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GREECE: BIGGER SLOT OPPORTUNITY

The gambling bill could be yet another new market for slot suppliers

 

 

According to various news agencies, the Greek government has finalized plans for its gambling bill.  It will include a tender for 4 to 10, 10-year VLT licenses - permitting 30,000 VLTs.  This is a significantly larger proposal than the 50,000 total VLTs that was previously reported in the media.  Furthermore, the Greek government could tender additional smaller scale licenses for another 5k VLTs in total. The bill also includes 15-50 internet betting licenses, which will be allocated through an international tender.  Consistent with the thesis as outlined in our recent note "TIS THE SEASON", this was another favorable headline for slots.

 

Additional details:

  1. Qualifying bidders (OPAP is a leading candidate) must operate a company based in Greece or the EU with permanent presence in Greece and capital that exceeds €200k
  2. The minimum drop will be €0.10 and up to €5
  3. The payout for these games will be set at 80%
  4. The tax rate will be 6% of revenues

 

Here is a timeline of the gambling bill:

 

What has happened so far:

  • February 2010: To avoid EU fines, Finance Minister George Papaconstantinou said he will unveil a draft bill to deregulate slot machines, which can currently only be used in casinos.
  • June 2010: Greece finance ministry said in an email that it will soon release a draft law on electronic gaming and Internet betting and that it will be presented for public consultation.
  • July 2010: Skeleton draft detailing tender process was prepared.
  • August 2010: Start of public consultations on regulating gambling
  • Sept 2010: Dialogue on the gaming draft law
  • Jan 2011: Finalization of bill framework

What are the next steps (with tentative dates):

  1. Submission of bill to Parliament (Spring/Summer 2011)
  2. Passage of bill in Parliament (Late 2011)
  3. Bill sent to President Papoulias for promulgation and publication in the Government Gazette (2012)
  4. Setup of new gaming supervising committee (mid-2012)
  5. Tender process (2013)

King Cronyism

In an article titled “Voted Off the Island” on 11/23/10, days before Ireland received its €85 Billion bailout from the EU/IMF, we discussed the paper-thin credibility of Irish Prime Minister Brian Cowen’s government.  Cowen and Fianna Fáil have seen their credibility eroded further in recent weeks as revelations of Cowen’s golf and dinner outings with then-Anglo Irish Bank chairman Sean FitzPatrick in the run up to the 2008 state banking guarantee have emerged. Cowen was once again in the limelight yesterday evening after winning his party’s confidence vote on his leadership, defeating his major opposition within the party, Foreign Minister Michael Martin.

 

Despite Cowen’s victory in the secret ballot, including vocal support from Finance Minister Brian Lenihan, support for Fianna Fáil, in power since 1997, has fallen to 14%, while support for Fine Gael, the main opposition party, stands at 35%, according to a poll this month by Red C for bookmaker Paddy Power Plc.

 

As the markets continue to confirm, Europe’s risk premium continues to heighten (over the long term) due not only to its sovereign debt crisis, but also the Crisis in Leadership to right these sinking ships. We continue to highlight Italy and Spain on these fronts, however suffice it to say that Ireland’s sovereign and banking issues are far from rear-view despite the bailout. As Ireland wrestles to elect a new leader over the next weeks, we’d expect investor (and market) confidence to continue to shake.

 

For additional perspective on Cowen’s win and the country’s uncertain political state we include commentary this morning from our restaurant analyst and Irish national Rory Green below:

 

“Cowen’s party, Fianna Fáil, is “staggering toward election oblivion” according to the Irish Times today, and I definitely agree.  

 

As we have discussed with clients in the past, internal events within Cowen’s party are unlikely to impact the outcome of the upcoming election, which increasingly looks like it will be held sometime in March.  While members of opposition parties were critical of the terms of the EU-IMF bailout, I believe it is unlikely that new leadership will necessarily act as any sort of catalyst with respect to that arrangement.  The country is handcuffed with respect to its monetary policy and there seems to be a lack of ideas or options forthcoming in the short term, at least. 

