CMG is one of a long list of the companies we follow that is priced for perfection.  Others include MCD, SBUX, YUM, DPZ, PNRA and BWLD.  Given the early read in this earnings season, companies that are priced for perfection need to put up an exceptional quarter to keep the momentum going.  We believe CMG will post some of the best numbers in the industry but whether or not it is going to be enough to keep the stock going higher is difficult to say.  


Looking out to 2012, we see two important metrics that will help to determine how the rest of the year is going to shape up. 


Chipotle is trading near its all-time highs and at 21x EV/EBITDA NTM, making it the most expensive stock in the space.  We’re not making any call into the quarter; this business model has clearly surprised to the upside over the last few years.  Here are two key points we will be watching for any sign of weakness.  It should be noted that two other companies that the Street loves, MCD and SBUX, printed strong numbers last week but traded down because they missed expectations.


Is the company taking further price and did pricing impact traffic in 4Q11?  The company suffered in early ’09 from a drop off in traffic after pricing was taken up to protect margins.  While food inflation has subsided, we expect a continuation of margin pressure from those items that CMG relies on.  CMG took significant pricing in 2009 and traffic did fall off precipitously.  One could argue that the brand is stronger now, but we will be watching to see if the divergence between Food Away from Home CPI and CMG pricing grows any larger in 4Q.  If, on the margin, other companys' offerings are perceived to be better value than Chipotle's, we would expect that to negatively impact traffic (second chart).  







Is the company continuing to drive strong returns on incremental investment as it grows?  This is a key metric we follow for restaurant companies that are growing.  If the ROIIC were, any time soon, to come down from the best-in-class level it is currently at, we would expect the stock to trade at a much lower multiple.  While we could see a dip in the stock price if the street’s expectations - particularly the anticipated 10.4% comp - are not met, we do not expect any larger correction until the ROIIC comes down much, much further.  





Howard Penney

Managing Director


Rory Green



The Macau Metro Monitor, February 1, 2012




Janauary Macau Gross Gaming Revenue was up 34.8% YoY to MOP 25.040 BN (HKD 24.309 BN, USD 3.13 BN). 



Ponte 16 has submitted its extension project application with the Macau government.  The company plans to invest $800 million catering a floor area of 400,000 sq ft., including a shopping mall, and expanding the current casino floor, and expect to complete in 2013.



The number of tourists during Chinese New Year was lower than expected according to the tourism industry insiders, but still managed to achieve single digit growth.  During the week long holidays in mainland China, from January 23 to 29, the average room rate at guesthouses rose by a staggering 28.1% from the same period of last year to almost MOP 560.  The prices at five-start hotels increased 9.1% to more than MOP 2,400.  The average occupancy rate at three to five-star hotels actually grew by 4.6 points from the 2011 Chinese New Year to 91.9%.  This figure even reached 94.9% at five-star hotels, up by 3.7 points.



Average housing prices in 100 major cities in China fell 0.18% in January compared with December, China Real Estate Index System says.  This is the 5th consecutive sequential decline. 



Singapore created 121,300 jobs last year which caused the unemployment rate to fall to 2%, a 14-year low.


In preparation for PENN's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • We've got Wyandotte, which is the project first expected to open. Our share of the spend is $155 million of a $410 million project. We've spent roughly $80 million. There's 600,000 people. Tax rate is 27%. And we'll be opening in the first quarter, probably sometime in February, but we're still working on the exact date for that opening. In Toledo, we're looking at second quarter of '12. It's a $320 million project and we've spent roughly $98 million. It's a population of roughly a million. Tax rate is 33% and will be open in the second quarter…. Columbus; $400 million, we've spent roughly $86 million. There's 1.8 million people and we'll be opening in the fourth quarter next year as well.”
  • “I will tell you that in the history of gaming, the move of having VLTs extended as an extension of lottery has gone challenged in probably every state that's authorized it and so far, it has been a perfect record where the Supreme Court has upheld the legislature's ability to expand lottery.”
  • “Under most foreseeable circumstances, we would never take leverage above 5 times. And candidly, if we did take it above 5 times, we would have to see that it's deleveraged quickly. You're not going to see Penn's management team putting themselves in a position and certainly with our existing creditholders where we take leverage that high.”
  • “The Gulf Coast right now and certainly Mississippi is really hurting now. I got to tell you if there is one area of the country that seems to be consistently having tough times and not too many upticks to give you any kind of encouragement, for us anyway, it's been Mississippi. We've been in major cost control, cost cutting modes in Mississippi. We've been able to hold together the EBITDA there. And there is more to come and there is more cost that we can cut and there is more marketing stuff that we can cut, but that's one area of the country that seems to be really struggling. The Biloxi, Tunica markets are just having a really tough time. So other than that, it's pretty much – I mean table game in Charlestown is wonderful, right, for that matter all things Charlestown is doing fine. Bangor is fine, the Midwest is fine. I mean yes, when I say fine, I mean it's just kind of blah fine.”


