January 20, 2010





  • It didn’t take long for Amazon’s investment in livingsocial to result in a deal.  Yesterday livingsoical featured a $20 Amazon giftcard for $10 which resulted in 1.3 million cards purchased!  This beats the previous social/local coupon record in which Gap sold $11 million worth of Groupons.  While the total value of the Amazon deal is unlikely to move any needle, it’s interesting to see the online retailer using new methods to universally promote given that the company is historically known for its everyday low price strategy and targeted promotion.
  • Green manufacturing takes a step forward with the impending introduction of Levi’s WaterLess jeans.  The new denim pants use 11 gallons less water to manufacture conventional jeans, for a reduction in water consumption of 26% to 96%.  A normal pair of jeans takes about 11.1 gallons to produce as a result of the washing process which spans three to ten cycles!  Perhaps it’s just coincidence but the new “line” arrives just at a time when costs are on the rise and “content” will be more important than ever to facilitating pricing power.
  • In an effort to five fashionistas, bloggers, and consumers a sneak peak at what’s in-store for Spring, TJ Maxx and Marshalls offered a live spring/summer preview in NYC.  The event featured a wide range of merchandise that is likely to be available over the coming months, complete with price comparison signage highlighting the massive savings on like-items between the offpricer and traditional department stores.  We suspect the pricing message is about to get louder as cost pressures mount.



Dillard's to Form REIT - Dillard’s Inc. — a family-run but publicly traded department store chain known for going its own way in areas of corporate policy — plans to spin off some properties into a real estate investment trust and then lease the properties back. Real estate investment trusts, or REITs, bring certain tax benefits that aren’t available in other corporate structures. The Little Rock, Ark.-based firm has doors in 29 states and, according to last year’s annual report, owned 241 of its 309 stores. <WWD>

Hedgeye Retail’s Take: With the Dillard’ family in complete control of DDS, this is just another chapter in the clever structuring of the pubicly traded, but family run business.  Regardless of the REIT structure, has anyone noticed the company’s high single digit holiday comps?


Brown Shoe Reportedly Looking at Acquiring American Sporting Goods - Brown Shoe Co. Inc. is said to be in talks to buy American Sporting Goods Corp., but analysts are undecided if the purchase will be good for the Missouri-based firm. According to a report by Sporting Goods Intelligence, Brown Shoe may pay $150 million, which BB&T Capital Markets said is as much as 10 times the earnings potential of ASG. ASG, the parent of Avia, Ryka and several other brands, reportedly had sales of $220 million last year and earnings in the range of $10 million to $15 million. The California-based company has been on the market since 2005, and has gone through at least two unsuccessful formal auction processes due to the relatively weak stature of its key brands in an increasingly concentrated athletic market, according to the note. <WWD>

Hedgeye Retail’s Take: While it can be argued that acquiring brands falls into one of management’s key priorities for 2011 (i.e. people and product) – integrating a deal could easily prove to be more of a distraction. That said, adding a few athletic brands to the BWS portfolio could be viewed favorably with more exposure to one of the more robust categories within the space.  


Tony Fisher Appointed Head of Target Canada - Target Corp. has promoted Tony Fisher to the new post of president of its Target Canada unit. Fisher, with Target since 1999 and vice president of merchandise operations since his promotion last year, will be responsible for “building the team, establishing the headquarters and leading the day-to-day operations” of the company’s expansion into Canada, details of which were disclosed last week. <WWD>

Hedgeye Retail’s Take: While this is a large opportunity for TGT over the next 3-5 years, expect numerous announcements to trickle out as the team, infrastructure, and strategic plans begin to take form.  This will be a long, methodical process and one that will not accrue overnight benefits. 


SKNL and Li & Fung Eye JA Apparel  - JA Apparel Corp. could have a buyer in the wings at last. The owner of the Joseph Abboud and Joe by Joseph Abboud brands has been on the market since 2006 but is coming under closer scrutiny as potential buyers kick the tires, according to market and financial sources. Two prospective buyers said to have signed confidentiality agreements are SKNL International, the owner of HMX Group, and Li & Fung, the Hong Kong-based conglomerate. <WWD>

Hedgeye Retail’s Take: With both bidders entrenched in sourcing, it’s clear that the synergy lies with marrying a well known US mens brand with lower-cost, efficient manufacturing.  Interestingly, a purchase by SKNL would mark one of the first brands to be bought by an Indian retail/textile conglomerate.  On the Li & Fung side, this would be just another step in building out the company’s diversified content portfolio.


