• run with the bulls

    get your first month

    of hedgeye free



Negative investor sentiment could turn positive. Regionals might be at a positive inflection point with ASCA and PNK the standouts. The bottom might be in on LVS.




Jacobs allegations & SEC/DOJ investigation

  • The Jacobs suit will either settle quickly or will sit for a while before it goes to trial, which would take a while. The judge ordered settlement discussions to take place. 
  • What happened with Jacobs?
    • If you get fired but not for cause, LVS vests all of your restricted stock and options, pays you your bonus and severance.  Jacobs wants his contract honored – which entails all of the above.  The company wanted to fire him because he was acting erratically and many people actually thought that he was looking to get fired.  After the company already made the decision to let him go but before telling him, Jacobs sold 250k of his restricted shares without asking the company, which is one of the reasons he got canned. When Leven told him that that were letting him go, Jacobs was offered his salary and bonus but not his remaining options.  In response, Jacobs threatened to spread information on Sheldon's behavior including bribing a public official which he was “collecting for months”.
  • Leven believes that Jacob’s allegations are baseless against Sheldon.
  • Think that there is nothing in the 5 issues that the DOJ is investigating and that a small settlement will be the most likely outcome. Caveated that with while Sheldon is innocent they can’t vouch for every person in their organization.
  • International investors don't fully understand the investigation and the implications, and are just staying away from the stock
  • Think that the investigation will wrap up in 6 months and that they will settle with Jacobs. Sheldon doesn't want to take this to jury trial.
  • Jacobs has a record of suing at least one former employer – Starwood

Approach to Junkets

  • Four Seasons is in the process of signing 2 very large junkets (who currently have rooms at Wynn, including David) to Four Seasons
  • Still talking to Neptune about expanding their relationship. Neptune wants additional incentives if they can bring roll from 9BN to 15BN/ month, but they are unlikely to sign such a deal
  • Strategy is to hold at the 1.25% commission level (little higher at Sands). They would like to follow Wynn's model more closely.  They are trying to add more junkets. Jacobs built a lot of the direct business that they have.
  • Want to change the dynamic of junkets—just hitting their minimums and that's all at their properties. They recently hired a new junket relations person who will hopefully improve relations over the next few months.

 Strategy with Galaxy World opening

  • Doesn't think that they will get more aggressive on marketing
  • They are more concerned with labor issues for 5 & 6


  • Thinks that they will be capacity constrained in that market which will limit growth.
  • Property can hit $1.3BN of EBITDA this year and maybe $1.6BN next; from there, growth will slow to maybe 10% a year
  • This month they are rolling ok but win rate is low. Last month win rate was good
  • Plan on a mall sale in 2013, some sort of rent securitization, which they believe can yield $4bn of proceeds
  • Plan on refinancing the debt at MBS so they can take more cash out of the property
  • Later this year, they are planning on building a new VIP area near the roof
  • Still skeptical of whether junkets will get approved, but are taking the wait and see approach
  • They are beating Genting on the mass side, but Genting will beat them on the roll

Cannibalization from 5 & 6

  • There is likely to be cannibalization but their bet is 2014 and beyond
  • The Venetian is an $800mm property EBITDA with maybe 10% growth this year and flatting out from there
  • Hope to open a casino in January then another in May with the final one in 2013


  • Slot business is grungy
  • They reduced their comps. Initially, they were comping too much, then not enough, now going back to center. Palazzo was filled with slot comps which got as low as 40/day - they raised the floor to $300/day players   

Other Stuff

  • Thinks that the EGTs will eventually catch on in Macau but off to a slow start. 



