A normalizing quarter



Now that all the public companies have released their earnings, we can take a look a slot ship share trends.  Total shipments into North America decreased 11% YoY to approximately 16k in 4Q10 from an estimated 18k in 4Q09.  We estimate that a total of 63k units were shipped in NA in 2010 compared to an estimated 71k units in 2009.  Replacements increased an estimated 3% YoY in 2010 to 47k units from approximately 45.5k units in 2009.

  • We estimate that new and expansion units decreased almost 40% YoY to 3.9k from 6.3k in 4Q09
  • Replacements in the quarter were about 12.4k, up 4% YoY and up from roughly 10.0k replacements shipped in 3Q10

Going forward, we think ship share for IGT and BYI will likely rise throughout the year while WMS and Konami will fall slightly.


Slot Ship Shares

  • IGT:  28% in 4Q up 1% from last quarter and down from 29% in 4Q09.  For 2010, IGT’s share dropped to 27% from 34% in 2009.
  • WMS:  24%, up 1% from 3Q share and flat with their 4Q09 ship share.  For 2010, WMS’s ship share was 25% compared to 22% in 2009.
  • BYI:  14% in 4Q2010 - flat sequentially and down 400bps YoY.  In 2010, BYI’s ship share fell 3% to 15%.
  • ALL:  2H2010 results were at 12%, flat YoY.  Based on company commentary on the earnings call last night, we believe that their 4Q2010 share was 13%, up from 3Q share of 11%.
  • Konami: 13% in 4Q, down from 16% in 3Q2010 and up 2% from their 4Q09 shipshare of 11%.  In 2010, Konami’s ship share stood at 13% compared to 10% in 2009

The chart below summarizes slot ship share trends:




I went through my initial take on JACK’s fiscal 1Q11 earnings yesterday (JACK – FIRST LOOK, posted yesterday).


As we knew going into the conference call, increasing commodity costs are putting significant pressure on the company’s margin relative to its prior guidance.  Fiscal 2011 commodity costs are now expected to be up 3-4% from its prior outlook of up 1-2%. Although management broke out its expected commodity cost increases by food item, they did not say how much of the company’s total costs are currently locked in for the remainder of the year.  To that end, there is still risk to the company’s current forecast.


Management would not comment on whether they are planning on taking price to help offset some of the inflationary pressures but said their approach to pricing would be cautious and if necessary, any price increases would be modest and targeted.  Given recent comp trends at Jack in the Box, the company is right to be cautious.  Although same-store sales turned positive during the quarter and improved 20 bps on a two-year average, Jack in the Box has underperformed its competitors and one quarter of positive trends does not give me confidence that the concept has real purchasing power in this environment.  Management is either being cautious on its full-year outlook or it is not yet convinced that trends have turned the corner at Jack in the Box because the low end of its full-year comp guidance assumes a slowdown in two-year average trends from first quarter levels. 


We know 2Q11 will be difficult from a top-line standpoint as the company guided to a flat to down 2% comp at Jack in the Box, which at the low end of the range implies a 50 bp decline in two-year average trends from the first quarter.  The company cited that unfavorable weather in many of its markets, particularly Texas where it has 27% of its Jack in the Box company restaurants, impacted results in the first four weeks of the second quarter.  I would expect comp trends to improve slightly on a two-year average basis in the back half of the year; though I am currently modeling a flat comp for the full-year (at the mid-point of management’s guidance).  Comparisons get much more difficult for Jack in the Box in the fourth quarter, however, so same-store sales growth could very likely turn negative again on a one-year basis.


So, 2Q11 is going to be bad from a top-line (severe weather impact), commodity cost (guided to a 5% increase, including a 20-25% increase in produce costs, versus their up 3-4% full-year outlook) and margin perspective.  I am currently modeling a 12.4% restaurant-level margin for 2Q11, which implies a 280 bp decline YOY.  Management stated that 2Q11 margin should be about even with the reported 1Q11 level of 12.6%.  In the back half of the year, restaurant-level margins should improve modestly largely as a result of the fact that the company is lapping a nearly 370 bp decline from 3Q10 and a 330 bp decline from 4Q10.  That being said, commodity costs are the biggest wild card as we move through the balance of the year!


