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A recent article on YUM, published on an online Franchise News website called Blue Mau Mau, put forth some interesting perspectives on the company’s franchise business in the United States.  YUM has been facing mounting problems in the U.S. for some time and the evidence this article presents suggests that these issues may prove difficult to resolve. 


Last year, at YUM annual investor conference in NY, the company centered its message to the investment community on “three pillars of growth”: China, YRI, and Taco Bell.  The critical component here is Taco Bell, because it represents the life of the U.S. business, with over 60% of the operating profit for the division.  The U.S. Division accounts for 35% of total operating profit, as of December 2010.


In the most recent quarter, the US business underperformed as Taco Bell had a very disappointing quarter with SSS flat in the quarter but seeing a negative reversal in trends following a lawsuit that made allegations regarding the ingredients of Taco Bell’s beef.  From the initiation of the lawsuit through the end of the quarter, SSS slumped 2% versus +4% during the first period of the quarter.  The plaintiff’s law firm subsequently dropped the case but there is significant damage to the brand’s public image. 


The company now has to continue to strive to repair that image while also mend relations with the franchisee community.  The beef lawsuit has proven to be a tipping point, of sorts, for franchisees.  According to the article on bluemaumau.org, Taco Bell’s Franchise Management Advisory Council (FRANMAC) sent an email to franchisees with 14 bullet points that the Board had taken up on the franchisees behalf on topics such as the lack of transactions being driven by value propositions and the need for a reduction in the costs of new buildings.  The letter also implored the franchisees to partake in a “Town Hall Call” to have their voices heard. 


The body of the article raises several questions regarding the malaise that Taco Bell faces in the U.S. and the root cause(s) of it.  The most interesting questions posed by the author are: “Is YUM advancing its growth in China at the expense of its struggling domestic fast food restaurants?  Has Yum lost touch with the American consumer? Is it so wedded to old ideas that the marketplace has moved beyond them?”


These are all relevant questions not only for Taco Bell, but KFC and Pizza Hut too.  Until this quarter, Taco Bell has not faced the same degree of commercial adversity that has become so familiar to KFC and Pizza Hut.  Now, thinking about it, the investment community has been hearing for several years about the innovations or iterations that are going to fix these ailing brands.  Alas, nothing seems to work. 


On the one hand, it is understandable that the company is focusing on international operations and, some might say, YUM have been ahead of the game in this respect.  Emerging Markets offer significant growth opportunity for the company and the infrastructure that has been built up in China is highly impressive.  Nonetheless, it is important for investors to note that the malaise in YUM’s domestic business only amplifies the leverage of the stock to China and emerging markets.  To the extent that there is volatility in those geographies for any reason and YUM suffers, do not expect the domestic market to offer much stability. 


Drawing from a book I recently read, and applied to a thought-piece on Starbucks, YUM’s brands in the USA have a long-term secular problem that will require significant time and capital to fix.  I’m once again referring to the book The New Rules of Retail, by Robin Lewis and Michael Dart, an impactful book that offers a comprehensive account of the history and future of retail with in depth accounts of the key macro trends that impacted the retail industry and the executive decisions that impacted companies. 


While I encourage anyone interested in retail to read the book, I can attempt to sum it up the key consumer shifts that Lewis and Dart outline pertaining to “Wave III” (post 2000):

  • From needing “stuff” to wanting experiences
  • From conformity to customization
  • From plutocracy to democracy
  • From wanting new to demanding new and demanding now
  • From self to community

The shift from ubiquitous brands such as GAP and Levi’s to niche brands, from large chains to small brands, and from (perceived-to-be) socially irresponsible firms to (perceived-to-be) socially responsible firms certainly corroborates with The New Rules of Retail thesis.  I see the first bullet as being most crucial here; the chains that offer an experience, and the anticipation of such, are thriving while those standing still in this regard are faltering.  In my view, KFC, Taco Bell, and Pizza Hut are standing still.


As FRANMAC sees it, there are some key steps that Taco Bell could take to address its issues.   I’ve outlined a few of the fourteen below.  For the rest, please see the image at the end of this note or visit www.bluemaumau.org:


INEFFECTIVE ADVERTISING: A core responsibility of our advertising agency is to produce creative that effectively promotes our menu.  Ads in the past 12 to 18 months have been largely ineffective and we believe that an agency review should take place.  Taco Bell Corporate, in conjunction with FRANMAC should immediately undertake an agency review.  Without a doubt, we will learn new things, obtain fresh ideas, and be further ahead, even if we decide to stay with the incumbent agency.