 

With a plethora of topics to attack the incumbent government on, I believe opposition parties will not risk suggesting any radical measures regarding the bailout in the context of the election.  Polls have shown support for the bailout among Irish people and populist angst is already aimed squarely at Ireland’s Deficit in Leadership, particularly Fianna Fáil and those deemed responsible for the banking sector crisis.”

 

Matthew Hedrick

Analyst

 

King Cronyism - cowen


R3: TGT, JCG, Li Ning, Jimmy Choo

R3: REQUIRED RETAIL READING

January 19, 2010

 

 

 

RESEARCH ANECDOTES

  • Just a day after we noted Kenneth Cole’s flagship store in Rockefeller Center may become a hot property, Michael Kors appears to have stepped up.  Word has it that Kors’ expansion efforts will make their way to 5th Avenue with a lease spanning 10 years.  Kors also recently opened a Bleecker St. boutique and is said to be exploring Meatpacking district locations as well.
  • Gallup reports that 19% of Americans are satisfied with the way things are going in the US at this time, just slightly above the lowest level of the past 12 months, 17% reported for December 2010.
  • Keep an eye on your online bank statement, for discounts.  A handful of retailers and restaurants are experimenting with new marketing technology which allows targeted ads to be inserted into consumers’ online statements.  So for example, if you bought a Big Mac with a debit or credit card, you may see a 10% off coupon show up on your next bill.  Interestingly, the technology allows for the discount to be automatically tied to the consumers account, thus eliminating the need to print or “clip” the coupon.

OUR TAKE ON OVERNIGHT NEWS

 

Target Faces Legal Challenge Over Name - Will the real Target store please stand up? Target Corp., which is paying $1.8 billion to take over about 220 Zellers stores from the Hudson’s Bay Co. and convert them into Target stores by 2013, is facing a legal challenge to its name being used in Canada by a retailer of the same moniker. There are already two Target Apparel stores in Canada owned by Isaac Benitah of Toronto, who also runs Canadian chains Fairweather and International Clothiers and doesn’t want to give up the Target name. But Target Corp. has asked the Federal Court of Canada for an injunction to ban Benitah from using the Target name and signature logo. Benitah responded on Monday by asking the court for exclusive rights to the name and is demanding $250 million in damages from Minneapolis-based Target Corp. <WWD>

Hedgeye Retail’s Take: While we’re no legal experts, this one likely ends in a settlement of some sort.  Given that Target (US) is all about its brand, it would be hard to envision the company renaming itself in order to do biz in Canada.  Bottom line is Benitah is likely to be the big winner here.

 

J. Crew Extends Deadline for Rival Bids - J. Crew Group Inc. — which has a $3 billion takeover offer from TPG Capital and Leonard Green & Partners — on Tuesday agreed to accept rival bids until Feb. 15 to settle a shareholder lawsuit. The retailer’s November deal with TPG and Leonard Green initially allowed it to consider alternative proposals until this past Saturday. “Despite an active and extensive solicitation of potentially interested parties in connection with the ‘go-shop’ period since the announcement of the merger agreement, the company has not received any alternative acquisition proposals to date,” the retailer said. Sears Holdings Corp., Urban Outfitters Inc. and two private equity firms were reported to be considering offers, or at least taking the chance to look at the retailer’s books as part of their “due diligence.”<WWD>

Hedgeye Retail’s Take: At the 11th hour, it looks the rumor mill may re-accelerate with the lengthening of the “go-shop” period.  Hard to believe someone will step up now if they haven’t already, however. 

 

Carrefour Said to Be Linking With India's Future Group - Speculation in India is mounting that Carrefour is about to ink a deal with Future Group, one of India's largest retail conglomerates, to open more stores in the country. The French retail giant opened its first cash and carry store in New Delhi on December 30. The parties declined to comment directly on the possibility of a deal but both said that they are exploring new business opportunities and potential partnerships. <WWD>

Hedgeye Retail’s Take: Another move to tap into the world’s second most populous country while foreign direct investment still remains in limbo.  Wal-Mart isn’t far behind. 

