Solid quarter and guidance



“Our business continued to show improvement as we saw double-digit EBITDA growth in our wholly-owned operations for the third straight quarter. Our strategy of building a diversified portfolio and maintaining an exceptional customer experience,
while keeping a tight rein on costs, is delivering strong results.”


- Keith Smith, President and Chief Executive Officer of Boyd Gaming




  • IP acquisition: "We are confident we will be able to drive significant efficiencies and generate additional revenue through cross-marketing opportunities"
  • Las Vegas Local: "Three of the four major properties in the region posted increased EBITDA, led once again the Orleans, as margins for the region improved..."
  • Downtown: "Successful marketing efforts with the Hawaiian customer segment drove strong increases in play and visitation, generating revenue and EBITDA growth for the third consecutive quarter.  Results continued to be impacted by significantly higher fuel costs associated with the Company's Hawaiian charter service."
  • Midwest and South: "Results reflect widespread improvement across the region, particularly in our southern Louisiana and Illinois operations."
  • Borgata: "Borgata's results reflect the mandated closure of the property for three days in late August due to Hurricane Irene; absent this closure, the Company believes Borgata would have reported growth in both revenue and EBITDA during the third quarter. Borgata continued to outperform the Atlantic City market, achieving an all-time record market share of nearly 20% during the third quarter."


  • Positive momentum that they have seen in the 1H11 continued in the 3rd Q
  • Las Vegas locals market - business is moving in the right direction. 
  • IP generated $36MM of LTM EBITDA as of Sept 30th.  $5MM of synergies from IP as well as benefits from cross marketing.  Closing was extended to Nov 28th and will be funded by secured financing
  • Strategy is deleveraging and diversifying their business.  Interested in acquisitions, management contracts, and opportunities from online gaming should it become legal.
  • Las Vegas locals business - margins rose by 320bps due to focus on maximizing returns on marketing dollars. EBITDA rose 28% at the Orleans - making it the 4th Q of growth at the property.  Elevated promotional environment has continued.  Stations remains aggressive and launched its 2nd large marketing campaign, but BYD will remain rational. No impact yet. Customers continue to choose BYD despite elevated promotional environment.
  • Downtown segment EBITDA hurt by $850k increase in fuel expenses.  All 3 properties experienced growth. Hawaii's economy has been strong and their marketing efforts continue to be successful.  Boeing 767 has increased their capacity by 12%.
  • Midwest & South: 4 out of 6 properties grew EBITDA.  Treasure Chest lead gains, followed by Delta Downs
  • AC: Estimate that the impact of Irene cost Borgata $10MM of revenue and $6MM of EBITDA. In September they reported an 11% increase in GGR and had record levels of table drop - with stable hold levels. 
  • Cash ADR's were up across the board and so they remain cautiously optimisitc
  • $2.4BM of debt; Borgata: $806MM ($16MM no R/C).  Consumated IP for $288MM right after the Q.  They borrowed $200MM under the R/C. $415MM O/S on their R/C. $215MM available in facility due 2015.  They expect to raise $300MM between now and the end of the 1Q12'.
  • $31MM of fully consolidated D&A. Decrease in D&A is due to a decrease in capex
  • Expect 4Q D&A to add $4-5MM from IP acquisition
  • Guidance 4Q: 
    • Wholly owned:
      • $73-78MM EBITDA (including IP)
      • EPS: $0.01 to a loss of $0.04 (including IP)
    • Borgata:
      • $34-37MM of EBITDA


