposal and total income rather than the interest rate environment or changes in savings preferences

Other positive drivers

Consumer confidence index in August reached 92.4, the highest it has been since the last seven years (essentially since the 2008 recession)

Strengthening dollar against European and Asian currencies decreases the cost of production and imports for retailers doing business primarily in the United States

PERSONAL CONSUMPTION

-$ 6B

$ 0B

$ 6B

$ 12B

$ 18B

$ 24B

$ 30B

$ 36B

Apr May Jun Jul

Flow Credit Flows: Total (T), Non-Rev. (NR), Rev (R)

T MoM R MoM NR MoM

Steady growth in consumer loans

Credit outstanding since April has increased every month

Revolving loans (credit card spending) is experiencing accelerating growth

Strong uptick across the board in July

More affordable lending rates

Despite overall yields rising in the bond market, loans for consumer purchases have declined since Q2’13

Loans on interest bearing credit card accounts is 12.73% in Q2’14, down slightly from 12.76% in Q2’13

24-month personal loans has declined to 9.57% in Q2’14 from 10.34% in Q2’13

-$ 25 B

$ 8 B

$ 41 B

$ 74 B

$ 107 B

$ 140 B

-$ 20 B

$ 7 B

$ 34 B

$ 61 B

$ 88 B

$ 115 B

Apr May Jun Jul

Flow Chg. in Inc. (I), Dispos. Inc. (DI), Pers. Cons. Exp. (P)

I MoM DI MoM P MoM

7

Retail Trends

Sources: US Census Bureau, Bloomberg, SEC Filings

Recent retail sales trending up

Sales in the retail industry ticked up in August.

However, Department Store sales has trended sideways over the past year, but has made some progress.

Thanksgiving and Christmas sales were weak, although independence day sales were strong.

RETAIL AND FOOD SALES

Comparable department stores (NAICS 452111)

JCPenney is a mid-leverl player compared to other department stores. However, the firm faces strict competition from niche fast fashion retailers (H&M, Zara) and cost-leadership/generic retailers (Walmart, Target) – not included in the data.

JCPENNEY MARKET SHARE METRICS

$13.5B

$13.7B

$13.9B

$14.1B

$14.3B

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Department Store Sales (Seasonally Adjusted) TTM

Macy's, 23.4%

Sears, 21.4% Kohl's,

16.3%

JC Penney, 11.0%

Nordstrom, 9.9%

Dillard's, 4.6%

Belk, 3.3% Saks, 2.7%

Department stores market share

Saks

Nordstrom

Belk

Dillard's

Macy's

JC Penney

Kohl's

Sears

109

271

299

302

836

1062

1160

1251

Ranked by number of stores

3.0%

3.6%

4.2%

4.8%

5.4%

6.0%

0.0%

0.2%

0.4%

0.6%

0.8%

May Jun Jul Aug

Retail and Food Store Sales RFS MoM RFS Core MoM RFS YoY

III. Company Story

9

Company Overview

Source: SEC Filings and S&P Capital IQ

Business consists of selling merchandise and services to consumers through our department stores and through our Internet website

1,062 stores in 49 states

Founded in 1902

Sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora

Offers services such as styling salon, optical, portrait photography and custom decorating

BUSINESS MODEL

MANAGEMENT

Myron E. Ullman, III (CEO)—2013 Previously CEO from 2004-2011 Previous Directeur General for Louis Vuitton Previous CEO of DFS Group and Macy’s

Edward Record (Executive VP, CFO)—2014 Former COO of Stage Stores 25 years of experience managing financial and

operational performance of retailers

D. Scott Laverty (Executive VP, CIO)—2013 Previous CIO of Borders Group Retail practice leader for HCL Axon Held senior consulting roles with IBM, PWC,

Deloitte, E&Y

REVENUE BREAKDOWN

2013 2012 2011

Women’s Apparel

24% 24% 23%

Home 22% 21% 20%

Women’s Accessories,

Including Sephora

11% 12% 16%

Children’s Apparel

11% 10% 9%

Family Footwear

9% 9% 8%

Fine Jewelry 7% 7% 7%

Services and Other

5% 5% 5%

JCP PERFORMANCE

0

10

20

30

40

50

1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014

10

Source: SEC Filings, MS Notes, Earnings Call Notes

Debt to the Rescue

1Y and 5Y CDS Spreads (09-14)