  • Things have been really busy. Their FIT calendar is really strong but think that that business will be event driven.
  • Cosmo - is doing well from a restaurant/nightlife standpoint. Don't know how the gaming business is going. Seen a big pickup in foot traffic at Crystals and Aria since Cosmo opened. From a gaming standpoint, they haven't been impacted.  Cosmo’s room rates are higher than Aria’s.
  • Feb and March feel a lot better this year than last year.  Feel good about convention business in the year for the year.
    • 1% increase in occupancy/$5 dollar increase in ADR equals $50mm of EBITDA
  • Luxury is clearly leading the way in their recovery.  Lower end properties draft off of the higher priced properties in peak periods.  Environment is less promotional today than it has been over the last few years. Doesn't think it'll be all smooth sailing though.
  • Airlines are picking their spot to add some capacity.  Over the next 90 days, there is a 3-5% seat increase coming into the market.
  • Macau:
    • Thinks that 25% of customers are coming from in-house marketing
    • Still working to clear the HK exchange on the IPO process. There is a debate of having more good quarters vs timing of IPO.
    • Talking to a few new junket operators to join MGM. Converting some of their Villas to VIP rooms. Converting some of the spa space too. Still have 70k of incremental space that can be built out. 
    • Cotai? They are a lot further along than people think. They know the site and as soon as the government will be ready to commit, they are ready to go. They will be in the same wave as Wynn and SJM. Their site is 2x they size of their Peninsula site.
    • Would be surprised if they aren't gazetted at the same time as WYNN and SJM.
  • Don't need to be in the capital markets until sometime next year. So they will just be opportunistic - more so on the debt side in pushing out the maturity profile.
  • Have almost $190mm sitting in trust in NJ. They have a 30 month time frame to sell the property. Over the first 18 months, they have oversight of the process - which expires this September 24th. 
  • 2 hospitality openings later this year.
    • MGM Grand Sanya - 600 rooms
    • Beijing 100 units (unbranded)- Diaoyutai Art Hotel. This will grow their database for direct players in Macau. Have 17 contracts signed/ LOI's for additional hotel openings which they will manage.



  • IL: thinks it will be tough for the state to find alternative funding for their bonds.
  • Italy: will have 4,600 machines in Italy.  Will have a variable daily fee rate.  The 7,000 machines out there now earning 2x what AWPs were earnings (80-100 euros/day)
  • Problem with 2011 is that they are spending R&D on Italy and Canada w/ no revenues till '12
  • Thinks that lots of companies are spending to their fixed charge coverage ratio – they see weak spending from operators in the first two months of the quarter with catch up in the 3rd.
  • Their oldest reel machines are 10-12 years old.  The video slots older than 8 years old have trouble sourcing parts.
  • IGT’s multi-hand poker patent expires in 3-5 years for IGT
  • Downward revision with systems was primarily due to slower rollout of iVIEW DM.  They thought they would be further along in their DM release at this point. It took them longer to rollout the DMs across the difference manufacturers.  They're in the first rollout of the iView applications.
  • Given the momentum in technology changes accelerating,- it’s taking regulators longer to approve things.
  • Pricing on slots? 3-4% annual increases are realistic.  They are realizing 5-7% price increases on the new platform.  Not seeing price pressure, however as pro series ramps as a % of sales their margins will be under pressure until they reach a critical mass.  Usually takes 12 months after a new intro of a product to start getting leverage margin-wise. 
  • Software for iVIEW will be subscription based and the premium stuff will be additional. Thinks that iVIEW DM can have a similar life cycle of penetration as iVIEW did, but it depends on content.
  • The overall cost of ownership of a windows system is a lot cheaper than a SDS system.  The IT department needed to operate their non-windows based system is a lot larger.  The Windows-based system only need a few people.  Licensing for a Windows based system is also cheaper. 
    • Other competitors for smaller systems deals include ALL & Komani.
    • Windows-based system is really helping them internationally, where many of the casinos are very small


  • Thinks that the Strip needs to recover first before their locals market recovers. In Oct, when strip was good, their business was good. Don't think that they need to fix the housing or unemployment issues. Just need to have their customers spend more per visit. Thinks that 35-40% of their locals customers are retirees.
  • Seen more aggressive marketing from STN's since February. However, it’s not hurting BYD’s properties. When they gave guidance on the last call, they already saw the impact from STNs promotions. STNs slot product is pretty old and they are starting replacing more slots.
  • M Resorts impact - saw a small impact when they first opened but it’s just too far away for their customers.  40 minutes from their properties.
  • 2011 won't be much different then 2010 unless convention business picks up materially.
  • Looking for some ideas on how to create value on the Echelon site. Are considering all options including: JV partnerships and asset sale opportunities for the site.  Rating agencies have Echelon land valued at $5mm/acre—thinks it’s worth more like $10-15mm/acre.  BYD’s cost basis on the land is around $1mm per acre
  • Always viewed as having a strip property as strategically important
  • Regional markets are doing pretty well. LA has recovered faster than they expected
  • Doesn't think that MGM wants the property to go to the trustee. Believes that the LTM EBITDA ($170MM) at Borgata is the low.
  • Thinks that the LTM EBITDA at most of their property represents trough levels
  • When does capex go back to historical levels?  Not anytime soon. Historical maintenance was $100-$120mm vs. the current 50mm. Skimping on room product. 
  • They're good on the financing side through 2014. 
  • Thinks that BYI and WMS has some new good content.
  • Definitely want to grow the company and are looking at opportunities to do so.



