Lesson of the day:  always be wary when a company decides to provide less disclosure.


"While concerns about the U.S. and global economies, as well as weakness in the capital markets, persisted throughout the quarter, Penn National did not experience any significant changes in consumer spending patterns at our facilities." 

- Peter M. Carlino, Chairman and Chief Executive Officer




  • "We took advantage of the dislocation in the capital markets during the third quarter and repurchased 755,517 shares of our Common Stock for approximately $27.1 million."
  • "Our third quarter revenue and EBITDA growth of 11% and 27%, respectively, exceeded guidance again illustrating the value of our operating disciplines, continued success with company-wide initiatives to improve margins and returns on capital deployed over the last year for expanded, acquired and newly-opened facilities...Impressively, fourteen of our fifteen gaming properties generated year-over-year improvements in adjusted EBITDA margins, and twelve of the fifteen increased their adjusted EBITDA."
  • "Hollywood Casino at Kansas Speedway and Hollywood Casino Toledo are expected to open on time in the first quarter of 2012 and second quarter of 2012, respectively, with Hollywood Casino Columbus on track to open in the fourth quarter of 2012."
  • "Reflecting the financial outperformance in the third quarter relative to guidance and assuming a continuation of the consumer trends we have experienced thus far in 2011, we are raising our full year 2011 revenue and adjusted EBITDA guidance to $2.7 billion and $733.8 million, respectively." 
    • 4Q: Net revenues of $671MM and $160MM of Adjusted EBITDA
    • EPS: $2.31 and 4Q of $0.46
    • Preopening: $13.5MM million in 2011, with $7.5MM in 4Q
    • No gains from insurance proceeds related to the Hollywood Casino Tunica flood
    • Operating results of Rosecroft Raceway with a live meet in the second half of 2011
    • D&A: FY $210.4MM and $50.8MM in 4Q
    • Non-cash stock compensation: $24.8MM for 2011, with $6.3MM in 4Q
    • The blended 2011 income tax rate: 37.2%
    • A diluted share count: 107.3MM