 

Li Ning Ramps U.S. Investment - Li Ning will invest $10 million in its U.S. business this year and enter a joint-venture with Acquity Group LLC to expand U.S. distribution, Li Ning Chief Executive Zhang Zhiyong told the Wall Street Journal. The Chinese athletic apparel and footwear brand also plans to open warehouses this year to broaden its distribution as well as to hire 20 product developers in coming months to better meet the needs of the U.S. consumer. The goal is to  attain U.S. sales of $50 million this year, according to the report. The company said sales outside China accounted for 2% of revenue last year. Li Ning hasn't reported full-year figures but posted revenue of 4.5 billion yuan ($682.5 million) for the first half. Acquity, a Chicago-based brand-consulting firm whose clients include General Motors Co. and the American Airlines unit of AMR Corp., is designing an ad campaign for the Chinese athletic brand. The campaign, scheduled to launch in May with TV, print and online, wil be Li Ning's largest yet for the U.S. market. Li Ning in June unveiled a new logo and global slogan, "Make the Change." <Sportsonesource>

Hedgeye Retail’s Take: What has been a methodical and understated approach to entering the U.S. athletic footwear/apparel market over the last 2-years when the brand first established a foothold on American soil is about to get considerably more vocal. In addition to various running and basketball offerings, expect the company’s lightweight running shoe – the Freemont – to be a visible element of the campaign as the category takes off this Spring/Summer.

 

Jimmy Choo Men's line - Inspired by the stylish London man, Jimmy Choo’s debut men’s footwear collection features classic styles, with a dash of luxe and glamour. All the models — from Chelsea boots to loafers to the classic monk-strap shoe with English pewter buckle — are fully lined in leather; sneakers are fashioned from cashmere flannel; distressed biker boots have shearling on the inside, while the Wellington boots — a collaboration with Hunter — come embossed with a crocodile pattern. There is even a signature “P*rno Paisley” slipper, with silhouettes of undulating ladies, à la James Bond, and black lacquered soles. <WWD>

Hedgeye Retail’s Take: They’re back! After discontinuing its men’s line in 2002, only time will tell if Choo’s fiercely loyal following will translate to the male consumer the second time around. The line’s new “P*rno Paisley” slippers are likely to create a buzz at minimum.

 

Fraud Losses Fall - Fraud rates for online merchants in the United States and Canada remained steady at 0.9% in 2010 for the second straight year, says a report released today by CyberSource, a subsidiary of payment card network Visa. The fraud rate for online merchants in the United Kingdom, however, increased to 1.9% last year, up from 1.6% in 2009. CyberSource defines the fraud rate as the percentage of accepted orders that later turn out to be fraudulent. The vendor bases its findings on 334 survey responses from North American online retailers and 200 responses from web merchants in the United Kingdom. The surveys were conducted in September and October.<InternetRetailer>

Hedgeye Retail’s Take: The silver lining here is that fraud figures suggest the practice isn’t becoming more pervasive, however, with a significant portion of the American consumer still unwilling to buy products online for this very reason, this figure needs to shrink – not stabilize.

  

In-App Purchases Become Major Mobile Revenue Stream - With smartphones in the hands of more than 60 million Americans, according to eMarketer estimates, app stores are growing quickly and the application market continues to evolve as it approaches maturity. According to research from app store analytics provider Distimo, many app developers are changing how they monetize their creations. All major application stores are growing rapidly, with triple-digit increases across the board. Apple’s App Store, the best-established market, is moving slowest but still more than doubled in size between January and December 2010. For all app stores, growth in free apps outpaces that of the store as a whole. <eMarketer>

Hedgeye Retail’s Take: Growth figures well into the triple digits suggests this market is nowhere near maturity. Perhaps most notable is the lack of disparity between BlackBerry’s free vs. total apps reflecting the brands business user base.

