JCP: Retirement Plan a Drop in the Bucket


Two days into Johnson’s tenure on JCP’s Board, the company initiated JCP an early retirement program, which is a nice move for Johnson at face value. He is effectively throwing his feelers out to see which senior members of the organization are interested in taking the offer helping shed overhead. Here are a few thoughts on the news:

  1. There are few details regarding the scope and size of the voluntary-retirement program. We have run a few numbers on what this could mean, but in doing so, assume this plan is intended only for those at corporate.
  2. With roughly 150,000 employees and using the general rule of thumb for a big box retailer that corporate accounts for ~2% of employees, we are talking 3,000-4,000 eligible heads. Of that number, there are likely 20% that have 20-years under their belt, which further narrows the pool of eligible employees down to 600-800 potential takers, or 0.5% of JCP’s entire workforce.
  3. On a dollar basis, this equates to roughly $140mm or 10% of JCP’s total salary expense, and ~2% of SG&A according to our math (see below).
  4. This implies an opportunity to shave 80bps off SG&A if every single employee took the offer and the company doesn’t back-fill vacated posts with new talent, which is highly unlikely. More realistically, we’re talking maybe 10%-20% of those eligible “cash out” early, which equates to 7-15bps margin opportunity.
  5. In fact, given that the company will have to payout severance expense associated with early retirements that most likely include at least 3-years of salary, we’re looking at ~50bps hit to margin before the company starts to realize its 15bps benefit.

The bottom-line here is that we agree that this is step in the right direction for the company over the longer-term as it looks to reduce fixed overhead costs.  It’s also a great way to get rid of ‘C’ and ‘D’ players.


But in the grand scheme of what needs to be fixed at this company, it is only a drop in the bucket. We still think that this will prove to be an extremely ugly CEO transition, and that earnings will go much much lower before they go higher. Johnson’s duration of 7-years is much greater than the average investor.


See our recently released JCP Black Book for more detail on this and other factors that have us squarely in the bear camp on JC Penney. If you are interested in receiving a copy, please contact .


JCP: Retirement Plan a Drop in the Bucket - JCP Emply 3 8 11


JCP: Retirement Plan a Drop in the Bucket - JCP Emply 2  8 11


JCP: Retirement Plan a Drop in the Bucket - JCP Emply 8 11



Casey Flavin



Solid quarter in a tough environment. ASCA continues to be prudent in capital deployment as cash flow accelerates.



“The second quarter of 2011 may be considered one of the most significant periods in Ameristar’s history because of the foundation it set for future growth.  As we seek external growth opportunities, we believe the combination of our ability to generate substantial free cash flow and our recent strategic transactions will help to deleverage the Company at a solid pace, particularly when the economy begins to show meaningful recovery."


- Gordon Kanofsky, Ameristar’s Chief Executive Officer




  • As a result of ASCA's debt refinancing and stock repurchase they "recorded on a pre-tax basis an $85.3 million loss on early retirement of debt and $3.4 million in non-operational professional fees during the 2011 second quarter.  The refinancing extended the maturity of all our debt, reduced our weighted-average interest rate, resulted in more favorable covenants and provides us with flexibility for meaningful growth opportunities in the future.”
  • "While gross revenues were relatively unchanged, promotional allowances decreased $12.7 million (15.5%) from the prior-year second quarter. Promotional costs were reduced as a percentage of gross gaming revenues at each property, with an overall decrease from 26.0% in the second quarter of 2010 to 21.9% in the second quarter of 2011."
  • "In May 2011, Indiana reduced its state income tax rate from 8.5% to 6.5%, which will be phased in over a five-year period beginning July 1, 2012. This change reduced the value of our state deferred tax assets (net of federal taxes) that can be realized in the future."
  • "Adjusted EPS for the 2011 second quarter was favorably impacted by $0.15 (net of fees and taxes) by the reduction of approximately 21.0 million in the weighted-average number of diluted shares outstanding from the April 19, 2011 share repurchase. The increase in Adjusted EPS from the prior-year second quarter was also attributable to efficient revenue flow-through and decreased interest expense resulting from the termination of our interest rate swap agreements in July 2010 and the lower interest rates achieved through the refinancing."
  • Debt: $2.01BN. "In July 2011, we repaid an additional $35.0 million. After taking into consideration the July debt repayments, we have $221.8 million available for borrowing under the revolving credit facility." 
  • Net Leverage Ratio: 5.48x
  • Capex: $16MM
  • 3Q Outlook: “Although the magnitude of the year-over-year growth seen in the last two quarters may be difficult to sustain for the entire year, we expect our stream-lined operations, profitable marketing strategies and top-flight product and service offerings to result in another strong and efficient financial performance for the third quarter"
    • D&A: $26-$27MM
    • Interest expense: $27-28MM (incl non cash interest expense of $1.3MM)
    • Tax rate: 20-25%
    • Capital spending: $10-15MM
    • Stock comp: $3.5 - $4MM



