Geopolitical Risk Update: Asia says, “Don’t forget about us!”

Conclusion: While Gaddafi, Wisconsin, and Greece continue to dominate the geopolitical risk headlines, some of Asia’s largest economies are currently dealing with uprisings of their own. Each, to varying degrees, has the potential to heat up substantially in the coming days and weeks.


Position: Short Emerging Market equities via the etf EEM.


While the conflict in MENA and the recent volatility associated with global crude oil prices appropriately garner the bulk of investor attention, that doesn’t mean geopolitical risk ceases to exist elsewhere. Given, we detail below three scenes in Asia where current uprisings have the potential to accelerate in the coming week(s):


CHINA: Cold For Now


LinkedIn Corp. has become the latest social networking site to be blocked in mainland China after a user, “Jasmine Z”, posted comments that explicitly stated Tunisia’s Jasmine Revolution should be spread throughout China. Additionally, the user set up a forum whereby others in the discussion group could post their opinions. The Chinese government’s suppression here puts China in direct contention with recently-enacted US foreign policy:


“The US will help people in oppressive internet environments get around filters, stay one step ahead of the censors, the hackers, and the thugs who beat them up or imprison them for what they say online.”

-Hillary Clinton, US Secretary of State, Feb. 2011


We doubt Washington D.C. has the political will to get in between China and its citizens; we will point out, however, that any reneging on the US’s hard stance on this topic could potentially undermine their efforts and influence in MENA negotiations.


Elsewhere in China, demonstrators continue to make a push for weekly demonstrations at 13 locations throughout the country after the initial gatherings on Feb. 20 failed to produce more protestors than police. China’s Foreign Ministry Spokesman Ma Zhaoxu had this to say regarding the demonstrations:


“It is the Chinese people’s common aspiration to safeguard social and political stability, promote social harmony, and safeguard our people’s livelihood… No one can force or sway our resolve.”


Translation: We will continue to suppress any uprising and the US/UN rhetoric will not factor into our decision.


All told, the situation remains fairly muted in China at this point, and given the recent wage increases and the potential for the next five-year plan to focus exclusively on raising broad living standards throughout the country, we don’t see this as a situation that will get out of hand.


INDIA: Warm; Poised to Heat Up?


On Feb. 3, we published a report titled, “Falling Like a BRICk: Is India the Next Egypt?”; in the report, we detailed the similarities between India’s economy and the now-falling MENA States. Furthermore, we highlighted the #1 risk that could propel Indian citizens to do their best Tunisian/Egyptian/Libyan impersonations: accelerating inflation.

We’ve been vocal about the RBI’s poor effort to adequately resolve India’s inflation issue (instead of raising rates, they spent the bulk of 4Q10 buying back gov’t bonds to increase liquidity in its banking sector). Now India is in a scenario whereby food and energy inflation is spilling over into “core” inflation as producers and retailers hike prices throughout the economy – and this is before $112 Brent crude oil gets factored into corporate decision-making.


As we’ve maintained for the past few months, high and rising food, fuel, and now “core” inflation in an economy where ~830 million people live on less than $2 per day is a sure recipe for social unrest – and now India is getting exactly what the RBI has “cooked” up. Led by the country's trade unions, thousands of workers have convened on the nation’s capital this week to protest rising food prices, low wages, and job insecurity.


And this is with +9% YoY GDP growth. Imagine what the scene would look like if Indian GDP growth slowed by 100-200bps over the next 6-9 months…


Monday (2/28) will be a critical day for the direction of social instability in India, as Finance Minister Pranab Mukherjee unveils the government’s FY12 budget. The budget is expected to be filled with food and fuel subsidies for low-income citizens, as well as guaranteed work programs for over 41 million of its poorest rural families.


The expectations for massive stimulus for the low-income segment of the Indian populace have been set; any “miss” relative to these expectations could potentially incite further unrest among Indian voters – many of which have been turning away from the ruling Congress Party in the recent polls due to corruption and unpalatable inflation, among other things.


All told, the Indian government cannot afford for the budget to miss expectations or for it to get derailed via further legislative gridlock. Opposition to the alleged graft of former Congress Party officials has stalled the legislative agenda and made the final parliament session of 2010 the least productive in 25 years!


