Many Ways to Win

Value Investing Congress October 18, 2011

T2 Partners Management L.P. Manages Hedge Funds and Mutual Funds and is a Registered Investment Advisor
The General Motors Building 767 Fifth Avenue, 18th Floor New York, NY 10153
(212) 386-7160 Info@T2PartnersLLC.com www.T2PartnersLLC.com

Disclaimer
THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT.

INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENN TONGUE OWN STOCK IN MANY OF THE COMPANIES DISCUSSED HEREIN. THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION.
WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED.
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Our Analysis of Berkshire Hathaway, Which Is, By Far, Our Largest Position

Berkshire Hathaway: A High-Quality, Growing 65-Cent Dollar

History Berkshire Hathaway today does not resemble the company that Buffett bought into during the 1960s Berkshire was a leading New England-based textile company, with investment appeal as a classic Ben Graham-style net-net Buffett took control of Berkshire on May 10, 1965 At that time, Berkshire had a market value of about $18 million and shareholder's equity of about $22 million

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The Berkshire Hathaway Empire Today

Stakes in Public Companies Worth $1+ Billion
Company Coca-Cola Wells Fargo American Express Procter & Gamble Kraft Johnson & Johnson Munich RE Wal-Mart ConocoPhillips Sanofi-Aventis U.S. Bancorp POSCO Tesco Shares 200.0 358.9 151.6 72.4 97.2 45.0 19.3 39.0 29.1 25.8 78.1 3.9 242.2 Price Value ($B) $65.90 $24.54 $43.43 $63.91 $33.76 $63.13 $128.77 $53.70 $64.16 $71.59 $23.33 $40,424 $6.33 $13.2 $8.8 $6.6 $4.6 $3.3 $2.8 $2.5 $2.1 $1.9 $1.9 $1.8 $1.6 $1.5

Note: Shares as of 12/31/10; Stock prices as of 10/7/11.

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The Basics

Stock price (10/17/11): $109,690 $72.89 for B shares (equivalent to $109,335/A share) Shares outstanding: 1.649 million Market cap: $181 billion Total assets (Q2 11): $383 billion Total equity (Q2 11): $163 billion Book value per share (Q2 11): $98,716 P/B: 1.11x Float (Q2 11): $71 billion

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Earnings of Non-Insurance Businesses Have Soared Thanks to Burlington Northern and the Economic Rebound
Earnings before taxes*

2004 970 3 417 161 2,824 4,375

2005 1,221 -334 -1,069 235 3,480 3,533

2006 1,314 523 1,658 340 4,316 8,151

2007 1,113 555 1,427 279 4,758 8,132

2008 916 342 1,222 210 4,896 7,586

2009 649 477 250 84 5,459 6,919

2010 1,117 452 176 268 5,145 7,158

Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Burlington Northern Santa Fe** Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Other Businesses Total Non-Insur. Oper. Inc. Total Operating Income

584 228 237 2,253 3,302 7,677

822 217 523 2,406 3,968 7,501

1,157 229 1,476 3,297 6,159 14,310

1,006 232 1,774 3,279 6,291 14,423

771 733 276 2,963 2,809 7,552 15,138

653 686 344 1,528 884 4,095 11,014

3,611 689 813 369 1,539 3,092 10,113 17,271

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* In 2010, Berkshire changed this table from Earnings before income taxes, noncontrolling interests and equity method earnings to Earnings before income taxes. Thus, 2008-2010 reflect the new numbers, and all prior years reflect the old ones. ** Burlington Northerns run rate annual operating profits are approximately $4.1 billion.

Quarterly Earnings of Key Business Units

Earnings before taxes*

Q1 07 Q2 07 Q3 07 Q4 07 295 30 553 49 1,078 2,005 325 230 356 63 1,236 2,210 335 157 183 77 1,217 1,969 158 138 335 90 1,227 1,948

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 186 42 29 25 1,089 1,371 298 102 79 81 1,204 1,764 246 54 -166 -8 1,074 1,200 186 144 1,280 112 1,529 3,251 148 -16 177 4 1,354 1,667 111 276 -318 29 1,482 1,580 200 186 141 7 1,412 1,946 190 31 250 44 1,211 1,726 299 -39 52 33 1,283 1,628 329 222 117 48 1,494 2,210 289 201 -237 52 1,218 1,523 200 68 244 135 1,150 1,797 337 -326 -1,343 56 1,261 -15 159 132 -354 54 1,404 1,395

Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Burlington Northern Santa Fe Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Other Businesses Total Non-Insur. Oper. Inc. Total Operating Income 58 513 723 1,536 3,541 72 372 1,015 1,736 3,946 50 481 1,020 1,824 3,793 52 408 957 1,631 3,579 242 277 273 214 241 28 73 516 744 1,602 2,973 254 261 68 329 956 1,868 3,632 163 247 68 526 798 1,802 3,002 113 197 67 1,592 516 2,485 5,736 112 162 143 303 206 926 2,593 115 170 66 402 201 954 2,534 119 194 64 441 350 1,168 3,114 307 160 71 382 271 1,191 2,917 476 111 190 80 395 583 1,835 3,463 974 155 219 109 338 860 2,655 4,865 1,127 140 212 89 416 844 2,828 4,351 1,034 283 192 91 390 805 2,795 4,592 965 156 222 82 451 675 2,551 2,536 1,070 177 273 105 320 976 2,921 4,316

* In 2010, Berkshire changed this table from Earnings before income taxes, noncontrolling interests and equity method earnings to Earnings before income taxes, but a breakdown of Q1-Q3 numbers in 2008-2010 isnt available, so we use the old numbers for Q1-Q3 of each year, but to get the Q4 numbers in 2008-2010, we subtract from the full-year numbers, which causes slight anomalies in Q4 08, Q4 09 and Q4 10.

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Berkshire Is Becoming Less of an Investment Company and More of an Operating Business

Source: 2010 annual letter.

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After a Two-Year Hiatus, Berkshire Is Acquiring Stocks Again

20

Cash paid, mostly for Burlington Northern

(the total value of the company at acquisition was $34 billion)

Starting to buy stocks again (plus Buffett said he bought $4 billion of stocks in Q3)

$B

15
10 5

0
1997 (5) (10)
Acquisitions Net Stock Purchases

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

H1 11

Hes doing a good job but the cash is coming in so fast! A high-class problem Markets have a way of presenting big opportunities on short notice Chaos in 2008, junk bonds in 2002 Buffett has reduced average maturity of bond portfolio so he can act quickly
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Buffett Invested Large Amounts of Capital During the Downturn in 2008

Investment/Commitment
Mars/Wrigley Auction rate securities Goldman Sachs

Amount (Bn)
$6.5 $6.5 $5.0

Comment
Q2 event; sold much in Q3 Plus $5B to exercise warrants

Constellation Energy stock and preferred

Marmon

$5.7
$4.5

Sold for a $1.1B gain incl. breakup fee

The remaining 34.6% not owned by BRK will be purchased from 2011-14

General stock purchases

Dow/Rohm & Haas General Electric Fed. Home Loan Disc. Notes

$3.3
$3.0 $3.0 $2.4

Full year; net of sales

Plus $3B to exercise warrants Q2 event; sold much in Q3

Tungaloy
Swiss Re unit ING reinsurance unit Other businesses purchased TOTAL

$1.0
$0.8 $0.4 $3.9 $46.0

Iscar acquisition
Plus sharing agreement

Plus $8B to exercise GS & GE warrants

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Note: Does not include capital committed to Berkshires new bond insurance business, Berkshire Assurance

Valuing Berkshire
Over the years we'veattempt[ed] to increase our marketable investments in wonderful businesses, while simultaneously trying to buy similar businesses in their entirety. 1995 Annual Letter In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments, but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. 1997 Annual Letter

In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs. 1997 Annual Letter
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Buffetts Comments on Berkshires Valuation Lead to an Implied Multiplier of Approximately 12

Pre-tax EPS Excluding All Year-End Investments Income From Stock Intrinsic Implied Year Per Share Investments Price Value Multiplier 1996 $28,500 $421 $34,100 $34,100 13 1997 $38,043 $718 $46,000 $46,000 11 1998 $47,647 $474 $70,000 $54,000 13 1999 $47,339 -$458 $56,100 $60,000
1996 Annual Letter: Today's price/value relationship is both much different from what it was a year ago and, as Charlie and I see it, more appropriate. 1997 Annual Letter: Berkshire's intrinsic value grew at nearly the same pace as book value (book +34.1%) 1998 Annual Letter: Though Berkshire's intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value. (Assume a 1520% increase in intrinsic value.) 1999 Annual Letter: A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value...We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated...Recently, when the A shares fell below $45,000, we considered making repurchases.
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Estimating Berkshires Value: 2001 2011

Pre-tax EPS Excluding All Income From Investments1 -$1,289 $1,479 $2,912 $3,003 $3,600 2 $5,200-$5,400 $5,500-$5,7003 $5,727 $3,571 $7,200 $7,200 Subsequent Year Stock Price Range $59,600-$78,500 $60,600-$84,700 $81,000-$95,700 $78,800-$92,000 $85,700-$114,200 $107,200-$151,650 $84,000-$147,000 $70,050-$108,100 $97,205-$128,730 ? ?

