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"Net revenues increased at eleven of our fifteen properties, including each of our properties outside of Mississippi, where the markets have been slow to recover from the flooding last spring and economic issues continue to negatively impact the market. We are continuing to utilize smarter marketing and targeted facility improvements to drive business and improve results.  Our operating successes in Florida, Colorado, Iowa and Missouri were able to largely offset the substantial difficulties facing the Mississippi markets and costs we incurred in Lake Charles while renovating the gaming floor of our primary riverboat and preparing to consolidate our operations."


- President and Chief Executive Officer Virginia McDowell



  • Cape G is similar to their operations in Waterloo, Iowa and Boonesville Missouri
  • Getting started on room remodel for the Lake Charles property
  • $1,165MM of debt with $496 term loans, $10MM on R/C. Have $200MM of borrowing capacity at the end of January 


  • Lake Charles had a lot of noise in the quarter with the ongoing renovations at the property
  • Paid down about $15MM of debt in the quarter. At the end of Oct they have $1.184BN and Jan they had $1.165BN
  • They think that the cost savings on the sale of the vessel in Lake Charles will be at least neutral to them if not beneficial.  
  • Sub debt becomes callable at par next month.  They will start to look at redeeming some of those notes opportunistically.  They also have some options on refinancing those notes 15-18 months before their maturity
  • Lake Charles will go from 1,782 to 1,262 slots, 51 tables to 40. No change in hotel rooms - still at 440-450.  They used the vessel for overflow on weekends and holidays so it shouldn't be an issue from a capacity standpoint. They are thinking about a potential on the 3rd deck if necessary - more likely for poker. 
  • Mississippi has been really challenged since the floods. Part of it is due to the tracks in Arkansas which had a big spike in business when the casinos in MS closed for flooding and only some of that business came back.  Biloxi was already weak before the floods. They had a lot more customers in that part of the country that had high teens unemployment and then also had a heavy impact from the floods
  • Impact of new competition on their Kansas City facility?  Geographically, we're the property that is farthest away, and with the construction complete on the bridge, traffic is flowing around and through to our property better than it did before. 
  • They can structurally take out the sub notes before the 7.75% seniors come due. As long as they meet the 2 to 1 covenant restriction within 15/18 months to maturity they can refinance those notes with Senior notes
  • The total business interruption receivable will be a lot larger than what they have received thus far. The discussions with BP were one time and separate from the insurance flood receivables. 
  • Pompano: no impact from Seminole Coconut Creek expansion.
  • They didn't quantify the impact from disruptions at Lake Charles. Aside from the hotel the casino floor disruption is done
  • Capex spending for Cape: 
    • $80MM left to spend. $20MM ish in the 4Q. Generally speaking, 50% of the spending is right at the end because that's when the FF&E gets ordered. 
  • Their leverage is 6.3x vs. 7.35x steps down after Cape opens in F4Q13 (one year from now)
  • Database skews more South and East than West in the Kansas City market. 
  • Thoughts on new opening in Biloxi? 
    • No
  • Step up in promotional spending. Will some of the new projects under way will they see more promotional spend?
    • Most of it was customer reinvestment.
    • Spike was temporary and surrounding new product launches at various properties
  • Majority of Iowan's are still against online poker
  • Cape G is tracking at or under budget



  • "We are looking to the future with optimism as we expect to open our Isle property in Cape Girardeau, Missouri by Thanksgiving of this year, subject to regulatory approval, at least a month ahead of our previous schedule."
  • "The Company's results benefitted from increased retail play as a result of generally favorable weather conditions in December and January, several recent facility improvements and continued strong marketing programs."
  • "In Boonville, revenue increased by 3.3% and EBITDA increased by 8%, despite having a buffet closed for renovation during the bulk of the quarter."
  • "With the recent declines in the unemployment rate, we are cautiously optimistic that our retail play trends could continue to improve as we have historically seen a high negative correlation between the unemployment rate in our markets and retail revenues."
  • "Our properties in Mississippi are suffering from a lagging economy and some lasting effects of the flooding which has impacted our overall results. Competition from race tracks in Arkansas, which increased following the floods, impacted revenue streams from Little Rock and several secondary markets."
  • "In Lake Charles, results were directly impacted by renovation disruption, which was completed in early February, and preparing to consolidate operations onto the larger remaining riverboat. We opened a new poker room, installed new carpet on the casino floor and completed other cosmetic refurbishments. We made the decision to invest in improving our product offering during the second and third fiscal quarters, and we believe we are beginning to see positive financial results from that investment. Additionally, we expect to benefit from a lower cost structure now operating only one facility.  We will continue to improve the customer experience with a $15 million refurbishment of the main hotel tower, which is expected to be completed by the end of the second quarter of fiscal 2013."
  • "We are also continuing to upgrade our food and beverage options across the portfolio."
  • "At Rainbow Casino in Vicksburg, we expect to complete the Lady Luck Casino rebranding by the end of the second fiscal quarter of fiscal 2013.  The rebranding will introduce upgraded amenities"
  • "Our upgraded customer rewards program, called Fan Club, is now active in Pompano and Waterloo." 
  • "The decrease [in corporate expense] is primarily due to development expenses in the prior year related to obtaining the Cape Girardeau and Nemacolin licenses.
  • "In the third quarter of fiscal 2012 we recognized $0.9 million of revenue as partial advances of our business interruption claim. Through February 22, 2012 we have received initial payments of $10.1 million related to the claims."
  • Nemacolin Woodlands Resort, Pennsylvania: "The appeal hearing for the gaming license awarded toNemacolin Woodlands Resort for the final resort license in Pennsylvania has been set for March 7, 2012. "
  • 3Q Capex: $11.7MM ($4.5MM related to Cape Girardeau)
  • "Capital expenditures for the remainder of the fiscal year to be approximately $45 million, including approximately $20 million in Cape Girardeau."