TRYING TO DO TOO MUCH AT ONE TIME (not focusing on the core)We have either a real or perceived quality problem at Taco Bell.  Until such time that we reinvigorate our base business, we should redeploy the resources that are utilized on HMR, Oasis, and Breakfast to focus on our quality perception and fixing our core.


DRIVING VALUE CAN BE DIFFICULT (I wonder how the MCD franchisees are feeling as transactions slow?): The value proposition as currently being executed is not driving transactions, and squeezing margins beyond a reasonable tolerance.


SALES ARE NOT GETTING ANY BETTER: We do not understand the unwillingness to allow DMA's to run the Beef Quality spot while senior management says we just have to wait until we start running value again.  The business will turn around then.  Well, it didn't.  Now what?


GIVEN YUM FOCUS ON ROI THIS WAS VERY SURPRISING: All mandates must have an adequate return on investment.


A PERCEIVED LACK OF DIRECTION: There continues to be an ongoing lack of alignment around the Refresh program.


QUESTIONS ABOUT HOW SOON TACO BELL WILL REALLY BE GROWING UNITS AGAIN:  We believe there is a need to cut 20-25% out of the cost of a new building to make the economic model work.


I understand that franchisees can get emotional when sales and profitability are down.  The article even describes one Pizza Hut franchisee’s view that YUM’s “hardball tactics” in counteracting pushback from Pizza Hut franchisees have reached “Syrian” proportions.  Whether or not franchisees are categorically correct on every gripe they have at the moment, they are on the front lines dealing with real issues.  On the other side of the equation, any franchisor at any company will tell you that franchise relationships are not perfect, but strong.  As always, the truth lies somewhere in the middle.





Howard Penney

Managing Director


Good quarter but with seasonally slower convention activity, is it sustainable?


“Our improved results are broadly based throughout our resort portfolio. Performance at our Las Vegas properties was driven by increased hotel occupancy and room rates.  MGM Grand Detroit had another impressive quarter and remains the market leader. Results from joint ventures reflected record quarters at both MGM Macau and CityCenter. Our belief that the Las Vegas recovery is underway is supported by our first quarter operating results and our positive early second quarter trends.”


- Jim Murren, MGM Resorts International Chairman and CEO




  • Net revenue: $1.5BN; Adjusted property EBITDA: $364MM; Wholly owned adjusted property EBITDA: $301MM
  • "Rooms revenue grew by 13% led by a 16% increase in Las Vegas Strip REVPAR"
  • "Casino revenue decreased 5% mainly as a result of a lower than normal table games hold percentage"
    • "The overall table games hold percentage in the first quarter of 2011 was below the low end of the Company’s normal range of 19% to 23%, which affected Adjusted Property EBITDA attributable to wholly-owned operations by approximately $34 million. The overall table game hold percentage in the first quarter of 2010 was near the mid-point of the Company’s normal range.  Slot revenues increased 1% compared to the prior year quarter. "
  • CityCenter:
    • Adjusted property EBITDA $64MM and net revenue of $262MM
    • Aria net revenue: $225MM and EBITDA was $55MM
      • "Aria’s hold percentage was above the high end of its normal range in the current quarter which positively impacted Adjusted Property EBITDA by approximately $13 million"
      • ADR: $201; Occ: 86%; RevPAR: $172
    • Crystals: $6MM adjusted EBITDA
    • "Recorded a $24 million loss on debt retirement related to the write-off of debt issuance costs in connection with the refinancing of its credit facility in January 2011."
  • MGM Macau: $146MM Adjusted property EBITDA
  • "The Company received approximately $31 million in distributions from MGM Macau during the first quarter of 2011."
  • Corporate finance stuff:
    • Debt: $12.3BN; incl $2.6BN of R/C borrowings ($826MM of availability)
    • "Repaid the remaining $325 million of its 8.375% senior subordinated notes in February at maturity."
    • $1.1BN  of total liquidity