The opposing Bharatiya Janata Party’s insistence on a parliamentary probe of the alleged graft has finally resulted in capitulation by Prime Minister Manmohan Singh, who finally agreed to the probe earlier this week, understanding just how important it is for India to get the upcoming budget bill through parliament:


“We can ill afford the situation that our parliament is not allowed to function during the critical budget session… It is in these special circumstances that our government agrees to setting up a joint parliamentary committee.”

-Indian Prime Minister Manmohan Singh, Feb. 22, 211


Special circumstances indeed... We’ll continue to monitor this situation closely, as the current demonstrations have the potential to go from “warm” to “very hot” in a heartbeat.


KOREA: Dry Ice Hot


In what is likely the wackiest news of the week, it appears South Korea is stirring the pot of its northern neighbor, attempting to incite a Jasmine Revolution-style uprising designed to overthrow the Kim regime. Its military has dropped over three million leaflets containing information regarding the pro-democracy revolts in the MENA. In addition to the leaflets, the South is also flying in rice, clothing, medicine, and working radios (with the intention of keeping them up to speed on the uprisings).


While the South Korean military declined to comment, other officials did chime in with clues as to where this may potentially be headed:


“North Korean people’s protests may also be able to bring a change to the regime… South Korea’s military and government should also be ready for any revolt inside North Korea.”

-Song Yong Sun, Member of the National Assembly’s Defense Committee


While it’s too early to tell if this latest attempt at psychological warfare will successfully incite a massive uprising in North Korea, we do believe it is of upmost importance to keep this risk on your radar. As we saw last year with the North’s sinking of the South’s naval warship Cheonan in March and its November shelling of Yeonpyeong, tensions can heat up on this peninsula in a real hurry. And perhaps more so than Libya or Egypt, any real outbreak here brings with it a great deal of global geopolitical risk, as the US and Japan remain firmly behind South Korea and China (albeit less firmly) stands behind the North.


Let us not forget that a) North and South Korea are still technically at war (and have been since 1950); and b) nuclear weapons (or merely talk of nuclear weapons) have the potential to be a factor here.


While it’s much, much too early to even assign the slightest thousandth of a percent to the probability that a nuclear conflict ensues here, we do think it’s important to keep the Korean peninsula on your screens as a place where significant geopolitical risk could erupt rather quickly.


Darius Dale



In preparation for ISLE's FY3Q11 earnings release Monday, we’ve put together the pertinent forward looking commentary from ISLE’s FY2Q11 earnings call.




