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TGT: Trend Brewing?

Despite January expectations that were gradually ratcheted down, Target’s results were once again disappointing.  This marks the second month in a row where internal projections called for a low to mid single digit increase and results failed to materialize. 

 

Interestingly, there remains a major divergence between the growing, P-Fresh driven performance in the food and consumables category and the rest of the store.  Unfortunately, grocery induced traffic does not appear to be leading to an acceleration in discretionary spending at this point.  While two months doesn’t make a trend, scrutiny surrounding the company’s topline initiatives centered on 5% rewards and P-Fresh is on the rise. Over time, these strategies should work.  However, sales expectations need to be taken down in the near term.  Management’s guidance for low single digit increases in February is a start, but this is clearly not the 4+% comp trend we were originally expecting to see for most of 2011. 

 

TGT: Trend Brewing? - TGT matrix

 

Eric Levine

Director


PENN 4Q2010 CONF CALL NOTES

Hard to bet against this management team. We were above the Street and they beat us. 

 

 

"We are very pleased with fourth quarter casino operating results which compare favorably to the prior year. Ten of Penn National's fifteen gaming properties grew net revenue, twelve of fifteen properties generated year-over-year improvements in Adjusted EBITDA and eleven properties successfully increased Adjusted EBITDA margins... While we are encouraged by our fourth quarter performance and early indications for an overall improvement in the economy, our current outlook and guidance for 2011 contemplates a continuation of the trends we saw in 2010 until we gain more visibility of a meaningful recovery."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming

 

HIGHLIGHTS FROM THE RELEASE

  • "$14.4 million impairment charge and lobbying costs incurred in the fourth quarter at Maryland Jockey Club which are not expected to recur."
  • "The fourth quarter and full year GAAP net loss reflects fourth quarter pre-tax impairment charges of $193.2 million, as a portion of the goodwill and other intangible assets associated with the Company's original purchase of the Aurora and Joliet facilities was deemed to be impaired based on the planned 2011 opening of Illinois' tenth gaming facility and the continued challenging operating environment in the state."
  • "During the quarter we repaid $85 million of the $145 million that was drawn on our revolving credit facility to partially fund the October 2010 acquisition of all of the outstanding debt of The M Resort LLC."
  • Development updates:
    • M Resort: "In early January, we began sending offers to stay at The M to some of our highest value players and while it is still early, the response has been encouraging. We believe we are close to completing negotiations with the property's equity holders regarding ownership and future operations and are simultaneously working with Nevada gaming regulators to secure necessary approvals for the transaction."
    • Hollywood Casino Harvey: "We are currently seeking Louisiana's fifteenth gaming license and in December provided details of our proposal to bring a first class gaming vessel to the Harvey Canal in Jefferson Parish. The project's nearly $150 million first phase investment would bring capacity for up to 1,500 slots machines, 44 table games, a parking facility and an upscale buffet and steakhouse, as well as other food and beverage offerings and a multipurpose room. As part of the proposed $155 million second phase investment, Penn National would add a 250-room hotel, an additional parking garage, a dedicated entertainment showroom and a pedestrian skywalk that would connect these amenities to the riverboat...We are prepared to fund a significant escrow account to demonstrate our unmatched financial liquidity and our genuine commitment to the project, Jefferson Parish and the State of Louisiana...The Jefferson Parish Council recently passed a resolution allowing Parish citizens to vote on whether they support the development of the proposed riverboat gaming facility if Penn National Gaming is awarded the provisional gaming license, which is expected to be granted by the Louisiana Gaming Control Board this spring."
    • Laurel Park and Pimlico: "Late in the fourth quarter, The Maryland Jockey Club reached an agreement with local horsemen to run 146 live racing days at Laurel Park and Pimlico and preserve the Preakness Stakes... Pursuant to the agreement, these tracks, which have recently generated significant losses, are expected to receive financial subsidies from the state and horsemen, saving jobs and significantly reducing future operating losses. Longer-term, we continue to believe that bringing a video lottery terminal (VLT) operation to Laurel Park would guarantee the preservation of Maryland's rich racing heritage and the existing jobs and other economic benefits associated with the racing industry."
  • Guidance:
    • Net revenues: $2,688.3MM in 2011 and $657.1MM in 1Q
    • Adjusted EBITDA: $662.9MM in 2011 and $169.6MM in 1Q11
    • EPS: $1.48 in 2011 and $0.40 in 1Q11
    • Assumes M Resort purchase closes in early 3Q2011
    • "Excludes the impact of the announced fourth quarter opening of the Anne Arundel, Maryland slots facility pending additional clarity of the exact opening date"
    • "September opening of the tenth gaming facility in Illinois"
    • "December opening for a competing facility in the Baton Rouge, Louisiana market"
    • "Expiration of the Casino Rama Management agreement and related amortization in July of 2011, although we are in negotiations for an extension"
    • "Full year of results for Beulah Park"
    • "$7.0 million of pre-opening expenses"
    • "Excludes any additional gain from insurance proceeds related to Empress Casino Hotel fire"
    • D&A: $242.2MM in 2011 and $55MM in 1Q11
    • Non cash stock comp: $25.2MM in 2011 and $6.3MM in 1Q11
    • Tax rate: 45%
    • Diluted share count: 108MM