JACK – 2QFY11 LOOKING ROUGH - jack sigma


Howard Penney

Managing Director

Show-me The Comps

Target’s earnings report and conference call still leaves us comfortable with our short bias over the near-term.  In fact, it’s probably now more clear than before that the near to intermediate term topline results are integral to this show-me story.  The expected sales ramp over the course of the year, tied almost entirely to the company’s growth in P-Fresh remodels and 5% Reward penetration, is the single biggest factor in determining if TGT can control its own destiny or if macro factors will keep the topline muted.  We remain concerned that guidance for incremental comps of 200-400bps driven by such initiatives still remains aggressive. 


As always there were a few positives (mostly longer-term) and a few negatives to contemplate following today’s official 4Q report.  First the positives:

  •  TGT’s quarter was largely as expected following the company’s January pre-announcement that indicated credit card profits and a favorable tax rate would offset modest declines in retail profitability.  In reality what we got was a much better tax rate to the tune of $0.07 per share and a flat y/y EBIT performance from retail.  All in no big surprises in the P&L.
  • Management suggested that a sale of the credit card portfolio has become increasingly likely, although the timing of such a transaction could take time and drag into early 2012.  The transaction will result in a gain on sale and a future stream of “shared economics” between the new owner and Target.  This should viewed as a win, as this takes risk off of the company’s balance sheet while maximizing the NPV of the portfolio at a time when credit seems to be stabilized. 
  •  Additional clarity was given on Canada and the impending transaction to acquire 180-200 former Zeller’s locations/leases.  The process is clearly underway and will begin to impact the P&L in the form of front-loaded investment beginning in 2Q.  This investment covers IT development, increased headcount to support the Canadian expansion, and the assumption of leases as they become property of Target.  Store openings are still slated to take place in 2013 and 2014.  Bottom line here is this will be a drag for a while until the stores actually produce revenues.  For those with a multi-year time horizon, we believe Canada will be a success and has the potential to be a key top and bottom line driver beyond the next two years.

And the negatives:

  •  The P-fresh and 5% reward programs are clearly having an impact on the topline, although not as much as originally anticipated at this early part of the roll-out.  Management noted that the rewards program added about 100bps to 4Q same store sales and P-fresh added a bit as well.  Target now expects the two efforts to contribute about 350bps combined on a run-rate basis to same store sales by the end of the year.  Keep in mind that in late fall, the expectation was for these efforts to contribute an incremental  200-400bps for the ENTIRE year.  Yes this is a subtle change in tune, but one that at best makes 2011 a year of two distinct halves.  First half comps now expected to be positive low single digits, while the second half is planned higher.
  •  The investments in Canada will result in two buckets of costs over the course of 2011.  First the actual investment in people and infrastructure to support the acquisition, which amounts to $0.10 share.  Second, the funding for Canada is now expected to put share repurchase temporarily on hold to the tune of $0.05 to $0.10 per share.  All in a $0.15 to $0.20 per share hit in the near term.  We understand these are prerequisite investments that must be made and we like the Canada acquisition.  However, we suspect that this effort may also add additional SG&A volatility over the coming year as operating a new and sizable division in a completely new country with re-purposed real estate is sure to bring some surprises.
  •  Inventories came out of the quarter a bit on the high side, up 6% against a 2.8% in total sales growth.  Management says inventories are in good shape but we can’t ignore that the reported sales/inventory spread as at its widest point in a year.  
  •  The year’s greatest same store sales increases are now expected to occur in the back half of the year at the same time costs and pricing issues are going to be at their greatest year over year increases.  We respect management’s conservatism on holding off from predictions on how the consumer will react, but we can’t ignore the fact this boils down to increased uncertainty at time when management appears to be more confident in their own sales growth.  Time will tell.

Show-me The Comps - tgt


Eric Levine


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Pavlov's Bell: SP500 Levels, Refreshed...

POSITION: no position in SPY


I’ve seen bulls and I’ve seen bears. I’ve seen neither survive in perpetuity.


After a 40 point 3-day drop in the SP500 from my “Exhausted” range of 1, I think the “flows” bulls have been reminded of the bearish fundamentals that are associated with Global Growth Slowing as Global Inflation Accelerates.


What was 3 days ago was then, now we have to live in the now. And right now, the SP500 is trying to make up its mind between a  -2.6% correction (1308) and a -6.9% drawdown (1251). If the SP500 closes below 1308, we’ll say a -6.9% intermediate-term peak-to-drawdown is a probable risk.


