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ISLE 2Q FY 2011 CONFERENCE CALL NOTES

In-line quarter; Florida helped results.

 

 

“Revenues in our markets were generally flat during the quarter...We are pleased to have achieved modestly increased results in Iowa, Missouri and Mississippi.  Management initiatives in Lake Charles to control costs and cut out unprofitable marketing efforts led to an increase in earnings despite decreased net revenues.  In Florida, we were able to take advantage of the gaming tax rates and modify our marketing efforts to achieve significant year over year improvement. In Black Hawk, we had a significant decrease in EBITDA due to a major competitive expansion in the market, which recently had its one year anniversary.  Our midweek revenues and hotel occupancy were impacted the most significantly.  We continue to refine our marketing programs and cost savings initiatives, and believe these changes will lead to more positive results in the coming periods. Including our recently acquired Vicksburg property, our operating costs decreased by $1.0 million, or 0.8%.  Excluding Vicksburg, we decreased our same-store operating cost structure by $5.3 million, or 4.0%, during the quarter.  Overall, we remain dedicated to keeping our costs tight and marketing to our most profitable customers until the economy improves."

- Virginia McDowell, President and COO of ISLE

 

 

HIGHLIGHTS FROM THE RELEASE

  • "While we have recently seen positive signs in certain economic indicators and hope this positive news will continue, we believe that discretionary consumer spending could continue to lag these trends."
  • Corp & development expenses: $10.9MM ($12.3MM in F2Q 10)
  • Non-cash stock comp: $2.4MM ($2.6MM in F2Q 10)
  • $64.1MM in cash; $1.26BN in debt
  • Interest expense: $23.4MM ($17.9MM in F2Q 10) primarily as a result of increased borrowing costs and increased borrowings related to the acquisition of Rainbow Casino in Vicksburg.
  • Capex: $13MM--all maintenance
    • Capex for remainder of FY2011: $22MM
    • Cape Girardeau Capex: $10MM
  • PA license decision: Dec 16 or early January

CONF CALL NOTES

  • Cape Girardeau: construction will start in summer of 2011; completion in 2012
  • Cautiously optimistic on consumer spending environment; rebound in jobs market is necessary for spending growth.
  • Other line in FQ2 2010: Pittsburgh Penguins receivable
  • EPS: -0.06 comparable with -0.18 last year
  • $1.26BN debt (85MM outstanding on revolver) $813MM in term loans; 357MM under the 7% bond indenture; 5MM other
    • Leverage ratio: 6.9x
    • Interest coverage: 2.3x
    • Available credit  facility: 106MM
  • Cape Girardeau funding: FCF and existing credit facility

Q & A

  • FY2011 maintenance capex: half of maintenance capex is slot-related (incl. conversion kits)
  • Pompano: still trying to find right marketing mix; good run rate going forward; big improvement in mid-week business
    • Competition: Coconut Creek expansion will include hotel; but still needs state approval
  • Colorado competition: had tough Q; had tough comps; weak mid-week business; benefited from increased retail play
  • Interested in Riviera Casino in Black Hawk if it becomes available? No.
  • Discontinued operations: income tax audits: favorable income tax from UK operations; could see a little more of this in the future.
  • Bettendorf: reopened highway helped the property; saw weekend business recover; had increase in mid-week convention business to better utilization of convention facilities.
  • Davenport: competitor pressured mid-tier  business. If offered $140-160MM for Davenport, then ISLE is interested. Agreement with operator runs to 2019.
  • Margin improvement: primarily due to tax decrease in FL and targeted marketing programs and cost containment measures.
  • Weather was not abnormal in October
  • Lake Charles market:
    • Upcoming competitor $450MM Mojito Pointe will have an impact
    • Sees pressure from Houston market and from competitors regarding mid-week promotions
  • $50MM Nemacolin project--funding through revolver and FCF
    • Each year will pay a $350K-500K all-in fee (base fee and % of revenue fee to the resort); rest of earnings will go to ISLE
  • Will amend senior credit facility (July 2012)
  • Not worried about January covenant 7.4x even with the two new projects
  • Biloxi: benefited from Alabama closures; still highly competitive; benefited from the double-digit declines in Pensacola market
  • Apples-apples quarter for Caruthersville would see 13% EBITDA growth YoY when one excludes the $950,000 tax effect  in FY2Q10
  • Q had Increase in retail play is a result of consumer confidence increasing; best example is Florida
  • More greenfield projects and property transactions possible
  • ROIC for the new projects: high teens; Cape G will be similar to Boonville
  • Operating costs down by $30MM; sees more flow-through once revenues recover

