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In preparation for Boyd Gaming's Q3 earnings release on Monday, we’ve put together the pertinent forward looking commentary from BYD’s Q2 earnings release/call and subsequent conferences.



2Q YouTube

  • “The weakness we experienced following our last conference call in early May is a reflection of the fragile nature of today’s consumer, and the fragile nature of consumer confidence in general. Whether it’s the burgeoning federal deficit, volatility of the stock market, the European debt crisis, or stubbornly high unemployment, the consumer is reacting more quickly to the news than ever before. Their current reaction has been to pull back on their spending. The severity and length of this recession has clearly had a profound effect on consumer behavior.”
  • “We anticipate that the third quarter will trail last year’s results, but as we have said in the past, starting in the fourth quarter, we will have much easier comparisons going forward.”
  • “However, starting in late June and continuing into July, we have seen a return to expected summer levels of business with occupancy and business volumes more representative of a typical summer season.”
  • “We continue to believe that YoY growth is achievable by the end of this year.”
  • “Las Vegas convention attendance in March, April and May increased between 3 and 5% and we expect to see meaningful growth in bookings in 2011.”
  • “Normal seasonality for the Las Vegas Locals market shows a low point in the third quarter and a peak in the first quarter, with the second and fourth quarters lying in between.”
  • [Downtown Las Vegas] “During the second quarter, we increased our market share by over one full % point to 30.5%, up from 29.2% in the second quarter of 2009.”
  • “Borgata ended the quarter with a debt balance of $627 million. We issued an 8-K last week regarding a potential refinancing of Borgata’s debt. If the transaction is approved by the New Jersey Casino Control Commission, a distribution of approximately $100 million will be made to Boyd.”
  • “We continue to expect total corporate expense for 2010 to be $40 million in line with our previous expectations.”
  • [Consolidated tax rate] “We expect this rate to be approximately 30% for the remainder of the year.”
  • “I think what we saw in July and what we’d expect to continue to see throughout the summer, will continue to be in the trends that we generally saw in the first and second quarter.”
  • “Going forward, we wouldn’t expect to have increased utility costs kind of in the fourth quarter largely because we had such terrible weather in the fourth quarter last year. Obviously in the third quarter it should be higher just because of the extreme heat that we are dealing with right now…We didn’t see rates dramatically increase. Really it is a usage issue.”
  • “In the last couple of years as we have worked our way through this recession I think we – and most companies in the business have pulled back on what we call maintenance capital. And I think our focus going forward is to make sure our properties are well maintained and are competitive. [Maintenance Capex] increasing in 2011.”
  • “We still believe buying EBITDA is better than building EBITDA in the current environment.”
  • “Well as some of the opportunities we’ve looked at including Stations haven’t come to fruition, we’ll use our free cash flow to pay down debt, reduce our overall debt load and improve our leverage ratio just going forward as we look to de-lever the company, absent of this style of acquisition.”

The Week Ahead

The Economic Data calendar for the week of the 25th of October through the 29th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

Being a Lady

This note was originally published at 8am this morning, October 22, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Being powerful is like being a lady. If you have to tell people you are, you aren't.”

-Margaret Thatcher


America (she) is a great country and I’m proud to be an American!  When are we going to behave like the powerful nation we are?  


Sadly, of late, we need to keep reminding people how powerful we are.  We do have tremendous power and this is a great nation, but right now we lack the backbone and the political leadership to make the tough decisions to get us on the right track.  (And, no, I do not believe the Tea Party is the answer).   


Case in point #1 - Treasury Secretary Tim Geithner 


Mr. Geithner is in the hot seat today because he is representing the USA on the world stage in Seoul, South Korea at the G20 summit this weekend.  His quotes in the WSJ yesterday are a sign of weakness, not strength.  Just one example: “We would like countries to move toward a set of norms on exchange-rate policy."  Seriously, the Chinese are having a field day with that comment.  As issuers of the world reserve currency, it’s embarrassing that successive administrations have led us down this path.


Another embarrassing quote: "Right now, there is no established sense of what's fair".  What? C’mon, Mr. Geithner, what is not fair?  Given his record of paying taxes, some might find it amusing that Geithner is our guy in Seoul, making the moral case.  Some might say he lacks legitimacy in such a claim.  The same might be said by the international community: why is America pointing fingers when it is plainly obvious that failed economic policies and Washington DC dogma has rendered the U.S. economy and currency in their present states?  The Chinese march to the beat of their own drum and look out for their interests.  What part of that is not fair?