  • After the first week of February, business has been good for them and March is strong.
  • Q1 looks good, somewhat due to East Chicago because there was so much money spent there last year.  ASCA changed their slot marketing program mid-year in 2010 that will also help comparisons in 1H2011. Last year, they also had 2 quarters of weak table hold at East Chicago and one quarter of bad hold at Vicksburg. March – May 2010 were also bad months.
  • Visitation has been improving for them.
  • Not seeing an impact from gas prices, but higher commodity prices are helping them in the Midwest economies which are commodity dependant.
  • Not much left to do on the cost side
  • Unemployment rate is so high in most jurisdictions that they aren't likely to see wage inflation.  If they do, it means that the economy is good.
  • Should get at least 50% flow through at most properties (basically only variable costs for now-taxes and marketing).
  • Blackhawk is doing fine - even if they are just flat YoY. Think that that market can be more impacted by fuel increases.
  • Harrah's:
    • Took several hundred machines off the floor in Council Bluffs and Kansas City. Sounds like they are mostly focused on Vegas with regards to any capex spend. ASCA's market share improvement partly has to do with HET’s lack of maintenance of their assets. Their properties don't look good and are starting to look really worn down.  They’re only spending exactly what they have to to meet health and safety levels.
  • Not interested in a cross marketing agreement with MGM. They already compete effectively against HET which has cross marketing with Vegas and have the highest industry property level margins – so if it’s not broken, why fix it?
  • Will use their cash flow to delever.  They won't be paying taxes this year courtesy of bonus tax depreciation and should have at least $10mm per month to retire debt.  Should get them to sub 6.0x leverage by YE and sub 5.5x by 2012. 
  • They don’t see any attractive acquisitions right now. HET and MGM can't afford to sell any assets because it would be leveraging up for them.
  • Should close the financing in 1-2 weeks
  • If not for ASCA buying back some of Ray’s stock, he would have had the tax issue next August - but the real issue was 2013. Justified premium paid for Ray’s stock:
    • Still very accretive ~ 20%.
    • Still cheap on a multiple basis
    • Will allow them to use stock as currency in the future for acquisitions or projects which really wasn’t an option before
    • Eliminated an overhang
  • No update on East Chicago bridge really
  • Thinks that IL will eventually get VLTs but no idea when



  • Business is outstanding, can't complain. First and second shifts at their manufacturing facility are tapped out.
  • Not expecting a huge jump in replacements in 2011 - just a few thousand units over 2010
  • HET’s product is getting so stale that sooner or later they will lose patrons to their competition
  • Canada remains strong for them as are the regional and tribal markets. They are seeing a recovery in the South West. STN is starting to buy more, BYD is starting to talk about buying more. Herbst is buying more. MGM and HET aren't buying slots yet.
  • Their participation install base is 5,500-5,600.  They don't have WAPs and don’t intend to develop WAP games.
    • 40% of their install base is on 80/20 arrangements
    • 60% is fixed daily fee which pays between $55/day and up to $65-75/day for games with the Rock on Top feature
    • Their install base grew 2,500-2,700 units YoY
  • Expect that their March for sale shipments will be up YoY materially from last year in North America and overall.  Europe is kicking in for them. Their French distributor ordered more games over the last 4 months than all of last year (this distributor isn’t exclusive to Konami so there is read-through to other US manufacturers). South America is up materially - Argentina, Uraguay, Chile – these are newish markets for them.
  • Think they will continue to take share from IGT, BYI, and ALL this year. Targeting BYI right now.  Think that they can get to 16% share in 2011.
  • This year they have 75-80 new titles.
  • Implemented a price increase on Jan 1st.  Claim that IGT has been heavily discounting. WMS and themselves are the only players who have been maintaining price.  Their ASP is over $14k. Contrary to competitors' allegations of deep discounting of their products,  they have never sold a game for $10k unless it’s used.  They do have the lowest cost basis in the industry and the highest margins on game sales.
    • They only have 350 employees.
    • Lowest break even in terms of how many units they need to sell.
  • Konami’s gaming business contributes about 25% of the operating profit ( 8-9% of revenues) of the Company and will become a larger part of the company. Thinks that their sports club business will get cut down a lot because of the disaster in Japan. Not sure that they would ever float this business.
  • Their biggest challenge is growing their systems business. Grand Falls Iowa and Des Plaines Casinos will have their Oracle based system. They were invited to compete for the systems business at Revel, Resorts, and Cordish. Thinks that BYI’s Windows is notoriously unreliable. Oracle is much more reliable, which is why all the banks use it.
  • Thinks casino legislation has moved to the very bottom of Japan’s priority list, post disaster.  Regarding supply chain concerns - they don't have a factory in Japan. Their manufacturing facilities are in Vegas and Australia.
  • They are licensing their content to other manufacturers for the Italian market