Year End 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q2 2011

Investments Per Share $47,460 $52,507 $62,273 $66,967 $74,129 $80,636 $90,343 $75,912 $91,091 $94,730 $95,500

Intrinsic Value Per Share $64,000 $70,000 $97,000 $103,000 $117,300 $143,000-$144,400 $156,300-$158,700 $121,728 (8 multiple) $126,801 (10 multiple) $166,730 (10 multiple) $167,500 (10 multiple)

Given compressed multiples at the end of 2008, we used an 8 rather than a 12 multiple. Weve now increased this to a 10 multiple, still below the historical 12 multiple we believe Buffett uses.
1. Unlike Buffett, we include a conservative estimate of normalized earnings from Berkshires insurance businesses. 2. Actual result was $6,492, but we reduce this to assume the 2nd-worst year ever for super-cat losses. 3. Actual result was $6,270 but we reduce the pre-tax, pre-investment-income margins of the insurance businesses by 400 basis points (from 14% to 10%) to reflect Buffetts guidance in the Annual Report.

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Berkshire Is 35% Below Intrinsic Value, Close to a Multi-Decade Low

Intrinsic value estimate of $169,500 using 10 multiple Intrinsic value*

35% discount to intrinsic value

* Investments per share plus 12x pre-tax earnings per share (excluding all income from investments) for the prior year, except for YE 2008 (8 multiple) and YE 2009 onward (10 multiple).

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12-Month Investment Return

Current intrinsic value: $167,500/share Plus 5% growth of intrinsic value of the business Plus cash build over next 12 months: $7,000/share Equals intrinsic value in one year of $182,875 67% above todays price

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Catalysts

Meaningful share repurchases Continued earnings growth of operating businesses $1+ billion of pre-tax earnings from Lubrizol New equity investments Additional cash build Eventually, Berkshire could win back a AAA rating (not likely in the near term) Potential for more meaningful acquisitions and investments If theres a double-dip recession, this becomes more likely

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Berkshires New Share Repurchase Program

On September 26th, Berkshire announced the first formal share repurchase program in Berkshires history, and only the second time Buffett has ever offered to buy back stock Its unusual in three ways:
1. 2. 3. Theres no time limit Theres no dollar cap Buffett set a price: no higher than a 10% premium over the thencurrent book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount

Book value at the end of Q2 was $98,716 ($65.81/B share); we estimate that book value today has declined slightly to perhaps $97,000 ($64.67/B share). Thus, a 10% premium means that Buffett is willing to buy back stock up to $106,700 ($71.13/B share), roughly 3% below todays price
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The Share Repurchase Program Has Significantly Improved the Risk-Reward Equation, So We Bought More Stock
It confirms that Buffett shares our belief that Berkshire stock is deeply undervalued
He wouldnt be buying it back at a 10% premium to book value if he thought its intrinsic value was, say, 20% or even 30% above book Our estimate is nearly $170,000/share, more than 50% above todays levels

Buffett put a floor on the stock: he was clear in numerous interviews after the program was announced that he is eager to buy back a lot of stock and he has enormous cash to do so:
Berkshire has $43.2 billion of cash (excluding railroads, utilities, energy, finance and financial products), plus another $34.8 billion in bonds (nearly all of which are short-term, cash equivalents), which totals $77 billion The press release notes that repurchases will not be made if they would reduce Berkshires consolidated cash equivalent holdings below $20 billion, so that leaves $57 billion to deploy, equal to nearly one-third of the companys current market cap On top of this, the company generated more than $6.5 billion in free cash flow in the first half of the 2011 in other words, more than $1 billion/month is pouring into Omaha

Buffett can buy back a lot of stock and continue to make other investments
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Berkshire Stock Outperformed the S&P 500 by 83 Percentage Points in the Year After the Only Other Time Buffett Offered to Buy Back Stock
March 11, 2000 March 11, 2001 Up 72%

Berkshire Hathaway

S&P 500

Down 11%

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Risk: Who Will Replace Buffett?

When Buffett is no longer running Berkshire, his job will be split into two parts: one CEO, who has not been named, and a small number of CIOs (Chief Investment Officers)
Two have been named already, Todd Combs and Ted Weschler, who both appear to be excellent investors

Nevertheless, Buffett is irreplaceable and it will be a significant loss when he no longer runs Berkshire for a number of reasons:
There is no investor with Buffetts experience, wisdom and track record, so his successors decisions regarding the purchases of both stocks and entire business might not be as good Most of the 75+ managers of Berkshires operating subsidiaries are wealthy and dont need to work, but nevertheless work extremely hard and almost never leave thanks to Buffetts halo and superb managerial skills. Will this remain the case under his successors? Buffetts reputation is unrivaled so he is offered deals (such at the recent $5 billion investment in BofA) on terms that are not offered to any other investor and might not be offered to his successors Being offered investment opportunities on terms/prices not available to anyone else also applies to buying companies outright. Theres a high degree of prestige in selling ones business to Buffett. For example, the owners of Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm. Buffetts Rolodex is unrivaled, so he gets calls (and can make calls that get returned) that his successors might not
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Arent We Concerned About the Uncertainty of Berkshire After Buffett?

