Software timing remains the quarterly issue but if your time horizon is beyond 3 months, do you really care?



We are very bullish on the long-term fundamentals in the slot sector space.  Now that earnings calendar 2011 earnings estimates now appear achievable and beatable, we are not as concerned with the timing of the acceleration of replacement demand, and importantly for BYI, the quarterly timing of software shipments.  BYI may be the best positioned of the three big US slot suppliers because:

  • Unlike IGT, BYI should be a long-term participation game market share gainer
  • Quarterly ship share should increase sequentially at the expense of WMS
  • BYI maintains the highest valuation upside

We must admit that we have low confidence in Wednesday’s quarter announcement.  Not that we are predicting a miss – we’re actually above the Street.  However, software sales is always the wild card.  We don’t believe there will be any surprises in the core metrics other than software, but that shouldn’t be more than a timing issue.


We’re 2 cents ahead of the Street for the quarter and about 10 cents higher for the year.   We project BYI to post $190MM of revenue and EPS of $0.48 when they report F2Q11 results next Wednesday after close.  We don’t expect there to be a whole lot of news on the replacement front.  The consensus from our conversation with operators is that replacements should be flat to up moderately this year.



  • Product sales of $61MM with gross margins just shy of 50%
    • NA units of 2,600 and 1,000 international shipments
      • 2,250 replacement units and 350 new units (including some units to Cosmo)
    • ASPs of $15k
    • Other product sales flat YoY
  • Systems revenue of $50MM at a gross margin of 72.5%
  • Gaming operations revenue of $78MM at a gross margin of 72.6%
  • Other stuff:
    • SG&A: $54MM
    • R&D: $22MM
    • D&A: $5MM
    • Net interest expense: $2.2MM
    • Tax rate: 33% (R&D tax credit)

The Week Ahead

The Economic Data calendar for the week of the 31st of January through the 4th of February 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 - lac1

The Week Ahead - lac2

Bearish: SP500 Levels, Refreshed



We had this right in November. We had it dead wrong in December. We are waiting for January to end.


Managing globally interconnected risk doesn’t happen in a vacuum. Globally, inflation is accelerating. Domestically, US Consumption has slowed materially in January versus December and that, alongside real-time inflation pressures, is why US Consumer stocks are underperforming.


We just covered our short position in Consumer Discretionary (XLY) because, at down -3.1% on the day, it’s immediate term oversold. If you’re looking for a line where we’d cover our SPY position, 1275 could be it. That would be our immediate-term TRADE view from here. If 1275 doesn’t hold, our intermediate-term TREND line of support remains all the way down at 1215.


From a long-term TAIL perspective, much like equities in Japan, all US Equities are doing here is debating where they’ll finally make their lower-high.


What was immediate term TRADE support this morning is now resistance at 1290. So 1 should provide some bearish fodder for the bulls to consider. Remember, consensus is still that US growth is “back” and that the SP500 is going to be up double digits in 2011.



Bearish: SP500 Levels, Refreshed - 3

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January 28, 2010






  • Long, long overdue but never too late.  H&M announced (via Twitter) that the brand will be launching e-commerce! Unfortunately, fast fashionistas will have to wait an entire year before the launch which is slated for 2011/2012.
  • Given the early success of Omni Heat technology for Columbia, the brand looks to expand the penetration from 10% of the assortment to 40% for Fall 2011.  The distribution will remain narrow and focused on specialty and sporting goods retailers. 
  • Just weeks after a report suggested that celebrity endorsements have low ROI’s, a new study emerges that takes a look at which athletes make the best endorsers.  The Nielsen study found that Olympians dominate the top 5 male endorsers, while tennis players dominate the top female endorsers.  Formal NFL players top the list of most effective commentator endorsers.