Nevada Gaming Commission (Mark Lipperilli – Head of the Commission)

  • His goal is to deregulate somewhat and having the agency serve in more of a consultative function than just as a regulatory body
  • Couple of bills in legislative phases to ease things.
    • Increasing the ownership threshold that requires an owner to be licensed from 0% now to 5%. Will make it easier for investors to take small stakes in casinos
    • Legalizing internet poker: Poker Stars and Full tilt have pushed the agenda. You can argue that a poker bet isn't a violation of the wire act. Although even if that is the case, you still need a license to take wagers. All the US guys will partner with an existing operator if and when online poker gets legalized. Thinks that any US technology is 5 years away from where Poker Stars and Fulltilt are today.
  • Thoughts on what goes on in Macau?
    • They aren't blind to it and it’s a controversial issue at the agency.  Part of the issue is whether the alleged laundering occurs on the mainland or in Macau.  It’s believed that it's mostly on the mainland.
  • They are doing their own investigation on LVS


IGT (Pat Cavanaugh)

  • Slot sales are still tough but game ops are getting a little better. Some of that is due to better game content.
  • Thinks that Japan is now more likely to happen post disaster.
  • Acqueduct: IGT will have 36% market share.
  • Launching their Reel Edge (Skill based games) shortly which, if successful, can become a new niche category of games for IGT
  • Thinks that the online space is going to be a nice source of growth for them. Today, they are just a content provider in the UK.  Figuring out how do they become a B to B provider though if online gaming gets legalized in the US.  Their online business is currently included in game ops, and generates about $40mm. Will go into Italy this year. Wager Works is really just an online casino- they need to address the sports betting and the poker/table gaming side – for which they will need a partner or license content.
  • Video poker machines last 12-15 years.  
  • They just introduced the universal slant cabinet which can be used as video poker/ video slot/ and even a mechanical reel.
  • Montana just legalized video slots. Until now, they just had video poker and keno, so this could and should stimulate replacement cycle there.
  • Feel like they are under penetrated internationally
  • Italy: Very fragmented from a systems standpoint, there is a lack of consistency from each vendor which is part of the reason why rollouts are taking so long. Right now, they are only selling/leasing Barcrest content in Italy since developing a new platform was not considered a good ROI investment for them… but that may change given that many new markets (like Greece) will also have similar platform requirements. They have signed 2 deals to place  3,000 units in Italy (SNAI & CIRSA).  Starting shipping to SNAI in Dec, will take a little while to get all those machines shipped.  The SNAI units are roughly ½ of the 3,000 units and are for sale. Cirsa units will be participation but haven't started shipping those yet.
  • IL:  Supposedly the Supreme Court is scheduled to rule on the Appelate ruling in May/June and usually rules with the government- so hopefully, there will be more visibility on VLT timing post ruling.
  • Will continue to push away from hardware dependency and more towards content
  • Over the last downturn, they have also learned to understand saturation on the game operators side and will be more thoughtful on restricting the number of any title they release.
  • Getting more thoughtful about repurposing content from successful Class 3 titles to VLT to internet titles
  • Gaming Operations: They are standardizing the hardware and platforms so that they can recycle the hardware and eventually increase the life of the games. Hope that they can move to 3 years on depreciable life from 2 currently.  Business still has returns of north of the 200% returns but used to be 300%.   Longer D&A cycle will boost margins.