  • Our improved performance was fueled by our continuing efforts to improve flow through by focusing on profit enhancement programs, including continuing cost containment efforts and refining our marketing programs.”
  • “We are cautiously optimistic that the economy is beginning to recover, but slowly.”
  • We expect maintenance capital for the rest of the year to be about $22 million. And we expect to probably expend about $10 million towards the Cape Girardeau project between now and the end of our fiscal year, primarily related to completing some land acquisitions and design cost.  We fully expect that the funding will come from our free cash flow from operations and draw on the existing credit facility”
  • Pompano potential: “I think that these results are probably indicative of what we can see going forward.”
  • Texas gaming: “It was a lot more active I’m going to say about six months ago, but relatively recently we haven’t heard anything”
  • “Our biggest problem in Black Hawk has been our midweek business. When you have 500 incremental rooms in the market, they were going after the same customers midweek that we are, and it’s highly competitive. So what we have been working on is, how do we drive that midweek business, particularly since we don’t have any convention space that we can use to drive midweek meeting or convention business? How do we do that? And how do we strengthen our acquisition programs?”
  • “For almost two years now… we’ve had pressure on the Bettendorf property, in particular, because of construction on the I-80 bridge. And after 19 months of that bridge being impacted negatively in one fashion or another, last month it finally reopened again, and what that did is it opened up our very profitable secondary markets in Illinois. So we’re starting to see those markets recover again, and we’re also starting to see our weekend business recover again. We were trying to do everything that we could to drive database business midweek because of the bridge issues, and we’re now able to benefit from some of that increased retail play again. The other thing that we did very successfully in the quarter in Bettendorf is utilize the Quad-Cities Convention Center. We did a very aggressive entertainment schedule in the quarter, and we also benefited from an increase in midweek convention business.”
  • “The pressure on Davenport has primarily been as a result of the competitive situation. Our Illinois competitor has been very, very aggressive in the mid-tier segment of the database, which is where we’re seeing the most pressure in Davenport. We’ve been able to maintain strong relationships with the upper end of the database, but again, it’s tough when a competitor is throwing a lot of money at you.”
  • “The biggest improvement obviously came from the tax decrease in Florida. And as I was saying to Larry, I mean, I think that what we’re seeing down there is indicative of trends that we’ll see in the future. When you look at the rest of the portfolio, though, we did see margin improvement at nearly all of our properties; I think it was eleven of fourteen. And this was as a result of, number one, an increase in retail business at nearly all of our properties, which we think is another sign that the economy is starting to slowly recover. But it’s also very, very targeted marketing programs. At almost every one of our properties, we really focused on driving midweek business. And it’s also our cost containment programs, which we have continued at all of our properties.”
  • “As to Mojito Pointe, if anybody spends $450 million in your market, it is going to impact you.
  • “Nemacolin [is] about approximately a $50 million project in that market, so it’s not that large. We believe that even with Nemacolin, incrementally, that between the credit facility, and we still generate a fairly significant amount of free cash flow on an annual basis, that the way these projects lay out and the different construction periods of the two projects, that between free cash flow and the revolver we would anticipate funding them both through those sources. We’ve also mentioned that we’re very aware that in the coming months, sometime over the next period of time here, that it’s likely that we’ll be redoing our senior credit facility. The maturity of the revolver is July of 2012. The term loan’s 2013, and we’ve mentioned several times we’re always looking for the right time and the right way to address that and extend that out. I don’t want to – I think it’d be premature to talk about anything in Davenport at this time.”
  • “This is a company that has over $100 million of NOLs.”
  • Nemacolin: “Our agreement is that we would provide for the build-out of an existing facility that’s already there. We would pay to expand that facility and pay for all the FF&E and the renovation that goes into it. There’s a base fee and then a percentage of revenue to the resort, and then we get the rest of the profit or the EBITDA after that fee’s paid. We anticipate that the fee would probably be somewhere around $350,000 a year or something like that.”
  • “We’re definitely seeing benefit from Alabama closures. But that’s still, obviously, a highly volatile situation, and we’re waiting to see what plays out in Alabama. It is still a very highly competitive market. We’re still seeing some double-digit declines out of the Pensacola market, which has traditionally been a very strong market for us, as a result of the increase in gaming in Florida. And one of the things that is not reflected in what you’re seeing in Biloxi for the quarter is we actually lost one of our biggest special events as result of the oil spill in the Gulf, and we still posted those numbers, so they did a good job.”
  • Caruthersville: “Well, you’ve got a lot of noise in the numbers. There was a $935,000 tax adjustment in the second quarter last year. So if you had looked at the quarter apples-to-apples,  we actually would have been up almost 13% in EBITDA.”
  • Lake Charles: “We have completely revised and revamped our marketing programs there. We have eliminated unprofitable marketing programs. We’ve focused on driving more midweek business. We are seeing some pressure in the market. The market obviously declined in the quarter. We’re seeing some pressure in the market from the secondary markets, particularly Houston, which was down significantly for us. We do have some competitive pressure midweek. Some of our competitors are actually going out and doing midweek promotions, which is something that they haven’t done in the past. But I think for the quarter, the property did an excellent job in terms of containing their costs and marketing smarter.”
  • Q: “Do you expect once Delaware North closes on Jumer’s that they’ll get a little more rational in terms of marketing there and that’ll help give your property there?”
    • A: “We generally see when a property is being marketed that there is an increase in promotional expense. Obviously, you’re trying to drive the top line. So there is usually a rationalization of the expenditures in the market when you see a property like that transact. We’re certainly hoping that that’s the case.”
  • “If we feel that conditions are right in the future, or if there’s a catalyst to raise equity in the company, there might be another attempt to bring in a slug, whether or not it would be as much as we talked about this summer, who knows. I think that would determine on what all we have in the pipeline when, and how the market stacks up.”
  • “For the year, close to half of our maintenance capital is spent on slots or slot related, including conversion kits and stuff like that. “

The Bounce: SP500 Levels, Refreshed...

POSITION: no position in SPY


“A hard fall means a high bounce... if you're made of the right material.”



There be bulls in these parts. This bounce is made of what’s made the last 2.5 months so bullish – higher prices.