Nau Introduces QR Coded Hangtags - Urban + Outdoor apparel maker Nau will showcase how QR codes can be used on hangtags to help outdoor specialty retailers engage smartphone users in their stores by directing them to branded websites and away from price comparison sites.  Nau will showcase key styles labeled with QR codes designed by ExtraTags, a company launched earlier this year by the man who helped build's outdoor business. The demo at Nau's booth (#30049) comes as Nau and its sister company's Horny Toad and Lizard Lounge launch a blog to help specialty outdoor retailers improve their merchandizing and share best practices.<SportsOneSource>

Hedgeye Retail’s Take: Even before mobile price comparison has been fully adopted, we’re beginning to see moves to divert attention away from price and towards content.  With smartphones essentially turning in to personal POS’s, will charging stations become commonplace in the mall? 


Usablenet and PayPal Team Up to Ease Mobile Checkout - Mobile commerce technology provider Usablenet Inc. has teamed with eBay Inc.’s PayPal to integrate the online payment company’s Mobile Express Checkout with Usablenet m-commerce sites, mobile apps, tablet apps, Facebook applications and kiosk systems. Consumers with PayPal accounts enter their user name and password and then buy with one touch; the system uses the consumer’s stored default shipping and billing information.<InternetRetailer>

Hedgeye Retail’s Take: Paypal’s involvement in the mobile transaction landscape is likely to ease consumer fears regarding security, or more aptly the lack thereof over mobile devices. While a step in the right direction, it’s going to take far more to get most consumers over the hurdle in this regard.


TSA to Open Largest Store in U.S. - The Sports Authority plans to open a 56,000 square-foot in August to open in Orland Hills, IL, representing its largest store in the U.S. The store will be located in a site of a former Circuit City and an Office Max. Orland Towne Center owner Tony Youshaei, speaking to the Orland Hills Patch, described the new store as a "flagship" for the national chain. The new store will represent a relocation. A 40,000 square-foot Sports Authority store now operates in the Orland Park Place shopping center, next to a Dick’s Sporting Goods store.  When the Orland Park Sports Authority will close for the relocating has not yet been determined. < SportsOneSource>

Hedgeye Retail’s Take: Within a year of launching its smaller S.A. Elite concept, Sports Authority comes out with its biggest store yet. While contrary to the company’s growth initiative in smaller format stores, empty Circuit City boxes are more readily available while smaller footprints continue to be more challenging to line up.




In preparation for IGT's FY Q4 2010 earnings release this afternoon, we've put together some forward looking commentary from the company's FY Q3 and subsequent conferences.



Post Earning Conference Commentary

  • “As we mentioned back in November, when we laid out guidance for the current fiscal year, we anticipate replacement sales ranging anywhere from flat in 2010 to slightly up, and that’s really what predicated the range in our guidance.”
  • “So at the low end of your guidance you’re assuming a flat replacement environment and at the high end you’re assuming up 10%?”
    • A: “Right, correct”
  • “I think on the operating expense line, I think as where we sit today, we’re probably comfortable at the level of operating expenses, but if things should stay protracted for a longer period then I think we have to take a harder look at  what we need to make some structural changes in how we operate the business.”
  • “You’ve seen us in the area of R&D really stick to holding that number right around 200 million year. The big difference that’s going on there is how we’re spending those R&D dollars. I think today much more focus, lot of analysis going into every dollar that’s deployed in R&D so that we make sure that we’re managing the ultimate returns of products, so killing products sooner in the development lifecycle.”
  • “We’re going to continue to take costs out of the margin through consolidation of product lines, reduction of the number of products we support where there isn’t incremental value being derived from offering, let’s say, 11 cabinets versus what you could accomplish with, say, 6 or 7.”
  • “We probably have another year or so before we’re on a – what I’ll say a standardized platform.”
  • “I think American Idol has been out there now about 60 days. I think the indicators on it are that it’s a pretty successful game, so we’ll see how well it does as it gets out into broader deployment. It’s been on an exclusive with, I believe, 9 of the MGM properties for the first 60 days, but we’re encouraged”
  • “I mean we’re always looking for opportunities to grow the installed base.”
  • “So we have a promotion running right now that entitles the customers to some additional discounts above their normal discounts as dictated by the volume of business they do with us. And that really is for them to commit to product between now and the end of the calendar year. And then we have some others that will be introduced as part of G2E”
  • “We’re going to run out of pre-payable debt here before too long. And so one of the things we’re looking at right now is what, if anything, maybe we should do with some of our long-term debt. So stay tuned. It’s still unclear. We’ll, early part of next year, be sitting down with our bank group to redo our credit facility, which goes current in June of ‘11.”
  • “I think the more likely area for us is really in the online space or things that could be complementary to our business, when you think about technologies that maybe we can incorporate into the products, either online or in the core business.”