Managing your gross or net exposure is one way to manage drawdown risk. Another is to be dynamically managing your asset allocation to cash. If we’ve all learning anything from managing risk in the early part of 2008, it’s that cash can be cool – particularly if inflation remains stubborn and sticky.


In terms of an immediate-term TRADE oversold line, 1295 is now our number. If we remain below 1308 on a closing basis, there will be plenty more days like this in the coming weeks. Pavlov may very well have taught everyone to buy every dip – but that doesn’t mean everyone is still going to be a winner.


Volatility (VIX) backing off today is both bullish and bearish all at once. Anytime we see the combination of a bullish TRADE and TREND breakout in any market price, it begs the question as to where that bullish breakout stops making higher-immediate-term highs.


Currently, what was heavy overhead TREND line resistance for the VIX is now support at 18.11 and I see no immediate-term TRADE resistance to north of 23.


If the SP500 can close above 1308, a lower-high of immediate-term TRADE resistance at 1330 is still our line.



Keith R. McCullough
Chief Executive Officer


Pavlov's Bell: SP500 Levels, Refreshed... - 1


Good quarter.  Margin story playing out and numbers need to go higher.




"Throughout 2010, Pinnacle developed and adopted a broad range of strategies, focused on further enhancing the best-in-market experiences that we provide to our guests.  At the same time, we undertook initiatives to leverage our development and management skills and solid balance sheet to pursue new opportunities to generate profitable revenue growth.  Going forward, we will maintain our organization-wide focus on best practices, while further positioning Pinnacle to benefit from any lasting rebound in the economy and consumer sentiment." 

- Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment



  • "Consolidated Adjusted EBITDA for the 2010 fourth quarter increased 125.9% to $50.4 million, inclusive of $2.8 million in severance and relocation charges."
  • "2010 fourth quarter financial results also benefited from more efficient marketing activities relative to the prior-year period, particularly at its L'Auberge du Lac Casino Resort and Boomtown New Orleans properties."
  • "Pinnacle has further opportunities in 2011 to improve utilization of our personnel and systems to grow hotel yields, optimize our gaming floor layouts and game mixes, revise our approach to marketing and promotional activities, and effect additional corporate and property expense reductions.  Each of these factors contributed to our strong 2010 fourth quarter and full-year results and these areas remain priorities for improvement in 2011."
  • "The implementation of our St. Louis Shared Services structure in late 2010 is resulting in more efficient allocation of operating costs across the two properties and creating opportunities to drive revenue growth through coordinated marketing and player development efforts.  Our goal for St. Louis Shared Services is to drive consistent operating margin improvements and simultaneous market share gains."
  • "In Louisiana, we recently revised our operating approach by creating a Louisiana Shared Services structure to accomplish a similar goal as in St. Louis.  Geno Iafrate, Senior Vice President and General Manager of L'Auberge du Lac, now also oversees Boomtown New Orleans and Boomtown Bossier City, our two other operations in Louisiana."
  • "Beginning in April, we will relaunch mychoice, our guest loyalty program.  We also recently created a national casino marketing department, which focuses on marketing the unique experiences available at Pinnacle's resort facilities to potential guests outside of our immediate markets."    
  • "We plan to have a standardized marketing approach fully deployed later in 2011, and our strategic approach to marketing and branding is expected to enhance our ability to drive profitable revenue across our portfolio."
  • Development updates:
    • In January, PNK "completed the acquisition of River Downs Racetrack in southeast Cincinnati, Ohio"  for $45MM.  "If VLTs become operational, we plan to move quickly to revitalize River Downs and create a new gaming and entertainment facility for the Cincinnati market."
    •  Announced that the opening of its $357MM Baton Rouge Casino originally scheduled December 2011 will be pushed back to 1Q2012
      • "As a result of low Mississippi River water levels, the Company has been unable to move the three completed casino hulls, which together will form the casino itself, from Bollinger Shipyards in southern Louisiana to the project site in order to continue construction on the casino facilities"
      • "As of December 31, 2010, approximately $319 million of the $357 million construction budget (excluding land and capitalized interest) remains to be invested in the planned Baton Rouge facility." 