  • Seeing some positive trends in the second quarter
  • Convention room nights represented 20% of their mix vs. 15% last year. It's the best convention Q they had since 2007, which allowed them to yield up rates.
  • Expect full year convention mix to be 2% better than last year or up 14% YoY
  • Consumer spending is strengthening and they will take advantage of this through a strong event calender.  Revenue per occupied room was up 3% in the quarter. They also saw an increase in their rated play.
  • Over the last 4 months, they have been outpacing last year's room nights on the books. 
  • Events calendar is favorable, and events drive more spending at their properties
  • Will invest in their properties to capitalize on the improvement in the economy. 
  • M Life - have enrolled 1MM new members since launching the program. Regional properties have seen an increase in number of trips and players. Especially at the higher end tiers. The program also helped them decrease the promotional spending at their lower tier properties. Signed a deal with Rank Gaming, Dover Downs, SBE and Avis
  • Began a room remodel at Bellagio and MGM Grand. Bellagio will also launch a new nightclub. Replacing & refreshing some of their F&B and entertainment outlets. Signed Blue Man Group to Monte Carlo.  Michael Jackson Cirque show starting in 2013 at Mandalay Bay
  • MGM Macau
    • Drop in VIP grew 94%
    • Drop in Mass grew 21%
    • Slot drop up 92%
    • Held within normal range in the quarter
    • Doing more with Pansy in China
  • Excluding resort fees, RevPAR was up 11%
  • Tunica property is temporarily closed as of Monday.
  • Received a $175MM refund from IRS last week
  • 2Q Guidance:
    • Corporate expense; 30-35MM ex stock comp
    • Stock comp: 9-10MM
    • D&A: 150-155
    • Gross interest expense: $265-270MM (220MM was cash interest - no capitalized interest)
    • 2Q RevPAR: + mid single digit
  • MGM will consolidate MGM China when the IPO goes through. They will recognize a material gain
    • Debt: 695MM Cash: 280MM
  • Capex of $34MM; FY spend of $275MM for all of 2011
  • City Center commentary:
    • Aria: EBITDA 55MM, net casino revenue $111MM, $72MM table game revenue; $147MM non-casino revenues.
      • Benefited from a favorable property tax adjustment of $6MM in the quarter
      • 2011 convention room nights have already surpassed estimates, had 72k room nights in 1Q
      • Aria REVPAR: $172 (86% occu, $201 ADR)
    • Cosmopolitan opening has had a positive impact on CC by increasing foot traffic
    • Vdara:
      • EBITDA: 3MM 
      • Net revenue of $15MM
      • 83% occupancy
      • Increased room inventory by 200 units
    • Crystals:
      • EBITDA: 6MM
      • Net revenue: 12MM
      • 82% occupied
    • Residential division: leased 212 units (72 in Mandarin and 14 in Veer towers)
      • Closed 8 units with $7.5MM in revs
        • 1 unit in Mandarin ($2.7MM)
        • 4 units in Vdara ($2.8MM)
        • closed 3 previously contracted units at Vdara ($1.9MM)
    • Took a $5.4MM writedown on notes related to lower value given by outside consultant


  • The 20% convention mix is for their wholly owned, and higher than they predicted
  • Convention business is always seasonally stronger in the first quarter.  As you get into May and June, you have a lot more leisure and FIT business
  • Core properties did really well compared to last year and think that's the beginning of a trend. Convention business is allowing them to yield up and the leisure customer is also improving.
  • Does the change in the MGM Macau structure change anything for Borgata?
    • No, they have a settlement agreement that they are adhering to
  • How does rate look like for their convention business?
    • It's what they were achieving in 2005 and should be up double digits next year
  • Saw good traffic in LV in general. Mass table business is starting to pick, but most of the improvement has been on non-gaming.
  • October will be a good month on the convention side
  • Mandarin continues to be a drag, what can they do to reduce that drag?
    • Occupancy was up 20 points from 35% last year so they are working hard to improve operations
    • Think that they will slowly improve
  • Operating expense creep?
    • Not really. Payroll will go up a bit. But doesn't expect expenses as a % of revenues to increase
  • Baccarat business?
    • Had a tremendous quarter last year so the comps were tough this year
    • It's going to be harder for the international business in Vegas to show growth
    • They believe that they will gain share of the high end business this year
    • International business makes up most of the business
  • $120MM of gross receivables and were 50% reserved on those at MGM Macau
  • Rates on leased inventory at CC: $2/foot
  • Have 1,050 rooms at Vdara being rented currently
  • Mix of 3rd party or discount channel business and what is the delta? 
    • $50 delta between discount channels and convention business
  • Length of play hasn't been impacted, they just had a run of bad luck given the concentration of high end in 1Q & 4Q
  • $17MM benefit annually of tax adjustments for City Center, so the $6MM benefit in the quarter is not one time, although it is going to be less in subsequent quarters.