  • Operating in a stable promotional environment.  5 of their properties grew their net revenues.  6 of their properties grew their adjusted EBITDA. Their promotional spend was down across all of their properties.
  • No significant guest impact from flood waters. Had $400k of flood related expenses excluded from Adj EBITDA.
  • East Chicago - strong performance across all key metrics including 100% flowthrough of revenue growth. Attribute the improvements to normalization of hold at table games, marketing and cost efficiencies
  • Kansas City: EBITDA growth was more than 2x net revenue growth
  • Very confident that they can continue to achieve strong flow through in the coming quarter
  • Blackhawk - construction on Canyon Rd that has had some negative impact on the property's performance
  • They had a number of deferred tax assets in Indiana calculated at the higher tax rate, now that the tax rate is lower they had to revalue and write down the value of the deferred asset
  • Share count going forward: 34.5MM shares and 41.7MM average weighted at year end
  • New facility allows them more flexibility to pursue growth opportunities
  • FCF is $7MM higher post transactions
  • YTD $156MM of debt repayments have been made including the July repayment
  • R/C has a $200MM accordian feature which they haven't used yet
  • Now they have a total 'Net' leverage ratio vs a Total Leverage ratio.
  • Sr. Secured Ratio was 3.2x vs 4.5x
  • Interest coverage is still over 3.5x times - can't be lower than 2x
  • Lower tax rate going forward is due to certain state allocation changes that will impact them in the quarter. In Q4 the blended tax rate will be 40%.
  • Expect to continue to generate significant FCF - retire $40-45MM of debt in 3Q (prob closer to $45MM)



  • East Chicago - surface street project will help them but timing is uncertain
  • Confident that they can continue to grow YoY for the balance of the year.  Seeing greater signs of stabilization in consumer spending.  Saw increases in consumer spending in 2 of their markets despite lower promotional spending
  • Vicksburg had a good quarter despite elevated water levels.  2 operators in the market were closed and two remained opened (incl themselves) - so they obviously had some benefit from decreased competition
  • Favors acquisitions over greenfield opportunities.  Would rule out acquiring an entire company - not a top priority.  Opportunities that allow them to diversify revenue and EBITDA. There are a lot of assets that they could improve operating performance if they folded them into their system.
  • Have a lot of flexibility (financially and from a leverage standpoint) regarding acquisitions - their covenant is 7x
  • Is most of the improvement driven by their high end customers?
    • See that admissions have declined while the average loss per customer has gone up- all of which adds up to them getting higher quality of revenue
  • Bridge construction will last next year (St Charles).  Will close the Westbound span for about a year- currently there are 5 lanes going in east direction will go to 3 lanes with dividers. Shouldn't be too disruptive since there are lots of options to avoid the traffic, but they will likely suffer some revenue losses.
  • Blackhawk - 2 projects- sewer line work - finishing up and will pick up later this year down the hill.  There is also a project to straighten and widen I114 - encompasses an area a mile or so from Blackhawk. Construction is mostly during off hours - but it likely still has some small impact on them.