CALL NOTES

  • January 2011 is off to a rocky start due to weather
  • Seeing a stabilization in their business.  Seeing flat spending behaviors still. Forecast for 2011 is more of the same of what they saw in 2010.

Q&A

  • Why is EBITDA above consensus and EPS below for 2011 guidance?
    • Not sure.  103.2MM of interest expense and stock comp is in-line with last year.
  • M Resort - need to sign a purchase agreement with the current owners and get through regulatory approvals;
  • Moving their tracks in Ohio? Governor is new and they aren't sure what he's thinking. Given the budget issues they have PENN believes that they may be inclined to generating more revenues from their tracks by relocating to more optimal locations. Already expect competition for Lawrenceburg in late 2012 and 2013.  Land-based casino in Cincinnati will be more a competitive threat than River Downs.
  • Perryville - Feel like they are running within expectations. They are working on building their database. Expect to see continued growth in 1Q unless weather continues to impact them.
  • Promotional and marketing environment? Seems very stable and rational.
  • Weather impact? They have factored the impact into the guidance but they aren't going to elaborate in the exact impact. When weather is good, the business has been good.
  • Cash: $246.4MM ($78MM in unrestricted sub)
  • Debt: $71Mm on R/C; $1,589MM of total bank debt. Total debt $2,171MM
  • Cap interest: $1.1MM
  • Capex timing: $77.7mm (18.2MM of maintenance) in the Q. 1Q: 70.2MM of new and 26.9MM in 1Q
  • Capex 2011: $289MMM in new  and $88.5MM in maintenance, plus Kansas Speedway capex for a total of 449.2MM
  • $7MM of pre-opening is for Toledo and Columbus mostly Toledo. There are also some $2MM of Kansas speedway pre-opening but its in JVs.
  • Expenses: still room for improvement
  • Maryland status quo not sustainable for long-term
  • 2011 corp expense is roughly 78MM
  • Slot spending: 60% of maintenance capital; still refreshing 1/7th of the floor annually; nothing changed in outlook
  • Feb 9: LA gaming board meets; Feb 17: final decision on 15th license
  • In general, states are considering gaming expansion plans more than raising taxes as a solution to the budget deficits
  • Doesn't see Harrisburg winning in Category 3 license but Foxwoods license may go there. No time frame for Cat 3 license.
  • Vegas outlook: Vegas has a future but way too much capacity. Waiting for another opportunity
  • Atlantic City outlook: gloomy; Revel will cannibalize the market; couple of more years of contraction
  • More racino acquisitions? More focused on location rather than the property itself
  • M Resorts: has positive operating income

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER

Initial Claims Fall 39k 

The headline initial claims number fell 39k WoW to 415k (42k after a 3k upward revision to last week’s data).  Rolling claims rose 1.25k to 429k. On a non-seasonally-adjusted basis, reported claims fell 23k WoW.  As the third chart below shows, NSA claims have risen in this week of the year for the last three years.  It's possible that this discrepancy reflects weather-related reported delays, which could reverse next week.  

 

We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - 1

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - 2

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - 3

 

One of our astute clients recently pointed out the relationship between the S&P and initial claims shown below, suggesting that claims is one of the strongest drivers of the market. Based on the chart below, we are hard-pressed to disagree.  We show the two series in the following chart, with initial claims inverted on the left axis.

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - 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 FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - 5

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Daily Trading Ranges

20 Proprietary Risk Ranges

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HOT: SOLID Q BUT Q2 REMAINS OUR CONCERN

The HOT Q4 was better than we predicted but not quite a blowout. Guidance was good – slightly lower than consensus for Q1 but higher for 2011 due to timeshare.  Q2 remains our concern.

 

 

Contrary to our prediction, HOT did beat the quarter and modestly raised guidance for FY11.  However, below the surface of a “blowout” quarter, things aren’t as exuberant as they appear. Likewise, the raise for FY2011 was driven by higher timeshare (partly timing of Bal Harbor revenue recognition), higher incentive fees, and lower below the belt items.