But make no mistake, these be lower-highs – both on a long-term TAIL and immediate-term TRADE basis. And while an immediate-term breakout above the 1308 line of resistance was proactively predictable, we don’t want to mistake today’s low-volume bounce for something that we should chase. A close above my refreshed immediate-term TRADE line of resistance of 1325 would change that, potentially.


Here are a few other things to think about in the immediate-term: 

  1. Monday is month-end, so there’s plenty of reason to believe we could see 1325 with month end markups
  2. Monday is after the weekend, so anything priced into oil risk premium can change
  3. Volatility (VIX) remain well above my TRADE (15.59) and TREND (18.11) lines of support (bearish for US Equities, from a price) 

No one said hard falls can’t be proactively prepared for (last Friday I had 14 LONGS and 15 SHORTS). No one said you should short-and-hold after hard falls either (this Friday I have 14 LONGS and 7 SHORTS). I’m just saying that the best strategy from here is to keep managing your gross and net exposures aggressively as Big Government Intervention perpetuates price volatility.




Keith R. McCullough
Chief Executive Officer


The Bounce: SP500 Levels, Refreshed... - 1

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Caesar's reported a 5.1% YoY increase in Adjusted EBITDA; however, excluding the $23.5MM property tax accrual included in the IL/IN region, Adjusted EBITDA actually declined 1.7% YoY.




  • "The company's 2010 fourth-quarter revenues increased approximately 1.0 percent to $2,121.0 million from $2,099.1 million in the 2009 fourth quarter, due primarily to revenues associated with our February 2010 acquisition of Planet Hollywood, offset by the continuing impact of the weak economy on customers' discretionary spending. However, certain markets, including Las Vegas, have shown signs of stabilization and improving operating margins."
    • Same store net revenues declined 2.4% YoY in 4Q10 compared to a 2.7% YoY in 3Q2010
  • "During the quarter, we initiated a new program to streamline our operations further, and I'm confident we will end this year with an even leaner, more efficient and responsive organization"
  • "While most markets in which we operate showed modest revenue gains or stabilization in the fourth quarter, Atlantic City did remain challenged"
  • "Our new joint venture with Rock Gaming, LLC, broke ground earlier this month on casino projects in Cleveland and Cincinnati that will operate under the Horseshoe brand name.  The two casinos combined will offer about 4,100 slot machines, 180 table and poker games, and exciting dining, retail and entertainment venues to an
    estimated 14 million visitors annually." Both projects are expected to open in 2012, pending receipt of required regulatory approvals."
  • "On a consolidated basis, when compared with the respective periods of 2009, visitation by our rated players decreased 5 percent for the fourth quarter 2010 and decreased 1 percent for the full-year 2010. The amount spent per rated-player trip increased approximately 1 percent for the fourth quarter 2010 and decreased approximately 2 percent for the full-year 2010. Average daily room rates and occupancy were generally flat for both the fourth quarter and full-year 2010."
    • 4Q Las Vegas YoY trends: 
      • "Visitation by our rated players increased 15%"
      • "Amount spent per rated-player trip decreased 5%"
      • "Hotel occupancy remained above 90 percent"
      • Hotel revenues increased 16%: Occupancy +3.5%; ADR: Flat
    • 4Q AC YoY trends:
      • "Visitation by our rated players decreased 9%"
      • "Amount spent per rated-player trip decreased 5%"
      • Hotel revenues remained relatively flat: Occupancy -3%; ADR: +4%
    • 4Q all other US markets YoY trends:
      • "Visitation by our rated players decreased 8%"
      • "Amount spent per rated-player trip increased 4%"
  • IL/IN: "Revenues in the region increased for the 2010 fourth quarter from the 2009 comparable period, primarily due to increased visitation... Income from operations prior to consideration of impairment charges, and property EBITDA increased for the fourth quarter and full year of 2010 from the 2009 periods as a result of reduced marketing expenses and the benefit of a $23.5 million property tax accrual adjustment recorded in the fourth quarter 2010."
  • "Revenues from our managed properties decreased for the fourth-quarter and full-year 2010 due to the continued impact of the current economic environment on our managed properties. Revenues from our international properties for the fourth-quarter and full-year 2010 increased from 2009 due to increased visitation and increased spend per trip at our Uruguay and London Clubs properties."