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A look at last week’s price action in commodities most relevant to the restaurant industry.


Last week saw positive price action in most of the commodities we include in our commodity monitor as the dollar moved lower and much of the supply and demand data points were supportive of higher prices.  Corn moving higher is the most important call out for the restaurant industry as it likely points to higher protein costs as feed prices increase.  The ongoing drought in Texas continue to pressure corn, dairy and protein costs.  Cheese paused over the last week, trading slightly down as some of the commentary out of management teams this week seemed to point to sustained dairy inflation in the back half of the year. 







Coffee prices gained 1.5% week-over-week and rose today in London for the fourth day in a row, the longest winning streak since June, on concern that supplies may be limited as Vietnamese exporters delay shipments, according to Bloomberg.  Vietnam is the largest robusta grower and a lack of beans has caused shippers there to postpone or cancel as much as 60,000 metric tons of exports in the past two months.  Arabica prices in New York also declined for the fourth consecutive day as top producer Brazil delayed sales because of lower prices.  Arabica prices declined 9.8% in June as supply worries eased.





Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.


PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”


“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”


HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.



SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”


“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.” 


HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.



GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”


HEDGEYE:  GMCR hedges out 6-9 months in advance.  Without a rising dollar and some stronger supply growth to counteract growing global demand, we expect sustained elevated prices.



Live Cattle


Beef costs gained 1.5% week-over-week as hot and dry conditions continue to strangle Texas farmers.  Farmers in the Lone Star State are beginning to turn water off in cotton crops and abandoning parts, or whole fields, of corn.  More than 99% of the state was in one level of drought or another by the last week of July.  Cattle feeding margins dropped further last week as cattle prices held steady at slightly over $108 per hundredweight, according to  Average feedyard closeouts now show losses exceeding $128 per head on cattle marketed last week.





Below is a selection of comments from management teams pertaining to beef prices from recent earnings calls.


RRGB (5/20/11): “Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins.” 


HEDGEYE: Live cattle prices are up +22.7% y/y.  See the price chart above.



JACK (5/19/11): Beef accounts for more than 20% of our spend and is the biggest factor driving the change in our guidance. For the full year, we are now anticipating beef cost to be up nearly 14% versus our previous expectation of 9% inflation. We expect beef cost to be up approximately 14% to 15% in the third quarter.


HEDGEYE: Live cattle prices are up +22.7% y/y.  See the price chart above.



WEN (5/10/11): We communicated to you back in March that we expected beef cost to rise approximately 10% to 15% and that we expected our total commodity costs to rise 2% to 3% in 2011. We are now forecasting that our beef cost will rise 20%.


HEDGEYE: There is moderate upside risk to beef price guidance for WEN.



EAT (4/27/11):  Well, consistent with what we've talked about in the last month or so as we visited many of you, beef continues to present the most significant inflationary pressure in our commodity basket.



MRT (5/4/11): Q: I wanted to revisit the overall expectations for your commodities basket, and I missed the part about beef, just wanted to verify that it was up in the 20% range.  A: no, no, no.  I said in the low double-digits. 


HEDGEYE: This is possible, even probable, for the year looking at average 2010 versus average YTD 2011 prices, and given the easier compares in the fourth quarter, but will require no sustained upturns from here.





Corn continues to be a concern for companies with exposure. The abandonment of corn crops in Texas due to the continuing drought is likely to support price in the immediate to intermediate term. 





Below is a selection of comments from management teams pertaining to beef prices from recent earnings calls.


AFCE (5/26/11):  On a full year basis, we now expect the Popeye’s system will experience an increase of 4% to 5% in food costs. This is up from our previous guidance of a 2% to 3% increase, primarily due to higher commodity costs in corn and soy, which impacts our bone-in chicken, as well as increases in the cost of flour and cooking oil.