The countries with strong economic and fiscal policies are being forced to embrace capital controls to slow the inflows of speculative cash that is coming from the USA.  It’s not unfair, it’s embarrassing!  Nobody cares about the losing team complaining about the officiating or the lack of sportsmanship from the other team; at the end of the day, all that is remembered is who lifts the trophy.


Case in point #2 - Failed Washington policies - Stress Tests 2 is on the way


I could go in multiple directions with this one (TARP, Healthcare reform, etc….), but despite the Dodd-Frank financial regulatory act, the US financial banking system is still facing a high level of systemic risk.  The foreclosure fiasco is posing systemic risks to a number of financial intuitions, and I don’t believe the first round of bank stress tests contemplated a breach of contract in securitized mortgages.  This is a problem.  Who knows what other omissions the stress tests made from their “analysis”?


While today is the 103rd anniversary of the Panic of 1907, which led to a run on the Knickerbocker Trust Company, we are seeing another crisis emerge at a number of large financial institutions.  The 13% month-to-date decline in Bank of America is not a run on the bank, but it’s frightening nonetheless.  There is no immediate threat of Bank of America being insolvent, but the damage to the bank’s reputation is immeasurable and the financial liability is uncertain. 


If we have learned anything over the past two years, the downside scenario is that the losses are likely greater than the $47 billion that a few institutions want back.  Importantly, the latest round of uncertainty in our financial system is not helping consumer confidence and will make most financial institutions more cautious about extending new credit, further slowing the recovery.


It would seem that it’s just a matter of time before the Stability Oversight Council created by the Financial Regulatory Act orders Stress Tests 2.  


Case in point #3 - No credible plan


While Mr. Geithner can cry this weekend that things are not fair, nobody in Washington (Democrat nor Republican) has put forth a credible plan to fix the nation’s problems except for more QE.    


As my colleague Daryl Jones noted in a post yesterday on Canada, for the second time in the last 30 years, the Canadian Dollar is now worth more than the US Dollar.  In short, Canada cut spending and improved the corporate tax environment, which narrowed the deficit and reduced government borrowings. 


Austerity, not quantitative easing, will provide Mr. Geithner the respect he needs to be powerful on the world stage.  Leaders make brave decisions at difficult times; there is no evidence of strong leadership on either side of the aisle in Washington today.


The S&P 500 is up 3.4% so far this month, on the back of the FED printing more and more money.  The potential headwinds for the market are seemingly being ignored (for now) but won’t go away.  The headline risks from the mortgage mess, slowing GDP momentum, margin pressure from higher commodity costs and lingering worries about the backlash that could emanate from the divergent fundamentals at work in the foreign exchange market can’t be solved by the FED and QE.


Margaret Thatcher was a leader that was unafraid to take a stand.  She was a divisive figure in Britain, and around the world, and remains so today.  I believe that America’s leadership could learn much from her example.  She allowed the gales of creative destruction to blow through the nation’s economy and many fault her for the demise of the mining industry in Britain in the 1980s. 


On that same point, many applaud her confrontation of the unions and credit her with reestablishing Britain as a world power.  My point here is that she made difficult decisions, perhaps made mistakes at times, but showed the leadership that was needed to boost her country. 


Much like President Obama, Thatcher had a record-low approval rating during her tenure as Prime Minister.  On average, it was 40%.  History has been much kinder; a survey conducted by Yougov/Daily Telegraph in the United Kingdom in March 2008 rated Baroness Thatcher as the leader Britons regard as the greatest post-World War II prime minister, receiving 34% of the vote.  Sir Winston Churchill came in second, with less than half of Thatcher’s support, at 15% of the vote.  Politicians that make tough decisions are not always appreciated immediately. 


Doing the right thing is not always easy.  The administration needs to realize that instant gratification and pandering for votes is not going to set this country straight.


Function in distaster; finish in style,

Howard Penney


Being a Lady    - mt

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VFC For TRLG? Not a Chance

VFC For TRLG? Not a Chance


The rumor mill is saying that TRLG is exploring a sale – and it absolutely should before margins collapse.  Any buyer with half a due diligence process should realize this. VFC has learned its lesson with 7.


The good ‘ol rumor mill is churning this fine Friday afternoon. An interesting one is that True Religion has hired Goldman to explore a sale, and that VFC could be interested. Now… the first part of that might very well be true. After all, this is the exact time TRLG should sell – before margins erode further as the company tries to establish itself as a lifestyle brand with more of a direct-to-consumer (i.e. Retail) strategy. This will fail.  Any buyer with half a due diligence process should realize this. That brings us to the second part of the rumor – that VFC is interested.  Not likely… Let’s YouTube VFC on its acquisition of 7 For All Mankind.