  • Honing in on CFO in the next week or so; hope to make an announcement by month end. It's between Lewis and Carlos – but thinks it will be Carlos.
  • Pleasantly surprised with results that they’ve been seeing lately - despite the crazy weather.
  • L'Auberge saw revenue increases despite a drop in admissions
  • Baton Rouge: As long as water levels say at current levels, they will be able to get the last pole in very shortly
  • My Choice relaunching on April 4th
  • The marketing costs shouldn't increase with the Wynn announcement. The marketing deal is really just for their top 3 tiers of players which are roughly ~2,000 patrons. Will use the marketing agreement as an aspirational tool to help them encourage patrons to consolidate play at their properties to get into those top 3 tiers.  People that go to both their casinos in St Louis play 2x as much as people that just go to one. HET’s Vegas properties help them increase regional play.  Wynn will give them a certain amount of free play and free rooms. 
  • MGM wasn't willing to offer an exclusive on their co-market deal, so they passed on it.
  • Seeing admissions decrease but revenues are still up in LA. Customers at least feel more stable in their jobs. Pretty optimistic on LA. St Louis is more sluggish economy wise. Had too many competing marketing offers at their 2 properties a year ago. Now their offers are non-conflicting. Think that their market share in St Louis in 4Q will get better. My Choice will help them garner more share. That market has the most potential to consolidate play.
  • In the 6th of 9 innings re: cost cuts. Looking at cash services contracts now, consolidating some corporate and property level jobs. They’re still in the early innings on improving their marketing efforts. Overall margin improvement will slow though, unless there is topline growth. He's less cautious than just outright optimistic.
  • Wasn't surprised by Dan Lee winning the LA contract.  PENN wasn't even close in winning that contract. Dan still needs to win the local election and raise financing.  ISLE of Capri and other employees might vote against it. PNK won't spend money against Dan Lee. They do think that Dan will grow the market – just not sure if he will grow it enough not to cannabilize their property
  • Capp - he's not going anywhere - has a 3 year non-compete. Thinks that he was disappointed that he didn't get the CEO spot.


On the back of a sell-side initiation, Keith shorted SAM in the Hedgeye Virtual Portfolio today.


We retain our bearish outlook on Boston Beer Company despite a positive sell-side initiation.  On March 9th, I wrote a note titled, “SAM – DEPLETING EXPECTATIONS”, discussing SAM’s 4Q earnings.  In short, I noted difficult top-line comparisons, energy cost exposure, and a new “Freshest Beer Program” that will reduce EPS by $0.20 to $0.30 as it causes shipment growth to lag depletion growth during FY11.  The combination of a slowing top line and peak margins coming under pressure from elevated input costs does not bode well for this company going forward. 


Furthermore, the quantitative setup is “very bearish”, according to Keith McCullough.  On SAM, Keith says, “The TRADE and TREND lines are converging above the current price; this is a very bearish leading indicator”.




Howard Penney

Managing Director


Valued Client,


Hedgeye's CEO Keith McCullough, Managing Director Daryl G. Jones, and Lou Gagliardi of our ENERGY vertical recently hosted a conference call on crude oil. The key questions answered included: 

  • Why has oil been trading off in the last week(s)? What's changed?
  • How should we think about assessing the upheaval in the Middle East as it relates to supply?
  • What are the key long term supply and demand factors to analyze as it relates to future price?
  • What are the implications for other energy markets?
  • What's next for the price of oil?
  • What are the best oil equities to play given the current environment?
  • What is the role of US monetary and fiscal policy in determining the price of crude oil? 



Replay Podcast:



Presentation Slides:



If either hyperlink fails to work, please copy & paste it into the URL of your browser.




The Hedgeye Macro Team

R3: PVH, JJB, Leather Shoes & Labradoodles



March 23, 2011






  • In a stunning display of missing the boat, the “original” toning brand MBT is just now deciding to take a more aggressive approach in the U.S. with the launch of its new shop-in-shop within footwear boutique concept The Core in northern California. To top it off, in addition to a more pronounced physical presence the brand is also launching its first ever domestic advertising campaign.   
  • In an effort to improve an underperforming apparel category, DG will be reallocating space towards more children and infant apparel from the laggard women’s category. Additionally, consistent with recent trends at mass/discount retail, management highlighted shoes and accessories as the strongest segment within the apparel category.
  • While exclusive merchandise deals are hardly novel at retail, Hollywood studios are beginning to play a more significant role as a proven traffic driver. With offers that include specialty tracks, new footage, and limited run toy designs, studios are leveraging the exposure to drive sales of their own consumer products as well as traffic at retail in what appears to be a truly mutually beneficial partnership.
  • In an effort to compete on something other than price, grocers are becoming increasingly focused on differentiated experiences by offering events such as wine tastings, live music, and even Zumba classes in the case of Whole Foods. What may sound more like a gimmick is actually gaining traction with the frequency of customer visits increasing to several times a week compared to what has historically been a once a week chore. Based on the success at grocers, we wouldn’t be surprised to see the trend spread through to other areas of retail. Remember the Duane Reade in Brooklyn that added a beer bar back in January?