Gilly in WMT. Tough Fringe Competitor for CRI

Is it me? Or did GIL just say in Q&A that infant category was down meaningfully this year at its biggest customer, but have since made changes and now sales are up dd. Carter’s…are you listening to this??? Same product and same customer. And let's be real, the category is not growing by 30% inside Wal-Mart.


TALES OF THE TAPE: SBUX, PEET, CMG, BWLD

There were several important moves in restaurant stocks yesterday that I’d like to call out.  While the day’s change for the S&P 500 was up 2.16%, restaurant stocks saw plenty of divergence.  Brinker and Starbucks both outperformed the market.  As was pointed out in our sales team’s Best Ideas email this month, EAT and SBUX are two of our favorite names.

 

SBUX:  During its investor conference in New York yesterday, management outlined plans to accelerate international openings (particularly in China), expand CPG globally, and improve multi-daypart sales in their stores.  Chairman, president, and CEO Howard Shultz also suggested that the company would look to make acquisitions “small and large” that are compatible with the company’s growth strategy.

 

PEET: Peet’s was also up on strong volume.  This is a great company that is operationally very strong and is being touted as a possible target for Starbucks given their distribution capabilities. 

 

EAT: Brinker has been outperforming on a one week and thirty-day basis and yesterday proved to be a good day for the stock, finishing up 3.5% on high volume.  My thesis is for sales stabilization and margin gains at Chili’s as we head into 2HFY11 to coincide nicely with the lapping of menu changes that caused sales to decline last year.  Additionally “2 for $20” is to become permanent and Chili’s will be rolling out a new lunch menu focused on gaining traction in a day part that has been challenging for the company.  Please refer to our Blackbook on EAT for a deeper dive on this thesis.

 

CMG:  This stock continues to perform strongly, finishing up on strong volume yesterday despite trading in the red for much of the day.  CMG’s ability to drive strong sales is trumping any underlying concern about the company’s commodity exposure.  

 

BWLD: Buffalo Wild Wings declined sharply yesterday on strong volume.  The companies favorable cost of goods sold outlook should continue for the next quarter or two, on a year-over-year basis. 

 

TALES OF THE TAPE: SBUX, PEET, CMG, BWLD - stocks122

 

Howard Penney

Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK

Initial Claims Rise from YTD Lows - Seasonal Factors Likely to Dominate Through Year-End

The headline initial claims number rose 26k last week to 436k.  Rolling claims fell to 431k, 5.75k lower than the previous week.  Rolling claims hit a new YTD low, but the reported series moved off of the lows significantly. We continue to look for claims to in the 375-400k range before unemployment can meaningfully improve.  Seasonal factors appear to dominate into the year-end, as the third chart below shows. Over the next few weeks, the pattern of the last two years suggests that claims will rise further before falling sharply in the last weeks of the year. 

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - 2

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - 3

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - 4

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - 5

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK

Initial Claims Rise from YTD Lows - Seasonal Factors Likely to Dominate Through Year-End

The headline initial claims number rose 26k last week to 436k.  Rolling claims fell to 431k, 5.75k lower than the previous week.  Rolling claims hit a new YTD low, but the reported series moved off of the lows significantly. We continue to look for claims to in the 375-400k range before unemployment can meaningfully improve.  Seasonal factors appear to dominate into the year-end, as the third chart below shows. Over the next few weeks, the pattern of the last two years suggests that claims will rise further before falling sharply in the last weeks of the year. 

 

 INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - initial rolling

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - initial raw

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - initial claims

 

Yield Curve Continue to Improve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. After falling sharply for two quarters, the 2-10 spread has stabilized thus far in 4Q, rising 8 bps thus far (average of QTD versus average of 3Q).  Yesterday’s closing value of 243 bps is up from 240 bps last week.