4Q2010 Earnings Call Commentary

  • “Moving into 2011, we may see SG&A stay about flat on a total dollar basis when compared to the full year 2010 as we invest in the people and processes necessary to take advantage of the expected industry turnaround and new business opportunities.”
  • “We expect R&D to be about flat to up slightly for fiscal 2011.”
  • “We will plan to further reduce our reliance on the North American replacement cycle by taking advantage of our diverse global revenue sources.”
  • “We expect to begin to see improvement in our Gaming Operations yield. We believe we have the most exciting titles both on the floor and in our pipeline and I cannot wait for the world to see some of the best games IGT has ever introduced at G2E this year.”
  • “We are planning for increased adoption of our improved systems products and heightened returns on our vast intellectual property portfolio.”
  • “We will continue to find ways to drive our improving profitability and margins even higher.”
  • “We are planning to accelerate our growth in the online and mobile business.”
  • “For the current fiscal year 2011, we offer GAAP earnings guidance of $0.77 to $0.87 per share.”
    • Guidance includes: “Very little if any for Illinois; and I want to say about 1500 units for Italy.”
    • “At the higher end, we’d assume we see some improvement in replacement activity."
  • “2 cents of potential upside depending on the timing of some software recognition at ARIA I think it was. Did that 2 cents happen in this quarter or was that not recognized in the September quarter just yet?”
    • A: “It was not…It will more than likely happen in FY 11.”
  • “I think another thing that’s worth noting, Joe, when you look at the international business in the quarter, not only were the units that we recognized up from the expectation, but the ASPs were up pretty significantly, so $3,000 year-on-year and $1,200 sequentially, so we’re finding that the health of the business in the international marketplace is really holding up”
    • “We hope it’s not a one-time thing, one of the opportunities that IGT has is it has a broad portfolio of markets to sell within and a broad portfolio of products to sell.”
  • “I would expect for the next couple of years that we would expect outsized growth in our international marketplaces. I think it’s a combination of jurisdictional expansion and an ability for us to take some share in markets where perhaps we haven’t been as aggressive as we have in North America. So I would expect to see the international business closing the gap a bit on the U.S. business, if you will, I would say in 11 and 12.”
  • “This year’s fourth quarter had fair amount of MLD carry-over from the dynamics promotion that ended the end of June, i.e. people had to have their orders in. Some of those orders came in in Q4. That’s really what explains the lower ASP.”
  • Game ops margin guidance: “I think 58 to 60% is the right kind of range”
  • “Do you have any intentions of … trying to take out the convert?”
    • A:  Actually studying all that right now... Because at the rate we’re generating cash we won’t have any pre-payable debt before too much longer, so a lot of analysis being done at this time around that.”

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Q4 was likely very strong on most metrics but may not provide the upside that investors have come to expect.  Will 2011 be any different?



Singapore generated more revenue and profits than virtually anyone predicted in 2010.  Bravo.  Where do we go from here?  We are trying to put the math behind a credible theory that a lot of the initial upside was driven by the local Singaporean business.  If that business has been fully penetrated then growth could be impeded.  We estimate locals drove roughly one third of 2010 gaming revenues.


The problem won’t be growth.  Singapore should grow nicely, probably in-line with Southeastern Asian GDP plus a kicker from licensed junkets.  However, we suspect analysts and many in the investment community are expecting much more.  Indeed, analysts appear to be valuing Singapore EBITDA on a Macau-like trajectory.  We estimate the consensus target price is derived using an 18x 2011 EV/EBITDA multiple on LVS’s MBS property.  That’s aggressive even for a Macau property, despite the fact that in Singapore casinos pay income tax on gaming income while in Macau they don’t.


For Q4, our sense is that rolling chip was only up modestly from Q3.  Mass likely grew but will it be enough to drive more than the 15% sequential revenue gain that analysts appear to be projecting?  It might be tough.  October was clearly the strongest month of the quarter and December appears to have been a good month, but maybe lower gaming volumes than the operators were projecting.  Indeed, the monthly government tax receipts from gambling for October and November did not grow that much from Q3.


For 2011, will Singaporean tourism growth match the 20% increase generated in 2010?  To some extent, growth may be limited by a tough comparison of an explosive 2010.  The Singaporean government is projecting much lower visitation growth for 2011 and GDP estimates have recently been cut.  GDP and tourism growth will likely be the main drivers in gaming growth and while both are expected to be strong, they may not be enough to satisfy investors’ appetites for Macau like growth.  The licensing of junkets should boost growth, but not for LVS, at least not in 2011.  LVS is not sponsoring any junkets at this point.