VFC’s tone is changing on its premium denim line, 7 For All Mankind, as it hits a critical juncture in the contemporary brands portfolio.  The original business of 7, which was purchased at the top of M&A cycle in 2007 for $775 mm, is under pressure as premium denim is no longer selling at price points it once did.  Average price has now fallen from a peak $180 to $150, down 17%.  Despite oversupply and weakening prices in the premium denim space overall, VFC is following its original growth plan for the brand.  Such strategies include opening retail locations, expanding internationally, and extending product line offerings beyond denim and into sportswear and accessories. The challenge however lies in the fact that the wholesale channel is suffering (primarily department store distribution), the retail stores aren’t performing as well as Vans and North Face stores, and overall contemporary coalition margins are being deluted by investment spend with no near-term incremental revenue return.


Most notably,  management’s tone has changed on the company’s quarterly conference calls.  What was once the trio of investment spending – North Face, Vans, and 7 For All Mankind – has now become the duo with a side of everything else - 7 included.  It will likely be a long time before $200 jeans return on such a widespread scale.  There’s no question that there will always be a niche market for premium denim, just not one that shares distribution and price points all the way from Macy’s to Barney’s.  With that said, we’re more likely to hear about efforts to  diversify the product assortment from 75% denim to 66% and ultimately lower as original expectations for the “lifestyle” denim brand are paired back.  7 stores will still be opened but this is not a needle moving strategy at this point or in the near future. If one thing was clear on yesterday’s call, it’s that the company’s growth drivers remain rooted in North Face, Vans, and in Asian (China) expansion.


The 7 For All Mankind YouTube:


Q3 09

  • 7 For All Mankind should continue to enjoy mid-teen operating margins this year. The growth opportunities we identified at the time we purchased the brand – international expansion, retail store growth, and product line extensions – remain intact, and we continue to see excellent long-term potential for the brand.


Q4 09

  • 7 For All Mankind’s international revenues grew by 23% in constant dollars.
  • This year we will step up our investments to drive future growth. These investments, totaling $50 million, will be very targeted and concentrated in those businesses with the strongest opportunities for growth, including The North Face, Vans and 7 For All Mankind brands, and our business in Asia.
  • Our Outdoor & Action Sports and our Contemporary and Sportswear businesses achieved growth in revenues on a constant currency business in the fourth quarter. The strongest growth was in our 7 For All Mankind, Eastpak, Vans and The North Face brands.
  • Our 7 For All Mankind brand has also gotten off to a fast start in Asia. We have 15 new freestanding partnership stores planned in ‘10, and we also be investing to support our distributors in both China and Korea to build market leadership in the premium jeans category.
  • Obviously, there’s mixed numbers in there with all the retail formats we have around the world. And as you’d expect, our retail formats in businesses like The North Face and Vans and 7 For All Mankind posted stronger comps.
  • The 2010 outlook, the best way I think to deal with that, we’re looking at 80 to 90 stores [globally]. Two-thirds of [of the store openings will be] between The North Face, Vans and 7 For All Mankind. We’re very focused this year in our marketing spending, and we’re very focused supporting strongest brand opportunities. And so, really, it’s 7 For All Mankind, The North Face and Vans will be where we’re focused in new stores. A lot of them internationally


Q1 10

  • Double-digit growth in the 7 For All Mankind direct-to-consumer business was driven by both new store openings, as well as very strong comp store increases. We’re looking forward to double-digit revenue growth for our 7 For All Mankind brand starting in the second quarter. Investments in new 7 For All Mankind retail stores reduced margins in this seasonally low period for revenues, these new stores are expected to contribute to significantly stronger margins throughout the remainder of the year. We are also expanding the direct-to-consumer business for 7 For All Mankind to the opening of a combined total of over 15 owned and partnership retail stores in key European cities this year.
  • The 7 wholesale business is getting better than it was last year for sure. Last year was a particularly tough year. But we still don’t have positive trend in our wholesale shipments business. Part of the reason for that is we lost a lot of customers to bankruptcy over the recession – small customers and specialty stores. And that’s part of the reason we’ve invested in some of our own specialty store business and that business is strong for us. Our comps are good and our overall global trend in opening 7 For All Mankind stores is strong.
  • Yeah, I can comment on what gives us confidence in our product direction being back on track and that is the performance of the products we have in our own stores where we get obviously instant feedback on whether or not we’re on trend. And our own stores are performing well. So that tells us that consumers are relating to the products we have in the stores. And our team out there has done a nice job of getting the brand back on – into the right product mix. Unfortunately, we have a lot less customers to sell those products to because of the massive amount of closures in the specialty store industry during the recession.
  • And what we can say is that later in the year is when we’ll see the most substantial improvement in terms of the retail side of things. So, as Eric said, we’re in the pretty early stages of our overall retail business within 7 For All Mankind and especially in a lower quarter of revenues which is, as you know, this is a low retail quarter for us and it picks up in the third and fourth quarters and that’s true for our 7 For All Mankind business as well. So we’ll see some substantial improvement in terms of the profitability of those stores beginning in the second half of this year.