Answer: Not really, for two primary reasons: 1. Buffett isnt going anywhere anytime soon. We think its at least 80% likely that Buffett will be running Berkshire for five more years, and 50% likely hell be doing so for 10 more years
Buffett turned 81 on Aug. 30th and is in excellent health There are no signs that he is slowing down mentally in fact, he appears to be getting better with age A life expectancy calculator (http://calculator.livingto100.com) shows that Buffett is likely to live to age 93 (12 more years)

2. The stock is very cheap based on our estimate of intrinsic value (nearly $170,000/A share), which does not include any Buffett premium
We simply take investments/share and add the value of the operating businesses, based on a conservative multiple of their normalized earnings The value of the cash and bonds wont change, and Coke, American Express, Burlington Northern, GEICO, etc. will continue to generate robust earnings even after Buffetts gone
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The Real Buffett Risk

Buffett is often asked (as are we): What would happen to the company (and stock) if you got hit by a bus (i.e., die suddenly)?
If it happened tomorrow, our best guess is that the stock would fall 10-15% (which would give Berkshire the opportunity to buy back a lot of stock if it was trading below 110% of book value) But this isnt likely. Not to be morbid, but most people dont die suddenly from something like an accident or heart attack, but rather die slowly: their bodies (and sometimes minds) break down gradually A far greater risk to Berkshire shareholders is that Buffett begins to lose it mentally and starts making bad investment decisions, but doesnt recognize it (or refuses to acknowledge it because he loves his work so much) and the board wont take away the keys, perhaps rationalizing that a diminished Buffett is still better than anyone else Buffett is aware of this risk and has instructed Berkshires board members, both publicly and privately, that their most important job is to take away the keys if they see him losing it We trust that both Buffett and the board will act rationally, but also view it as our job to independently observe and evaluate Buffett to make sure were comfortable that hes still at the top of his game. Today, we think hes never been better.
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An Analogy with Apple & Steve Jobs

The most comparable example of a business that, like Berkshire, is closely associated with its legendary founder and CEO is Apple
As Steve Jobss health began to fail, he assumed fewer day-to-day responsibilities, passing them to top lieutenants Jobs resigned as CEO on Aug. 24, 2011 and died exactly six weeks later Apples stock on the first trading days after his retirement and death were announced declined less than 1%, as this chart shows:

First day of trading after Steve Jobs announces retirement

First day of trading after Steve Jobs dies

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Other Risks
A double-dip recession impacts Berkshires earnings materially No catalyst occurs, so the stock sits there and doesnt go up Intrinsic value will likely continue to grow nicely Berkshires stock portfolio declines Losses in the shorter-duration derivatives such as credit-default swaps are larger than expected and/or mark-to-market losses mount among the equity index puts A major super-cat event occurs that costs Berkshire many billions Berkshire is downgraded

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Conclusion
Cheap stock: 65-cent dollar, giving no value to recent investments and immense optionality Extremely safe: huge cash and other assets provide downside protection Strong earnings should eventually act as a catalyst

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Our Analysis of J.C. Penney, Our Second-Largest Position

Summary of Investment Thesis

A decent business that has underperformed
But this is NOT Sears/K-Mart

A fairly valued stock based on current performance

5.6x EV/EBITDA; 18.1x P/E

An extraordinary combination of people, covering the key value drivers, have come together to bring about change and you get this for free
New top management: Ron Johnson and Michael Francis Real estate: Steve Roth, Vornado Capital allocation: Bill Ackman, Pershing Square

The business has been undermanaged, so there are many areas for improvement that can drive enormous value creation
Increase sales/sq. foot Cut costs Unlock real estate value Optimize capital structure
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The Basics
Stock price (10/17/11): $29.99

Shares outstanding: 213.3 million

Options and warrants: 24.8 million Market cap: $6.4 billion

Enterprise Value: $7.9 billion

Book value per share (7/31/11): $22 Sales: $17.7 billion P/E (LTM): 18.1x EV/EBITDA (LTM): 5.6x

P/S: 0.36x

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JCPs Stock Has Done Little Over the Past Decade

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JCPs Stock Since Activists Investments

JCP reports May SSS -1%

JCP reports June SSS +2% (vs. KSS +7.5%, M +6.7%); lowers EPS guidance
JCP reports July SSS +3.3%

JCP announces Ron Johnson as next CEO Pershing Sq. and Vornado investment announced JCP reports Aug SSS -1.9%