  • Trends in 4Q so far: 
    • December is slowest part of the quarter for locals
    • Overall they are seeing overall stable trends in gaming.  In August and September, their customers played very lucky.
  • On the gaming side of the business, they continue to see modest but stable growth in the locals business
  • There are some extenuating circumstances that impacted IP EBITDA.  They are very confident of the upside there.
  • They are not interested in MA
  • Impact of Mojito Point at Delta Downs?
    • They are already at capacity on weekends at the property, mid-week is more of an issue. Thinks that more people visiting the area will benefit them.
  • Write off was related to acquisition costs and flood expenses.  There shouldn't be any material acquisition costs in the 4Q.  The $1MM of other revenue was related to a payment from Dania.  Basically EBITDA from Dania was a $1MM loss.
  • Cost of funds/options for the $300MM financing? 
    • They have a lot of options across the capital structure - it's not just high yield notes.  For the right kind of acquisition they would consider equity but not for IP - it's more of a plug in acquisition not transformative
    • They never counted on Dania closing to fund IP
    • We think they are talking to the banks and negotiations are going well
  • They are not depending on market growth to make the IP acquisition make sense. They think that plugging it into their system will be important and the key driver of growth there. They believe that the there are more synergies than they thought.
  • FCF will be continued to be used to maintain their properties competitive. Maintenance capital is about $70MM or $15MM/Q in 2011 and $80MM in 2012.  Room refurb will be done in 1Q12 at Borgata. Borgata's maintenance is about $20MM/year. 
  • Expect 60%+ flowthrough going forward in 2012
  • Capex in the Q:
    • BYD:  $15MM in maintenance and $70MM or a little less in 2011. Boyd ex IP in 12' $75-80MM. Borgata $8MM of capex, and will spend $20MM on the room refinish.  Next year: $20MM of maintenance and $25-30MM of project capex.
    • IP:  $44MM of maintenance - including $5MM in 4Q
  • How long will it take to recognize synergies at IP?
    • Some will be immediate and some will take longer.  North of $5MM in year 1 - not pro-rata all year - will take a year to get to $5MM.
  • Treasure Chest is truly a local casino - most of their customers come within a 5 mile perimeter. Most of those clients also visit Biloxi as a destination market.
  • Bought back $8.5MM of bonds at Borgata late in the quarter
  • IP  - peak EBITDA? N/A - happened in the year following Katrina as they were first to open. 
  • Impact of Acqueduct opening? 
    • Will likely to have some small impact on AC but not really an impact on Borgata
  • Revel - not sure what exactly will open amenity wise. They do think that Revel will grow the market, but aren't naive to think that there will be no impact. They are doing a room refurbishment. They will be aggressive to maintain their #1 position in the market.  
  • IP is not limited in regards to second lien capacity


As we like to say at Hedgeye, markets don’t lie; politicians do. 


Having said that, the quantitative set up for the Hedgeye sector models have all nine sectors bullish from an immediate-term TRADE perspective.  Yesterday, Healthcare (XLV) joined four other sectors in the Bullish TRADE and TREND camp. 


Keith’s models favor Utilities (+10.8% YTD), Consumer Discretionary (+6.7% YTD) and Healthcare (+6.7% YTD) on the long side.  Market prices are saying that the consumer looks good, but the macro data continues to look challenged.  As prolonged as the jobless malaise has been for consumers, it could be getting worse.


As a word of caution, consumers have not stopped spending and many well-positioned companies continue to post strong results.  However, the anemic job and income growth, stock market volatility, falling house prices, elevated gasoline prices, and soft consumer confidence are all reasons for concern. 


RETAIL SALES TRENDS - Today, after four weeks of little change, the ICSC chain store index surprised by posting a sizable decline and came despite seasonably cool weather, which should have supported sales trends.  The 0.8% decline brought year-over-year growth to 2.4%, its lowest reading since mid-June.  The ICSC noted weak customer traffic at all types of retailers during the week.  Year-over-year growth softened as well, although it will take more than one soft week to suggest a change in behavior. Trend spending growth is nearly 3%, where it has been much of the year, with the exception of a dip in June and a jump in July.


HOUSING – The Hedgeye Financials team published a note today titled, “Case-Shiller Better, But Not Good Enough”.  The Case-Shiller Home Price Index posted a -3.8% decline y/y in August versus -4.2% y/y in July on a non-seasonally-adjusted basis.  This sequential improvement wasn't enough to live up to expectations, which were looking for a -3.5% y/y decline.  Drilling down to the city level, 17 of the 20 cities showed improvement on a year-over-year basis between July and August.  Atlanta, Las Vegas, and Miami were the exceptions.  The Financials team likes ITB as a good short it is the US Home Construction ETF. It is similar to XHB but has a larger exposure to the builders themselves as opposed to home goods retailers and other non-builder components. 





