FL/DKS: Mind the Sympathy

Resist the urge to jump to conclusions on FL (which we like) based on the significant comp miss out of DKS (which we don’t like) this morning. If FL trades off, it will look all the more appealing heading into the print. Consider the following…


  1. Hardgoods account for 54% of DKS’ total sales (and is the likely source of comp underperformance in the quarter) while footwear is only ~18% of the portfolio. On the contrary, footwear accounts for nearly 90% of sales at FL.
  2. Based on monthly NPD POS athletic footwear data released last night, the spread between the athletic specialty channel and the shoe chains and dept/natn’l channels is at its widest in years. The bottom-line is that sales in the athletic specialty channel were up +8.4% in Q1 compared to the +3.6% implied by weekly data – this is a significant improvement.
  3. Lastly, ASPs, while growing at a sequentially lower rate, are still up LSD yy (vs a difficult 5% comp yy) in the athletic specialty channel – where FL is leading. In addition, higher unit sales more than make up for any ASP weakness.

We don’t want to send the wrong message here – this s not a stock we love. It’s not a great business, it’s far too over-indexed to one vendor, and it’s not super cheap at 6.2x EBITDA. But there is plenty of ‘outside-the-box’ execution to be conceived and executed upon here in the new regime.  We still think that after the call, this will slowly but surely convert some of the perennial perma-FL-haters’ into viewing this as a story that can manage double digit EPS growth and can buy back 30% of the float within 3-years. That’s not half bad…  While not our favorite stock, it is one we think should keep working in 2H.


The Macau Metro Monitor, May 17, 2011




MGM China will offer 760MM shares at HK$12.36 to HK$15.34 a piece.  MGM China received orders covering all the stock offered to institutional investors on the first day of marketing the IPO, two people with knowledge of the matter said.  MGM China will hold a press conference for the share sale on May 19.


Steve Wynn said he is confident Macau's gaming revenue growth for 1Q (+43% YoY) will be exceeded this year with the launch of Galaxy Macau.  Wynn added, "We just have a lot of VIP business, but we also have the best win per table in the general casino in Macau. Of all 33 casinos, the best general casino is the one you are standing on top of.  We are always looking for new opportunities. We feel that we are an Asian company and we are now mature. We are all grown up, we have a capital structure and balance sheet that allows us to go anywhere and do any project of any size easily."  Asked about losing market share to rivals, Wynn said he was not worried as the company's share of the money had grown.  Moreover, Wynn remarked that after seeing Galaxy Macau, it has made him rethink some of the designs for a new casino his company is planning to build.



Aristocrat announced it has well over 60% of the slot installations at Galaxy Macau.



The government will inject MOP 6,000 into the saving accounts of ~320,000 qualified permanent residents.

DKS: Still Looking Elsewhere


These results from DKS don’t cut the mustard. This is the 1st time DKS has missed its own comp guidance in over 5-years, and by a wide margin.  They’re one of the few retailers playing the ‘keeping inventory tight and GM% high’ game so EPS impact was muted. But as we discussed yesterday in our note (DKS: Look Elsewhere) this stock is priced to grow.  The company is not following suit.


DKS: $0.30 vs. $0.29E

  • Lower than expected top-line offset by greater than expected expense control.
  • Core DKS comp of +1.4% begs the question of the source of underperformance. Our sense is that it came from the hardgood category given the strength we’ve seen in both athletic footwear and apparel during the quarter both of which have been up HSD.
  • Consolidated comp came in below the company’s range of guidance for the first time in our recollection since at least 2007. They have come in at the lower end of their range – but have never missed entirely.
  • Gross margins were a positive surprise in the quarter coming in up +80bps against the toughest comp of the year. While only 30bps higher than our estimate, this is one of the few positive surprises in the quarter and likely driven by mix to the extent hardgoods underperformed during the quarter – more to come on the call.
  • SG&A growth was substantially lower than we expected adding $0.03 in EPS in the quarter. Yes, the company is anniversaring higher investment spending from last year, but this is not exactly how you want to see a growth company hit numbers.
  • Contrary to our expectation [we said that they would likely not give forward guidance], management took up full-year guidance for the 9th consecutive quarter though only by the margin of the Q1 beat maintaining its outlook for the rest of the year.
  • The sales/inventory spread turned sharply lower following a run of seven straight quarters of a +4% or better, though in fairness remained in positive territory despite the negative delta. Inventories increased +4% on +6% sales growth against a more favorable compare as same store sales came in well below expectations.

DKS: Still Looking Elsewhere - DKS CompGuid Q1 5 17 11


DKS: Still Looking Elsewhere - DKS S 5 11


Casey Flavin


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Notable news items and price action from the past 24 hours as well as our fundamental view on select names.

  • CHUX reported 1Q EPS from continuing ops of $0.09.  O’Charley’s comparable restaurant sales increased by 0.4%, with guest counts growing by 0.9%, for the first quarter.  Restaurant level margins declined from 15.8% in 1Q10 to 14.7% in 1Q11.  For 2Q, the company is forecasting a net profit/loss between -$1 million and +$2 million.
  • DPZ’s hedgefund fan base is growing.  Trian Fund Management LP disclosed a 9.7% stake yesterday.
  • DRI rotated four top executives at Red Lobster and Olive Garden.
  • YUM’s Taco Bell debuted a new promotion campaign for its Taco 12 Pack with the offer of free music by hip hop duo Chiddy Ban.
  • YUM’s bid to acquire Little Sheep will be subject to China’s anti-monopoly inspection process. 
  • CBOU and MCD gained on strong volume yesterday.