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JCP Valuation vs. Peers

JCP Com p group Dillard's Inc. (NYSE:DDS) Kohl's Corp. (NYSE:KSS) Macy's, Inc. (NYSE:M) Nordstrom Inc. (NYSE:JWN) Target Corp. (NYSE:TGT) The TJX Com panies (NYSE:TJX) Average J. C. Penney (NYSE:JCP) 6,408 7,956 Mkt Cap 2,575 13,593 12,497 10,681 35,753 21,986 EV 3,353 16,118 18,078 12,393 52,448 21,715 TEV/EBITDA LTM 5.1x 5.9x 5.5x 7.9x 7.1x 7.9x 6.6x 5.7x 13.9x 12.7x 12.0x 16.8x 12.6x 17.3x 14.2x 18.1x P/E (LTM)

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JCPs History
James Cash Penney opens The Golden Rule, a dry goods and clothing store, in Kemmerer, Wyoming Company launches jcpenney.com, its online store

Incorporated in Utah as the J.C. Penney Corporation

J.C. Penney issues its first catalogue

Myron Ullman III joins as companys 9th Chairman and CEO

Exits catalogue business

1902

1913

1914

1951

1963

1992

1994

2004

2006

2010

2011

Moved headquarters to NYC Store sales exceed $1B for first time

Moved headquarters to Plano, Texas

Announces Sephora inside jcpenney concept

Ron Johnson to begin as 10th CEO 11/1/11

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JCPs Broad Footprint

JCP operates 1,106 department stores in 49 states and PR JCP owns 426 of its 1,106 stores (38.5% of stores, ~42mm sq. ft.) and 17 of its 26 distribution/warehouse centers (~12m sq. ft.) JCPs real estate alone could be worth over $3b (total EV of $7.9b)

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Revenues Over the Past Decade

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Revenue Growth Has Been a Zero Sum Game

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EBIT Over the Past Decade

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EBITDARP Over the Last Decade

* Earnings before interest, taxes, depreciation, amortization, rent and pension expense; assumes $302mm LTM rent expense

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A Diverse Business Mix

Fine jewelry, 4% Footwear, 7% Womens apparel, 24% Childrens apparel, 11% Womens accessories, 12% Mens apparel/accessories, 20% Services and other, 4%

Home, 18%

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Private Brands
49% of revenue comes from private brands developed, designed, and sourced in-house

Billion dollar brand

Billion dollar brand

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National Brands

45% of revenue comes from national brands

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Exclusive Brands
6% of revenue comes from exclusive brands/concepts a major opportunity

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Investment Thesis
New management team & active Board of Directors
Opportunity for operational improvement Significant real estate value Capital structure optimization

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Investment Thesis
New management team & active Board of Directors
Opportunity for operational improvement Significant real estate value Capital structure optimization

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Ron Johnson Left Apple for JCP

Ron Johnson, 52, beings as new CEO on Nov. 1st After graduating from Harvard Business School, was one of only a few of his classmates to go into retailing, at Mervyns Mervyns was acquired by Target, where Johnson rose to become senior vice president of merchandising
During his 15 years there, Target got hip, went national, and crushed sales records[His track record is nuts. The Atlantic

In 2000, Steve Jobs hired him to lead Apples retail stores

Today: More than 350 stores worldwide, generating sales of over $4,000/sq. ft. Credited with the Genius Bar concept
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Ron Johnsons Motivation, Incentives and Alignment With Shareholders

"I've always dreamed of leading a major retail company as CEO, and I am thrilled to have the opportunity to help J. C. Penney re-imagine what I believe to be the single greatest opportunity in American retailing today, the Department Store. Ron Johnson, 6/14/11 Johnson forfeited150k AAPL restricted stock units (RSUs) granted in 2008 (that vest in 2012) and 100k RSUs granted in 2010 (that vest in 2014) with a market value of $73 million In return, he only received 1.7m JCP RSUs that vest 1/27/12, worth roughly $50 million In addition, Johnson personally invested $50m to buy warrants to acquire 7.3m JCP shares at $29.92. They expire 7.5 years and Johnson cannot sell or hedge them for six years
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Michael Francis Left Target for JCP

Michael Francis, 48, begins as JCPs President on Nov. 1 Francis will be responsible for merchandising, marketing, product development and sourcing 21 years at Target (1990-2011) 2011: Led Targets expansion into Canada Chief Marketing Officer (Aug 08- Sept 11) EVP Marketing (Feb 03 Aug 08) Francis began his merchandising and marketing career as an executive trainee on the sales floor of Marshall Fields in Chicago in 1986

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Pershing Squares Involvement

As of 9/22/11 13-D filing: Pershing Square owns 39.1m shares (18.3%) and has economic exposure to 16.6m shares (7.8%) through total return swaps for total economic exposure of 55.6m shares or 26.1% of shares outstanding Pershing Square gave up some voting rights to increase ownership The 8/19/11 stockholders agreement limits Pershing Square from exceeding 26.1% ownership