 

If we deconstruct the $29MM Adjusted EBITDA beat vs. consensus, 74% of the beat came from low quality items; namely, 45% came from higher incentive fees, 17% from “other fees”, and 12% from VOI.   These items account for $0.11 of the $0.13 EPS beat, with lower interest and D&A expense making up the balance.  That said, HOT still would have beat our number due to better control expenses with SG&A and CostPAR growing less than we projected as well as $4MM of better base management and franchise fees.  

 

 

Detail:

Starwood reported strong 4Q2010 results with total revenues exceeding our estimate by $13MM (2%) and unadjusted EBITDA beating our estimate by $20MM (9%).  The EBITDA beat was driven by a higher mix of high margin fees revenue, which was largely driven by higher incentive fees, better VOI margins and lower SG&A expense.

  • ­Owned room revenue of $459MM missed our estimate by $12MM ( 3%) but the revenue miss  was somewhat offset by expenses being $6MM lower as well.
    • Owned comparable RevPAR of $151 was almost $7 below our estimate, growing 8.6% vs our estimate of 12.5% (however our number isn’t same store)
    • Room revenue was the culprit of the miss while F&B and other revenues look like they grew 10% YoY
    • CostPAR only increased 2% to vs. our estimate of 6.7%.
  • Managed, franchised and other revenues of $209MM beat our number by $22MM
    • 813 (.3%) more managed and franchised rooms were added to the systems than we projected – with all of the upside coming from Luxury segment additions
    • $13MM of the beat was higher incentive fees (which the company explicitly guided to only being up single digits and ended up growing 39% YoY)
    • Other “revenues” termination / etc was $5MM higher than our number
    • Franchise and Base mgmt fees beat our number by $2MM each, respectively.
  • Timeshare sales and service revenue beat by $2MM and operating expenses were also a little better for a total operating profit beat of $3MM
    • Originated sales revenue was $1MM better and other sales and service revenue was $6MM better than our estimate. However, deferred revenues were $4MM higher.
    • Originated sales margins reached 41%, much higher than the 35% YTD margin and 30% margin in 2009
    • Other expense margin was 23.4%
  • Other stuff:
    • SG&A: $4MM lower
    • D&A: $8MMlower
    • Interest expense: $5MM lower

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER

Initial Claims Fall 39k 

The headline initial claims number fell 39k WoW to 415k (42k after a 3k upward revision to last week’s data).  Rolling claims rose 1.25k to 429k. On a non-seasonally-adjusted basis, reported claims fell 23k WoW.  As the third chart below shows, NSA claims have risen in this week of the year for the last three years.  It's possible that this discrepancy reflects weather-related reported delays, which could reverse next week.  

 

We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.

 

 INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - rolling claims

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - raw claims

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - NSA claims

 

One of our astute clients recently pointed out the relationship between the S&P and initial claims shown below, suggesting that claims is one of the strongest drivers of the market. Based on the chart below, we are hard-pressed to disagree.  We show the two series in the following chart, with initial claims inverted on the left axis.

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - claims with S P

 

Yield Curve Continues to Widen

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 41 bps wider than 4Q.  The current level of 282 bps is slightly wider than last week.

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - spreads

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - spreads QoQ

 

Financial Subsector Performance

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

 

INITIAL CLAIMS FALL 39K, ROLLING CLAIMS TICK SLIGHTLY HIGHER - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: WEN, YUM, GMCR, BWLD, EAT, RT, CHUX

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

  • WEN shareholder Nelson Peltz has revealed that approaches were made recently by a third party regarding a potential acquisition of WEN.  However, as a result of the move to sell Arby’s, announced on January 20th, Peltz and Trian decided not to propose any strategic alternatives at this time.
  • WEN shares rose on accelerating volume, pushing the stock above $5.  The stock has risen every day since their investor day last Thursday.
  • YUM reported strong results for 4Q10 and the full year, exceeding EPS expectations and reporting strong comps in China and the U.S. versus consensus.  YRI comps fell slightly short of the Street’s number.
  • GMCR declined on accelerating volume during yesterday’s trading session but shot up in post market trading after EPS exceeded expectations.
  • BWLD gained on strong volume as chicken wing favorability continues.  BWLD reports next Tuesday.
  • EAT underperformed the casual dining category, declining 2.1% on accelerating volume.   I continue to like this name for the intermediate term as its margin and sales enhancing initiatives continue.
  • RT declined on strong volume.
  • CHUX reports earnings tomorrow.

TALES OF THE TAPE: WEN, YUM, GMCR, BWLD, EAT, RT, CHUX - stocks 23

 

Howard Penney

Managing Director


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