  • MA may be a semi-auction process.  PENN will likely be a major contender in that market.
  • In Ohio, it's more of a legislative issue. It's not clear on what the state wishes to do with the racetracks - but they are working hard at coming to an answer and expect an answer from the government soon.
  • Reasons behind going to the regional reporting approach is because they have regional managers overseeing these regions.  Reporting details for 22 properties is becoming cumbersome. Giving that much information from a competitive standpoint is also not in the best interest of shareholders.  
  • They will be opportunistic regarding share buybacks.
  • Corporate overhead was $18.8MM in the 3Q
  • Will not breakout Ohio results when the facilities open - not exactly showing a lot of optimism here
  • Toledo costs are just fine tuning as they get close to opening
  • 3Q cash: $207.8MM, Bank debt: $1.6376BN--$200MM on revolver; 691.2MM on term A debt; 748.1MM on term B debt; Capital leases of 3.3MM; contracted work of 1.9MM; total debt: 1967.8MM
  • $73.6MM of project capex and total capex $96.2MM.  Kansas Speedway Capex - their portion was $20.2MM
  • Opportunities in Asia are limited but they are a constant presence there now. They are looking for modest size projects - not Singapore size. Won't be leaping off of any cliffs.
  • What was $2.7MM of other income?
    • Currency translation gain ($2.9MM of currency)
  • Pre-opening is included in the various regions
  • Saw a slight increase in their non-rated activity and a slight decline in rated activity. 
  • Broadly, they haven't seen any change in early October trends from what they saw in the 3rd quarter
  • In Baton Rouge, they expect PNK to open their project in 3Q12.  Expect a loss of business in their Baton Rouge operation. Are prepared to reduce expenses and protect their profitable business.
  • Spring of 2013 is when they expect Horseshoe Cincinnati on Lawrenceburg. There will be an impact but have the benefit of no smoking ban vs. the competition. Also, there is the difference of suburban location vs. an urban competitor. They will react swiftly to adjust their cost structure.  This is part of the reason that they are taking a regional approach.
  • Street guidance for 2012 - clearly some of the numbers are too optimistic since they do not take into account for cannabalization and ramp.  In 2013, they feel very confident that they will be higher than the highest number.  Expect 2012 to be flattish to 2011.
    • Low and behold, the real reason for less disclosure
    • Believes that many analysts either believe that Ohio will open at full margins and or are not modeling any cannibalization
  • They are not seeing anything unusual in promotional spend out there. Las Vegas locals market is still the most competitive market out there. They are trying to stay out of the fray in Las Vegas though.  Beyond that, regionally, there has been a lot of experience with being over promotional and what that does to your business.
  • Benefit of buyback vs. dividend is that they can't claw back dividends but can also reissue new shares. Dividends are also not tax effective.  Don't count on a dividend anytime soon.
  • They don't believe that their investments are going to yield lower returns. Kent believes that new builds will cannabalize existing properties.  If shareholders don't like their investment opportunities, then they can always sell their shares. Ohio will have a great return on cash - even if you take Lawrenceburg cannibalization into account.
  • Expect that the Baltimore property will get built 
  • Competition from Rivers?
    • Through the 3rd quarter they are not seeing a large impact from Des Plaines.  The Elgin and Hammond license are most impacted as they expected. Not as much impact on Joilet and Aurora feeder markets
  • IL came out strongly against racinos.  The rub is that the measure passed in the House and Senate with minimal majority votes and that without the tracks it may be hard to get the bill passed during the veto session. The government has been unequivocal that it's too expansive to include the tracks. 
  • Ohio tracks - there have been some conversions about the approval and relocation of the tracks, but they expect an answer soon. Cost of relocation? Expects that there will be a premium on the cost of relocation. 
    • Could be well in excess of the $50MM license fee
    • Don't expect to be subject to local referendum but will be subject to local approvals but expect that part to be smooth sailing
  • Normalized tax rate will be roughly 37.5%- 38% 
  • Have $240MM remaining on their stock buyback reauthorization
  • There were no large lobbying expenses in the quarter. They did do a reorganization of their entities to be more tax efficient and will save them $4MM a year of taxes. They did have an obligation to spend some money lobbying in TX - but they weren't successful in getting to a statewide referendum - so there is nothing worth mentioning
  • $50MM in Ohio per license is paid in the quarter before they open
  • They are shifting some players that were rated to non-rated at lower segments of rated play.  Thinks that their share gains may be more that competitors are being more rational on promotion. Losing low end rated play because it's less appealing from a reward standpoint. Seeing less trips at the low end of rated play. 
  • Tick up in promotional allowances: this year includes M and Perryville in the numbers


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Initial jobless claims fell 1k last week to 403k (falling 6k net of the revision to the prior week).  Rolling claims were also at 403k, down 6k from the prior week.  While the rate of improvement has been disappointing, claims have been edging lower over the last five weeks (on a rolling basis).  We remain struck by the fact that the supposedly "technical" factors that affected the 395k number published a few weeks ago have not yet reversed. Overall, this is more positive than we would have expected, especially given market weakness and the lack of fiscal or monetary stimulus.  


Meanwhile, the spread between claims and the S&P remains nearly as wide as it's ever been in the last three years.  If claims move to the level implied by the S&P, that would be roughly 450k.  For reference, a 475k claims level would be consistent with 0% or lower GDP growth.  











2-10 Spread

The 2-10 spread tightened by 2 bps last week as the 10-year yield dropped 5 bps.  






Subsector Performance 

The table below shows the performance of financial subsectors over various durations.




Joshua Steiner, CFA


Allison Kaptur


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Feedlot placements during September fell 1.5 percent to 8 percent YoY based on estimates from three analysts before of the U.S. Department of Agriculture’s next monthly Cattle on Feed update, scheduled for release Oct. 21. Feedlot placements are an indicator of beef supplies in four to eight months.  - The Cattle Net work


Jon Bon Jovi is opening a new charity restaurant, Soul Kitchen, to help fight hunger in New Jersey.