Howard Penney

Managing Director

NKE: Choose Your 'Term'

One of the big brokers is out with positive comments on Nike over the 'near-term.' We're the biggest long-term bulls here of anyone. But unless 'near-term' is six months out, we question this one. Choose your duration wisely here.



We note the following.

  1. If ‘near-term’  = this quarter, then we’re less optimistic. There still a firm –(300bp) yy gross margin headwind that Nike needs to pass, and then what’s likely to be another meaningful hit in its August quarter.
  2. We absolutely positively agree that Nike’s pricing initiatives will work. But we won’t see it until the November quarter.
  3. Then the February and May quarters of next year are the big margin movers – which, mind you, is also the same time that Nike sells into the Olympics, is coming off of less-stressed inventory levels.
  4. Most importantly, these things will culminate in the sweet spot of execution on its consumer-centric growth platform – which is the key factor that we think takes it from $20bn to $28bn over 3-years. That’s pretty dang solid, longer-term.


The bottom line is that estimates for the upcoming quarters have come down to some degree, which is a positive. Perhaps that mitigates the stock getting spanked as the Retail group comes under severe pressure in 2H (per our broader thesis).  But where we come up dry is why this is something that makes the stock go up over the near-term.  For those that love to buy great businesses at great prices, we think you’ll have a better shot at Nike than at $85.


Solid quarter, favorable outlook



  • 1Q results:
    • Group gaming revenue: HK$18,141MM
      • VIP gaming revenue:  HK$12,748MM (565 tables)
      • RC Volume: HK$453.9BN; 2.81% hold
      • Mass gaming revenue: HK$5,015MM (1,179 tables)
      • Slot revenue: HK$378MM (3,943 slots)
    • Total Group revenue: HK$18,271MM
      • Hotel, catering and other revenue of HK$130MM
    • Casino Grand Lisboa:
      • Gaming revenue of HK$5,334 and Adjusted EBITDA of HK$882MM
      • occupancy: 88.3% and ADR: HK$2,055
    • Other self-promoted casinos (Lisboa, Jai Lai, Oceanus, 3 slot halls and Tombola Hall):
      • Gaming revenue of HK$3,008 and Adjusted EBITDA of HK$332MM
    • Satellite Casinos (14 3rd party promoted casinos and one slot hall which ceased operation on 1/19/11):
      • Gaming revenue of HK$9,799 and Adjusted EBITDA of HK$391MM
    • Adjusted EBITDA: HK$1,678MM
    • 31.9% market share
    • HK$17,735MM of debt and cash of HK$3,852MM
    • Capex: HK$205MM
      • "Work on the upper floors of Grand Lisboa, for phase 3 of Ponte 16 Resort and for equipment
  • "To be more comparable to casino companies reporting in the United States, commissions and
    discounts paid to players and promoters would be deducted from revenue before calculating
    Adjusted EBITDA margin. Using this method, the Group’s Adjusted EBITDA margin for Q1 2011
    was 16.5%.  If the Group’s revenue is further adjusted to include the net revenue of self-promoted
    casinos plus the net revenue contribution (after reimbursed expenses) of the Group’s third
    party-promoted casinos and slot halls, the Group’s Adjusted EBITDA margin would be 30.6%."


  • Had a record month in March
  • Oceanus is making an increasing contribution to Group results
  • 30 cent dividend was approved last month, adding together the interim dividend produced a 53% payout


  • Added 31 new VIP tables at Grand Lisboa
  • Grand Lisboa - QoQ results were impacted by poor hold - held only 2.6% vs. 3.0% in 4Q2010.  Chips grew 14.4% YoY.  They're up 21.5% QoQ on the Mass gaming win.  VIP margin dropped by 2.9% offset somewhat by the increase in Mass margins (up +4%).
  • Other owned hotels had a margin of 11% - and think that's a sustainable margin going forward.  The improvement and growth in that group is due to ramp at Oceanus and good results at the Old Lisboa
  •  Don't see any impact yet from Galaxy Macau. Had no impact at all at Grand Lisboa over the last 2 days... the weekend was better than last weekend. Really too early to tell.
  • Traditionally, their 2H is better than the first half of the year.  Yes - if you annualize the 1Q EBITDA you come out ahead of consensus.
  • Still waiting for government approval of their Cotai project. They haven't had any back and forth in 3 months.  So its unclear if the government will ask for more data or not. Right now they are just waiting.
  • Seems like gaming spend per customer is growing in the market.  Rated play is playing more. They seem to be attracting visitors with more liquidity.
  • Non-gaming revenues are just reaching their stride since they added a lot of non-gaming components over the last year or so
  • YoY their staff costs have increased 8%.  They also have 800 fewer staff members though YoY.  Granted a 5% raise for the year across the board as well.
  • Migration in VIP tables is almost entirely at 3rd party migration. Took on 50 more VIP tables at Grand Lisboa and 15 more mass tables.
  • Oceanus results are ahead of plan. Still tracking at 35,000/table mark.  Trying to grow the utilization of tables. Think that there is a bit more growth left there for the next 3 quarters.
  • Grand Lotus - won't really kick in until the second half of the year for premium Mass play as they are still doing some renovations there.

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