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Station management and Colony Capital blazed a trail last year in taking the company private, a trail now potentially headed for bankruptcy. That’s what happens when one levers up at the highest multiple, at the peak of market and the peak of the easy money era.
Station is now blazing another trail in eliminating employer matching contributions to employee 401(k) plans. Like many gaming operators, Station has laid off employees this year but this is the first I’ve heard of a gaming company cutting benefits. It’s hard to believe that employee morale and service levels won’t suffer. Station’s employees have seen coworkers laid off and now their benefits cut at the same time their 401(k)s are likely down significantly already with the stock market crash.

Whether this is the right move for Station at this juncture is debatable, but it certainly adds to the list of potential competitive disadvantages vis-à-vis Boyd Gaming in the locals Las Vegas market. Unlike Station, BYD is on the right side of the liquidity trade. We’ve written extensively on the advantages liquidity provides in this environment including:

• The ability to acquire cheap and strategic assets or companies in a buyer’s market with few buyers
• More cash for advertising, marketing, and promotional activity
• Liquidity to upgrade slot floor – this is a biggie
• Better maintained facilities overall

Better customer service should be the next opportunity for BYD to steal share. Employee relations are very important in this labor intensive and service oriented business. Happy employees provide better service. Ask Steve Wynn. Hopefully, BYD will capitalize.

US Regional Economics Part 1: It Matters... A Lot

Yeah, the national unemployment rate is heading higher. We get it. But unless you’re Wal*Mart, the ‘national average’ rate means squat. We need to look at the trends in each and every state.

Most retailers that have pointed out areas of weakness by geography have chirped the same song. Florida, Texas, Nevada, Arizona, and California. But what about Oregon, South Carolina, Georgia, Wisconsin and Louisiana? These might not be the epicenters of our economy, but they are showing meaningful deterioration on the margin in employment trends – yes, even more so than California.

Map 1 shows unemployment rate by state. Not a lot of surprises. West Coast in tough shape, South/Southeast feeling pain, Northeast hanging tough, and Midwest/Northern plains a mixed bag.

Map 2 is more meaningful. It shows the yy change in employment rate by state. The punchline is that many states that have been most resilient to date are the ones showing the biggest erosion in employment trends.

What’s the next step in this analysis? We’re taking the lat and long of every retailer and plotting to see greatest exposure/risk. We’ll come back to you with results shortly. In the interim, if there are any specific retailers you want results for, contact my team or Jen Kane (Director of Client Services).

Zach Brown and Brian McGough

The S&P 324

If the S&P held to its $4bn market cap hurdle, it would lose 166 components. With 75% of apparel S&P components under that level, this is something to consider.

What does it take to get removed from the S&P 500 Index? LIZ was booted last week due to not even coming close to hitting market cap hurdles. According to S&P, here’s what get’s you the boot from the index. One thing that is clear to me is that S&P has hardly been true to these standards on a consistent basis.

A company must “substantially” violate at least one of the following criteria for an “ongoing” period:

1) Market capitalization must exceed 4 billion
2) Adequate liquidity defined by having the ratio of annual dollar value traded to market cap great than 0.3
3) Corporate governance structure must be consistent with U.S. practice
4) The U.S. portion of revenues, operations, fixed assets, and employees must be a significant portion of the total.
5) Financial viability must be expressed through consecutive quarters of positive as-reported earnings and an operationally justifiable balance sheet.
6) Company should not be involved in mergers, acquisitions, or significant restructuring.

Recently, the Nasdaq temporarily removed their minimum market cap rule…

Below is a chart of the lowest market cap companies in the apparel space:

Zach Brown
Jr Analyst

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INDIA: Perspective on the Mumbai Attacks

Despite the devastating terrorist attacks from only five days earlier, life in Mumbai had largely returned to normal by Monday - sidewalk vendors had resumed their business, streets were “choked” with traffic, and the train platforms—the very same platforms that the terrorists arrived on—were congested with commuters, heading in and out of the station now filled with bullet holes. Despite this appearance of normality, not unlike the activity in New York a week after 9/11, the question remains, has the world changed as a result of these attacks? Unequivocally, in our opinion, just like after prior major terrorist attacks, that answer is yes.