Near Bankruptcy and Recovery Strategy

NEAR BANKRUPTCY

RECOVERY CATALYSTS—3 PILLARS

2011 Ullman replaced by former Apple executive Ron Johnson , wanted to rebrand image

No more coupons—went with lower prices and even prices but got rid of coupons

Segregated online and in-store inventory in 2011 (couldn’t find things online in stores and vice versa)

Renovated stores to appeal to a richer demographic, had stores under construction for a year

No emphasis on the online store—online sales tanked

Fired all top executives, thousands of middle managers, and got rid of sales commissions

Dividend suspended

Merchandise

New, upscale stores, restoration of key private brands

Continued partnerships with leading national brands

Coupons back—”buy it while it’s cheap” mentality

Omni-Channel Experience—Linking All Avenues

Realigned web and store inventory in 2013

Online store has taken off, +26% Q1 2014, +16.7% y/y

Save the sale by finding colors, sizes online, and ordering

Marketing

Targeted marketing campaigns like “back-to-school” working well

Source: Bloomberg

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0

1000

2000

3000

4000

5000

6000

2008 2009 2010 2011 2012 2013

Total Debt Debt/Equity

IV. Company Analysis

12

Operating Model Overview

Income Statement Snapshot

Cost Structure

Profitability Metrics

Fiscal Year

($ in mi l l ions) 2010A 2011A 2012A 2013A 2014 2015 2016 2017 2018

Net Sales $17,759.0 $17,260.0 $12,985.0 $11,859.0 $12,693.8 $13,430.0 $14,249.3 $15,118.5 $16,040.7

COGS $10,799.0 $11,042.0 8,919.0 $8,367.0 $8,170.6 8,460.9 8,834.5 9,373.4 9,945.2

Gross profit 6,960.0 6,218.0 4,066.0 3,492.0 4,523.2 4,969.1 5,414.7 5,745.0 6,095.5

SG&A $5,350.0 $5,109.0 4,506.0 $4,114.0 $4,186.3 4,429.1 4,699.2 4,985.9 5,290.0

Primary Pens ion Expense $221.0 $87.0 315.0 $100.0 ($16.1) (17.03) (18.07) (19.17) (20.34)

Supplemental Pens ion Plans $34.0 $34.0 38.0 $37.0 $26.2 27.71 29.40 31.19 33.09

D&A $511.0 $518.0 543.0 $601.0 $654.0 691.92 734.13 778.91 826.42

Real Estate $4.0 $21.0 (324.0) ($155.0) ($70.0) (74.06) (78.58) (83.37) (88.46)

Other $8.0 $451.0 298.0 $215.0 $27.0 28.6 30.3 32.2 34.1

Operating Expenses 6,128.0 6,220.0 5,376.0 4,912.0 4,807.3 5,086.2 5,396.4 5,725.6 6,074.9

Operating Income (Loss) 832.0 (2.0) (1,310.0) (1,420.0) (284.1) (117.1) 18.3 19.4 20.6

As a Percentage of Revenue 2010A 2011A 2012A 2013A 2014 2015 2016 2017 2018

COGS 60.81% 63.97% 68.69% 70.55% 63.00% 63.00% 62.00% 62.00% 62.00%

SG&A 30.13% 29.60% 34.70% 34.69% 32.98% 32.98% 32.98% 32.98% 32.98%

As a Percentage of Revenue 2010A 2011A 2012A 2013A 2014 2015 2016 2017 2018

Operating Margin 4.68% -0.01% -10.09% -11.97% -2.24% -0.87% 0.13% 0.13% 0.13%

Gross Margin 39.19% 36.03% 31.31% 29.45% 37.00% 37.00% 38.00% 38.00% 38.00%

Fundamental Perspective on Turnaround

2Q14 sales increased 5.1% to $2.80B (above estimated $2.78B)

Sales

Expenses

2Q14 SG&A dollars declined 6% ($62M) YoY

8.8% decrease in 2Q14 Operating Expenses YoY

Decline in Capex to $250M (from $500-$600M past 3 years)

Margins

Inventory

Annual Net Sales

2Q14 Gross Margin rose 36% (640 bps)

Improvement in sales trends, lower clearance markdowns, increasing penetration of private brands, expense controls