Initial jobless claims came in at 351k for the week ended 2/18 versus expectations of 355k and 351k the week prior (revised from 348k).


THE HBM: JACK, THI, CBOU, DRI, CBRL, TXRH - initial claims










JACK: Jack in the Box reported comps ahead of expectations: +5.3% at Jack in the Box and +3.8% at Qdoba versus expectations of +4.1% and +2.9%, respectively.  EPS came in at $0.27 versus $0.25 expectations.


JACK: Jack in the Box was reiterated “Buy” at Lazard.  The firm notes that average check appears to be improving along with better traffic, which could indicate a successful shift from heavy discounting, according to Street Account. The price target is $28.


THI: Tim Hortons reported 4Q EPS of C$0.65 versus consensus C$0.62.  Comps in Canada grew +5.5% versus consensus 4.8%.  U.S. comps came in at +7.2% versus 4.2% expectations.  The company announced a new $200m share repurchase program.


CBOU: Caribou reported 4Q EPS of $0.14 versus consensus $0.16.  Comps increased 5.6% in the quarter.





SONC: Sonic traded down -3.3% on accelerating volume.


PZZA: Top-line miss pushed the stock down -6.9% on accelerating volume.





DRI: Darden prereleased 3Q (quarter ended 2/26) earnings of $1.23-1.25 versus consensus $1.19.  Blended U.S. same-restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse for 3Q will increase approximately 4% versus 2% consensus.  FY12 blended comps guidance was reaffirmed at +2.5-3.0% and FY12 EPS growth from continuing operations guidance was reaffirmed at 4-7%, consistent with prior guidance.









TXRH: Texas Roadhouse was reiterated “Buy” at Miller Tabak and the price target was raised to $21 from $19.


CBRL: Cracker Barrel PT raised to $62 at Morgan Keegan.  The stock is rated “Outperform”.





TXRH: Texas Roadhouse gained 6.7% on accelerating volume on strong 4Q EPS.


CBRL: Cracker Barrel took a step back after trading strongly on 2QFY12 EPS.


CAKE: 1Q12 guide-down hurt the stock yesterday.





Howard Penney

Managing Director


Rory Green




It's become clear that Singapore benefited from a significant honeymoon period.



It happened sooner than we thought.  The number of Singaporean visitors to the Integrated Resorts is falling.  Many markets/casinos experience a honeymoon period but this looks unprecedented.  Of course, we shouldn't forget that the Singapore market exploded out of the blocks.  We still expect 2012 growth but it certainly won't come from the local population.


Genting Singapore mentioned a couple of quarters ago that mass market growth has been limited by a stagnant local population and inability to promote gaming to locals.  According to numbers released by Acting Minister for Community Development, Youth and Sports, Chan Chun Sing, total Singaporean visitation for the two integrated resorts dropped 22% YoY.  At RWS, the number of local gamblers fell by 31.7% from 199,783 in 2010 to 136,434 in 2011.  For MBS, the number dropped by 8.9% from 150,691 in 2010 to 137,259 in 2011.


This data provides further confirmation of our view that Singapore growth will moderate significantly in 2012.  Without more rooms or junket approval, Singapore growth might slip into the single digits in 2012.  See our note GENTING BLOWS IT (2/23/11).

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The Macau Metro Monitor, February 23, 2012




Some 200,000 Singaporeans visited the two casinos here in 2011, said Acting Minister for Community Development, Youth and Sports Chan Chun Sing.  The number of domestic casino gamblers at each of the casinos also dropped from 2010 to 2011.


At RWS, the number of local gamblers fell by 31.7% from 199,783 in 2010 to 136,434 in 2011.  For MBS, the number dropped by 8.9% from 150,691 in 2010 to 137,259 in 2011.



According to sources, the nine-person Wynn Macau board - which includes five members with ties to Wynn - can take unilateral action to drop Okada from among their ranks this Friday.  The Wynn Macau unit can take action on its own but parent company Wynn Resorts cannot remove Okada from its 12-person board without first convening a special shareholders' meeting.



