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ISLE beats handily and numbers need to go higher.


"While we are seeing signs that the economic conditions for our business are slowly beginning to improve, we are cautiously optimistic that the positive changes we have made during the past two years will soon begin to have a more dramatic impact on our bottom line."

- Virginia McDowell, the Company's president and chief executive officer




  • "Across our portfolio, we have been introducing new entertainment options through our Jester's Jam concert series, new dining options with the popular Otis & Henry's concept, and we have also streamlined our marketing to benefit from the synergy created by more centralized promotional and branding programs. As a result of these targeted investments, we have been able to maintain a reasonable mix of rated and retail business, even through tough economic times, and believe that this is an area of further opportunity for fiscal 2012. Further, we have recently put in place new marketing programs in Colorado and management in Vicksburg that we believe will positively impact our results in periods to come."
  • "Flooding along the Mississippi River resulted in the closures of five properties including: Davenport, Iowa; Caruthersville, Missouri; and Lula, Vicksburg and Natchez in Mississippi. At this point, three properties have reopened with Lula and Natchez remaining closed. We hope to reopen Lula this weekend, pending regulatory approval; however Natchez will remain closed until the Mississippi River recedes further."
  • Development updates: 
    • Cape Girardeau, Missouri: 
      • $125MM budget
      • broke ground on March 31, 2011
      • in final phase of contractor selection
      • planned to open late in 2012
      • 1,000 slots/ 28 tables
    • Nemacolin Woodlands Resort, Pennsylvania:
      • Through a development agreement with the Resort, ISLE will develop & manage Lady Luck Nemacolin
      • 600 slots/ 28 tables
      • Assuming no appeals filed by 6/19, construction should commence late summer 11' and the casino will open 9 months later (May 2012 or F1Q13)
  • As of 4/24/11, ISLE had non-restricted cash of $75MM and $1.2BN of total debt w/ $175MM of R/C availability
  • "Fiscal Year 2011 capital expenditures were $58.6 million, of which $13.0 million related to Cape Girardeau, $0.3 million related to Nemacolin and $45.3 million related to maintenance capital expenditures, including conversion of approximately 2,600 slot machines to the Bally's slot system technology."
  • FY12 guidance for non-operating items:
    •  D&A: $89-91MM
    • Cash income taxes: less than $5MM (primarily state income taxes)
    • Interest expense, net of capitalized interest: $83-86MM
    • Corporate and development expenses: $43MM, including $6MM of non cash stock comp
    • Maintenance capex: $50MM
    • Project capex: $90-100MM


  • They continue to see signs of a recovery in half of the properties in their portfolio.
  • Hope to have a new COO within a month
  • Interest in the Q included a $2.2MM write-off related to their former credit facility
  • $33MM drawn on R/C; $500MM on new T/L, $357MM sub notes, $4MM of other debt
  • Flooding & claims: Deductibles are around $250k/location. They expect the first report filed for Davenport in the next few weeks. Timing of settling the claims depends on when the properties reopen and what happens elsewhere like Tunica.


  • If anything happens in Florida, then they expect to get parity treatment
  • Volumes in Vicksburg were healthy when they reopened
  • Mechanics of recognizing insurance proceeds.  Business interruption comes through as revenues. It's still to be determined whether they will have any write-offs from property damage.   You get reimbursed for certain costs as well like payroll.
  • Customer behavior in impacted regions - In Vicksburg, the results have been in-line with prior expectations.  Caruthersville is also in-line with prior expectations.  Not that many people live in the flood plains at their properties. Don't think that there will be much of an adverse impact on their customers.
  • Why was corporate expense so low and why is the guidance for next year so high?
    • They spent a lot of money earlier this year to get licensed in PA & MO
    • Claim that the corporate number for the year was $42MM
  • They plan to have a GMP order on the Cape Girardeau project - generally speaking around $50-65MM is covered by that 
  • If there are appeals filed by June 19th at Nemacolin, it's unclear how long the delay would be, but don't think it will be that long.  They don't think that they will get appeals. They pay $150,000 per year in base fees to the resort and a % of revenues over $30MM. They expect that the fee that they will pay will be about $400,000 per year.
  • Even with the flood impact, they expect to be in compliance with their covenants
  • Capex spend throughout the year? Assuming everything is on time
    • 10% in 1Q; 15% in 2Q and balance is in the back half - either equal or 4Q loaded
  • Blackhawk numbers in the 4Q are actually masking a very positive trend.  The last quarter's numbers include some impact from renovations and management/ marketing/ dining/ hotel yield changes.  The trends are positive there, though.
  • KC market - competition in advance of Kansas speedway?
    • They are happy with their performance there; they have been gaining market share. They are not going to market into the Kansas Speedway opening.
  • Thoughts on IL proposal?
    • Still unclear on how the governor will respond.  Veto is still a possibility.
    • It will likely come down to a negotiation between the governor and the mayor