Tommy Preps for Takeoff  - On May 19, Tommy Hilfiger will open a traveling pop-up shop in New York in the form of a replica East Hampton beach house that will stock the brand’s new Prep World collection of 60 men’s and women’s Eastern Seaboard staples. The collection offers classic, wardrobe-building pieces sure to be embraced by prepsters from Nantucket to Knokke, Belgium—and the designs fuse European silhouettes with American country-club motifs. Hilfiger has tapped author Lisa Birnbach of The Official Preppy Handbook fame to join him in launching the pop-up shop as it travels around the world, including stops this spring and summer in Los Angeles, Paris, London, Amsterdam, Stockholm, Madrid, Tokyo and, yes, Knokke. Apart from the Prep World collection, the shop—which will be built from the ground up in each city—will sell vintage croquet, badminton and tennis gear. <WWD>

Hedgeye Retail’s Take: Following a particularly harsh winter, the beach house inspired pop-up is likely to resonate. But more importantly, Tommy has been such a poor performing brand in the US (despite the fact that it has been stellar in Europe), and this is an innovative way to change up the perception.   


Lacoste Unveils Catherine Malandrino Collection - With the Lacoste + Malandrino line making its debut in stores in mid-April, both the French brand and Catherine Malandrino are gunning for shoppers to look at the label with fresh eyes. The 12-piece spring line — the first in a collaboration that will last four seasons — has white harem pants, slinky knit dresses, wide-leg pants and mini-pleated skirts, a far cry from the standard polo shirt. “My most important role with Lacoste is to open the door to the feminine world,” Malandrino said of her work with Lacoste. “Now I am relaying effortless, chic, everyday clothes that you don’t have to think about. All of the silhouettes can be eye-catching, whether it is a miniskirt or high-waisted pants.” With her designer status, French upbringing, Saint-Tropez hideaway and Lacoste-loving husband, Malandrino was a logical choice to partner with Lacoste. <WWD>

Hedgeye Retail’s Take: the iconic polo shirt has always been Lacoste’s signature item, now it got a shot in the arm – disproportionately in its the women’s business. 


Fur Labeling Act Comes Into Law in U.S - A new legislation that requires all fur-trimmed fashions sold in the US to be labeled with the type of animal and the country of origin, regardless of the value of the fur, has recently come into effect, sources reported. The Truth in Fur Labeling Act closes a loophole in federal law that currently allows some animal fur garments to go unlabelled if the value of the fur is $150 or less. Past investigations by the Humane Society of the United States (HSUS) have found jackets trimmed with animal fur—including that from domestic dogs, wolves or raccoon dogs—being sold across the country without labels or falsely advertised as “faux fur”. <FashionNetAsia>

Hedgeye Retail’s Take:  Wow. We didn’t realize this was on the table. We kinda figured that this was either a) in place or b) not necessary. This is coming from a guy that owns four dogs…the thought of walking into a Macy’s and seeing fur labeled as ‘Labradoodle’ is sickening. The good news is that this is something we’ll likely never see, but unfortunately have probably seen in the past without knowing it because of the loophole in question.


Danskin to Launch Sports Line - Danskin will launch a line of high-tech sports bras and contemporary daywear, loungewear and sleepwear in July.  This will be the first collection of daywear, loungewear and sleepwear bearing the Danskin name.  Iconix Brands Group Inc., which has owned the Danskin name since 2007, entered into a licensing partnership with Saramax Apparel Group Inc. in late 2010 to produce the sports bras and innerwear lines.  Distribution is aimed at better department stores, sports specialty stores and e-commerce businesses.  Officials declined to give a first-year wholesale sales projection, but sales for the combined lines could exceed $5 million the first full year, according to industry estimates. Eddie Betesh, chief executive officer of Saramax, said the Danskin collections received “strong” reaction during the innerwear market week in February. <WWD>

Hedgeye Retail’s Take: Gotta hand it to these guys. They keep finding ways to grow.