Bill Ackman joined JCP board Feb 2011

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Vornados Involvement
As of 10/8/11 13-D filing: Vornado owns 23.4m shares (9.9%) The 9/16/11 stockholders agreement allows Vornado to buy up to 15.4% of common stock Steven Roth has extensive real estate expertise and an extraordinary history of value-creation
Steven Roth joined JCP board Feb 2011

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Current Equity Price: $30 per share

Market value of equity

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Investment Thesis
New management team & active Board of Directors
Opportunity for operational improvement Significant real estate value Capital structure optimization

-52-

Opportunity for Sales Improvement

Sales per sq. ft. are below peers and remain -14% below 2007 peak levels vs. peer average of -8%

$177/sq. ft. in FY 2007

$153/sq. ft. in FY 2010

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JCPs Net Promoter Score Has Been Rising Steadily, Outpacing Peers

Dramatic improvement since 2003

Note: Net promoter score is percent of people who answer 9 or 10 minus those who answer 0-6 when asked, on a scale of 0-10, How likely is it that you would recommend our company to a friend or colleague? Source: JCP 2010 investor day, pp 93 of 120

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Initiative #1: Sephora Inside JC Penney

Expected to have ~30% store base penetration by YE 2011

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Sephora Brand Awareness Is Rising and Should Drive Increased JCP Traffic
Google Trends indicates Sephora search traffic is up roughly +50% YTD in 2011

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Initiative #2: Liz Claiborne

Liz Claiborne is one of the most recognized brands in the history of American apparel retailing with a deeply loyal following, and our research shows that it is among the most desired by the J.C. Penney customer. CEO Myron Ullman October 2011: J.C. Penney acquires worldwide rights for the Liz Claiborne family of brands as well as the U.S. and Puerto Rico rights for the Monet brand for $267.5 million.

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Initiative #3: Grow Online Sales

Online sales have been flat for 4+ years

Source: Credit Suisse, 10/4/11

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JCP Sales Opportunity Could Add $8/share in Value

$38

$8

15% improvement in sales per sq. ft. = $8 to equity

Current stock price

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There Is Significant Opportunity for Margin Improvement

EBITDAR margins are 380 bps below peak levels vs. peers on avg. at or above former peak levels

13.1% in FY 2007

9.3% in FY 2010

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EBITDARP Margins Have Also Been Weak

EBITDARP margins are 280 bps below peak levels while peers are hitting new highs

13.8% in FY 2006

11.0% in FY 2010

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J.C. Penney Spends Much More on Advertising Than Its Peers

Penney Dumps Big Book Catalog ChiefMarketer Network, 11/18/09 Retailer J.C. Penney is discontinuing its traditional catalog business in favor of look books, which refer consumers to the company's e-commerce site. Direct Marketing News, 9/28/10
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Margin Improvement Could Add $15 in Value

$53
Sales per sq. ft. improvement

300 bps EBITDA improvement = $15 to equity

$8

$8

Current stock price

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Investment Thesis
New management team & active Board of Directors
Opportunity for operational improvement Significant real estate value Capital structure optimization

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JCP Real Estate Portfolio (1)

JCP real estate is worth $12 - $15 per share

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JCP Real Estate Portfolio (2)

$20/share in gross book value of buildings
Property and Equipment, Net
Estimated Useful Lives (Years) N/A 50 3-20

($ in millions) Land Buildings Furniture and equipment Leasehold improvements Accumulated depreciation Property and equipment, net

2010 $ 315 4,434 2,271 1,065 (2,854) 5,231 $

2009 308 4,276 2,356 1,118 (2,701) 5,357

Source: JCP 2010 10-K

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JCP Real Estate Portfolio (3)

JCP spends ~$300m/yr to rent the 62% of stores it does not own
JCP pays itself ~$180mm in synthetic rent for the 38% of company-owned stores $2.3b of owned real estate value (owned stores, ground leased stores, owned distribution centers) implies 8% cap rate on the synthetic rent

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Valuation Based on Separate Retailer and Real Estate Earnings Stream

Sale-Leaseback & Implied EBITDAP Multiple Low Case Value of Real Estate Assumed Cap Rate Implied NOI of Real Estate Current LTM EBITDAP Rent Expense Impact to EBITDAP Pro Forma LTM EBITDAP Current TEV Less: Real Estate Value Implied Firm Value Implied EBITDAP Multiple $2,058 8.0% $165 $1,584 (165) $1,419 $7,689 (2,058) $5,631 4.0x Mid Case $2,339 8.0% $187 $1,584 (187) $1,397 $7,689 (2,339) $5,350 3.8x High Case $2,620 8.0% $210 $1,584 (210) $1,374 $7,689 (2,620) $5,069 3.7x

JCP trades at 3.8x LTM EV/EBITDAP, adjusting for real estate value
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JCPs Real Estate Could Be Worth $13/share