JCP: Covering TRADE


Booking a nice gain on the short side of JCP on the sales miss. Brian McGough remains bearish on JCP for the intermediate-term TREND. -KM



JCP came in well below expectations this morning citing weather for the second consecutive week as well as a shift of promotional mailers into April - a factor the company failed to mentioned as a positive driver last month. After a handful of brand highlights in April, Sephora was the only callout in May with Liz Claiborne noticeably absent. Additionally, internet sales remain underwhelming contributing only +2.8%. However, the most notable callout (and red flag) is the absence of any comment on inventories. Last month the company dropped the verbiage that inventories were “in-line with sales trends,” this month they failed to mention inventory altogether.


With the least attractive sales/inventory spread among its peers (KSS, M, JWN – see chart below), it looks like JCP is likely to maintain its laggard status over the near-term. We remain bearish on the deparment stores and are still convinced that JC Penney is in the center of the bulls-eye as it relates to the erosion in retail margins in 2H.


JCP: Covering TRADE - JCP 6 2 11


JCP: Covering TRADE - SSS Dept SIGMA 6 2 11

Liberalizing in Latin America

Conclusion: We continue to believe that the short-term scare ahead of a close Fujimori victory or the long-term capital flight that is likely to follow a Humala victory in Peru’s upcoming presidential election will serve as a warning notice for bureaucrats throughout the region to steer clear of further Big Government Intervention and instead opt to increasingly lean on the private sector as vehicles for economic growth.


As Peru’s financial markets brace for Sunday’s presidential elections, we wanted to use this as an opportunity to restate our long-term thesis on the implications of this historic election – which is that we’re likely to see increased economic liberalization throughout the region. As we wrote in an April note titled: “Peruvian Crystal Ball”, we think the potential for measured international capital flight from Peru will serve as a wakeup call against incremental socialism to the region’s leaders:


Such incremental sell-offs have the potential to destabilize the Peruvian economy and should be viewed as a warning sign to politicians throughout the region. Gone are the days of simply parlaying the poor vote into election victories – particularly at the highest office. As we are seeing currently, Latin American politicians must pay increasing attention to the desires of international investors, as well as the needs of the region’s growing middle class.


As resource-rich Latin American countries continue to capitalize economically from elevated commodity prices, we expect this trend to continue. This should put incremental pressure on regional leaders like Dilma Rousseff of Brazil and Cristina Fernandez de Kirchner of Argentina to open up to investor calls for additional privatization of the region’s vast investment opportunities in the coming years.

-Peruvian Crystal Ball, April 19, 2011


At a bare minimum, the surge in volatility we’ve seen across Peru’s equity, currency, and bond market has been noteworthy to say the least. In the YTD alone, Peru’s Lima General Equity Index has seen a -25.3% decline and a subsequent +27.3% melt-up; its currency, the Peru Nuevo Sol, has seen a -2.3% decline and a subsequent 3% gain; and its sovereign 5Y CDS has seen a +71bps melt-up followed by a -50bps decline.


Liberalizing in Latin America - 1


All of the volatility has been centered on the projected outcome of Sunday’s Presidential elections, in which the socialist Ollanta Humala goes head-to-head vs. the younger, more right-leaning Keiko Fujimori. We’ve written extensively about the credentials and policies of each candidate in previous reports, so we’ll spare you the details here. For more background, refer to the aforementioned “Peruvian Crystal Ball” and our April 27 report titled: “Everyone’s A Winner – Except Peru”.


As of yesterday’s close, various sources had shown that Fujimori’s lead in the polls was slipping: -100bps in the latest Datum poll and -270bps in the latest CPI poll (both released on May 29), while the larger Ipsos Apoyo poll showed both candidates in a statistical tie. The Lima General Index is up nearly +6% today on rumblings that Fujimori has gained +100bps in a private Ipsos poll (official polling is prohibited in the week prior to the election), which would give her the lead heading into this weekend’s election. An official Fujimori victory will likely be a further tailwind for Peruvian assets.