JJB Investors Back Lease Changes - JJB Sports, the U.K. sporting goods chain, has persuaded creditors and investors to back a controversial rescue plan. The company said it received the required 75% majority support of unsecured creditors and a majority of its shareholders to undergo a company voluntary arrangement (CVA), its second in two years. Chairman Mike McTighe said: "Following approval of the CVA proposals at the creditors' meetings held this morning, approval by the shareholders this afternoon further demonstrates the solid support for the company's turnaround. "We would like to thank our landlords and creditors who have supported the company. As a result the management and the vast majority of our colleagues now have the opportunity to work alongside all stakeholders as we continue to achieve milestones in our turnaround." <SportsOneSource>

Hedgeye Retail’s Take: No way that anyone would allow this company to go under 16 months before the London Olympics.


Brandix buys Comfortwear - Sri Lanka's top apparel exporter Brandix has announced a major addition to its portfolio, following the acquisition of full ownership of Comfortwear (Pvt) Ltd., the Group's former joint venture with Lanka Equities. The new cluster, Brandix Lingerie, formally launched on 1st March 2011, will see the Group emerge as a key player in the manufacture of high end specialty bras and complementary coordinates for global high street labels such as Marks & Spencer, H&M, and Victoria's Secret, the announcement said. The two manufacturing facilities of Comfortwear in the Wathupitiwala Export Processing Zone in Nittambuwa, which have been under Brandix management since December 2008, have been restructured into a focused Bra/Lingerie facility that complements the Group's extensive product offering in categories such as casualwear, intimates, briefs, textiles, knits and accessories, Brandix Group Director AJ Johnpillai said.<Fibre2Fashion>

Hedgeye Retail’s Take: Good example of the bottom end of the supply chain doing what it needs to in order to stay profitable.


Leather Footwear Industry to Seize New Opportunities - The leather and footwear industry is now taking the lead in Vietnam’s export earnings from major markets such as Europe, the US, Japan and the Republic of Korea (RoK). 2010 was the most successful year so far for Vietnam’s leather and footwear industry with export turnover reaching more than US$5.2 billion. It is also one of the top five sectors that posted the highest export turnover in the country. With such momentum toward development, the sector has set its export target at US$5.4 billion this year.  The EU removing anti-dumping duties on Vietnam’s leather-capped shoes as of April 1 is also a good sign. This means that trade barriers imposed by the EU for Vietnamese footwear products have been fully abolished. This will offer a huge opportunity for Vietnamese footwear businesses to expand their markets to European countries.  Many Vietnamese footwear businesses have been urgently seeking new outlets and devised development strategies to promote exports to the European market, secure a firm foothold in the domestic market, renovate methods of production, and improve product design. <VovNews>

Hedgeye Retail’s Take: This is interesting, actually. The boost in raw materials in cotton, oil, etc, has disproportionately not taken up leather. As such, Vietnam – which is perhaps the most skilled country from a footwear building standpoint – is likely to shift on the margin to leather. Unlikely to have a big impact in the US, but for companies that sell leather footwear in Europe are probably going to benefit. This will help Ralph Lauren, Timberland, and a host of luxury brands.


Jeans Makers Embrace Point-of-Sale - The hot new trend in premium denim isn’t aesthetic, but practical: a strong partnership with retailers. Jeans makers are increasing efforts to work more closely with merchants and boost their marketing and branding presence on the sales floor. While vendors have always tried to cultivate good relationships with buyers, the tenor of their new initiatives has heightened amid weak sales in the challenging economy. Taking a more proactive approach, denim companies want to keep their spots on the competitive sales floor, where stores are kicking out brands that fail to sell. “This is a bull’s-eye economy,” said Gina Bloomingdale, vice president of sales at Los Angeles-based Habitual. “People are dropping lines and closing their doors. Before, if you had a 50 percent sell-through, you were OK. Now, if you’re not getting a 60 percent sell-through, they’re not coming back to see you.” <WWD>

Hedgeye Retail’s Take: This probably leaves out the fact that the premium denim market has tanked. Interesting, though, to see smaller retailers behave so rationally. It’s a shame that department stores don’t have the luxury to boot out a brand that is ‘only’ putting up a 50% sell-through.