$65
Margin improvement Sales per sq. ft. improvement

$8
$13

$8

$8

Real estate value Base value of retail business

Current stock price

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Investment Thesis
New management team & active Board of Directors
Opportunity for operational improvement Significant real estate value Capital structure optimization

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Share buyback: $900m Spent in 1H11

Feb. 2011: Board authorized up to $900m repurchase Q1 11: JCP bought back 21m shares for $787m Q2 11: JCP bought back 3m shares for $113m Completed program on 5/6/11 Average price of $36.98

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Debt Ratios

Source: Capital IQ
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Additional REIT Assets

Value of REIT Assets

REIT assets valued 7/30/11 at $300m = $1.40/share

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JCPs Total Value Could Exceed $70, More Than Double Todays Price
Capital structure optimization

$70+?

$65
Margin improvement Sales per sq. ft. improvement

$8
$13
Real estate value

$8
$13
Real estate value

$8

$8

Current stock price

Base value of retail business

Base value of retail business

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Conclusion: Many Ways to Win

Buy a decent, undermanaged business at a fair price and get an extraordinary combination of people, representing significant optionality, for free

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Appendix

Managements Goal is EPS of $5 by 2014

Source: 1Q11 company presentation

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Managements Goal is EPS of $5 by 2014 (2)

Source: 1Q11 company presentation

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Management Sees Revenue Growth from Many Sources

Source: 1Q11 company presentation

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5-Year Income Statement

JC Penney Income Statement Total Revenue Cost Of Goods Sold Gross Profit Selling General & Admin Exp. Pension Expense Pre-Opening Costs Depreciation & Amort. Other Operating Expense/(Income) Other Operating Exp., Total Operating Incom e Interest Expense Interest and Invest. Income Net Interest Exp. Other Non-Operating Inc. (Exp.) EBT Excl. Unusual Item s Restructuring Charges Gain (Loss) On Sale Of Assets Asset Writedow n Other Unusual Items EBT Incl. Unusual Item s Income Tax Expense Earnings from Cont. Ops. Earnings of Discontinued Ops. Net Incom e to Com pany NI to Com m on Excl. Extra Item s Per Share Item s Basic EPS Excl. Extra Items Weighted Avg. Basic Shares Out. Diluted EPS Excl. Extra Items Weighted Avg. Diluted Shares Out. FYE 02/03/2007 19,903 12,078 7,825 5,470 51 27 389 (35) 5,902 1,923 (270) 135 (135) 5 1,793 8 (2) (7) 1,792 658 1,134 19 1,153 1,134 FYE 02/02/2008 19,860 12,189 7,671 5,402 (45) 46 426 (37) 5,792 1,879 (278) 118 (160) 7 1,726 10 (1) (12) 1,723 618 1,105 6 1,111 1,105 FYE 1/31/2009 18,486 11,571 6,915 5,395 (90) 31 469 (36) 5,769 1,146 (268) 37 (231) 6 921 10 (21) 910 343 567 5 572 567 FYE 1/30/2010 17,556 10,646 6,910 5,382 337 28 495 (35) 6,207 703 (255) 10 (245) (15) 443 2 (42) 403 154 249 2 251 249 FYE 1/29/2011 17,759 10,799 6,960 5,350 255 8 511 (23) 6,101 859 (223) 11 (212) (19) 628 (32) 8 (3) (20) 581 203 378 11 389 378