  • “October was a little bit soft and the numbers that are out there with the exception of West Virginia, which has continued to drive the growth of the company with the addition of table games. Some of the weakness we expected obviously in Illinois, where there is some of the bigger negative numbers because we had the cannibalization from the Rivers. The cannibalization has been a little bit less than what we anticipated, but not far off from what our internal estimates are. The other markets have been just a little bit soft, but nothing dramatic.”
  • “So, the thing about Illinois is that you've got to remember that Rivers is limited on how many positions they can have. So, that even in the peak, in the days of Elgin, I think they were doing roughly $425 million of revenue. It's hard to get above those numbers because your win per units, starts to make it difficult, and it deteriorates the customer experience as you get up into those $500, $600, $700 win per unit per day on the game. So, we don't anticipate the cannibalization to increase from the levels they are at now, but we think it's kind of stabilizing in a more normal range.”
  • “If you look across our portfolio, I think when we do the count, we have roughly eight properties that are going to get cannibalized, next year, which is nearly half of our portfolio, and we have some really large ones. The biggest thing to quantify next year is what the impact on Charles Town is. We've never seen cannibalization of a property of this size and scope and in a market that deep at the same time. There is a vast difference in terms of the amenities that are mainly offered at Charles Town versus the competitor.”
  • [CharlesTown & Arundel Mills impact]  “So, we believe conversely when the slot revenue rolls off that we're unlikely to lose table revenue. We'll lose some, but we think it will be de minimis in terms of the impact on table games, that's how the company is viewing it. When you look at the new revenue levels in terms of where they're coming from, the difficult part to understand is will people drive into Anne Arundel Mills.  I'm sure the vast majority of people here are not familiar with the site, but it's a very, very, very busy mall site and today without a casino before there was construction there was lines of traffic waiting to get in and out of the mall.  So, it's very congested area…. It's going to be a significant amount of cannibalization on the slot revenue. There is no doubt in our mind on that, but we still think that post-cannibalization Charles Town is still going to be one of our largest properties from an EBITDA and the revenue perspective.”
  • “I don't think you're going to see our CapEx grow, based on the existing casinos today, the CapEx is at a pretty sustainable level…. What we did is we went back and looked at what the growth in the slot machine pricing has been, because Penn's always been a company that's that we've got to go out and refresh our floors and roughly 50% of our maintenance CapEx has been on slot machines over the last decade. So, what we realized is that the slot machine pricing has far outpaced inflation…. Obviously, there will be an increase in the maintenance capital for the Ohio properties because they're new casinos, and they weren't in the formula before. But we are at a sustainable level, our floors are fresh, our restaurants and our hotels are being run through those maintenance capital, so all the new restaurants that you've seen redone over the last couple of years are all fresh.”