R3: TGT, JCG, Li Ning, Jimmy Choo  - R3 1 19 11

Australian Consumer Confidence Falls to 7-Month Low on Queensland Flooding - Australian consumer confidence fell in January to a seven-month low on concern that flood damage in Queensland state will weaken the nation’s economy. The sentiment index dropped to 104.6, the lowest since June, from 111 in December, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers taken Jan. 10-16 and released today in Sydney. Outside the disaster area, perceptions about the national economy and personal finances were “adversely affected” by the deluge, it said. Reserve Bank of Australia Governor Glenn Stevens left the overnight cash rate target at 4.75 percent last month, after seven increases since October 2009, judging policy to be “mildly restrictive.” Higher borrowing costs helped slow third-quarter growth and savings have risen, even as energy and mining investments keep unemployment near 5 percent. <Bloomberg>

Hedgeye Retail’s Take: Catastrophic flooding unfortunately has a very long tail of damage and recovery associated with it. The ripple of deteriorating economic and consumer confidence is likely to be felt through much of 2011.

 


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 80.64%
  • SHORT SIGNALS 78.57%

DIAL-IN & MATERIALS: HEDGEYE MACRO Q1 KEY MACRO THEMES PRESENTATION AND CONFERENCE CALL

HEDGEYE MACRO: Q1 KEY MACRO THEMES PRESENTATION AND CONFERENCE CALL

HOW SHOULD YOU BE POSITIONED IN 2011?

TODAY, JANUARY 19 AT 11AM EDT

DIAL-IN & MATERIALS

 

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TALES OF THE TAPE: MCD, SBUX, YUM, BAGL

News items and notable price moves over the last twenty-four hours

  • MCD added to the US focus list at Credit Suisse Rating is outperform - target is $87.
  • MCD McDonald's upgraded to outperform from sector perform at RBC Capital
  • SBUX is taking its mobile payments plan nationwide. The company started testing mobile payments in September 2009 and now it is expanding the program to 6,800 stores across the country and soon onto other devices.
  • SBUX rolled out new beverage size.  The “Trenta” size will contain 31 ounces and cost about 50 cents more than the 20-ounce Venti size, according to Starbucks.
  • SBUX employees at the Astor Place store in NYC have announced that they have formed a union.  The disgruntled employees cited a need to stand up for themselves as, “Starbucks will not act in our best interests”.
  • YUM to sell Long John Silver's and A&W restaurants
  • BAGL was raised to "Buy" from "Hold" at Stifel Nicolaus  - target is $18.00 per share
  • Despite disappointing casual dining numbers from Malcolm Knapp, casual dining companies traded declined modestly yesterday.

TALES OF THE TAPE: MCD, SBUX, YUM, BAGL - stocks 119

 

Howard Penney

Managing Director


MCD - THE BLACK BOOK

All great truths begin as blasphemies - George Bernard Shaw

 

This “Black Book” outlines the current state of McDonald’s operations with a particular focus on its U.S. business. The company’s shares have performed tremendously since the implementation of their “Plan to Win” initiative in 2004 and competitors have found it hard to match McDonald’s performance.  Furthermore, the company is healthy and generates impressive levels of cash for shareholders.  All good things come to an end, however, and I see significant hurdles for the U.S. business in 2011 that present an auspicious opportunity to be a seller of this stock. 

 

When McDonald’s was first embarking on its highly successful “Plan to Win,” the company set out on a comprehensive program designed to “optimize and simplify operations.”  This program included offering fewer sizes of drinks and fries, fewer Extra Value meals, more simplified pricing, and streamlined merchandising supported by intensive hospitality training of employees. 

 

For most of McDonald’s history, growth was driven by one thing: unit growth.  Until the late 1990s, that strategy worked.  When the company reached a saturation point, sustaining unit growth resulted in cannibalization, which caused same-store sales growth and margins to deteriorate steadily until the “Plan to Win” was announced.  As Jim Skinner once put it, "We had lost our focus. We had taken our eyes off the fries."

