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PSS: Top Line Expectations into Q

 In looking at the upcoming quarter for PSS after the market close on Wednesday, we remain positive on the fundamentals (in fact, Keith just added to the Hedgeye virtual portfolio).  Making a call into the quarter for such a high-beta stock rarely sits well with us – especially for a company  that is hardly afraid to miss a number.  But the reality is that we’re seeing good signs out of PSS’ PLG business, and the comp on the core Payless business seems to be holding its own.



As a reminder, our call on this name is that its two primary growth brands (Sperry and Saucony – which account for about 30% of EBIT) are fueled by an annuity revenue stream out of the base business. Trends in those segments are nothing short of robust (see chart 1 below).




All in all, we’re at a loss of $0.15 this quarter versus the Street at ($0.19) – its seasonally lowest quarter of the year.

Next year we're shaking out between $2.00 and $2.10 vs street at $1.76 -- but will need some questions answered w the print.  


The charts below have had a good directional impact in the past


 PSS: Top Line Expectations into Q - PSS PLG Q4 trends 2 11


PSS: Top Line Expectations into Q - PSS CompTrends 2 11 Q4

Could the Kingdom Fall?

Conclusion: Though once unthinkable, the fall of the Saudi kingdom now seems at least in the realm of reality.  That is, popular unrest in Saudi Arabia and the Middle East could lead to a shift away from the autocratic rule in Saudi Arabia.  Keep March 11th on your calendars as Saudi youths have organized a day of protests against the monarchy called the Day of Rage.


Conventional wisdom suggests that Saudi Arabia will be immune from the popular upheaval that is occurring more broadly in the Middle East. The key factor supporting this view is simply that the standard of living is quite high in Saudi Arabia.  In fact, Saudi Arabia’s GDP per capita was $23.7K in 2010 based on the most recent data from the International Monetary Fund, which ranks it 39th in the world and just below such stable democracies as New Zealand. 


We often use market prices as a leading indicator for fundamentals in our model, and the Saudi stock market has been flashing some amber lights.  In the chart below, we’ve attached a 3-week chart of the Saudi primary equity index and 5Y CDS quotes.  As you can see, there has been a severe correction in the Saudi stock market of more than 10% and an expansion by more than 20% in CDS spreads.


Could the Kingdom Fall? - 1


While this correction is not surprising given the geo-political uncertainty in the Middle East (Tunisia, Egypt, Libya, and so on), on the other hand, the price of oil has gone up dramatically in that period, which, on a fundamental basis, improves the financial position of Saudi Arabia.  Specifically, almost 90% of Saudi Arabia’s export revenues are petroleum based.  Moreover, Saudi Arabia has 260 billion barrels in oil reserves, which is about 1/5 of the world’s total, and is the world’s largest exporter of oil.


Despite this and higher relative GDP per capita, all is not well in the Kingdom of Saudi Arabia.  In fact, both inflation and unemployment are pervasive in Saudi Arabia.  While data from the Saudi government is questionable at best, some reports reasonably put inflation at north of 5%, which is clearly squeezing those near the bottom of the income pyramid.  In the same vein, while unemployment measures are also difficult to come by, most estimates put the national rate at close to 11%.  The International Labor Organization (ILO), considered more credible, has put the unemployment rate for those between the ages of 20 – 25 at closer to 30%.  This is particularly important given then demographics of Saudi Arabia, where the population is young with median age of 23.4 years old.  (This is compared to 36.9 in the United States.)


Directly below, we’ve highlighted a chart from ILO, which compares unemployment, youth unemployment, and GDP globally.  The slow growth and high unemployment issues are quite clear in MENA.


Could the Kingdom Fall? - 2


In signal that the Saudi royal family is taking the risk of social upheaval  very seriously, last week Saudi King Abdullah bin Abdul-Aziz’s announced a $37 billion benefits package to create 1,200 new jobs, raise cost-of-living allowances, grant interest-free home loans, and more.   This was underscored by Prince Alwaleed bin Talal from Saudi Arabia, said to be the world's eighth-richest man, who wrote an op-ed in the New York Times, calling for "unwavering, enduring and sincere" reform.


The stock market, despite this package, the strong price of oil, and positive rhetoric, continues to signal danger.  In fact, the Tadawul, the largest stock market in the Arab world by capitalization, plunged (-6.78%) to 5,538.72 overnight, bringing its decline for the year to date to (-16.34%).


So, could the Kingdom of Saudi Arabia fall? While the Royal family has much in the way of wealth to appease it citizens, sharing power and democratic rights could be the real lynchpin to satisfy popular protests.  To that end, it is not clear the royal family is there yet.  The Day of Rage on March 11th could be a key catalyst in the future of Saudi Arabia, and its royal family.


Daryl G. Jones

Managing Director


In-line quarter but turnaround pushed off to Q2.



"As expected, fourth-quarter comparisons were the best of the year, as business conditions and consumer confidence continued to improve. As the economic recovery gains momentum, we anticipate we will see increases in both visitation and spend-per-visit, resulting in a return to consistent growth across our business this year."