European Data Download: PMIs Mixed to Down and Retail Sales Fall

Position: Long British Pound (FXB)


European retail sales for March registered -1.7% Y/Y versus 1.3% in February. It appears that a late Easter this year (April 24) versus an early Easter last year (April 4) contributed to some of the negative performance with a difficult comparison of +1.7% in March 2010 (see chart below). Expect stronger performance next month.  Equally, the austerity measures across the region continue to weigh to the downside on spending and consumer and business confidence, a trend we expect not to veer considerably for the balance of the year.


European Data Download: PMIs Mixed to Down and Retail Sales Fall  - na1



Below are recently reported MAR retail sales by country, and APR Eurozone confidence figures, for reference.


Spain Retail Sales            -7.9% MAR Y/Y vs -4.6 FEB

Portugal Retail Sales       -6.6% MAR Y/Y vs -3.6% FEB

Germany Retail Sales      -3.5% MAR Y/Y vs 1.5% FEB


Eurozone Business Climate Indicator       1.28 APR vs 1.43 MAR

Eurozone Consumer Confidence               -11.6 APR vs -10.6 MAR

Eurozone Economic Confidence               106.2 APR vs 107.3 MAR

Eurozone Industrial Confidence                5.8  APR vs 6.7 MAR

Eurozone Services Confidence                 10.4 APR vs 10.8 MAR



Weighing PMI


Manufacturing and Services PMIs across Europe continue to reveal a mixed outcome. For Manufacturing PMI, we see confirming negative inflections for Italy, Spain, and the UK, economies that are underweight manufacturing versus some peer nations, and laced with the repercussions of austerity programs: slower growth prospects and weak consumer and business confidence as inflation pressures push higher. The corollary remains Germany and France with continued strong Manufacturing results from domestic and global markets (see table below).


Of the countries that released Services PMI today (see chart), we see a clear negative divergence from Germany month-over-month, a play off mean reversion from the heavy resistance line of 60. Notably, France powered ahead, with a final reading of 62.9 in April versus 60.4 in March. In particular, we expect Services to hold up better (and higher) in Germany and France for the balance of the year.


European Data Download: PMIs Mixed to Down and Retail Sales Fall  - na2



Unimpressive UK Data (continued)


Below are recent data points out of the UK. While we continue to like the GBP-USD currency trade via the etf FXB due to the BoE’s more hawkish stance on inflation (rate decision announcement this Thursday) as US policy continues to debauch the greenback, economic fundamentals in the UK remain weak. The housing and construction data below speak to this point. While mortgage approvals ticked up month-over-month, they’re up marginally and well off historical levels.


UK Nationwide House Prices      -1.3% APR Y/Y vs 0.1% MAR

UK Hometrack Housing Survey   -3.3% APR Y/Y vs -3.2% MAR

UK Mortgage Approvals              47.6K MAR vs 46.7K FEB

UK PMI Construction                   53.3 APR vs 56.4 MAR



Charting Yields


Below is one of our familiar charts of 10YR government bond yields for the PIIGS. While yields have come in over recent days for Greece, Ireland, and Portugal, including due to the well-telegraphed bailout of Portugal announced last night (an agreement for a €78 Billion EU-led bailout package over 3 years to help reduce Portugal's budget deficit from 9.1% in 2010 to 3.0% in 2013) we continue to maintain that these short-term band-aids are no fix for the longer-term fiscal imbalances that these peripheral countries must work through. Remember that as the denominator (GDP) is reduced in the deficit as a % of GDP equation, the deficit will rise. We expect austerity to choke off growth, and especially for a country like Portugal that has averaged only 1% annual GDP over the last decade (vs Greece at 2.6%).  