CONFIDENCE – This morning’s print was a bomb, clearly.  The Conference Board’s Consumer Confidence Index decreased to 39.8 from a revised 46.4 reading in September.  Tellingly, this month’s reading was less than the most pessimistic forecast in the Bloomberg survey.  The expectations component fell to 48.7 from 55.1 (previously 54). The present situation component fell to 26.3 from 33.3 (previously 32.5).









RICHMOND FED - The composite index was unchanged from September at -6.  Details of the survey said that the employment declined for the first time since September 2010, as the index plummeted 14 points to -7 - the lowest level since November 2009.



The market seems hyper-focused on the European debacle and, by comparison, the issues in the United States may seem less threatening.  The macro trends are not encouraging  and earnings season, which is far from over of course, has been less than reassuring with results from 3M this morning not corroborating with the view many are holding that fears of sluggish economic growth are overblown.  The company said on its earnings call this morning that it expects sales trends in 4Q to be flat versus 3Q.


Howard Penney

Managing Director


Retail: Biggest Spending Divergence Ever

Somehow, retail sales march forward while consumer confidence takes it on the chin. Without even making a call on the consumer, this trajectory is simply not sustainable.



Here’s the mother of all (facetious) revealing statements by the Hedgeye Retail team today. “When people are more confident, they buy more ‘stuff’, and when they’re less confident, they buy less -- or at least growth in spending slows.” 


Why then, may I ask, does the chart below exist? It shows the gap between (Bloomberg’s) same store sales composite and Consumer Confidence – the latter of which put in a 3-handle this morning for the first time since March 2009.


Simply put, we’re looking at the widest gap between confidence and spending in recent history.


Even if we ignore the gap for a minute -- and assume that because of some kind of secular shift about which I did not get the memo – the trajectory of these two items is just wrong.


The punchline is that either the delta in spending is going to revert back towards the path of consumer confidence (bearish), or confidence levels will sequentially uptick (bullish) to catch up with where the consumer has already decided to go.


There’s a ton of theories we can conjure up – like the weak housing market is keeping money out of new homes, which is giving people a more meaningful pot of gold (even if the aggregate pot is smaller than last year) to spend in stores. Maybe it’s the on-line effect where we continue to see more impulse purchases (ie Amazon Prime). While that's very real, that one’s a stretch as it relates to explaining away anything in the ballpark of what we're seeing today.


Either way, something’s got to give. Be careful what you own here.


We like the franchise US brands that avoid exposure to a meltdown in global markets, like TGT and WMT. We also like names with accelerating growth and RNOA due to company-specific factors, like LIZ, NKE, and AMZN.


On the flip side, we don't like names that are playing catch-up due to lack of investment in their business -- as well as those that have to compete with them. A better way to say that is that we don't like JCP, KSS, M, HBI, GIL, and after the print -- JNY and CRI. We also don't like UA, but for very different reasons. 


Retail: Biggest Spending Divergence Ever - 10 25 2011 10 40 23 AM

Source: Bloomberg

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The ICSC chain store sales index fell 0.8% last week; year-over-year growth tumbled to 2.4%, its weakest performance since June. The result was disappointing given favorably cool weather and a declining gas prices.





THE HBM: MCD, GMCR, BKC, RT - subsector fbr




MCD: McDonald’s was reiterated “Buy” at Barclays Capital.


GMCR: Green Mountain Coffee Roasters was maintained “Buy” at Canaccord Genuity.


BKC: Burger King has a new burger and it looks like BK is trying to take on the "gourmet" burger chains.  At participating restaurants, customers can try the 5.5oz offering (pictured below).


THE HBM: MCD, GMCR, BKC, RT - new bkc burger





RT: Ruby Tuesday is entrusting Durham, N.C.-based McKinney with creative duties.  The switch is the second change for the fast casual chain in the past six months.


THE HBM: MCD, GMCR, BKC, RT - stocks 1025



Howard Penney

Managing Director


Rory Green


UA: Low Quality Beat


UA’s Q3 EPS of $0.88 came in above printed expectations of $0.83E, but the quality of the beat was low due to a $0.04 tax benefit. A real number was closer to $0.84. We were at $0.83, and true market expectations were for a number starting with a 9. This has been one of our top short ideas as the market is underestimating the margin risk for UA to right-size it's growth profile long-term. There's nothing in this release that makes us change that view.