  • Group bookings are strong in Las Vegas
  • In the US, they remain committed to legalization of online poker on the federal level
  • Implemented priority Prism system that allows them to customize marketing programs
  • Significant opportunities remain to streamline their organization and cut more costs
  • 2010 was a challenging year for CZR and the gaming industry
  • For the first time, both revenues and property EBITDA increased... 
    • Not if you exclude the Planet Hollywood acquisition and the tax accrual... oh well gotta love creative accounting GAAP measures
  • New $153MM cost saving initiative by end of 2011
  • I love how they mention the reasons behind their property level EBITDA but manage to exclude the single largest driver of the increase - since it's a one time item that should never be in adjusted EBITDA to begin with
  • The $23.5MM tax adjustment was related to the Hammond property


  • 1Q2012 opening of the temp facility in Cleveland and a 4Q2012/1Q2013 opening of the Cincinnati property. $65MM was contributed to the JV so far.
  • Think that stabilization is their ambition in AC given the regulatory changes there. Think that Revel will reinvigorate Showboat and that they need to reposition Bally's.
  • $550MM of cash at OPCO and no R/C draw
  • 2011 Capex plan? $425MM - includes maintenance and growth capex including OH and equity into the LINK project and Octavius Tower ($100-150MM of their equity + financing raise that they announced)
  • RevPAR growth in LV ex PH: Occupancy was up 3pts and ADR was down 1%.  They are against resort fees.
  • Group booking trends in Vegas:
    • Began seeing a pickup of group booking trends a year ago. Both volumes and pricing are much improved from what they saw in 2008-2010.
  • They are working very hard to make their marketing spend more efficient. In AC they have been substantially cutting back on marketing.
  • Why is now the right time to invest in Vegas?
    • They are not trying to game good timing, rather they are trying to attract customers to their strip real estate that has suffered from loss of visitation.  Think that the Wheel will drive a lot of traffic - ala the London Eye.
  • Believe that people's desire to visit their facilities hasn't diminished but their ability to spend has... believe that spend per visitor is starting to rebound a little
  • Planet Hollywood acquisition is really helping them draw more traffic to Vegas 
  • Thinks that the London Eye does 3MM visitors a year - each which pay $20 to take a ride. Intend to offer a more modern version and offer F&B.  Believe that this will be a highly remunerative project.  The Stratosphere also is a big draw.
    • Retail area will have 190,000 SQFT of leaseable space
    • Wheel capacity 10MM / year
  • Update on i-gaming legislation:
    • They would prefer to focus on the federal level until those efforts are exhausted
    • He is cautiously optimistic that they can have a successful passage of online poker in this congressional session
    • If the federal effort is not successful, then they can go the State route. However, given the lack of liquidity, the State efforts are limited unless a number of states legalize and join efforts.
    • US poker market is about $6BN with no promotion from the large operators
    • Think that it would be a fixed cost driven market with high margins
  • Thinks that New Orleans should have a great 2011 - with lots of events and big resurgence of tourism
  • MS has been very tough. Tunica is in its 5th year of decline.
  • Business in Chicago is a monster and that market is quite vibrant
  • St Louis has had too much supply, but is starting to see some stability
  • The competitive behavior has been quite favorable. ASCA has done some innovative work on their marketing front.
  • How did they identify another $150MM of cost savings?
    • Consolidation of mgmt activities in AC and Tunica, marketing activities in the midwest region
  • Strength in the Asian play in Vegas continues to be very strong
  • $220MM tax return was received in the 4Q but not at HET OPCO
  • What are they doing to get that incremental spend per visitor?
    • In Vegas - they are trying to make their network of properties more valuable to their players - trying to incentivize players to see them in multiple properties during their visit

Could The Turmoil in the Middle East Be Bearish for Oil?

Position:  We are long oil via the etf OIL

Conclusion: We are long OIL in the Virtual Portfolio as price continues to confirm this position, but longer term, as history shows us, political liberalization could actually support growing production.

The price of oil is already indicating to us that the current turmoil in the Middle East will not be resolved in the short term.  Since tensions heightened in Libya over the past week, the prices of most major grades of oil are up roughly $10 per barrel in just a couple of days. Today oil is flat after a volatile day of trading motivated by rumors surrounding the demise of Moammar Gadhafi.