European Data Download: PMIs Mixed to Down and Retail Sales Fall  - na3


Matthew Hedrick



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R3: SHLD, VLCM, BGFV, Next Plc



May 4, 2011






  • In addition to sighting macroeconomic weakness as the key governor of growth in the quarter, management of BGFV also highlighted a factor that we expect to hear more frequently over the next 24-hours – weather. With more than 50% of its stores in the two states with the highest unemployment (CA & NV) and 90% of stores in states above the national average, BGFV has an obvious handicap relative to its competitors. Additionally, while both apparel and footwear sales were positive in the quarter, hard goods were not. As a result, the company plans to get more aggressive on pricing in the current quarter – not what better performing competitors want to hear.
  • While Volcom’s footwear category has been non-existent (i.e. less than 2% of sales), PPR highlighted the opportunity to build the category given Puma’s core competency. In fact, PPR has already carved out several members of Puma’s team to work with Volcom’s design team. The process from start to finish takes at couple years at minimum, but expect innovation in the highly fragmented skate market to pickup over the next 12-24 months as incumbent players look to maintain share.



Sears Eyes Apparel Rejig - Even as Sears Holdings Corp. aims to lure back apparel shoppers, the retail behemoth wants to scale back the space devoted to the category. “We have, in my opinion, way too much space for the amount of apparel business we do,” Sears chairman Edward S. Lampert told shareholders Tuesday at the firm’s annual general meeting at its headquarters here. “We have a lot of space dedicated to apparel that’s been underutilized for too long. No matter how good our apparel people do, we cannot get to the level of productivity we should be at simply by working harder. It is incumbent on us to repurpose that space. “We are in the best malls in the U.S.,” he added. “If we want our customers and the community to shop at our end of the mall, then we need to have the brands they want to shop for. If they don’t want to buy what we sell, or buy enough of what we sell and there are other companies that can fit in and do it better, why shouldn’t we partner with them (on leases). We think we can partner with a whole lot of companies.” <WWD>

Hedgeye Retail’s Take: With Sears struggling to maintain share in categories like appliances, it makes sense for the department store to focus on one of the few positive drivers of comp in 2010 at both Kmart and domestic Sears – apparel. The Kardashian Kollection launch in August was a material step in that direction and based on the highlights from the meeting it sounds like we should expect more exclusive brand initiatives from the company in coming months. But don’t forget that Sears holds about 2-3% of the US apparel market. Simply tweaking brands won’t right this ship.


Next PLC Gets Royal Boost - Retail group Next plc raised its full-year profit guidance by £15m following sales ahead of market expectations in the first quarter. Next Brand sales in the period to end-April were up by 5.2%, compared with guidance for the half-year given in March of between -0.5% and +2.5%. The group said it estimated that at least 2.5% of the over-performance came as a result of exceptionally warm weather over Easter and spending in anticipation of the Royal Wedding bank holiday. It said, 'We believe these factors have encouraged consumers to bring forward summer purchases and we do not expect the current levels of growth to continue into the second quarter.' <Spectator.co.uk>

Hedgeye Retail’s Take: Interesting callout here from the UK’s second largest retailer that while weather has devastated U.S. retailers over the last two months it’s been a tailwind across the pond in addition to among other events both Easter and of course the Royal Wedding.


Puig Acquires Majority Stake in Jean Paul Gaultier - “Twelve points for Spain,” Jean Paul Gaultier, who is crazy about the annual Eurovision Song Contest, enthused on Tuesday, awarding the maximum appreciation to Puig, the new majority owner of his Parisian fashion house. The Barcelona-based beauty and fashion firm purchased the 45 percent of Gaultier held by Hermès International and roughly 15 percent from the founding couturier, giving the ebullient designer a new lease on life and making Puig — parent of Nina Ricci, Carolina Herrera and Paco Rabanne — a bigger and more formidable player on the international fashion scene. Come mid-2016, Puig will also get its hands on Gaultier’s lucrative fragrance license, currently held by Beauté Prestige International, a subsidiary of Japan’s Shiseido. WWD first reported Puig was in exclusive negotiations to acquire Gaultier on April 5. “I am thrilled,” Gaultier told WWD. “They’re nice people; they have a lot of energy. It’s a family business. They know what they want to achieve and they are buying Gaultier for Gaultier, not to turn it into something else.” <WWD>

Hedgeye Retail’s Take: Looks like a win for both sides – at least from a strategic perspective. Hermes relationship with the brand was severed with the passing of its former Chairman and Puig is starting to build a formidable stable of designers. In looking at another design house up for sale, we suspect Cardin’s process is not likely to be quite as smooth given the complexity of the deal as highlighted yesterday.