  • Believe that the Baton Rouge area is under served.   
  • They are committed to thoughtfully growing the company and continue to look at growth opportunities
  • Changed the mix of games at L'Auberge and their marketing strategy changed dramatically, which is why margins were so much better
  • Experienced about 100bps of margin compression in St. Louis due to seasonality. Properties don't perform as well when the weather is cold.
  • Believe that corporate costs will continue to trend down in 2011
  • Cash capex was $33.6MM for the quarter. Baton Rouge was $20MM;
  • January St. Louis market share reached an all time high of 32.6%. In 4Q - shared guests were 16% of rated customers but 39% of all rated play in St. Louis.
  • Belterra - impact from new competitor is easing
  • Seeing good results in their new hotel yield management system. Testing and launch new reward and marketing campaigns


  • Any impact from tornado warnings at the St. Louis properties?
    • On Dec 31st, there was a tornado warning and they needed to move their guests to a safe location. It's good and bad because the weather was warm but gaming was disrupted. Overall, the disruption was not material.
  • Hope to see a lot of the annualization of the cost reductions in 2011. 4Q corporate is the best proxy going forward but they aren't done yet. Hope for some marginal expansion.
  • They are going to use their manager from Belterra to oversee operations at River Downs and are making some improvements to that facility.  Will have the shared services concept at those 2 properties too. 
  • The $2.8MM corporate and severance charge - $1.3MM was in corporate and the balance was at the property level
  • Topline seemed to stabilize across their portfolio. They are optimistic about revenue growth for 2011.
  • Partnership opportunities with a Vegas operator?
    • Think that that idea has merit and are looking at it.
  • 15th license in Louisiana
    • License was issued to a company with very limited resources behind it and no operating experience. Think that in the best case it will take someone 30 months to open their doors
    • By that time, they hope to be a more diversified company with better operating focus
  • Continue to think that they can do a better job in running their company from a marketing and efficiency standpoint. They are very early in the process of developing their marketing engine.
  • Optimism of slots at tracks in Ohio - why?
    • Don't know when, but they do believe that they will become legal at some point in the future
  • Texas?
    • Doesn't think that the recent poll out of TX is particularly telling.
  • Marketing goal is to reallocate their marketing spend towards their best customers so that hey can capture a larger share of their wallet
  • Higher corporate expense is often driven by legal spending
  • They are continuing to work on the dry-side construction while they wait for the MS River to rise between now and mid-April/May.  They need the MS River to rise - otherwise they will not be able to move those hulls. No indication that that won't occur.
  • Doing what they can at Reno - they have a large track of land for sale there... and would entertain appropriate offers for that property but aren't actively shopping it.
  • Atlantic City is the largest portion of discontinued operations - double digit millions for the 2011. Mostly property taxes for AC.
  • There will be a shared loyalty and cost sharing service when Baton Rouge opens
  • Discovered that they weren't using the fully allowable square footage of gaming space at L'Auberge. Found another 5,500 SQFT and are putting in a poker room.




February 24, 2010






  • DLTR noted that the weather had an impact on the company’s quarterly sales results, but that sales momentum picked up with more normal weather patterns.  Additionally, management noted that Valentine’s week was the best sales performance in the company’s history.  Overall February is off to a strong start.
  • Saks noted that the company sold about 70% of its merchandise at full-price in 2010, which takes the selling levels at or slightly higher than pre-recession percentages. 
  • TJX noted that while inventory levels have been down across all divisions over the past couple of years, the bigger changes have come from the company’s smaller divisions.  While still cautious on taking meaningful amounts of inventory out of Marmaxx, it is for this reason that management believes there are still opportunities ahead to improve corporate turns.
  • Contrary to HD’s strong performance in appliances over Black Friday, Lowe’s chose to not be as promotional.  As a result, appliances comped “just above” the overall result of a 1.1% increase.  HD appliance comps increased by double digits in November and added 120 bps to the company’s overall comp in the quarter. 



Nike Unveils Mega-Logistics Center in China - Nike Inc. on Tuesday unveiled its biggest logistics center in Asia in Jiangsu province. The new 200,000 square meter facility is on target to be the first LEED (Leadership in Energy and Environmental Design Green Building Rating System) accredited warehouse complex in China. Construction of the facility generated 1,800 jobs and is expected to provide up to 1,500 permanent jobs by 2015. The 200,000 square-meter center in the city of Taicang, Jiangsu province, is the company's first such facility in China and the sixth worldwide, after centers in Belgium, Canada, Japan, South Korea and the U.S. <SportsOneSource>

Hedgeye Retail’s Take: China remains a key bogey for Nike particularly after reporting flat sales in the region in F10. This center is not a game changer alone, but will certainly help the company further penetrate not only the Chinese but arguably the Japanese market as well over intermediate-term.