Q2 10

  • Our 7 For All Mankind brand continues to expand in Europe, with 24% revenue growth in the second quarter. Strong bookings and additional new stores should drive double-digit growth in the second half of the year as well. New stores opened in the quarter include in Milan, Berlin, and Antwerp, and we are looking forward to opening our second store in Paris this quarter. We remain on plan to open a combined total of about 15 owned and partnership retail stores in key European cities this year.
  • 7 For All Mankind shifted on us a little bit here in the second quarter. You know, we had a really strong first quarter with 7. We had a strong second quarter with 7 as well. We have seen a slowdown in the premium denim space in the last few weeks – the last eight weeks, really, since May. That segment in particular has been a soft spot. So our stores are still working for us and we are continuing to invest in our stores, but there clearly has been sort of ‘how long does that last?’ I wish I knew the answer to that. The answer for us is to make sure we create compelling product, which obviously we’re working on that. And we are increasing our investment in the brand. In fact, we are just about doubling our marketing spend behind 7 For All Mankind right now because we think it’s a great brand. And even though it’s under pressure right now, we are going to spend on it to make sure that we connect with consumers in the right way. We underspent on it a bit in the last few years. So we are going to reinvest in it and hope we have the right products at the time and the fall gets better than the last eight weeks have been.
  • In the contemporary space in terms of price points, there was a significant reduction in price points during the course of the recession over a two-year period. The average price point for a pair of premium jeans regardless of brand came down. It didn’t mean that we didn’t still offer the high end of the range, but the consumers bought more at the lower end of the range. So we saw a reduction in AURs. That stabilized in the first four months of this year. And I think it’s under question right now because there’s been a change that really has just happened. And as you know, we’re also in a period of year, it’s been a very warm June and July across the United States. And I’m not sure if people are waking up thinking I am going to buy a pair of long jeans – long-bottom jeans right now because that’s what I want to wear today. In fact, I’m pretty sure they aren’t. The question will be during back to school, does that come back and what does that mean to the average unit retails?


Q3 10

  • We’re investing over half of our incremental marketing spend in outdoor and action sports initiatives, the balance of the spending increase is strategically allocated to important growth initiatives in our U.S. and our Asian jeanswear business and in our Nautica, 7 For All Mankind and other brands.
  • Relative to our 7 For All Mankind brand, the premium denim business is softening from the strength we experienced in the first half when we were up 8% globally. In tough economic times, consumers are more value conscious than ever, more focused on savings and spending and looking for something new as a trigger to spend. Fortunately, while 7 For All Mankind continues to be the brand leader in the category it’s more than a denim brand. In fact, a quarter of the brand’s volume in our own stores is nondenim currently and that’s going to be increasing to a third of the business next spring.
  • Also our retail partners are adding more sportswear into their premium denim departments which will add variety to the current offerings and help spark consumer interest. The 7 For All Mankind continues to resonate strongly with consumers and we’re capitalizing on this by adding new retail stores and we’re investing heavily in marketing, expanding into Europe and Asia and building our sportswear and accessories business. This brand still has a lot of room to grow but faces some short-term challenges.
  • There’s no question that the premium denim category is soft which resulted in a slight decline for 7 For All Mankind revenues in the first third quarter. There are, however, a number of bright spots. European revenues for the brand increased 8% on a constant currency basis and we are on track to open 19 stores this year. As mentioned in the release we are investing in the 7 For All Mankind brand and will continue to do so in the upcoming quarter.
  • Let me give you color on 7 For All Mankind for us globally. The domestic business year to date is up low single digits due mostly to the success we’re having with our own retail stores. The international business is up high single digits in constant dollars. And around the world we’re seeing that driven by the stores that we’re opening are working for us and some softness in the wholesale business in general.
  • The reason I’m confident in our future is we expect to continue the rollout of our own retail stores. We’re just really getting started in Asia and Europe. We have a lot of runway ahead of us there and we continue to build the brand into new product categories, into the sportswear and accessories business where it’s very early days for those initiatives. We do expect pressure on the core denim business at least in the short-term. But, and I don’t know what that will look like in five years, nor does anyone else. So that’s, when you look at total model, we think that we can weather through this because of the strength of the brand and the success we’re having on the initiatives I mentioned. The total premium denim business is soft. That’s really a U.S. comment. That’s why you’re seeing many of the brands expand their businesses into sportswear.