Retailers Increasing Mobile And Social Efforts - According to "The State Of Retailing Online 2011: Marketing, Social, and Mobile" report conducted by Forrester Research Inc. for Shop.org, 91 percent of retailers currently have a mobile strategy in place or in development (up from 74 percent a year ago). Additionally, 72 percent of retailers say they will increase their spending on social networks this year over last year. "The State Of Retailing Online" research series, which provides eBusiness & Channel Strategy Professionals with annual industry benchmarks of marketing and business investment and activities, surveyed 68 companies. Retailers report that 21 percent of all mobile traffic is coming from tablets, amazing considering the iPad was launched barely a year ago. Still, the overall amount of mobile traffic and revenue has not increased dramatically, suggesting that investment levels in site optimization may still be inadequate. For example, 48 percent of retailers report having a mobile-optimized website; 35 percent have deployed an iPhone app; and 15 percent offer an Android app and an iPad app, respectively. Challenges for retailers include differentiating the consumer experience on a tablet versus a smartphone and figuring out features and functionality in dueling app/mobile Web ecosystems. <SportsOneSource>

Hedgeye Retail’s Take: In reality a tablet is simply the current day notebook so call it what you want, but the key highlight here is that less than 50% of retailers have a site optimized for mobile viewing. This is clearly a case where less is better than none at all. Also, 72% of retailers will grow spending on mobile networking yy.  Why isn’t it closer to 100%?


Vietnam Plans big for Footwear and Leather Sector - Despite the surging overhead costs, Vietnam has drawn up big plans for its leather and footwear industries, both of which will be a national key export in 2020, according to a new development plan published by the Ministry of Industry and Trade (MoIT). By 2015, the ministry is estimated to earn US$9.1 billion in export turnover. MoIT hopes the turnover will increase to $14.5 billion in 2020 and $21 billion in 2025. Meanwhile, the ministry aims for localisation to be 60-65 percent in 2015, 75-80 percent in 2020 and 80-85 percent in 2025. During this time, the industry will focus on developing designs, products and their human resources sector. <FashionNetAsia>

Hedgeye Retail’s Take: The key beneficiary of higher labor costs in China, the surge in demand as brands look to shift to neighboring countries is a watershed event for Vietnam, whether they can develop their infrastructure fast enough to handle it is another issue.





Big quarter all around. Street margins and accretion from refinancing/buyback need to go higher going forward.



“The first quarter of 2011 produced our best overall financial performance in the last two years. We find it very encouraging that all our properties improved year over year in Adjusted EBITDA and Adjusted EBITDA margin."


- Gordon Kanofsky, Ameristar’s Chief Executive Officer



  • "Consolidated Adjusted EBITDA margin improved ...to 31.2% in the current-year first quarter, representing the highest consolidated Adjusted EBITDA margin since our acquisition of the East Chicago property in September 2007."
  • “Ameristar St. Charles is weathering the new competition well, with improvements in net revenues and Adjusted EBITDA on a sequential basis for the third consecutive quarter."
  • Debt: $1.49BN
    • "Prior to the refinancing closing on April 14, 2011 described below, we repaid an additional $15.0 million of debt on a net basis in the second quarter of 2011."
  • [Interest rate decrease] "The decrease is due mostly to the July 2010 expiration of our two interest rate swap agreements and a lower overall debt balance."
  • Capex: $10.9MM
  • "The repurchase of 45% of our outstanding shares of common stock and an estimated increase of only $6 million in annualized interest expense at current interest rates is expected to provide immediate accretion to earnings per share and free cash flow per share, excluding certain one-time costs.”
  • 2Q11 Outlook:
    • D&A: $26-27MM
    • Interest expense: $25-26MM (includes non-cash interest expense of $1.7MM) 
    • Tax rate: 42-43%
    • Capex: $10-15MM
    • Non cash stock comp: $4.5-5MM
  • FY11 Interest expense: $104-109MM (includes non-cash interest expense of $7MM) 