4.95 229.0 4.88 232.0

4.96 223.0 4.90 225.0

2.55 222.0 2.54 223.0

1.07 232.0 1.07 233.0

1.60 236.0 1.59 238.0

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5-Year Balance Sheet

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5-Year Cash Flow Statement

JC Penney Cash Flow Statement Net Incom e Depreciation & Amort. Depreciation & Am ort., Total (Gain) Loss From Sale Of Assets Asset Writedow n & Restructuring Costs Stock-Based Compensation Tax Benefit from Stock Options Net Cash From Discontinued Ops. Other Operating Activities Change In Inventories Change in Acc. Payable Change in Inc. Taxes Change in Other Net Operating Assets Cash from Ops. Capital Expenditure Sale of Property, Plant, and Equipment Other Investing Activities Cash from Investing Short Term Debt Issued Long-Term Debt Issued Total Debt Issued Short Term Debt Repaid Long-Term Debt Repaid Total Debt Repaid Issuance of Common Stock Repurchase of Common Stock Common Dividends Paid Total Dividends Paid Special Dividend Paid Other Financing Activities Cash from Financing Net Change in Cash FYE 02/03/2007 1,153.0 389.0 389.0 (8.0) 4.0 60.0 6.0 11.0 (376.0) (190.0) 195.0 (1.0) 26.0 1,269.0 (772.0) 20.0 (32.0) (784.0) (21.0) (21.0) 135.0 (750.0) (153.0) (153.0) 38.0 (751.0) (266.0) FYE 02/02/2008 1,111.0 426.0 426.0 (12.0) 5.0 45.0 9.0 8.0 (124.0) (241.0) 106.0 (66.0) (10.0) 1,257.0 (1,243.0) 26.0 (25.0) (1,242.0) 980.0 980.0 (737.0) (737.0) 45.0 (400.0) (174.0) (174.0) 0 (286.0) (271.0) FYE 1/31/2009 572.0 469.0 469.0 (10.0) 29.0 53.0 (5.0) (32.0) 382.0 (278.0) (36.0) 12.0 1,156.0 (969.0) 13.0 (956.0) (203.0) (203.0) 4.0 (178.0) (178.0) (3.0) (380.0) (180.0) FYE 1/30/2010 251.0 495.0 495.0 (2.0) 48.0 43.0 (2.0) 352.0 235.0 32.0 (57.0) 178.0 1,573.0 (600.0) 13.0 (587.0) (113.0) (113.0) 4.0 (183.0) (183.0) (35.0) (327.0) 659.0 FYE 1/29/2011 389.0 511.0 511.0 (8.0) 40.0 56.0 (11.0) (69.0) (189.0) (93.0) 28.0 (62.0) 592.0 (499.0) 14.0 (485.0) 392.0 392.0 (693.0) (693.0) 8.0 (189.0) (189.0) (14.0) (496.0) (389.0)

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JCP vs. Comps

JCP Com p group Dillard's Inc. (NYSE:DDS) Kohl's Corp. (NYSE:KSS) Macy's, Inc. (NYSE:M) Nordstrom Inc. (NYSE:JWN) Target Corp. (NYSE:TGT) The TJX Com panies (NYSE:TJX) J. C. Penney (NYSE:JCP) Px 50.03 50.45 29.26 50.7 52.95 57.71 30.04
JCP Com p set Dillard's Inc. (NYSE:DDS) Macy's, Inc. (NYSE:M) Kohl's Corp. (NYSE:KSS) Target Corp. (NYSE:TGT) The TJX Com panies (NYSE:TJX) Nordstrom Inc. (NYSE:JWN) J. C. Penney (NYSE:JCP)

Shares Out 51.5 269.4 427.1 210.7 675.2 381.0 213.3

Mkt Cap 2,575 13,593 12,497 10,681 35,753 21,986 6,408

LTM Net Debt 779 2,525 5,581 1,712 16,695 (271) 1,548

EV 3,353 16,118 18,078 12,393 52,448 21,715 7,956

LTM Rev 6,324 18,666 25,720 10,231 68,441 22,546 17,741

P/E (LTM) 13.9x 12.0x 12.7x 12.6x 17.3x 16.8x 18.1x

LTM EBITDA 657 2,754 3,293 1,563 7,402 2,744 1,399

TEV/Fw d Rev

LTM Adj EPS 3.59 3.97 2.43 3.01 4.21 3.34 1.66
TEV/Fw d EBITDA

NTM Rev 19,554 26,505 10,754 71,327 23,708 17,647

NTM EBITDA 3,007 3,304 1,655 7,488 3,129 1,290

NTM EPS 4.76 2.76 3.35 4.21 4.19 1.74

TEV/Total TEV/EBITDA Rev LTM 0.53x 0.70x 0.86x 0.77x 0.96x 1.21x 0.45x LTM 5.1x 5.5x 5.9x 7.1x 7.9x 7.9x 5.7x

TEV/EBIT LTM 8.5x 8.3x 8.2x 9.9x 9.5x 10.2x 9.0x

0.5x 0.7x 0.8x 0.7x 0.9x 1.2x 0.5x

5.1x 5.5x 5.4x 7.0x 6.9x 7.5x 6.2x

JCP Com p set Dillard's Inc. (NYSE:DDS) Kohl's Corp. (NYSE:KSS) Macy's, Inc. (NYSE:M) Nordstrom Inc. (NYSE:JWN) Target Corp. (NYSE:TGT) The TJX Com panies (NYSE:TJX)

NTM Fw d

Gross

EBITDA Mrgn (LTM) 10.4% 14.8% 12.8% 15.3% 10.8% 12.2% 7.9%

EBIT Mrgn (LTM) 6.2% 10.6% 8.5% 11.9% 7.8% 10.1% 5.0%

Rev grow th (LTM) 2.5% 4.5% 6.1% 11.1% 2.8% 6.0% 0.8%

EBITDA grow th (LTM) 24.1% 2.2% 13.5% 20.9% 4.4% 1.0% 9.4%

P/E Mrgn (LTM) 12.2x 36.9% 10.6x 38.4% 10.6x 40.6% 12.6x 37.2% 13.8x 29.9% 15.2x 26.9% 17.3x 38.7%

Source: Capital IQ

J. C. Penney (NYSE:JCP)

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