Here are our key takeaways ahead of the 8:30 call:


What We Liked:

  • Incremental footwear revenues were the key driver of +42% top-line growth above our expectation of 37% with the difference in footwear alone accounting for an additional 5% growth. This supports improved trends that we’ve highlighted with recent share gains in the athletic channel with UA finally piercing the 1% market share mark.
  • Other SG&A spend (product innovation etc.) was up +36% consistent with last quarter and slightly higher than we expected. We would have liked to see marketing spend higher as well (see below), but at the end of the day UA needs cutting edge product to sell and this line drives that engine.

What We Didn’t Like:

  • Inventories are still high up +63% yy on +42% revenue growth compared to +73% last quarter. The increase last quarter was attributed to the need to better service demand, an earlier build of ColdGear apparel for the fall/winter season, and the transition of hat’s and bag business in-house. Inventory levels up over 60% for the third quarter in a row has us increasingly concerned in the in the obvious -- which is the direction of Gross Margins. 
  • The absence of an initial 2012 outlook. The company provided its initial view on 2011 in its Q3 release last year and the year before management spoke to it in their opening remarks. If they don’t offer a view in their prepared remarks, you can rest assured they’ll be asked in the Q&A.
  • Marketing spend ratio of 10.4% was the lowest in 5-years. Sure, it’s due in part to higher sales, but we know that endorsement spending is up, which means that media and consumer facing marketing is down – not what we want to see as a 2012 revenue driver.
  • Apparel came in softer than we expected. This doesn’t give us any reason to think that our concern re Q4 apparel revs is unwarranted.  
  • We highlighted the growth in footwear, but timing is playing a role here. Yes, the latest running product is starting to gain traction – a definite positive after several years of disappointment, however the mention of “earlier y/y shipments of basketball product” indicates a shift at play here compared to a much higher level of sustainable demand.
  • The $0.04 tax benefit in the quarter – it boosts the headline number, but is meaningless to true underlying performance.

We’ll be back with more as warranted after the call.


UA: Low Quality Beat - UA S 10 11


Casey Flavin



It's all about Las Vegas!  Just kidding. 



Macau may disappoint the Street but it all comes down to Singapore where expectations are all over the place.  We were initially worried that management had raised the bar too high on Singapore.  You may recall such comments as "Q3 VIP volumes at the end August had already reached Q2 levels".  However, at least one analyst tried to temper expectations yesterday as September hold percentage may have been a bit low.  Management has a lot of flexibility - and uses it - in determining the hold impact.  As usual, we will try and get you an impartial and unbiased estimate of the hold impact.  For now, we are somewhat agnostic on the stock going into Thursday's Q3 release.


Here are our projections:





We estimate that LVS’s 3 properties will do $1,143MM of net revenue and $364MM of property level EBITDA in 3Q11.  Luck did not smile upon LVS’s properties this quarter – with all three holding low in the 3rd quarter.  We estimate that low hold cost LVS $30MM in net revenue and $18MM of EBITDA on the VIP side.  We’re pretty sure some of that bad luck was offset by good luck on the Mass side, but we’ll have to wait and see until they report that detail.


We estimate that Sands Macau will report $318MM of net revenue and $87MM of EBITDA, which is 5% below the Street.

  • Net gaming revenue of $309MM
    • VIP Net table win of $136MM, negatively impacted by low hold
      • RC volume of $7.7BN, assuming 12% direct play and 2.6% hold
      • Rebate rate of 84bps or 32% of hold
      • Normalizing for hold, gross win would have been $18MM higher and net win would have been $12MM higher.  EBITDA would have been $7MM better.
    • Mass win of $146MM
      • $728MM of drop and 20% hold
    • Slot win of $27MM
  • Net non-gaming revenue of $9MM
    • Promotional expenses of $11MM or 3.5% of net casino revenues
  • $181MM of variable expenses
    • Taxes: $146MM
    • Junket commission and gaming premiums: $29MM
  • $4MM of non-gaming expenses
  • $46MM of fixed expenses in-line with last quarter

We estimate that Venetian Macau will report $671MM of net revenue and $229MM of EBITDA, which is 6% below the Street.