In contrast to our view, the main stream consensus media has decided to react differently this time, the “other” times being the other major terrorist attacks post-9/11: Madrid in March 2004 (killed 191, injured 1755) and London in July 2005 (killed 52, injured 700). In numerous reports, the media has mentioned that the terrorists coordinated the attacks with Blackberries, as if for a minute to bring the violence into the living rooms of Blackberry owners and create the image of these attacks being close to home. More generally though, the gravity of these attacks has quickly been dismissed likely because the number of victims didn’t approach the 9/11 numbers, or because Mumbai is so far from US soil.

As Keith noted in The Early Look this morning: “The facts were there – this cross border attack from Pakistan to India was not a trivial one to consider. The financial network media simply chose not to highlight it.”

What we’re left with today is a number of facts and speculation on intelligence. What we know: The 62-hour siege of Mumbai was carried out by ten heavily armed and well-trained gunmen, suspected to have links to the Islamic terrorist group Lashkar-e-Taiba (LET), which is believed to have links to Pakistan’s military intelligence agency. The goal of these terrorists was to kill over 5,000 people, which would have rivaled the 9/11 attacks, the fact that they failed does not alter the seriousness of the action.

According to Goldman Sachs, the India terror attacks won’t hurt the economy. Goldman seems to be, just like the mainstream media, painting an overly optimistic view. We actually believe the implications are potentially significant for stability in the region and tensions between Pakistan and India. This was the fifth major terrorist attack on Indian soil since May. This attack, had it been executed properly, would have been on par with the largest terrorist attack in the last decade, and finally, this action only amplifies heightened tensions between Indian and Pakistan.

We remain short India via the IFN, iShares India etf.

Daryl Jones - Managing Director
Matthew Hedrick - Analyst


ISLE’s FQ2 was a disaster. Company EBITDA missed projections by a whopping 24%. EBITDA fell 21% from last year, and last year was certainly no prize. So the stock should be down big, right? Wrong. ISLE’s stock is ripping, up 10%.

I’m not necessarily making a call on ISLE although I am biased to the long side. The $95 million in insurance proceeds from Hurricane Katrina will help the balance sheet, and the company’s liquidity position was already in decent shape thanks to Dale Black, CFO. The suspension of Capex, as announced today, is another good liquidity move.

However, the stock is essentially an option, and there are probably better risk/reward opportunities on the short and long side elsewhere. I do think the investor reaction to these horrendous operating numbers is quite positive for other regional gaming stocks. This may signal a bottom for stocks such as BYD, PNK, and PENN. All of these companies have ample liquidity and are not going away.

This fits the definition of a bad quarter yet the stock is up!

Commodity Exposure Exposed – Casual Dining

Last week, the USDA lowered its food inflation forecast for 2009 by 0.5% to reflect the decline in prices for meat, eggs, dairy, cereal and baking products. Despite these declines, food prices are still expected to increase by at least 4% in 2009 (marking the third consecutive year that food prices have increased by 4%). The USDA left unchanged its forecast for 2008 food prices, which are expected to rise 5.5%, the largest increase in two decades.

Specifically, 2009 beef, pork and poultry estimates were lowered and are now forecasted to grow 3% and the forecast for dairy prices were reduced to up 2.5%. That being said, commodity inflation pressures should begin to moderate on a YOY basis in calendar 2009, but will still remain at historically high levels. Gas prices, which are down 40% YOY, should help from both a cost standpoint as added fuel surcharges begin to decline and from a customer demand perspective.

The tables below highlight specific casual dining companies’ commodity exposure and their most recent cost outlook for fiscal 2008 and fiscal 2009.