Joe Fresh Opens Flagship in New York City - Joe Fresh, an apparel brand sold in Canadian supermarkets, will open a 15,000- to 20,000-square-foot flagship at 510 Fifth Avenue here this fall. The value-driven fashion brand is owned by Loblaw, a chain with more than 1,000 locations. It was created five years ago by Joseph Mimran, founder of Joseph Mimran & Assoc., who launched Club Monaco in 1985 and sold it to Polo Ralph Lauren in 1999. Joe Fresh is sold in 330 Loblaw’s and Real Canadian Superstores. The brand opened its first freestanding store in Vancouver in October and four more stand-alone units are slated for this year. Mimran said he plans to open 30 to 50 additional stores. <WWD>

Hedgeye Retail’s Take: The newest fast-fashion concept enters the domestic market with what could be considered perfect timing as higher prices begin to crimp unit consumption. In addition, as the U.S. consumer shifts toward greater value product, the lack of fashionable competition may get Joe Fresh noticed in a hurry.


Keds Entering Sportswear - Keds, the nearly 100-year-old footwear brand owned by Collective Brands Inc., has enlisted the help of sourcing powerhouse Li & Fung to break into the apparel market for spring 2012 with its own take on classic American sportswear.  The line, which will include a broad range of men’s and women’s looks, will cater to Millennials, who are mostly in their 20s. Under the licensing agreement, Keds and the Regatta team at Li & Fung’s LF USA division will develop the collection. Li & Fung will be responsible for marketing and sales to boutiques and better department stores across the U.S.  The casual line will launch with a limited edition collection and expand into more complete offerings in 2012. Keds plans to take a measured approach, setting up a business that can last decades.  <WWD>

Hedgeye Retail’s Take: Regatta, known for its proprietary brand development, is a not only an opportunity to expand the Keds brand, but also leverage the store footprint at Sperry. Management has highlighted their interest in collaborating with an apparel brand to enhance the presentation of an expanded portfolio – they’ll now have an opportunity to cross market the brands.


Best Buy Closes Stores in China and Turkey - Best Buy, the world’s largest electronics retailer by sales, is closing all of its branded stores in China, highlighting the resistance of Chinese shoppers to some western-style store experiences.  The retailer, which will continue to run 170 stores in China under the Five Star brand acquired five years ago, is also giving up an attempt to enter Turkey, with the closure of two trial-run stores opened in the past two years. The company said in a statement it would close all nine China stores that carry the Best Buy brand, one of the best-known US retail marques, but one that has failed to catch on in China. It captured less than 1 per cent of the China market, analysts said, struggling to compete against the more agile and aggressive homegrown rivals Gome and Suning, which each have more than 1,000 branded stores in China.  <FinancialTimes>

Hedgeye Retail’s Take: BBY’s failure to penetrate the Chinese market may be more an indication of the commodity-like nature of the electronics market than domestic brand preference, but it’s noteworthy nonetheless for the many other domestic brands looking to make concerted efforts to gain share overseas in 2011.


Facebook Reaches Majority of US Web Users - As Facebook continues to solidify its role as the world’s top social networking site, eMarketer estimates that more than half of internet users in the US were logging on to the site at least monthly as of the end of 2010. This year, eMarketer forecasts, 132.5 million US web users will use the site. That increase of 13.4% in the number of users means Facebook will reach almost nine in 10 social network users and 57.1% of internet users. By 2013, 62% of web users and almost half (47.6%) of the overall US population will be on Facebook. <eMarketer>

Hedgeye Retail’s Take: 50%+ penetration of all internet users is simply astounding and a rate the company will surely look to leverage when it looks to go public.


R3: TJX, SKS, DLTR, LOW - R3 2 24 11


Lady’s shoes rise 20% in price in China- Retail prices of lady’s shoes increased by 20% during the spring season in Shanxi province, China, sources reported.  Hiking production cost is the major reason for the price increase, according to a local shoe producer. For example, leather prices have risen by 20% over the last two consecutive years, coupled with surging labour costs. Meanwhile, shoes for ladies are made of leather and accessories of higher quality, and therefore they cost more in terms of processing, design and materials in order to met the consumer demand. <FashionNetAsia>

Hedgeye Retail’s Take: A comeback for “pleather” in 2011 perhaps?





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 80.45%
  • SHORT SIGNALS 78.38%