  • “We’re seen a very, very rational promotional spending environment in the regional markets that have allowed us to continue to be smarter marketers and continue to shave off expenses to have better overall margins in our properties.”
  • “In Baton Rouge, we expect sometime in the third quarter Pinnacle to open that $350 million investment. And obviously, we think the market is not big enough to absorb that and there's going to be a loss of business at our Baton Rouge operation…. we do expect that there will be a hit in the third quarter next year. We're going to be fully prepared for that and react very quickly as a new level of business volumes are realized there.”
  • “Spring of 2013 is what we're expecting to be the opening of Horseshoe Cincinnati. It will be interesting to see what that effect will have on Lawrenceburg. It certainly will have a noticeable effect. We still have the advantage that our customers will be able to smoke in our casino environment, where in Ohio, it is a smoke-free casino.”
  • “As I look at '13 and there aren't many numbers published on '13, but I can tell you that I feel very comfortable that we're going to be significantly higher than the highest number on the Street in '12. Now, obviously that may not come as a huge surprise, but I can tell you that we're very comfortable that we're going to be growing EBITDA through '13. '12 is probably going to be closer to flat than what we're seeing in some of the estimates coming out for '12.”
  • “Between 37.5%, 38%, would be the normalized tax run rate. Relative to the authorization on the stock buyback, I believe we've got $240 million remaining.”
  • [when PENN pays $50MM license fee in Ohio] “Probably maybe a little bit before [opening], but not much time before then.”
  • “I think we're losing the low-end retail rated play, because they're finding it from a reward standpoint less appealing to them. And I think as you look at the overall rated player based on a per trip basis, we are seeing the quality of the rated customer up, but the amount of trips especially at the low-end, down.”

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SHLD: Our Take On SHLD Decision Tree

Take one bad company, merge it with an even worse company, then comp negative for the better part of 7 years on a levered balance sheet, and the balloon being held underwater is bound to pop sooner or later.


Could Sears really be reaching the end of its lifeline? If you want to read into the CIT debacle, the answer might be yes. We’re certainly not privy to Sears’ near-term financials, but the reality is that when you take one bad company and merge it with an even worse company and then comp negative for the better part of seven years on top of a levered balance sheet ($4.5bn in market cap plus another $4.1bn in debt), the balloon can be held underwater for so long.


The ‘saga’ I refer to, of course, is with CIT. CIT is the largest trade/receivable factoring company in the US, and is really what I’ll call a ‘lender of last resort’ in the retail space.


The recent timeline for this little lover’s quarrel looks like this…

  1. Jan 11, 1st cutoff. CIT refuses to fund Sears’ suppliers.
  2. Then on Jan 19th, CIT resumes sparingly under the guise of more financial disclosure by SHLD.
  3. Then today, Jan 31, after speculation that not enough financial info given, CIT reportedly cut off SHLD – again.


I should note that we cannot confirm the specifics of any of this, but simply want to provide context to our clients to the extent anything comes about.

In fact, I should note that CIT reported earnings this morning, and made no mention of Sears. Another point is that they are growing many areas of their business quite aggressively, so any decision here would be strategic, not one due to capital constraints.


All that said, SHLD isn’t reporting earnings for another 3-weeks. If CIT has to wait that long for the financial information it needs, SHLD will have a big big problem on its hands. After all, retailers make money by selling stuff. They only sell stuff when they can buy stuff. If the grease between the retailer and the supplier dries up, then it’s pretty difficult to get stuff into the stores. No stuff = no revenue.


The irony here is that the company comps down so consistently, that limited product flow into SHLD for a short time period can actually free up working capital.


Regardless of this situation, we can argue that Sears’ equity is worth zero. But as it relates to the industry, don’t get all excited about supply/demand coming into balance in the event of SHLD going under. The stores are still stores. Remember Circuit City? Yeah…some of those stores are now PC Richards, some are Best Buy, Dick’s, REI…you get the idea.  The point is that a brand going away is much different than floorspace going away.

HIBB: Setting Up As A Short

We think margin pressures will intensify in 2012, and estimates are too high. It's premium multiple is fine when it's printing 20-30% growth. Not 0-10%.



We think that HIBB, once one of the most attractive growth stories in retail, is setting up to be a good short. For those who don’t know Hibbett, it is one of the least known, but most successful, retailers in the Sporting Goods space. The company operates 825 stores throughout the South. It is unlike Dick’s Sporting Goods and Sports Authority in many ways, one of the most notable of which is the size of the store. DKS and TSA run at about 46,000 square feet, while HIBB is about 5,000.