Shifting gears to the region at large, we continue to believe that the short-term scare ahead of a close Fujimori victory or the long-term capital flight that is likely to follow a Humala victory will serve as a warning notice for bureaucrats throughout the region to steer clear of further Big Government Intervention and instead opt to increasingly lean on the private sector as vehicles for economic growth.


We’ve already seen signs of this with Brazil selling controlling stakes at a few of its major airports in an effort to spur much needed infrastructure investment ahead of the 2014 World Cup and 2016 Olympic Games. This is following the announcements of a potential pullback in Petrobras’ “aggressive” capex plans and a possible fuel & energy tax cut. On the flip side, the ouster of former Vale CEO Roger Agnelli is a red flag that reeks of the government’s old ways of trying to promote domestic job creation through its state-owned enterprises. He was replaced with essentially a puppet of the Rousseff regime, Murilo Ferreira, who regularly clashed with Agnelli’s overly capitalist management style.


Net-net, time will tell whether or not Brazil and the other countries in the region learn the following very important lesson the easy way or the hard way: Big Government Intervention shortens economic cycles and perpetuates volatility. In some cases (see: US, Japan, PIIGS), too much government in the form of burgeoning debt and deficits has a funny way of structurally impairing growth. As consensus currently reminds you that they lack the Global Macro process to actually get ahead of slowing growth, keep these very important long-term TAIL themes front and center.


Darius Dale


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Retail: Bring It




Our bearish '4.5 Below' call for a severe cut in back half margins was bouyed by today's sales results. We remain bearish on the department stores -- in particular JCP -- and think that M and even KSS are setting up for a negative turn in the 2H. Same goes for HBI, GIL, JNY and DKS.


On the flipside we like names with asymmetric factors to drive upside, like NKE, LIZ (despite negative datapoint vis/vis JCP), FL, and despite broken near term TRADE, URBN and TGT.



Review of the Month


What started as a crack last month has turned into a clear deterioration in sales momentum for retailers in May. Recall last month, both Macy’s and Kohl’s called for pent up demand driven sales. Well, Macy’s pulled through posting solid results while KSS came in light much like the balance of retailers that still contribute to this monthly exercise. In fact, the number of companies missing expectations (14 of 22) came in higher than beats for the first time this year.


Instead of proving last month to be an aberration, May sales results lend further support to our thesis that the 2H set-up is not going to be a pleasant one. As expected, there wasn’t much in the way of adjustments to company lead expectations for the 2Q or the full-year with only a month into the quarter, however we suspect revision activity is likely to pick up in June as retailers get a closer look around the corner. Over the last month, we’ve seen increasing evidence of mounting margin pressure beginning to impact companies more significantly and sooner than expected and now we have top-line trends starting to roll as well. We saw a crack in 2-year comp trends last month for the first time since last July. Now this morning we have comps decelerating at an faster rate across all three durations (1Yr, 2Yr, & 3Yr) in May. With some retailers looking to accelerate sales in an effort to offset margin headwinds in the 2H, May results suggest that simply passing through higher costs will prove challenging in the face of slower consumer spending to say the least.


(clients that have not yet flipped through our industry overview outlining our scenario for a 4.5pt decline in industry margins this year, please contact sales at sales@hedgeye.com for a copy – we’d be happy to run through it with you).


Here are the notable callouts from May sales results:

  • Higher-end products and brands continue to outperform. Within department stores, it continues to be a story of the “haves” vs. the “have nots” with JCP -1%, KSS +0.8%, SSI +0.0% underperforming the higher-end with M +7.4%, JWN +7.4%, SKS +20.2%. This continues to be positive for stronger brands like RL and GES.
  • Discounters were again the strongest performing segment of retail consistent with trends since the holidays despite more difficult compares. We expect this to continue near-term as consumer’s propensity to spend on discretionary items deteriorates.
  • JCP came in well below expectations citing weather for the second consecutive week as well as a shift of promotional mailers into April - a factor the company failed to mentioned as a positive driver last month. After a handful of brand highlights in April, Sephora was the only callout in May with Liz Claiborne noticeably absent. Additionally, internet sales remain underwhelming contributing only +2.8%. However, the most notable callout (and red flag) is the absence of any comment on inventories. Last month the company dropped the verbiage that inventories were “in-line with sales trends,” this month they failed to mention inventory altogether. With the least attractive sales/inventory spread among its peers (KSS, M, JWN – see chart below), it looks like JCP is likely to maintain its laggard status over the near-term.
  • TGT also came in weaker than expected and again at the low end of their May comp guidance. We noted last month that grocery trends would be one of the more scrutinized items in this month’s release given that it’s a key driver of the +200-400bps in incremental comp and coming off a huge April. Posting a mid-teen increase is positive on the margin and suggests that strength in April was not an aberration. After riding this one down with a bearish view over the last several months, we have turned incrementally more positive on the name and think we’ll start to see a reacceleration in the top-line over the next 12-months.
  • Category performance also supports our view that discretionary spending has indeed tightened with grocery/food highlighted as the top performing category at both COST and TGT, while home and electronics were cited as common underperformers with price deflation to the tune of 10% in TVs still present. Additional category strength was noted in accessories (JCP, SKS, KSS, ROST, ZUMZ, TGT) and women’s apparel (COST, JCP, SKS, ROST). While recent strength in men’s apparel was noticeably absent at most retailers both JWN and SKS highlighted strength in men’s during the month.
  • COST again confirms our view on inflation with both fresh foods and food and sundries still up in the LSD-MSD range. In addition, gas contributed +4% and +4.4% to SSS for both COST and BJ respectively. Our view is that while this won’t be the first or second crack in the retail industry’s margin equation, it will add to the pain as the retailers choose to capture consumables inflation costs at the expense of discretionary product margins. (i.e can’t take up price on milk, eggs, and chicken – so look to extract margin in categories like underwear, shirts, toys, etc…).
  • Weekly trends suggest that traffic was clearly stronger in the 1H of the month with sales strongest in week 2 and slowest in week 4. Interestingly, TJX was the only company to note that more favorable weather at the end of the month has lead to a pickup in June.
  • On a regional basis, performance was more mixed than we’ve seen in quite some time. The most consistent callout was strength in the Southeast (COST, KSS, ROST, TGT, JWN) and both CA and FL at the state level while the Midwest was the most varied (positive: COST, TGT, JWN; negative: GPS and TGT). Yes even TGT straddled the fence calling out portions of the Midwest on both sides.

Retail: Bring It - TGT Matrix 6 2 11


Retail: Bring It - SSS Total 6 2 11


Retail: Bring It - SSS 1Yr Cat 6 2 11


Retail: Bring It - SSS 2Yr Cat 6 2 11


Retail: Bring It - SSS Dept SIGMA 6 2 11


Casey Flavin


Swissy Strength and SNB Handcuffs

Positions in Europe: Long Germany (EWG); Short Spain (EWP)


Up, Up, and away. That’s the trend move in the CHF-USD over the last decade and CHF-EUR since late 2007. A white hot currency has both advantages and disadvantages from a macro perspective. Typically a strong currency is harmful for exporters; however recent data suggests just the contrary for Swiss exporters. Interestingly, monetary policy from the Swiss National Bank (SNB) to hike benchmark interest rates off the rock-bottom level of 0.25% (since March 2009) has largely been handcuffed due to 1.) low inflation, 2.) mild growth prospects, and 3.) the threat that a rate hike could impose further currency appreciation.


Swissy Strength and SNB Handcuffs - ch1


However, recent statements from SNB President Philipp Hildebrand suggest a more hawkish tone on monetary policy. Given the increased likelihood of a intermediate term rate hike and the continued CHF flight to safety trade alongside Eurozone sovereign debt contagion, we’d recommend getting long the CHF-USD (via the etf FXF). Switzerland more broadly can be played with the etf EWL.


Swissy Strength and SNB Handcuffs - ch2


Marginal Shift from SNB

SNB President Hildebrand has indicated a growing unease about price pressures, saying that the economy is expanding “more vigorously than anticipated” and “certain upside risks” on inflation “are beginning to emerge.”  Further, Vice Chairman Thomas Jordan said that while policy makers are “very concerned” about currency developments, exporters have “coped relatively well” with the franc’s appreciation.


Exports Defy Strong CHF

Quantifying “coping relatively well”, exports rose 9.8% in Q1 year-over-year and +7.9% in April month-over-month, driving a positive trade balance of 1.5 Billion CHF in April.


A recent report from the IMF on Switzerland shows that despite the strength of the CHF, due to the low level of price elasticity of demand from the Eurozone (0.4%), exporters have seen little hit. In contrast, price elasticity of demand is much higher in the emerging market, and therefore in the go-forward there’s a real threat that volumes will be dented. For reference, exports to the Eurozone contribute ~ 60% of total exports, while EM contributes ~ 15%, with the balance going to other advanced economies.