Real Commotion in Brazil

Conclusion: Recent moves in the Brazilian bond market have been attributed to the “currency war”, but analysis of the fundamentals suggest the moves are warranted. While we don’t currently have a position, we remain favorably disposed to the Brazilian real against the U.S. Dollar over the long term.


Yesterday, Brazilian Treasury officials walked away from a debt auction for the first time since July 22, citing bids that were deemed “unreasonable”. Why they think bids are unreasonable after effectively squeezing out half of the investor base, is beyond us. Earlier in the week, Brazilian Finance Minister Guido Mantega raised taxes on foreign inflows on fixed income investments (for the second time this month) to 6% (from prev. 4%) and to 6% on margin deposits for futures (from prev. 0.38%). A loophole that allowed Brazilian financial institutions to swap assets to foreigners was also closed.


The aggressive move to curb real appreciation brought on by inflows of dollars has triggered a bond market sell-off, with yields on Brazil’s longest fixed-rate securities increasing 60bps this week to 12.08%. Today’s failed auction highlights the lack of domestic demand needed to sustain Brazil’s “low” interest rates, causing Treasury Secretary Arno Augustin to suggest Brazil will have to accelerate international sales of real-linked bonds to counter waning domestic demand.


Brazil, like every other emerging market growth country, has been guilty of riding the yield-chasing liquidity wave brought on by expectations of QE2 in America. And while self-imposed, yesterday’s failed auction tells us exactly what direction the real is headed alongside Brazilian interest rates – up.


Mantega may be successful in slowing down the rate of real appreciation vs. the dollar in the intermediate term with taxes and regulation, but longer term, the fundamentals driving Brazilian interest rates higher will be tough for him to overcome:


Fiscal Policy: The latest polls show voter support for Lula endorsee Dilma Rousseff is growing; she currently has an 11-12% margin over rival Jose Serra and is likely to win the October 31st runoff election, barring any catastrophic campaign mistakes. This is meaningful as it relates to the direction of Brazil’s debt/deficits, as she is on record saying promoting spending cuts is a “crime”. Her fiscal policies are in stark contrast to the much more austere Serra, whose previous surge in the polls sparked a bond market rally. Currently, Brazilian government spending is growing more than twice the rate of GDP, and with Rousseff’s promise for continuity with Lula’s welfare policies, we don’t see that changing anytime soon. Further, her lax spending policies create incremental support for the next factor we outline below:


Inflation: September marked the first sequential uptick in Brazilian inflation in five months, coming in at +4.7% YoY vs. +4.5% in August. Prior to that, inflation was being tamed by the strengthening real, which is up around 3% YTD. We have been increasingly cognizant of the likelihood that the dollar finds an intermediate-term bottom around in the $78-$82 range. Should the dollar strengthen marginally over the next three months, as we expect it to, we will see downward pressure on the real over the near term, limiting Brazil’s ability to fight inflation with FX appreciation alone.


Moreover, demand from Brazilian consumers is being supported by a significant confluence of tailwinds. Brazil’s unemployment rate fell 50bps MoM to a record low in August, coming in at 6.2%. Average real incomes also increased +1.3% MoM and +6.2% YoY and the latest data (April-July) show Brazilian consumer borrowing rates are at the lowest level since 1995 (6.74% per month).


Real Commotion in Brazil - 1


All told, the direction of fiscal policy and consumer demand will continue to put upward pressure on Brazil’s inflation rate over the intermediate-to-long term, necessitating the need for future rate hikes. While we don’t currently have a position, we remain favorably disposed to the Brazilian real against the U.S. Dollar over the long term, largely based on diverging growth prospects. As mentioned, over the intermediate term, the dollar could catch a bid from 1) hawkish fiscal rhetoric from the likely-to-be Republican Congress; 2) mean reversion; and 3) widespread reflexive declines in equities and commodities globally.


Darius Dale



Real Commotion in Brazil - 2

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