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - 2 10 spread

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - 2 10 spread QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS JUMP 29K (26K AFTER REVISION); SEASONAL FACTORS AT WORK - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Another Day At The Carnival

“If I shoot at the sun, I may hit a star.”

-P.T. Barnum

 

Yesterday we held our quarterly company meeting in New Haven, Connecticut.  After Keith gave the opening remarks, we spent the next five hours having various leaders from within the firm talk about their business units.  This was an opportunity for us to reflect on what went right and wrong in 2010, what we need to do in 2011 to continue to take market share, and to share best practices amongst colleagues.  As I engaged with my teammates yesterday and watched their passion, one thought struck me repeatedly -- capitalism is alive and well in America.

 

Ironically, while going through the daily macro grind this morning, I happened upon a quote from another Connecticut capitalist, P.T. Barnum.   Now, admittedly, P.T. wasn’t in the securities or research business, he was in the carnival business.  Specifically, he started “P.T. Barnum’s Grand Travelling Museum, Menagerie, Caravan & Hippodrome”, which would eventually be coined as the “Greatest Show on Earth”.  Barnum’s circus eventually became so successful that he purchased his own train to transport it in the late 1880s.

 

While we don’t have any Tom Thumb like characters walking through our offices in New Haven (who Barnum billed as the smallest person to walk alone), we do enjoy moments of levity at work as we look out at the Global Macro Three-Ring Circus every morning. 

 

In the Geopolitical Ring this morning, we have Secretary of State Hilary Clinton.  Just when it seemed that the news flow could get no worse for the Obama administration following the mercy crushing of the Democrats in the midterms (losing 63 seats in the House), we have one of the leaders of global transparency, WikiLeaks founder Julian Assange, taking aim at the State Department. 

 

The most egregious foreign affairs circus act appears to have been spying at United Nations ordered by Secretary Clinton.  According to a news report:

 

“Secretary of State Hillary Rodham Clinton ordered State Department employees to gather private information from high-ranking officials, including the United Nations Secretary-General Ban Ki-Moon, Security Council members’ ambassadors (including our allies, France and Britain, as well as China and Russia), prominent African military and political leaders and top UN directors.”

 

Obviously, this is not exactly helpful as the United States tries to rally support to contain North Korea.

 

In the Inflation Ring this morning, we have China front and center again.  According to reports, China’s gold imports jumped almost 5x year-over-year in just the first 10 months of 2010.  Since the Chinese central bank has to approve all gold imports, this is a direct signal as to their thoughts on inflation and the direction of the U.S. dollar.  Like many commodities, even those with a less practical use like gold, China continues to be the key driver of incremental demand.  Chinese investment gold demand is expected to reach 150 tons this year, up from 105 last year and 3 to 4 tons 10 years ago. 

 

The fact that the Chinese are hoarding gold as a hedge against inflation should be no surprise given some recent inflationary data points out of China. The most noteworthy of which was October CPI, which was at a two year high of 4.4% year-over-year.  Inflation and subsequent tightening of monetary policy in China continue to be the key factors that drive our view that global growth will slow into the first half of 2011.

 

Finally, in the Sovereign Debt Ring, the PIIGS continue to be the main act in Europe.  This morning Spain auctioned 2.5 billion Euros in notes with an average yield of 3.7% and a bid to cover of 2.3x.  While the Spanish IBEX is up 2% on this news, the act of adding more debt to the Spanish balance sheet is far from a reason to celebrate.  In fact, as of November 30th the spread of Spain’s 10-year debt over comparable German bunds climbed to an all time high.

 

Most pertinent, of course, are the long term and structural unemployment issues in Spain.  Yesterday, our European Analyst Matt Hedrick wrote a note to our subscribers that highlighted Spain’s unemployment rate of 20.7%.  No, that was not a typo, a full fifth of Spain’s employable adults are out of work.  The second highest unemployment rate in the Eurozone is Ireland, which is currently at 13.5%.  While the equity markets are giving Spain a golf clap this morning, to think the structural economic issues in Spain have gone away are laughable at best.

 

While P.T. Barnum passed away well over a century ago, his famous quote, “there’s a sucker born every minute”, continues to have relevance today . . . especially for those folks who are buying Spanish government bonds today.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Another Day At The Carnival - 1spread


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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