As the chart below shows, exports from Switzerland are diverse; yet the main goods include: chemicals, machinery and transport equipment, and various manufactured goods.


Swissy Strength and SNB Handcuffs - ch3


Currency and Interest Rate Risks

We continue to see the pile-in trade to the CHF as Europe’s sovereign debt contagion threats continue to press to the forefront.  Managing a strong CHF versus major currencies is after all nothing new to the SNB, which throughout 2009 intervened to depreciate the currency versus the EUR.  The bank again intervened (again largely unsuccessfully) from the end of 2009 to mid-2010 to prevent “excessive” appreciation.


Now, a main threat is the credit risks associated with an increase in mortgage lending activities.  According to the latest IMF report on the SNB, the abundance of liquidity has increased risk taking, leading to declining lending standards in the mortgage market, especially to less affluent households.


Under the Hood

Fundamentals continue to look solid in Switzerland. Unemployment is at 3.1%, the lowest since February 2009, the KOF leading indicators rose to the highest in almost five years last month and the latest PMI Manufacturing numbers are strong, showing a major inflection from its Eurozone peers which collectively slid in the May numbers (for more see yesterday’s post titled The Big Read: European Manufacturing PMI). 


Consensus expects the Swiss economy to expand 2.4% this year and 1.9% in 2012.



We’d expect the CHF to appreciate versus the EUR and USD over the intermediate term as Europe remains mired in sovereign debt contagion (flight to safety) and the US remains unclear on a strategy to tackle its elevated debt and deficit (the debt ceiling debate). While the SNB exchange rate may be more driven by developments in Greece rather than the bank’s monetary policy stance, more hawkish comments on rates by the bank should only further propel the CHF versus the EUR and USD. 


Matthew Hedrick



Consumer confidence was disappointing onTuesday in general and the trend among low income cohorts suggests that the discounting environment in the restaurant space is far from over.


As the chart below shows, confidence levels among households in lower income brackets is suffering while confidence levels among households earnings $50,000 or more per year remain high.  The consumer at the high end is performing well; steakhouses and higher average check concepts have seen robust performance metrics of late while lower end concepts are continuing to rely on discounting to drive comps.  With high food costs compressing restaurant margins, many companies are either taking price or signaling their intention to do so.  Higher food and fuel costs are also impacting consumers, however; lower income cohorts’ confidence levels have declined sharply from February.


Some consumer data points have emerged over the past couple of days that corroborate with this view:

  • Saks May comp sales were up +20.2% in May.
  • Nordstrom reported May comps +7.4% versus StreetAccount +5.7%.
  • TGT sales came in at +2.8%, below StreetAccount consensus, and the CEO commented that “guests today continue to shop cautiously in light of higher energy costs and inflationary pressures on their household budgets”.
  • TJX reported comps +2.0% versus StreetAccount +3.2%.
  • JCP reported May comps -1.0% versus +3.4%.
  • DRI is focusing on value this summer with an LTO of a $15 four-course meal.  The “$15 Seafood Feast” includes soup, salad, entrée, dessert and unlimited Cheddar Bay Biscuits and runs through July 25th.

Restaurant companies from CMG to SBUX are going to be taking price to offset inflation.  How successful this strategy is will partly depend on where their core consumer is drawn from and how inelastic demand is for their product.  Casual dining is particularly prone to this effect, in our view.  While CBRL may continually raise prices, traffic is negative quarter after quarter.  Other companies, like DRI, will continue to discount heavily to maintain traffic.  For the foreseeable future, though, the economic health of each concept’s core consumer will be the primary driver of sales.  The consumer confidence data, and company commentary, point to a continuing divergence between the high- and low-end concepts.


How long the robust confidence levels continue for the upper income bracket is uncertain.  The Bloomberg Consumer Comfort Index for people with household incomes over $100,000 per year was -6.3, negative for a third week and below the 2010 and 2011 averages.  According to Langer Research Associates, the firm that compiles the data for the Bloomberg Index, the 1.4% drop in the S&P 500 in May, the biggest monthly decrease in shares since August, may be starting to concern people in higher income brackets.  Steak concepts, in the event of a further downturn in economic conditions, may begin to retrace some of the significant progress they have made in top-line growth, as the chart below shows.







Howard Penney

Managing Director

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