Further to this point, we’ve outlined in a chart below the highest closing price in February going back the last 15-years.  Typically, February would be a relatively slower seasonal month for demand in the United States (the world’s largest consumer) as the need for winter heating oil diminishes and summer driving season hasn’t picked up.  Interestingly, while the price of oil is still more than $40 from its all time high, it is very close to highest February close of $101.78 in February 2008.  This abnormal and non-seasonal price movement emphasizes the powerful price move we are seeing.


Could The Turmoil in the Middle East Be Bearish for Oil?  - dj oil


On February 16th, we called out this potential impact of popular unrest in Libya and Iran in a note that underscored our long position when we wrote:


“We are starting to see Egyptian and Tunisian type popular tensions spread to some key oil producing states, which should provide a key support under the commodity.  Specifically, both Iran and Libya have seen an increase in protests.  This is relevant because, based on the most recent data, Iran is the second largest producer of crude oil in OPEC, at 3.7MM barrels of oil per day, and Libya is a sizeable producer as well at 1.6MM barrels of oil per day.”


Given that Libya is less than two percent of global production and that the IEA has over 1.6BN barrels of oil in storage, clearly the current price movement is about more than Libyan disruption.   Even if Libyan oil production were completely turned off, the IEA has enough oil in storage to offset that lack of production decline for a full year.  Further, it is estimated that OPEC collectively has between 4 – 6MM spare barrels of daily production. So, why has oil gone parabolic over the past couple days?  Simply put: oil is now trading on fear.


In effect, this is fear that popular upheaval goes well beyond Libya and into more significant producers in the Middle East (like Iran) and that the ultimate outcome is a transition in government, or armed conflict, that leads to a broad decline in oil production.  An associated fear is that OPEC ultimately doesn’t have the spare capacity they claim, which could lead to a global oil supply tightening quicker than most expect.  Ultimately, this fear will continue to buoy and lead the world oil markets until we have some resolution or clarity in the Middle East, which certainly does not seem imminent.


Longer term there is a scenario, which certainly isn’t consensus on a week like this, that vast liberalization and democratization in the Middle East could be positive for oil production.  Russia is probably the prime example of this occurring. 


In the late 1980s, Russian oil production reached a peak of production of 12.5MM barrels of production per day.  Due to a decline of investment during the Soviet era, Russian oil production gradually fell thereafter and had fallen to around 6MM barrels per day by the mid-90s. The collapse of the Soviet Union combined with a privatization of the oil fields initiated a turnaround in production starting in 1999.  Currently, Russia is back to near peak production levels due to privatization and subsequent modernization of her oil assets.


Iraq looks to be on a very similar path to that of Russia.  Not surprisingly, with the Iraq War and the ensuing chaos following the removal of Saddam Hussein from power, Iraq oil production fell dramatically and was mired in the 1.5MM barrels per day level of production until early 2007.  By then, post Saddam Hussein modernization and investment started to pay off and Iraqi oil production began to climb.  In January of this year, Iraqi oil production hit a post war peak in production of ~2.6MM barrels per day and is expected to be near 3MM barrels per day by year end, a level not seen since the late 1970s.  In fact, as reported late last year in the Wall Street Journal, some Iraqis believe that growth in production could be meaningful in the coming decade:


“In all, Iraq hopes the work will boost output capacity from the current 2.5 million barrels a day to 12 million barrels a day in less than a decade. That would be a feat unrivaled in the history of the modern oil era. Last month, Fatih Birol, the International Energy Agency's chief economist, called Iraq a potential "game changer" for global oil markets.”


In fact, Royal Dutch Shell, who was awarded one of the Iraqi contracts last year, recently upped its Iraqi production from the Majnoon field from 45,000 barrels per day to 70,000 barrels per day.  A small change, but incremental.


No doubt this is a long tail type scenario, and a lot would have to happen for Western Oil companies to up investment in less stable regions like Iran and Libya, but both Iraq and Russia do provide some credence to the idea that production, over the longer term, could grow if the ultimately outcome is the spread of democracy and rule of law.


Could The Turmoil in the Middle East Be Bearish for Oil?  - dj iraq oil


Daryl G. Jones

Managing Director

JCP: Picking Apart the Outlook


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.


JCP: Picking Apart the Outlook - JCP 2 11


Eric Levine


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