- Keith Smith, President and Chief Executive Officer of Boyd Gaming



  • Locals Las Vegas: "local economic conditions began to stabilize."
  • "While we continued to expand our leading market share Downtown, business results were impacted by our Hawaiian charter operation."
  • Midwest and South: The "increase was the region's best year-over-year comparison in five quarters. The gain was primarily driven by strong business volumes at our southern Louisiana properties."
  • Borgata: "While we were encouraged by growth in slot win, non-gaming revenue and overall market share, these gains were offset by higher promotional expense, declines in table game hold and volume, and increased regional competition."



  • Core business is improving and they are on track to begin reporting improvements starting 2Q11. 1Q11 may reflect a slight decline YoY given the difficult comparisons in the Las Vegas Locals market. 1Q was also impacted by severe weather in the Midwest. They do expect a sequential pickup in EBITDA though.
  • Convention and meeting business looks to be poised for additional growth in 2011 in Las Vegas. Projected that their group business in Las Vegas will be up 15% YoY.
  • Even a modest increase in spend per visit - $5/ per visit - will lead to a $20MM increase in Las Vegas locals EBITDA
  • Optimistic about the legislative changes in AC and the potential impact they will have on the market there
  • Grew market share in Locals LV by 20 bps - with the strongest growth at Orleans - which has benefited from a new marketing campaign and a pickup in group and meeting business
  • Increasingly encouraged by the trends in the locals market, but are concerned by the promotional activity. Competitor [Station Casinos] introduced a new aggressive campaign.
  • Downtown - 35% market share. However, higher fuel costs impacted their quarter and should continue to do so.
  • Rated play from their Hawaiian tourism increased and is continuing to perform well.
  • Treasure Chest grew their market share by a full percentage point
  • Midwest and South: Winter weather cost 3MM in EBITDA
  • Borgata continued to outperform the market despite lower than normal table hold and new regional competition.  Promotional spend increased due to rising competition but remains low compared to others in the market. In January slot revenues were flat YoY and they had the highest slot share
  • 4.2x Sr Leverage ratio vs. 4.5x, total leverage ratio was 7.0x vs (7.75x)
  • Borgata was also in compliance with their covenants - their leverage was about 5x at 12/31/2010 (they don't have financial covenants).  Called the remaining balance of their 7.125% notes.
  • $40-42MM of corporate expense for 2011 - spread evenly throughout the year
  • D&A for 2011: $195-200MM - $130-135MM attributable to BYD, balance to Borgata
  • Share based comp of $12MM for 2011
  • Consolidated Interest expense for 2011: $145-150MM, Borgata $85-87MM  - total $230-237MM 
  • Tax rate of 35% for 2011
  • Capex: $50MM in 2H2011(maintenance), Borgata will start a room remodel starting in 2H2011 lasting through 1H2012 - $40MM in 2011 ($25MM spend on remodel and $15MM on maintenance). 40MM target also for 2012.


  • Are they seeing higher spend per visit yet or just more frequency?
    • Frequency is getting better not seeing a lift in spend yet
  • Impact of oil prices on their business
    • Impact on charter operations in Downtown
    • Airfare impact too
    • Unclear whether their So Cal business will be impacted by higher fuel
    • Haven't seen any impact yet
  • Don't think they have any deferred maintenance at any property but have postponed room remodel.  There are about 700 rooms that need remodeled.
  • Coin-in was up in the locals market in Jan 2011
  • In Q1 2011 - their comments were in reference to both revenue and EBITDA
  • Cash rooms in the LV Market account for 25-35% of their business mix.  Trends are continuing to strengthen in 2Q.
  • Opening of shopping area next to the Sun Coast should be positive. They will be opening the retail in phases and are working with the developer to promote the opening.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Oil fear trade: How Middle East unrest could lead to lower...

Lower-Highs: SP500 Levels, Refreshed

POSITION: no position in SPY 


From the vantage point of my core 3-factor model (PRICE, VOLUME, VOLATILITY), the risk/reward tells me I’m best served to continue to managing risk towards the probability of the US stock market making lower-highs.


As a reminder, here’s where the SP500 price of 1320 fits across my core 3 risk management durations: 

  1. TRADE support = 1312
  2. TREND support = 1258
  3. TAIL resistance = 1343 

Meanwhile, here’s how the Volatility Index (VIX) looks 

  1. TRADE support = 18.11
  2. TREND support = 17.74
  3. TAIL resistance = 22.02 

Convergence of TRADE and TREND durations like this in the VIX could be a very bullish leading indicator for future volatility. Fundamentally, with Global Growth Slowing as Global Inflation accelerates, that risk management scenario makes perfect sense to me. And I don’t think consensus is positioned for it.