Borders gets conditional lifeline; shares soar - Shares jumped 36 percent in after-hours trading after Borders said GE Capital, a unit of General Electric Co (GE.N), agreed to provide a $550 million credit facility under several conditions, including that it close stores and arrange financings with other lenders, vendors and landlords.Borders, the No. 2 U.S. bookstore chain by sales, also said it is prudent to explore alternative avenues, including a possible restructuring under court supervision. James McTevia, a bankruptcy restructuring consultant with McTevia & Associates, said Borders' discussion of an possible "in-court restructuring" was referring to a bankruptcy filing. "Borders has a commitment for financing that allows it to walk down two paths at the same time," McTevia said.<Reuters>

Hedgeye Retail’s Take: Less than 24 hours after BGP receives some indication that GE Capital may save the day (for now), the media is reporting that some publishers are not interested in funding the company’s restructuring.  The publishers want their cash, not paper based on a hopes for a turnaround.


Prada to Set IPO in Hong Kong - The Italian luxury goods house said Thursday that it will go ahead with an initial public offering on the Hong Kong Stock Exchange, although it did not specify a time frame or the size of the stake to be sold. Analysts believe an IPO could happen as early as this spring and value the company up to $9.5 billion.It will be at least the fourth time the firm has aimed for an IPO, having called off the last several attempts due to weak global markets.<WWD>

Hedgeye Retail’s Take: Signs of an IPO have been building as the company has become more vocal in recent months in presenting its growth prospects.  However, as the article notes, this “roadshow” has served many rubber chickens in the past.  It’s not official until it’s official.


Tory Burch Opens in London - Tory Burch is transporting her American lifestyle concept to Europe with her first stand-alone store here, joining one she already has opened in Rome. Earlier this week in London, guests including Joely Richardson, Rena Sindi, John Frieda, Avery Agnelli, Laura Bailey, Ashley Hicks, Allegra Hicks, Cosima Pavoncelli, and Santa and Simon Sebag Montefiore gathered at the store on 149 New Bond Street for cocktails, and later for dinner at Hakkasan in Mayfair. <WWD>

Hedgeye Retail’s Take:  With a brand that is close to producing $400 million in the US alone, expansion into Europe is not surprising as the company looks to hit the $1 billion mark in 5 to 10 years.


P&G Zeros In on Beauty Ritual - Procter & Gamble Co. is bent on changing consumers’ beauty rituals to expand existing categories and gain more traction in emerging markets. “We need to innovate in everything we do,” Bob McDonald, chairman, president and chief executive officer, told analysts during an earnings call Thursday.  In some cases, he said, that means introducing new product categories, in others it means expanding categories by changing consumers’ habits. For instance, McDonald said, “In China, it’s getting consumers to wash their hair more than once a week.” <WWD>

Hedgeye Retail’s Take:  If growth is predicated on the Chinese washing their hair more often, we wonder how analysts will put this in their model?  Seriously, the world’s largest CPG company is banking on selling more shampoo by teaching the Chinese to bathe more frequently?


A Shift to Upscale Offerings at Mass- Buoyed by the success of premium skin care, mass merchants plan to further increase upscale assortments while adding enhanced services. That’s not to say, however, there won’t still be a focus on value pricing with more space allocated to inexpensive brands, too.  According to data presented during The NPD Group’s Hot Off the Press conference, beauty in the food, drug and mass arenas experienced 3 percent sales growth in 2010, versus a flat 2009. Makeup sales posted the biggest increase, followed by skin care, while fragrance sales declined slightly. <WWD>

Hedgeye Retail’s Take:  As the consumer gradually learns that masstige products are essentially the same as those found in the center core at the mall, it’s hard to defend the dominant share department stores have held for decades in the premium category.  This is still a category with major opportunities for company’s like Target, Walmart, and Costco.


Snow Sports Market Sets Billion Dollar Record in December - The snow sports market sold more than $1 billion worth of equipment apparel and accessories in December alone and reached $2.1 billion season-to-date, according to a report by SnowSports Industry America.   This is the first time in history snow sports sales have topped a billion dollars for sales in a single month. Sales through December this season are 16% higher in dollars sold and 10% more units sold compared to the same time last season.  With excellent snow conditions across the U.S. and improved consumer confidence 2010-2011 is predicted to be the best season ever for the market. Equipment sales continue to lead market increases with a 22% increase in dollars sold overall and 11% more units sold.    <SportsOneSource>

Hedgeye Retail’s Take: With the snowiest January on record in NYC and 1.5 inch from the snowiest month ever (Feb ’10), record outwear/snow sport sales couldn’t have come at a better time – in fact it may be even higher in January. 