“The buyout market has slowed in the past several months, amid growing economic uncertainty, but that likely won't last. Private equity groups are still sitting on a huge pile of money—$937 billion, to be exact, according to a report this week from the London-based research firm Preqin. And much of that will have to be spent soon” - The Restaurant Finance Monitor


Consumers exposed to social content are significantly more likely to increase their spending and consumption than those who aren't exposed, according to final results from an Ogilvy-ChatThreads study that polled restaurant consumers.  There was a 2-7x greater likelihood of higher spending or consumption depending on the media encountered by the study group. The sales impact was most pervasive when social content was combined with other types of media such as PR, out-of-home and TV. - QSR WEB




Volumes across the board is very low (except GMCR)






Last week Starbucks sustainability director, Jim Hanna told the Guardian that climate change is already affecting coffee farmers.  “What we are really seeing as a company as we look 10, 20, 30 years down the road – if conditions continue as they are – is a potentially significant risk to our supply chain, which is the Arabica coffee bean,” Hanna said. “Even in very well established coffee plantations and farms, we are hearing more and more stories of impacts.” Starbucks is taking a proactive approach to climate change risks. Hanna will be in Washington, D.C. on Friday to speak to members of Congress about climate change and coffee at an event sponsored by the Union of Concerned Scientists (UCS).


THE HBM: GMCR, CAKE - qsreps



Pizza Inn joined the growing throng of U.S. restaurant brands seeking opportunity in China when it opened its inaugural location recently in Hangzhou.

$CAKE downgraded to neutral from positive at Susquehanna


THE HBM: GMCR, CAKE - fsreps




Howard Penney

Managing Director



Rory Green


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We knew hold was favorable but didn’t know the mix was unfavorable – the downside of rolling junkets.



Galaxy’s results fell short of our estimates but was in-line with consensus.  While Starworld and Galaxy Macau held higher than normal and we knew that going in, both properties held worse on the rolling junkets and than on the revenue share junkets.  That hurts profitability.  Unfortunately, junket hold mix is impossible to discern unless management tells you. 


For Galaxy Macau, unfavorable mix negatively impacted results by HK$60MM.  For Starworld, we believe that the impact was at least as high unless expenses rose.  So until we get more information on Starworld, we think that if not for unfavorable mix, the Adjusted EBITDA number would have been between HK$1.9-2.0BN – still below our estimate but better than Street’s.





Starworld reported revenues spot in-line with our estimate, but Adjusted EBITDA fell 14% short or HK$123MM from our estimate.  Management stated that the mix of VIP hold was unfavorable in the quarter.  We can only guess that the impact was around HK$100MM unless expenses and or promotional activity shot up sequentially.

  • Gross gaming revenue was HK$16MM (0.3%) above our estimate while net gaming revenue was HK$34MM higher (1%)
    • VIP gross win was in-line with our estimate
    • Rebate/commission rate was 45% or 1.46%, slightly lower than what we had estimated
    • Mass win was right in-line with our estimate.  Drop was a bit light but hold was better.
    • Slot win was HK$6MM lower than our estimate due to lower handle and a slightly lower win rate
  • Reported hold of 3.2% was obviously higher than theoretical – however, everyone knew that going into the quarter (especially the HK analysts) and knowing that the mix was unfavorable makes analyzing the impact of normalized hold on the quarter moot. 
  • Implied fixed expenses came in HK$142MM higher than we estimated at HK$517MM vs. estimated fixed expenses of $330MM last quarter and $1,325MM in 2010.  We can only guess that the majority of this increase is due to unfavorable hold mix.

Galaxy Macau reported revenue that was 2% below our estimate and EBITDA that was 18% lower.  Adjusted for unfavorable mix, Adjusted property EBITDA would have been HK$1,030MM vs. our estimate of HK$1,188MM.  The fixed operating expenses at the property were much higher than they appeared to be in 2Q11.

  • Gross win was 3% lower than we estimated due to lower direct play levels.  In the first quarter of operations, direct play was about 4% at GM. This quarter, there was less than 1% direct play at the property.
    • The rebate/commission rate was 40.3% or 1.2% - lower than the all in rate we estimated (note that this doesn’t include comped non-gaming revenues)
    • Mass revenues were in-line with our estimates although drop was lower and hold was better
    • Slot revenues were 9% higher due to better handle
  • Net non-gaming revenue was HK$39MM lower than we estimated
  • Fixed expenses were HK$125MM higher than we estimated

Other stuff:

  • City Clubs changed their reporting to just fee income so going forward, revenue and EBITDA will be the same.  City Club EBITDA was HK$5.5MM lower than we estimated due to lower volume and low hold as we had noted.
  • Construction materials EBITDA and revenue was a lot better than we expected.  We have no special edge here.