 

Companies churn out new “plans” ad nauseum, but in the case of McDonald’s in 2004, there was a clear need for management action.  In fact, operations had become so complicated that the average crew served one less customer every two hours between 2000 and 2004, which cost the company 135 basis points in company-operated margins.  Over the next six years, the company’s commitment to their “Plan to Win” yielded 600 basis points of restaurant-level margin expansion.  Accordingly, the stock price appreciated by ~160% by the end of 2010, or by 175% at its more recent December 2010 peak, from the implementation of the “Plan to Win” in November of 2004. 

 

Six years later, however, it appears that the lessons of the late 1990’s and early 2000’s have gradually been forgotten as a focus on driving same-store sales took precedence over all else.  The relentless focus on driving the top line has required the franchise system to invest significant capital in facilities and new equipment.  Further, from an operational standpoint, this approach has resulted in a burgeoning menu as item after item is rolled out, thereby complicating back-of-the-house operations and gradually offsetting much of the progress made in that regard by the “Plan-to-Win”.

 

As a specific example, McDonald’s rolled out the Southern-style chicken sandwich in 2008 with much fanfare and the goal of taking share from Chic-fil-A.  The rest is history; the product failed to deliver.  This episode smacks of the McDonald’s of old: launch new products, withdraw marketing support when the product doesn’t deliver but keep them on the menu.  The clear result is a complication of the menu and an inefficient back-of-house process. 

 

The “Plan-to-Win” mantra has always been "better, not just bigger.”  Instead of building more restaurants, McDonald's increased profitability by squeezing more from its existing store base and from its franchisees.  As a side point, the company loves to talk about the increased “cash flow” of its franchise base, but the more salient metric from a franchisee’s perspective is the “net” cash flow after servicing debt incurred to finance remodels and initiatives.

 

Over the past three years, however, the mantra has seemingly become “beverages, not burgers.”  As the company has shifted its focus away from its core business, that segment of the business has inevitably suffered.  Over time, the company has shifted so much time and effort (including marketing dollars) away from its core menu that it is losing ground to peer QSR burger concepts and also gourmet/niche burger players.  If we assume that the core business of MCD’s U.S. business is declining, then the emergence and growth of new operators in the burger space is likely impacting MCD’s U.S. business.  Bobby Flay, Five Guys, Shake Shack, Burger Bar, the Counter Burger, and others have gained popularity over the last few years. 

 

I believe McDonald’s needs to get back to what got it to where it is: its core business.  In the Wall Street Journal this week, there was an insightful article on McDonald’s Japan which is focusing on the core business.  Considering the reputation Japan has as a particularly healthy society, I was interested to read the following, ‘Yasutsuru Mori, a svelte 74 year-old patron, wolfed down a Texas 2 Burger this weekend.  "I love hamburgers.  I eat every new hamburger that comes out in Japan, but I especially love McDonald's burgers," he said.  "McDonald's keeps to the fundamental American hamburger profile: ketchup, mustard and beef.’  Clearly, this is just one person, but I believe that McDonald’s needs to refocus on its core business here in the U.S. also.

 

Notwithstanding my concerns, I would be remiss not to acknowledge the achievements of the company in what was a truly spectacular turnaround from 2004.  By keeping their “eyes on the fries”, MCD’s management team created an example of operational focus and discipline for operators in both the quick service and casual dining categories.  The “Plan-to-Win” forced management to rethink every element of its business, from product development and marketing to restaurant design and technology.  In the process, McDonald's, which had seemed out of touch with consumers just six years prior, had realigned itself with contemporary tastes. 

 

To see the balance of the McDonald's "Black Book" please reach out via e-mail or phone.  My contact details are below.

 

MCD - THE BLACK BOOK - mcd black book cover

 

Howard Penney

Managing Director


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