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2010 was an exceptional year for DPZ.  2011 will likely not be as impressive, however, given higher commodity costs and tough comparisons from a top line perspective.  Management knows the company’s YOY momentum will slow in 2011 and, accordingly, cautioned investors to not focus too much on YOY comp growth as the company laps the strong performance from 2010.  Specifically, management said it expects to post a negative sales comp in 1Q11. 


Comparisons get a little easier during the balance of the 2011 after lapping the initial trial period around the launch of DPZ’s new and improved pizza in 1Q10, but they remain difficult.  Although management did not comment on its same-store sales growth expectations for the remainder of the year, it is important to note that if two-year average domestic company-owned comp trends stay flat with 4Q10 levels throughout 2011, it would imply a -3.4% comp for the full-year.  Even if two-year average trends accelerate from here, same-store sales growth will slow meaningfully on a one-year basis.  I am currently modeling flat comp growth for FY11, which assumes a quarterly decline in both the first and third quarters.




Rather than comp growth, management directed investors to focus, instead, on overall volumes and profitability.  Nevertheless, I have my concerns about DPZ’s profitability in 2011.  DPZ achieved margin growth in 2010, despite the 16% increase in cheese prices.  Cheese prices moved straight up, but so did comp growth.  Cheese prices will move higher again in 2011, up 13-17%, based on management full-year forecast of $1.70-$1.75 per pound.  The company guided to a 3-4% increase in total commodity costs in FY11.  For reference, DPZ does not lock in any portion of its cheese needs but has a contract in place with its supplier that allows the company to reduce the impact of cheese market price volatility by approximately one third.  Outside of chicken, the company has not locked in any of its other meat needs.


The expected 3-4% increase in commodities assumes cheese prices ease from their current level of nearly $2.00 per pound so there is risk to management’s current expectations.  Either way, DPZ contended with higher cheese prices in 2010 thanks to elevated domestic company-owned comps, which increased 9.7%.  In 2011, however, cheese prices will continue to move higher as comp growth moves lower.  Both store-level and supply chain margins will take a hit from the expected 13-17% increase in cheese prices (could prove conservative) as same-store sales and volume growth moderates significantly and potentially turns negative. 


Management said that they have not yet decided whether to take price in 2011 given that consumers still want value, but commented that a 1% price increase would be necessary to offset a 3-4% increase in commodities.  The company also highlighted that some of its QSR competitors are starting to take price now, “but with the sorts of increases [they] are looking at right now, you are not looking at a big issue at this point.”  I have to disagree with this point because, as I said earlier, the expected 3-4% increase in commodity costs could prove conservative and any price increase in this environment will likely take a toll on traffic, which could turn into a big issue for DPZ when you consider the level of traffic gains the company is lapping in 2011.




Howard Penney

Managing Director

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

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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.

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

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