In digging below the surface, JCP’s guidance for 2011 of $2.00 to $2.10 does not appear as robust as it seems. What the press release fails to articulate is an assumption that the company’s pension expense will be reduced by $134 million year over year in 2011. This equates to a savings of $0.36 per share, which when added to the $1.59 just reported for 2010 gets to a starting point of $1.95. Add to the base the assumption that same store sales are expected to grow a robust 3-5% and management is essentially guiding to incremental earnings growth of just $0.05 to $0.15. Something is clearly not adding up if comps are expected to be solid, gross margins essentially flat, and barely any “core” earnings growth will result.
Bottom line here is not to be fooled by the seemingly robust topline outlook. Earnings growth in large part is being supported by pension expense reduction for 2011, at least for now. We expect the combination of 3-5% same store sales increases and flat margins to also be a challenging goal to achieve.
Eric Levine
Director