Coming into the quarter our thesis on BWLD was based on accelerating inflation and slowing sales trends.  In part we were right to be concerned, but our checks did not suggest that lunch was strong as it was.


That being said, BWLD’s incremental traffic is coming in at lower margins as it is associated with increased discounting.  So what is the right answer?  Was it a great quarter that the sales headlines suggest or should we raise the red flag on trends that are unsustainable?  Headlines are important, but BWLD is now going to experience what the rest of the industry has become so accustomed to: significant inflation.  For me, there is enough here from an inflation stand point to merit concern about the sustainability of current trends.


At the very least, the endless wing promotion will never be replicated given the trends in wing prices.    The company was right to “give something back to the consumer” given the significant decline in wing prices.  What happen to margins in the next six months when wing prices could be up 10-20%?  The $3.00 appetizer that is a different story and is a permanent reduction in margin that they can’t get back, unless they raise the price, but then the traffic goes away.


Here are our Top Takeaways from the quarter:

  1. Food inflation accelerating and discounting adding to COGS.  Traffic was driven by $3.00 appetizers and drinks during Happy Hour and the unlimited wings lunch promotion.  The appetizers are generating significant traffic at the happy hour time (not sustainable over the long term). 
  2. Unlimited Wings added to cost pressures, but it did end in September so it won't be around for 4Q11. Wing prices are headed higher!
  3. Same store sales were strong at 5.7% in 3Q compared to 2.6% last year; menu priced increases about 1.4%. Average weekly sales increased by 11.4%, exceeding same store sales percentage by 570 basis points.
  4. The NBA does not drive customer traffic.
  5. Menu pricing is running at about 1.5% and most of that would roll off in 1Q12.  BWLD is looking at a 2% menu price increase in 2012; they will make a decision on that in November and roll it out with the menu update in the first quarter.
  6. Tax rate significantly lower in Q3, was 28.1% vs. 32.8% seq.
  7. Balance sheet and cash flow generation remain strong
  8. 4Q11 guidance - for the first three weeks of 4Q11 same store sales are strong at 8.3% at company-owned restaurants and 6.7% at franchise locations as compared to same store sales trends for the first four weeks in the prior year of -0.7% 'at company-owned restaurants and -1.7% at franchise locations.  If the trends persist for the quarter, it would suggest a significant pick up in 2-year trends.  One-time items in the quarter make that unlikely. 
    • The price of chicken wings for the first two months of the fourth quarter is averaging about $1.39 per pound. This compares to last year's average price of $1.49.
    • BWLD boneless wings contract which was due to expire on March of 2012 has been extended through March of 2013 with a very small price increase beginning in April of 2012; the remainder of the commodity basket in 4Q11 is contracted at an increase of about 3.5% YoY.
    • In 4Q11 BWLD expects to leverage labor costs and operating expenses with higher same-store sales trends.
    • The 19 new store openings will be the highest pre-opening cost quarter of the year.
    • Wing prices are moving up.





Howard Penney

Managing Director


Rory Green


Practitioners vs Professors

This note was originally published at 8am on October 17, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Policy is the name we give to our future mistakes.”

-Henry Wallich


The late Henry Wallich (1988) was an economist, central banker, and Yale professor. He served under Eisenhower and was also a prolific columnist for Newsweek who was well known for his ability to connect with the common American citizen. He was accountable and accessible.


Yale University hosted a “Panel Discussion on the US Economy - How Do We Create More Jobs” last week that caught a lot of us in the ranks of Yale Alumni off guard. It wasn’t so much Yale’s esteemed James Tobin Professor of Economics, John Geanakoplos, suggesting that we “try inflation as a policy” that would have Wallich rolling over in his grave, as it was the glaring amount of partisanship on the panel.