But the biggest differentiating factor is its strategy, which is to find a shopping center where there is a Wal-Mart, and dirt cheap rent in the shopping center (because WMT puts the prior tenants out of business). Then HIBB comes in and sells Nikes, UnderArmour, and $250 baseball bats. In other words, it feeds off of Wal-Mart’s traffic much like a remora does a Great White.


The biggest concern we have with this story is that it is structurally different than it was in prior years, but the multiple does not know it yet – and we think it will in 2012.


Back in 2003-2005, this was the ultimate ‘cult stock’. UnderArmour was driving traffic into the market, Nike was playing catch-up and turning the product engine into overdrive. At the same time, HIBB had 12% square footage growth, with seemingly unlimited upside. 12% square footage growth + MSD comp growth on top of the lowest SG&A hurdle in Sporting Goods retail = 30-40%+ EPS growth.  Heck…it was worthy of being a cult stock.


Margins Topping Out

After a lackluster 2008-10 when HIBB missed square footage growth targets and consistently put up negative comps for the first time in a decade, FY11A and FY12E (Jan) are back to 30-40% EPS growth.  But the growth and margin characteristics are almost definitely topping out.

  1. First off… With square footage, we’re looking at the law of large numbers. Even if store growth accelerates to 40 stores NET of closures, assuming that the company can execute, then we’re still only looking at 4%-5% square footage growth. The recent management changes certainly won’t help execution.
  2. We have no reason to think that comps will decline, but we think the upside surprise and benefit from another Alabama football championship is already reflected in the stock. Recall that it was only two years ago when both the Tide and Saints won their respective titles it added 3.5pts to HIBB’s Q4 comp and then another 2pts in Q1. We expect the combination of an Alabama/LSA title game to add roughly 2pts to Q4.
  3. In December, both CEO Jeff Rosenthal and Chairman of the Board Micky Newsome sold stock.
  4. Then today we saw news of CFO Gary Smith leaving the company come across the wire. He’s leaving behind a perfectly capable team, but there’s something about a 12 year veteran walking away without a successor lined up that just doesn’t smell right.  Let’s respect the fact that Mr. Smith is only 64 years old, and has at least several years left in him. Having been passed over two years ago for the top job might have left a bad taste in his mouth. Regardless, he probably is not leaving ‘bc 2012 looks so dang good’.
  5. Gross margins are at peak (36%) and further expansion from current levels is getting incrementally tougher, particularly with Nike getting so aggressive with price increases, incremental competition coming down the pike in the Department Stores (thanks to the dominoes that are set to fall from Ron Johnson’s actions at JC Penney), and Foot Locker moving into the next phase of its turnaround adds competition in the mall. If FL does not pressure HIBB directly, Finish Line will.
  6. Of companies with exposure to the growing online threat that is AMZN, HIBB is among the most vulnerable due to the fact that it is the only retailer we know of that doesn’t have an ecommerce business.


With the stock now trading at over 20x and 11x our 2012 EPS and EBITDA estimates, respectively at the very high end of the range over the last four years, it appears to be pricing in a significant reacceleration in square footage growth, further gross margin expansion, or both. DKS trades at 17x; FL 13x; FINL 12x.


Slowing Growth, Slowing Turns = Dramatically Lower Multiple Support

We have earnings growth going from 30%+ over the last two years driven by 4 points of operating margin expansion to LSD over the each of the next two years as store related expenses increase in an effort to drive top-line growth. It might be tough to maintain its current multiple if growth expectations need to come down.


Check out our SIGMA and Management Scorecard for HIBB

SIGMA: HIBB has pulled a complete 180, and now has inventories building on the margin, which is very gross margin bearish. Ordinarily, when we see moves like this, the stock acts accordingly. HIBB has not – YET.


HIBB: Setting Up As A Short - sigma


Management Scorecard: This measures Asset Turnover (x axis) by tax-adj EBIT margins (y axis). Simply put, its easy for a stock to trade at 20x+ earnings when both turns and margins are headed up simultaneously.  But HIBB no longer has that on its side. Not only that, if our model is right, then we’ll see a reversal in this trend over the next two years, which – as noted above with EPS growth, has obvious implications for HIBB’s premium multiple.


HIBB: Setting Up As A Short - score

Will a Falling US Dollar End the Market Rally?