  • Net gaming revenue of $580MM
    • VIP Net table win of $230MM, negatively impacted by low hold
      • RC volume of $12.2BN, assuming 21% direct play and 2.7% hold
      • Rebate rate of 81bps or 30% of hold
      • Normalizing for hold, gross win would have been $19MM higher and net win would have been $13MM higher. EBITDA would have been $8MM better.
    • Mass win of $292MM
      • $1,120MM of drop and 26% hold
    • Slot win of $58MM
  • Net non-gaming revenue of $91MM
    • Promotional expenses of $24MM or 3.5% of net casino revenues
  • $325MM of variable expenses
    • Taxes: $265MM
    • Junket commission and gaming premiums: $47MM
  • $22MM of non-gaming expenses
  • $95MM of fixed expenses

We estimate that Four Seasons/Plaza will report $154MM of net revenue and $48MM of EBITDA, which is in-line with the Street.

  • Net gaming revenue of $131MM
    • VIP Net table win of $78MM, negatively impacted by low hold
      • RC volume of $4.4BN, assuming 41% direct play and 2.7% hold
        • This would mark the second sequential quarter of YoY declines.  We expect that 4Q will see a turnaround in VIP volumes with Neptune opening up its rooms any week now and then Sun City opening by year end.
    • Rebate rate of 89bps or 33% of hold
    • Normalizing for hold, gross win would have been $7MM higher and net win would have been $5MM higher. EBITDA would have been $3MM better
    • Mass win of $42MM
      • $119MM of drop and 35% hold
    • Slot win of $11MM
  • Net non-gaming revenue of $23MM
    • Promotional expenses of $10MM or 7.5% of net casino revenues
  • $78MM of variable expenses
    • Taxes: $66MM
    • Junket commission and gaming premiums: $9MM
  • $7MM of non-gaming expenses
  • $20MM of fixed expenses




We estimate that MBS will produce $785MM of net revenue and $434MM of EBITDA this quarter, which is 10% higher than the Street.  Based on our tax revenue through August, we believe that the Singapore market is on track to do S$2BN of revenue this quarter and MBS has a good shot of capturing more than 50% of the GGR this quarter despite lower sequential hold.

  • Net gaming revenue of $634MM
    • VIP Net table win of $223MM
      • RC volume of $14.7BN, up 43% YoY and 20% sequentially.
      • 2.8% hold – the average hold for MBS since opening has been 2.7%
      • Rebate rate of 1.23%
      • Normalizing for hold, gross win would have been $7MM higher and net win would have been $5MM higher. EBITDA would have been $3MM better.
    • Mass win of $275MM
      • $1.3BN of drop and 22% hold
    • Slot win of $136MM
      • $2.5BN slot handle, 5.4% win rate
  • Net non-gaming revenue of $151MM
    • Promotional expenses of $40MM or 21% of non-gaming revenues
    • $65MM of hotel revenues
  • $143MM of variable expenses
    • Taxes: $135MM
  • $208MM of fixed & non-gaming operating expenses, up a little from $201MM last quarter




We project LVS’s Las Vegas operations will produce $318MM of revenue in 3Q11 and $80MM of EBITDA, which is 4% ahead of the Street.

  • $104MM of net casino revenue
    • Slot win of $36.2MM flat QoQ
      • Handle down 37% YoY to $418MM but up sequentially from $412MM
      • Win %: 8.7%
    • Table win of $83MM
      • -5% YoY table drop ($453MM), 18.3% hold
  • Gross gaming revenue of $119MM and a rebate equal to 3.3% or $14.7MM compared to $15.6MM last quarter
  • $214MM of net non-gaming revenue
    • $106MM of room revenue
      • RevPAR: $164 (up 6% YoY)
        • Occupancy: 88%
        • ADR: $187
  • $126MM of F&B, Retail and other revenue, up 15% YoY
  • Promotional expenses equal to 15% of gross gaming revenue or $18MM
  • Gaming taxes of $8MM and total operating expenses of $230MM, down slightly from $232MM last quarter




We estimate that Sands Bethlehem will report 3Q11 net revenue of $110MM and EBITDA of $28MM

  • $70MM of slot revenue, $30MM of table revenue


  • D&A: $206MM
  • Rental expense: $10MM
  • $50MM of corporate and stock comp expense
  • Net interest expense:  $51MM

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