Keith R. McCullough
Chief Executive Officer


Lower-Highs: SP500 Levels, Refreshed - 1

R3: WRC, SHOO, M, New Balance


March 1, 2011






  • For those who don’t believe shopping is an American pastime you may want to think again.  A study conducted by OnePoll discovered that the average woman spends 399 hours and 46 minutes shopping per year over 301 trips.  Interestingly apparel shopping edges out food shopping with average time spent at 100 hours on clothing vs. 94 for groceries.
  • Add New Balance to the list of athletic footwear companies looking to focus on new product and innovation in 2011.  The company launches its latest marketing campaign entitled “Let’s Make Excellence Happen” with a presence on TV, print, digital, viral video, and in-store visuals.  The effort focuses on a slew of new product intros and marks the end of the company’s “softer” marketing efforts via its “Made in the USA” campaign.
  • In one of the more optimistic views we’ve heard regarding pricing dynamics, WRC’s management suggested that in addition to expecting higher selling prices to largely offset increased product costs, unit volume is also likely to remain flat over the balance of the year providing a source of comp upside. Compared to the rest of retail that expects unit volume declines as an offset to price, WRC would be a clear standout in the space if they manage to grow both.  



Reliance Brands closes Deal with Steven Madden Ltd. -  India’s Reliance Brands has taken a step closer to its vision of becoming an apparel and lifestyle powerhouse in the Asian country with a new license for accessories and footwear under the Steve Madden brand. The license, with Steven Madden Ltd., brings the Madden collections to all major cities across India through monobrand and premium department stores.  Darshan Mehta, president and chief executive officer of Reliance Brands, said the firm aims “to [translate] the brand’s unique fashion sense into the mind-set of the Indian female consumer.”  Reliance has joint venture partnerships with Paul & Shark, Diesel and Ermenegildo Zegna, as well as distribution agreements with Timberland and Quiksilver. <WWD>

Hedgeye Retail’s Take:  With foreign direct investment still up in the air, western brands are not sitting still.  Clearly sharing the cost of an Indian market entry with a partner like Reliance has its benefits to building a brand with very little, if any awareness at this point.


Sustainable Apparel Coalition Formed - Sustainability is on the road to standardization. After years of largely going it alone and producing a patchwork of overlapping efforts to reduce fashion’s social and environmental footprint, a group of major brands, nonprofit groups and the Environmental Protection Agency have banded together to form the Sustainable Apparel Coalition. Next month, the coalition, which was spearheaded by Patagonia and Wal-Mart Stores Inc., will begin testing the next generation of an index that measures the sustainability of apparel and footwear. That index is expected to evolve into a label or hangtag that would help shoppers understand the ramifications of their apparel or footwear purchases, from carbon emissions and water and chemical usage to conditions in factories. <WWD>

Hedgeye Retail’s Take:   For anyone interested in seeing where these efforts are headed take a look at Patagonia’s blog which actually tracks the entire production of its garments, component by component, factory by factory.  The complexity in coordinating the global supply chain to produce just one piece of outerwear is eyeopening.


Swiss Banker Buys Stake in JJB Sports - A Swiss investment bank acquired warrants convertible to a nearly 6% stake in JJB Sports last week as the insolvent British sporting goods retailer prepared to reorganize under protection from its creditors.  JJB Sports notified investors Feb. 25 that a group led by Adriano Agosti, chairman and  managing director for GoldenPeaks Capital Partners AG, acquired warrants convertible to 7.46 million shares, or 5.76% of the retailer. The retailer also said it had delivered a final draft of its revised business plan to Bank of Scotland detailing how it plans to restructure  under a "corporate voluntary arrangement," or CVA, which is the United Kingdom’s version of a Chapter 11 bankruptcy reorganization.  <SportsOneSource>

Hedgeye Retail’s Take:  Long rumored to be a potential “takeout” candidate, JJB looks to be heading more in the direction of survival mode.  Bonus points for anyone who can remember when sporting goods was actually a decent and money-making business in the UK. 


Macy’s Mobile Commerce - Macy’s is adding a little star power to its mobile channel. The retailer is using text messages and two-dimensional bar code scanning of the Quick Response, or QR, code variety to deliver video content to shoppers from the retailer’s celebrity designers, including Bobbi Brown, Sean “Diddy” Combs, Tommy Hilfiger, Michael Kors, Greg Norman, Rachel Roy, Irina Shabayeva and Martha Stewart. The program, called Macy’s Backstage Pass, was developed with the help of marketing firm JWT New York and lets in-store shoppers use a mobile device to scan a QR code on a product or send a text message to access videos about the designers and brands. <InternetRetailer>

Hedgeye Retail’s Take:  Expect to see even more mobile marketing from Macy’s as the company overall digital budget expands at the expense of traditional media. 


Facebook will Surpass Yahoo! in Display Ad Revenues This Year -  For the first time, the largest share of US display ad revenues will go to Facebook, eMarketer estimates. The social network’s 80.9% growth in display ad revenues, to $2.19 billion this year, will mean Facebook sees 21.6% of all US display ad dollars. That will put it ahead of Yahoo!, where eMarketer estimates display revenues will be up 16%. Yahoo!’s market share will inch up to 16.4%, while display gains at Google push the site’s share of display spending to 12.6%. Meanwhile, AOL will drop from 5.3% of display ad revenues in 2010 to 4.4% this year. <eMarketer>

Hedgeye Retail’s Take:  Definitely good for Facebook but probably not good for the Facebook user.  In other words, Facebook has quickly become the world’s largest billboard.


R3: WRC, SHOO, M, New Balance - r3 3 1 11