Despite the recent underperformance of LVS versus other Macau stocks, the valuation remains steep and is indicative of expectations of upside over current Singapore estimates.  Consensus 2011 estimates of $1.4 billion in EBITDA for Singapore in 2011 look reasonable to us, not conservative.  We remain bullish on Macau, although the recent LVS market share loss looks sustainable.  Even with Macau, we question whether there will be a lot of upside to existing estimates.  Besides, if there is Macau upside, the more directly exposed Macau players (WYNN for instance) will fare better. 

Athletic Trends in the January Duldrums


Underlying trends for the athletic space remain very positive despite a meaningful deceleration in the latest week’s data. We’re going to float some benefit to the industry for taking a sales hit last week due to weather, and therefore expect it to pick up meaningfully this week. It is also worth noting that the second week in January has been among the Top 5 lowest grossing weeks in footwear in each of the last 2-years with the final two weeks of the retail calendar typically recording 40%-50% more sales volume compared to the 1H of the month. Here are a few key callouts from the week:

  • The bifurcation between performance and non-performance footwear continues to be at near-term highs of a 40% differential. Product portfolio management continues to be a potential source of outperformance at individual retailers – good for DKS & HIBB, even more favorable for FL & FINL.
  • In apparel, Running and Basketball apparel were the clear positive callouts accelerating on the week up +17% and +11% respectively while Outerwear was not only noticeably absent from the top performing categories, but actually turned negative on the week down -5%.
  • Sales of sports apparel at athletic specialty retailers continue to outperform up +2.3% on the week compared to +0% for the overall category. The family channel lead the week up +2.7%.
  • Continued apparel ASP increases were offset by a decline in unit sales across the industry reflecting the impact of anomalous weather. Sport Retailers were the only channel to increase unit sales on the week driven by lower prices down -1%.
  • On a regional basis, the South Central and South Atlantic regions materially underperformed after snow blanketed the region early in the week causing many businesses to close Monday. The Mid-Atlantic region was the positive callout up +12% after bringing up the rear only 2-weeks ago.

Athletic Trends in the January Duldrums - FW App Ind 1Yr 1 19 11


Athletic Trends in the January Duldrums - FW App Ind 2Yr 1 19 11


Athletic Trends in the January Duldrums - FW App Reg 1 19 11


Athletic Trends in the January Duldrums - FW weather 1 19 11


Athletic Trends in the January Duldrums - FW Perf v NonP 1 19 11


Athletic Trends in the January Duldrums - FW Table 1 1 19 11


Athletic Trends in the January Duldrums - FW App App Table 1 19 11


Casey Flavin



I love this quote from Nelson Peltz, Chairman of Wendy’s/Arby’s Group, in the company’s press release today, “We believe the way to maximize shareholder value is to focus all of our management and financial resources on continuing to build the Wendy's® brand.” 


Although I would tend to agree with this statement, the first thing I thought of was the company’s initial rational for the transaction…. I thought putting the two brands under one roof was the best way to maximize shareholder value?  Just over two years ago when the company announced the completion of its merger, Roland Smith, President and Chief Executive Officer of Wendy's/Arby's Group said, “As one company, we are well-positioned to deliver long-term value to our stockholders through enhanced operational efficiencies, improved product offerings, shared services and strong human capital.”


So what has changed over the last two years?  Wendy’s business has improved with restaurant level margins moving higher YOY almost every quarter since the merger (3Q10 margins were impacted by higher commodity costs) while Arby’s trends have continued to decelerate with margins down every quarter.


On May 19, 2010, we published a note titled, “WEN - Undervalued Yes, Where is the Opportunity?” that discussed WEN’s stock and provided a sum-of-the-parts analysis that suggested that the company’s stock was trading below its intrinsic value.  Specifically, we highlighted the fact that the Wendy’s brand alone accounted for more than 100% of the value of the company, which implied not only that investors were seemingly getting Arby’s for free but also that the significant erosion of the Arby’s brand was overshadowing Wendy’s value as a standalone concept.  Our sum of the parts analysis (shown below) shows that the Wendy’s brand continues to be undervalued. 


Given Trian Partners’ past success in creating value from mispriced securities, WEN management must recognize that they can unlock value by spinning off Arby’s.  And, it is likely not a coincidence that management is putting Arby’s up for sale after 4Q10 company same-store sales trends improved to +3.1% from -9.5% in 3Q10, implying a 325 bp acceleration in two-year average trends and the first quarter of positive comp growth in at least 15 quarters.


WEN - SUM OF THE PARTS  - wen sotp


Howard Penney

Managing Director



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