Dolce & Gabbana Expanding in China - Italian fashion brand Dolce & Gabbana unveiled plans for 15 new stores across China in an effort to boost business in the world's fastest-growing luxury-goods market. The company currently operates 26 stores in China, including Hong Kong. The fashion house, which has become a major global business in the past decade, said the 15 new boutiques will be opened within the next two years.  It also plans to introduce a high-end cosmetics line developed with consumer-goods giant Procter & Gamble Co., according to designers Domenico Dolce and Stefano Gabbana, in an interview on Monday. D&G and P&G several years ago forged a partnership to produce fragrances and cosmetics. <WallstreetJournal>

Hedgeye Retail’s Take: There 's plenty of room for continued expansion in China off a low base; however, the cosmetics line is the real callout here. Given the brand's loyal customer base and successful foray into fragrance, This is a natural extension that could ramp quickly for the company.   



SONC reported fiscal 2Q11 earnings after the close yesterday.  The company had already preannounced comp results of +2.2% at company-owned drive-ins, which was the first quarter of positive same-store sales growth after 11 quarters of declines.  Earnings of $0.02 per share fell short of the street’s $0.03 per share estimate and despite the positive comp growth, restaurant-level margins still declined about 260 bps prior to non-controlling interest and 170 bps including the change to the company’s partner compensation structure, which includes non-controlling interest.   Even with positive comp growth, the company was not able to get any leverage during the quarter.


Higher commodity costs were a big factor for SONC during the quarter with food and packaging costs as a percentage of sales up 110 bps YOY due to higher beef and dairy costs and continued product quality investments.  The company had guided to a 25 to 75 bp increase in food and packaging costs for both the second and third quarters during its first quarter earnings call.  The company is locked in on most of its commodity needs, outside of beef and ice cream mix, and now expects third quarter commodity pressures to worsen with food and packaging costs as a percentage of sales up about 150 to 200 bps.  Although SONC management expects costs to mitigate somewhat during the fourth quarter as result of improved sales and the lapping of product quality investments from the prior year, food and packaging costs as a percentage of sales are still expected to increase 50 to 100 bps YOY.  As a result of these higher-than-anticipated food costs, management is now guiding to a decline in full-year restaurant-level margins relative to its prior guidance for flat fiscal FY11 margins.


The company now also plans to take a menu price increase during the fiscal third quarter, which will result in a 1.0 to 1.5% cumulative price increase (fully implemented in fiscal 4Q11) to help offset the increased commodity pressure.  As of the first quarter earnings call, the company had planned a less than 0.5% cumulative price increase for the third quarter.  Although management stated that this price increase has been tested and has not impacted traffic trends, I think a price increase of this magnitude is risky in this environment, particularly for a company that has underperformed its competitors and posted its first quarter of positive comp growth after about two and a half years, and will likely be detrimental to traffic trends.


The focus of yesterday’s earnings call was on management’s guidance for “continued improvement in same-store sales trends throughout the fiscal year.”  Although same-store sales improved during fiscal 2Q11 to +2.2% at company-owned drive-ins from -1.9% during 1Q11, two-year average trends decelerated about 85 bps.  The year-ago comparisons get increasingly more difficult with the company lapping a -6.3% comp from fiscal 3Q10 versus the -14.9% comp in fiscal 2Q10.  The guidance for sequentially improving same-store sales growth seems so unbelievable that about four different analysts questioned whether management was referring to better two-year trends rather than the implied 1-year trend.  Management finally just said that the guidance did, indeed, assume positive comp growth in both the third and fourth quarters as they layer on various initiatives and build on current momentum.


Given that two-year average trends continued to decelerate during the second quarter and only maintaining the same +2.2% level of comp growth in fiscal 3Q11 (rather than sequentially improving) implies a 430 bp improvement in two-year average trends, I think analysts and investors, alike, are right to be cautious.  This comp guidance is definitely aggressive.  With the stock trading up today, however, it seems that some investors are drinking the Kool-Aid.


It is important to remember that the company’s current margin guidance, particularly as it relates to the food and packaging expense line, takes into account this aggressive comp guidance so margins could come in much worse than current expectations should same-store sales trends fall short of management’s targets.  The company also guided to leverage on the labor and operating expense lines during the back half of the year as it laps the implementation of its new partner compensation structure in April of the third quarter and more importantly, as a result of the assumed continued momentum in top-line growth.  Time will tell.









Howard Penney

Managing Director

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