To challenge the Yale Economics Department formally to a debate would be challenging the perceived wisdoms of Big Government Interventions and Keynesian Economics on their merits – so I will.


For those of you who have not already seen this Panel Discussion, here’s he link (  and my notes:


1.   Richard Levin - opens by saying “we did not stimulate enough”…  and goes on to suggest the US government should have acted as boldly as the Chinese did (which is interesting in and of itself, given that’s not a democracy). Levin thinks it’s “simple” - if we spent even more tax payer moneys, we’d have been fine. This is the Paul Krugman school of thought. Period.


2.   William Nordhaus – says the word “occupy” is the wrong word – he thinks it sounds like the “West Bank.” In terms of “substance”, he says “even if they are right”, it won’t work unless they have “well defined policies” (again assuming that all Americans think more policy is the answer to America’s problems, as opposed to less).


Nordhaus, like Levin, thinks Obama is right and we need a “jobs bill times 3” and “need to stop attacking the Federal Reserve.” He states plainly that any other idea is “partisan” (implicating himself as partisan). He addressed trivial points like the Gold Standard saying “give me a break … come on over to econ 122 and we’ll have a discussion.”


3.   Robert Shiller – starts by saying “every crisis is an opportunity… I have written 4 books… and now I have 10 minutes to talk”… “I think we should be improving our financial markets by democratizing and humanizing” (through Dodd-Frank type reforms – i.e. more policy)…


On the Jobs Bill (that was filibustered), I like to focus on “all the good things that were in that bill… building bridges and highways, hiring teachers and policemen, etc… but it seems to have a budgetary problem… in that it would raise the national debt”… “especially in times like this when we are in near depression- we need a balanced budget multiplier” (a Paul Samuelson theory from the 1940s)


4.   Aleh Tsyvinski – clearly the outlier – younger and more globally oriented in his macro thoughts (refreshing). Said what worries him in general is the “short-term focus on today’s crisis” as opposed to focusing on the “longer-term context” of large Keynesian experiments like Japan. “I am afraid we are on the verge of something much bigger and problematic in terms of long-term US economic growth.”


“Part of our employment problem has to do with the failure of policy… the theory of the multiplier effect didn’t work…” Says a lot of what we’re focusing on creating with policy could make the US economy look like Europe – slow growth, higher unemployment. “They put a lot pressure on politicians to act… but the overall objective should be long-term economic growth.”


5.   John Geanakoplos – “the occupy wall st movement will be a prelude to bigger riots”… Yale campus was in riots in 1970-1971, “when I was here in 1975, we missed the revolution… but we may have another chance!”


He wants to build bridges and allow for principal forgiveness (mortgages) – but he doesn’t want to just triple the size of the spend – he wants to “plan” for it. “Most economists didn’t predict any of this… the fact is that they got it all wrong…” … “so there’s something wrong… there’s something missing from our macro economics and our federal reserve process because they don’t focus on leverage…”




Levin summarized the panel’s ideas as follows: A) short term problem = full employment B) short term problem = housing C) long-term problem = economic growth. And we can solve for all of these with MORE of what didn’t work! Short-term, focus on infrastructure and “double down.” Short-term, focus on mortgage forgiveness. Long-term we need a balanced budget (which you cannot do if you do A and B) and raise taxes.




I think my daily strategy notes for the last 4 years and, more importantly, accurate forecasts in calling the last 2 major Growth Slowdowns (2008 and 2011) serve as ample repudiation of Keynesian Economics. That said, I think the most transparent and accountable way to have a rebuttal to all of the aforementioned academic dogmas gone bad is to have an open public debate.


There are 9 Yale grads on my team who would love an opportunity to explain how some of our undergrad “economics” teachings have failed our country in the real world. We can call the debate “Practitioners versus Professors” and I think anyone who’d like to find room to occupy a bi-partisan debate in their thought process will come out smarter having heard both sides.


My immediate-term support and resistance ranges for the Gold (back above its TREND line this morning), Oil (failing at its TREND line of $89.18), the German DAX, and the SP500 are now $1685-1715, $84.18-89.18, 5811-6192, and 1179-1242, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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