HEDGEYE: Corn costs going higher are going to squeeze margins for food processors and, in turn, their clients.




Howard Penney

Managing Director


Rory Green







Solid End To July for Sports Apparel

Solid end to the month for Sports Apparel, with a big sequential acceleration for the week ending 7/31. Sales rate nearly doubled, with strong ASPs as well. Nearly every brand participated (except Columbia). Another good sign headed into tomorrow. With valuations where they are – the retail space needs all the good news it can get.


Solid End To July for Sports Apparel - chart1


Solid End To July for Sports Apparel - chart2


Solid End To July for Sports Apparel - chart 3


Solid End To July for Sports Apparel - chart4


Solid End To July for Sports Apparel - chart5


I was not allowed to ask a question on the conference call, yet I heard the tone that acknowledges I was in the queue.  I will try again next quarter.


Dear Mr. Travis,


Congratulations on the successful IPO of your company Dunkin’ Brands.  I know the process can be long and taxing answering what seems to be the same questions over and over again.


I wanted to take a moment to introduce myself and my firm.  I have been a sell-side analyst on Wall Street since 1990 and over the years have covered Food, Beverages, Tobacco, Restaurants and selected small cap companies.  For what it is worth, I have been ranked #1 by the WSJ and Intuitional Investor in multiple categories. 


My firm, Hedgeye Risk management ( features some of Wall Street’s best regarded research analysts - united around a vision of independent, un-compromised real-time investment research as a service. Our research teams have buy-side experience, which adds uniqueness in our approach to delivering value-added research, insights and ideas to our clients.


Maybe there was a technical problem, but for some reason I was not able to ask a question on your conference call.  As part of my research process, I don’t feel the need to ask questions on every company’s earnings call but this was my one chance to get a few questions answered since I was not involved in the road show process. 


In addition, I have reached out, on several occasions, to the company through your IR department and did not get any response.  I assume that is also because of the SEC regulations regarding “quiet periods.”


Today’s conference call was helpful but I have some questions that have not been answered.  In particular, I’m focused on the future growth model and a few other issues.

  1. Can you talk about how the system developed in New England (i.e. who was responsible for building  the CML’s)
  2. How important are the CML’s to the franchise economics?
  3. How many stores does a CML support?
  4. Do you need more CML’s in the East to support future growth?
  5. How many CML’s are west of the Mississippi?
  6. If you build a CML west of the Mississippi, who will fund the building of the facility?
  7. What types of incentives are you offering to franchisees in the Greenfield markets?

Depending on how the previous questions are answered and looking at the data from the S-1, it appears the future growth west of the Mississippi will incorporate a different growth model from that which made the company so successful in the New York and New England. 


As you have said in the S-1, ‘in newer markets, Dunkin’ Donuts brand restaurants rely on donuts and bakery goods that are finished in restaurants. We believe that this “just baked on demand” donut manufacturing platform enables the Dunkin’ Donuts brand to more efficiently expand its restaurant base in newer markets where franchisees may not have access to a CML.’


What market can you point to where the “just baked on demand” model has worked successfully and for how long?


To date, the company expansion plans west of the Mississippi have been less than successful.  There was some big fanfare in the Minneapolis market a few years ago that has not panned out.  In addition, Phoenix and Las Vegas markets might even be called “franchising failures.” 


I’m looking to better understand the growth model and the implications on the company’s earnings and returns.  As you said on the conference call, a move to open more stores in Germany and Russia would help to improve average unit volumes in The Dunkin international division.  Isn’t the opposite true for the USA?  The more stores you open away from the core market in NY and New England will lower the average unit volumes in the USA?


If DNKN is truly in a growth mode, the returns on the new incremental growth will be the key metric that sustains the company current valuation and investor’s long-term support for the current business plan.


I have other unanswered questions but I guess they will have to wait.


Again, congratulations on the successful IPO.




Howard W. Penney



Howard Penney

Managing Director



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