  • Think that top line growth came from efficiency, marketing effectiveness, and quality of their properties
  • East Chicago improvements are partly attributed to normalized table hold  in the quarter compared to low hold last year last year. Continue to speak to the state regarding the bridge closure.
  • Kansas City: Clearly seeing some cycling out of of the recession. Improved their market share.
  • Council Bluffs: Reached its highest quarterly market share (we believe 39.5%) since the re-opening and rebranding of a competitor in 2006
  • Have controlled costs well and have taken steps to reduce volatility in their table game play
  • Pleased with cost controls at Blackhawk, which resulted in one of their best margin quarters
  • Improvements in the quarter were achieved despite a decrease in their promotional allowances
  • Returned to normal table game hold this quarter
  • Leverage at 3/31: 4.46x and fixed charge coverage: 2.19x
    • Fixed charge coverage ratio goes away in the new facility
    • Pro-forma for the transaction of net leverage 5.9x
  • Used about 40% of their EBITDA for debt reduction
  • From a FCF standpoint the transaction is better than neutral given the dividend savings on the reduced number of shares outstanding
  • Current stock comp is elevated due to the transaction and Neilson's stock comp. Should return to $3.5-4.0MM by 3Q
  • Expiration of the swaps will save them $8MM
  • They should be able to pay down $40-45MM of debt in 2Q
  • Their plan is to delever quickly, assuming a stable stock multiple - the retirement of debt should add several dollars per share of stock value
  • They are more likely to favor acquisition vs. greenfield projects and prefer NA to international markets. They believe that their superior margin structure provides them with the unique capability to make accretive asset acquisitions


  • Capex for the year: $65-70MM including the start of the KC hotel
  • Taken steps to make sure that table game hold remains more stable.  While they looked for economic growth they planned for economic weakness, and so they continued to cut things that don't impact guest or employee satisfaction. Obviously, they have been more efficient on promotional spending as well.
  • 1Q is always their strongest margin quarter, they don't know if they will maintain those margins per say but margins should be good for the rest of the year
  • Don't see impact from gas prices
  • There weren't any real one-time benefits in the quarter.
  • They are not planning on selling any assets given the pricing environment out there
  • Share count - at YE the share count will be a little over 40MM but 33.5-33.6 will be the total reduced number of shares
  • They are seeing slightly better play from their long term existing players
  • HET is losing share to them because of their inability to keep their properties fresh
  • The mid 30% Blackhawk margin is probably a pretty good margin for that property


As the buck goes lower and lower, inflation is still an issue for consumers and corporations alike. 


Commodities continue to be a key focus for management teams as they react to significant downticks in gross margins due to inflation.  Some companies, in our view, are deciding to extend and pretend in the hope that the back half of the year presents a more favorable commodity environment where costs can be recouped.  Last week we noted the poor performance of MCD and CAKE following their respective earnings releases. 


This week, PNRA and TXRH are examples of companies that are moving their inflation targets higher in the face of rising food costs.  As we wrote yesterday, BAGL, CBOU and CPKI are two companies that we believe will increase their inflation outlook over the next few days.  Rice gained almost 5% over the last week but prices are up a mere 3.5% year-over-year.  PFCB has its rice needs contracted for the year. 


BWLD is currently escaping the effects of inflation and should continue to do so for the foreseeable future.  Tellingly, excluding chicken wings and broilers, the commodities in our commodity monitor table are up an average of 44% versus last year while chicken wing prices are down 39% year-over-year. 





Below, I call out a select few commodities and the respective week-over-week moves, alongside some additional company-specific commentary.




Wheat is a commodity that is widely used in the restaurant space but generally does not take up a large percentage share of any one company’s basket, with the exception of PNRA.  The pizza concepts generally play down the significance of wheat prices for their overall basket (DPZ have it hedged out for the year) but, clearly, for PNRA wheat is a big driver of margin.  PNRA raised its inflation target to 5% for the second quarter and an average of 4% for the year, which is approximately 75 basis points higher than the full year estimate from the prior earnings call.







Coffee is a commodity that is generating headlines.  GMCR and PEET reported last night and PEET’s, in particular, had some interesting commentary on coffee inflation and the significant impact management expects on gross margin in the second quarter.  PEET also raised its beverage prices by between $0.10 and $0.15 in retail stores.





Chicken wings


Chicken wings continue to March lower week-over-week.  As I wrote earlier, BWLD is in a unique position as a restaurant company because its commodity costs are down 39% year-over-year.  Excluding chicken wings and broilers, the commodities in our commodity monitor table are up an average of 44%.





Howard Penney

Managing Director

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