What Makes Facebook Fan Pages Successful? - Well-known brands like Coca-Cola and Starbucks have had success turning their Facebook fan pages into popular sites with millions of fans. Local businesses are also leveraging the site and can learn from their global neighbors. Local businesses make up 17.6% of Facebook fan pages, according to financial services firm Wedbush, while companies come in at 6.3% and products at 3%. Interests, musicians and public figures are also high on the list. <eMarketer>

Hedgeye Retail’s Take: Free marketing, what’s better than that as a small business owner? With 77% of users looking to receive incentives online, social networking sites provide the perfect opportunity for small businesses as well as national players to gain loyalty and drive traffic at the consumer level.


R3: COLM, BGP, H&M, P&G - R3 1 28 11



Mr. Mubarak, Turn On That Internet!

Yesterday, we posted a note about the Jasmine Revolution becoming Tunisia’s top export. Specifically, we wrote:


“Over the last three days, there have been massive protests in Egypt against the autocratic regime of President Hosni Mubarak.  These protests are being driven by economic concerns, primarily spiraling costs of living (read: inflation).  As the costs go up, the underemployed and underpaid youthful population naturally vents, and in an autocratic regime they have no outlet other than, at least in their minds, to take to the streets.  No doubt the successful revolution in Tunisian was a catalyst for the Egyptian revolts; the success of overthrowing the Tunisian government has emboldened protestors across the region.”


This morning it seems the Egyptian government is combating the spread of the Jasmine Revolution . . . by cutting off almost all internet in the country.  In the chart below (with credit to Arbor Networks), you can see the precipitous drop in internet traffic.  Somehow we don’t think this is going to appease the people of Egypt. 


This is a country with more than 2/3rds of its population below 30, a country where 40% of the population lives on under $2 per day, and unemployment is close to 10% (and higher in reality). 


If President Mubarak thinks that he is going to stem the rising tide of discontent in Egypt by limiting their ability to communicate, Tweet, and Facebook, he is, in our estimation, misjudging the power of the Jasmine Revolution.  So far, the stock and credit markets in Egypt agree with us, and profoundly so.  Specifically, Egyptian 5-year credit default swaps are hitting two-year highs today at 375 basis points and the EGX 30, the benchmark  equity index in Egypt, closed down (-10%), after a prior three-day drop of 16%.


Our advice is simply this : Mr. Mubarak, turn on that internet!


Daryl G. Jones
Managing Director


Mr. Mubarak, Turn On That Internet! - 1


Notable news items/price action over the past twenty-four hours.

  • WEN held their analyst day yesterday and, as my note published this morning details, I viewed the meeting as positive for the long term prospects of the stock which I continue to view as being undervalued
  • COSI has traded poorly this week but gained 5.4%, albeit on slowing volume.  I continue to like this turnaround story.
  • GMCR and CBOU declined on accelerating volume; coffee prices are posing a significant headwind for coffee companies and SBUX is growing market share.
  • SBUX downgraded at McAdams Wright Ragen.
  • EAT gained on accelerating volume.  This stock has performed strongly of late, even given the slowdown in Q4 for casual dining, and I continue to like the name as management executes on margin enhancing initiatives and sales driving catalysts come through over the next few months.
  • EAT was upgraded by Morgan Stanley this morning from “underweight” to “equal weight”.  Target increased to $26 from $18.
  • YUM’s Taco Bell chain is launching an ad campaign to fight back against a lawsuit over the quality of its beef taco filling.
  • YUM’s CDS spreads have blown out recently and this is due to rising food prices and the resulting riots in developing nations, according to Bloomberg.  General Mills, Darden Restaurants, and Campbell Soup Co. are other names named in the article.
  • MCD promoted Kevin Newell to the global chief brand officer role. 
  • The U.S. cattle herd probably shrunk to the smallest size since 1958 and the drop in beef supplies may boost prices to a record, analysts said. Ranchers held 92.211m head of cattle as of Jan. 1, down 1.6% Y/y, according to average estimate of 7 analysts  That would be the smallest herd in 53 years, said Ron Plain, livestock economist at the University of Missouri in Columbia.



Howard Penney

Managing Director

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