Normalizing to historical, pre-Johnson levels

Operating Margin improved to -2.5% from -14.8% in 2Q13

SG&A Quarterly

39.2

37.2

31.7

29.4

35

36.5

37.8 38.5

28

30

32

34

36

38

40

2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7

Gross Margin

Total inventory was down 9.7% to $2.848 billion

Clean merchandise levels heading into 2H14

Sales/Inventory

11K

12K

13K

14K

15K

16K

17K

18K

F Y 2 0 1 0

F Y 2 0 1 1

F Y 2 0 1 2

F Y 2 0 1 3

E 2 0 1 4

E 2 0 1 5

E 2 0 1 6

E 2 0 1 7

E 2 0 1 8

E 2 0 1 9

1.2K

1.4K

1.6K

1.8K

2.0K

2.2K

2.4K

F Y 2 0 1 0 F Y 2 0 1 1

F Y 2 0 1 2

F Y 2 0 1 3

F Y 2 0 1 4

F Y 2 0 1 5

F Y 2 0 1 6

14

Cost Structure Normalization

JCP had the capital resources to avoid a bankruptcy filing and to preserve equity value

Ongoing signals of stabilization

Confidence the company can generate further EBITDA improvement for the balance of the year

Company will shrink store base and rationalize infrastructure

33 initial store closings $65 million of total cost savings

EBITDA accretion of $150M for 100 store closures

EBITDA Growth

“Turnaround” is on Track Further EBITDA Improvement

EBITDA Growth (Yearly)

-1000

-500

0

500

1000

1500

2000

2500

2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7

Source: J.P. Morgan Research

15

Base / Bull / Bear Cases

Note: See appendix for scenario unlevered free cash flow breakdown

WACC 5.5x 6.5x 7.5x

13.00% $6,929 $7,826 $8,723

14.00% $6,646 $7,504 $8,363

15.00% $6,377 $7,199 $8,021

WACC 5.5x 6.5x 7.5x

13.00% $13.12 $16.72 $20.32

14.00% $11.99 $15.43 $18.87

15.00% $10.91 $14.20 $17.50

2014 2015 2016

y/y Sales grw. 7.70% 6.00% 6.50%

COGS/rev 63.00% 62.25% 61.50%

Op Margin -2.11% -0.55% 1.11%

Key Assumptions

BULL CASE

Enterprise Value

Terminal EBITDA Multiple

Price Per Share

Terminal EBITDA Multiple

WACC 5.5x 6.5x 7.5x

13.00% $5,426 $6,122 $6,819

14.00% $5,207 $5,873 $6,540

15.00% $4,999 $5,637 $6,275

WACC 5.5x 6.5x 7.5x

13.00% $6.92 $9.72 $12.51

14.00% $6.05 $8.72 $11.39

15.00% $5.21 $7.77 $10.33

2014 2015 2016

y/y Sales grw. 7.04% 6.00% 6.00%

COGS/rev 63.00% 63.00% 62.00%

Op Margin -2.24% -0.87% 0.13%

BASE CASE

Enterprise Value

Terminal EBITDA Multiple

Price Per Share

Terminal EBITDA Multiple

Key Assumptions

WACC 5.5x 6.5x 7.5x

13.00% $5,080 $5,691 $6,302

14.00% $4,878 $5,463 $6,048

15.00% $4,686 $5,246 $5,806

WACC 5.5x 6.5x 7.5x

13.00% $4.37 $6.82 $9.28

14.00% $3.56 $5.91 $8.25

15.00% $2.80 $5.04 $7.29

2014 2015 2016

y/y Sales grw. 3.04% 3.00% 2.90%

COGS/rev 64.00% 63.50% 63.00%

Op Margin -2.51% -1.34% -0.40%

BEAR CASE

Enterprise Value

Terminal EBITDA Multiple

Price Per Share

Terminal EBITDA Multiple

Assumptions

16

Fundamental Price Target

0

2

4

6

8

10

12

14

9/24/2013 9/24/2014 9/24/2015

+9.87% return

Case Price Probability Expected Value

Base $8.72 45.00% $3.92

Bull $18.87 35.00% $6.61

Bear $3.56 20.00% $0.71

Expected Price $11.24

Price Target Breakdown

Projected Trade Performance

17

Comparables Analysis

Sources: Thomson Reuters, SEC Filings

Undervalued but outperforming

Starting to outperform competitors.

JCP is extremely undervalued compared to its peers.

Price to market share shows people are forgetting that JCPenney remains a major player in the market and has an economic moat in terms of brand and value.

Price to sales confirms investors’ overly pessimistic attitudes towards JC Penney’s survival, without taking into the firm’s fundamentals.

Fiscal year 2015 PEG ratio of 0.03 is the lowest out of all its peers (peer median of 1.78).

Same store sales growth has steadily improved since 2013 and has actually outperformed that of competitors in 2014.

(16.60%)

(11.90%)

(4.80%)

2.00%

7.40% 6.00%

-20%

-15%

-10%

-5%

0%

5%

10%

Q1 2013 Q2 2013 Q3 2014 Q4 2013 Q1 2014 Q2 2014

Same Store Sales Growth JCP KSS M JWN

-63%

-27% -11% -2%

2% 39%

98% 101%

JCP

TGT KSS DDS

M

JWN

TJX ROST

Price to Market share (discount) vs. premium

0.3

0.5

0.7

0.7

0.8

1.0

1.5

1.5

JCP

TGT

KSS

DDS

M

JWN

TJX

ROST

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Price to Sales comparisons

V. Appendix

19

Base Model FCF

Unlevered Free Cash Flow (UFCF) FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Net Income ($682.3) ($117.9) $18.4 $19.5 $20.7 $22.0

Interest Expense $393.2 $375.0 $380.0 $391.0 $384.8 $384.8

Taxes 2.89 0.00 0.00 0.00 0.00 0.00

D&A $654.0 $691.6 $733.8 $778.5 $826.0 $876.4

EBITDA $367.8 $948.7 $1,132.2 $1,189.1 $1,231.6 $1,283.2

EBIT ($286.2) $257.1 $398.4 $410.5 $405.5 $406.8

( – ) Taxes 100.2 (90.0) (139.4) (143.7) (141.9) (142.4)

Unlevered net income (186.0) 167.1 259.0 266.9 263.6 264.4

( + ) Depreciation 654.0 691.6 733.8 778.5 826.0 876.4

( – ) Capital expenditures (295.6) (312.6) (331.7) (351.9) (373.4) (396.1)

( – ) Change in working capital 82.9 (109.5) (122.8) (130.3) (138.3) (146.7)

( – ) Change in deferred taxes (172.8) (29.2) (32.8) (34.8) (36.9) (39.1)

Unlevered free cash flow $82.6 $407.5 $505.5 $528.4 $541.1 $558.9

20

Bull Model FCF

Unlevered Free Cash Flow (UFCF) FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Net Income ($669.9) ($74.7) $160.6 $325.8 $347.1 $369.8

Interest Expense $395.4 $375.0 $380.0 $391.0 $385.4 $385.4

Taxes $2.9 0.00 0.00 0.00 0.00 0.00

D&A $657.9 $697.4 $742.7 $791.2 $842.9 $897.9

EBITDA $386.3 $997.7 $1,283.3 $1,508.0 $1,575.3 $1,653.0

EBIT ($271.6) $300.3 $540.6 $716.8 $732.5 $755.1

( – ) Taxes 95.1 (105.1) (189.2) (250.9) (256.4) (264.3)

Unlevered net income (176.5) 195.2 351.4 465.9 476.1 490.8

( + ) Depreciation 657.9 697.4 742.7 791.2 842.9 897.9

( – ) Capital expenditures (297.3) (315.1) (335.6) (357.5) (380.9) (405.8)

( – ) Change in working capital 71.2 (114.9) (132.0) (141.2) (150.4) (160.3)

( – ) Change in deferred taxes (175.9) (30.7) (35.2) (37.7) (40.1) (42.7)

Unlevered free cash flow $79.4 $431.8 $591.3 $720.7 $747.5 $780.0

21

Bear Model FCF

Unlevered Free Cash Flow (UFCF) FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Net Income ($693.1) ($170.2) ($52.6) $13.0 $13.4 $13.8

Interest Expense $381.0 $375.0 $380.0 $391.0 $381.7 $381.7

Taxes $2.9 0.00 0.00 0.00 0.00 0.00

D&A $632.5 $651.5 $670.4 $689.8 $709.8 $730.4

EBITDA $323.2 $856.3 $997.8 $1,093.8 $1,105.0 $1,125.9

EBIT ($309.3) $204.8 $327.4 $404.0 $395.1 $395.5

( – ) Taxes 108.2 (71.7) (114.6) (141.4) (138.3) (138.4)

Unlevered net income (201.0) 133.1 212.8 262.6 256.8 257.1

( + ) Depreciation 632.5 651.5 670.4 689.8 709.8 730.4

( – ) Capital expenditures (285.3) (293.8) (302.3) (311.1) (320.1) (329.4)

( – ) Change in working capital 154.1 (55.0) (54.8) (56.3) (58.0) (59.7)

( – ) Change in deferred taxes (153.8) (14.7) (14.6) (15.0) (15.5) (15.9)

Unlevered free cash flow $146.5 $421.1 $511.5 $570.0 $573.1 $582.5