In January 2012, total visitor arrivals surged by 18.6% YoY to 2,461,640 attributable to the Lunar New Year holidays.  The average length of stay of visitors decreased by 0.2 day YoY to 0.9 day.
Visitors from Mainland China increased by 22.5% YoY to 1,494,877 (60.7% of total), mostly from Guangdong Province (777,564), Fujian Province (65,966) and Zhejiang Province (51,549).  Mainland visitors traveling to Macau under the Individual Visit Scheme (IVS) totaled 711,475, up 32.2% YoY.  The average length of stay of Mainland visitors was 0.9 day.





S'pore CPI rose 4.8% YoY, beating consensus of 4.7%.  The core inflation rate was 3.5%.   Singapore's Monetary Authority of Singapore said inflation will remain “elevated and volatile” in the next few months even after consumer price gains eased to the slowest pace since May.  It added that core inflation may be about 3% for the next few months.


After the close, JACK reported a decent quarter on nearly every metric, but the quarter also highlights why the company is not getting the “full” valuations it deserves.  Our thesis for owning the stock today is centered on improving operating performance and better valuation stemming from a less volatile business model.  We will learn additional details on the conference call at 11am but it is likely that much more will emerge at the analyst meeting next week.


JACK is reporting FY Guidance (9/12) of GAAP EPS of $1.15-1.40 and operating EPS $0.95-1.10.  The reality is that the only number that matters is what the core earnings power of the company is.  So when the popular financial press is reporting that it is “unclear which range is comparable to FactSet $1.32” we immediately have a problem we don’t need to have.  When things are unclear or uncertain, people shy away.  By the end of FY12, this issue should be going away – a net positive.


Included in operating earnings this quarter were re-image incentive payments of $5.7 million, or approximately $0.08 per share versus $0.02 last year and $0.06 per share in impairment charges. 


Operating EPS Calculation

GAAP: $0.27

Refranchising Gain: ($0.02)

Franchise payments: $0.08

Impairment charge: $0.06

Operating EPS: $0.39


In 1Q12 Jack in the Box company same-store sales were 5.3% versus consensus +4.1% and guidance of +4-5%.  Franchise same-store sales were 2.8%, bringing the system same-store sales number to 3.6%.  Qdoba system same-store sales were 3.8% versus consensus +2.9% and guidance for +2-3%. 


Consolidated restaurant operating margin was 13.5% vs. 12.6% last year with an 8% increase in commodity costs.  This represents the second quarter in a row where the company is operating with positive same-store sales and expanding margins – the “Nirvana” quadrant in the chart below.  Typically, companies operating in that quadrant are awarded a higher multiple by the Street.


In the press release, management upped its same-store sales guidance for the fiscal year 2012 to +3-4% at Jack in the Box restaurants versus prior guidance of +2-4% and +4-5% at Qdoba system restaurants versus prior guidance of +3-5%.  Given that the bulk of the Jack-In-The-Box restaurants are in “non-weather” states, the favorable impact of weather in the first calendar quarter will be much less significant than for others in the space.


From an operating perspective, JACK reported a strong quarter.   More details to come at 11 a.m.


JACK – ONE STEP CLOSER - jack quadrant


JACK – ONE STEP CLOSER - jack pod1


JACK – ONE STEP CLOSER - qdoba pod1



Howard Penney

Managing Director


Rory Green


Bad Macro

This note was originally published at 8am on February 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The macro is so bad everywhere.  In America, our political leadership is doing nothing to help us get out of the current situation.  Worldwide, Europe is just in a state of financial collapse.  I think we are in plenty of trouble and have to watch ourselves closely.”

-Julian Robertson on CNBC, September 13th, 2011


While Julian Robertson is retired from managing other people’s money, prior to his retirement he established probably the best long term record of any money manager with a reported annual return of north of 30% from 1980 to 1998.  More impressive to me has been his ability to mentor, train, and seed successful money managers after retiring from the business himself.


I’ve had the pleasure of meeting Mr. Robertson a number of times.  The most notable for me was while I was attending Columbia Business School  and took a class called, “The Analyst’s Edge”, which was taught by John Griffin, founder of Blue Ridge Capital and the former President of Tiger Management.  This class offered me, and my fellow students, a crash course in analyzing companies from the practitioner’s perspective.  In lieu of a final exam, our final grade was based on pitching a stock to Julian Robertson in the Tiger Management boardroom. 


Not only was the situation itself intimidating, but the company I had spent the semester researching was Ace Aviation, more commonly known as Air Canada.   As background, in 1999, the year that Tiger Management dramatically underperformed the SP500 and eventually shut its doors, U.S. Airways was purportedly Tiger’s largest equity holding and a key reason for the underperformance.  So, yes, I was pitching an airline to Mr. Robertson, even though it was the industry that had burned him a few short years before.


Shockingly, despite my somewhat sweaty palms, the pitch actually went relatively well.  Mr. Robertson was very thoughtful in his questions as it related to my thesis, which was primarily based on a sum-of-the-parts analysis, and seemed very intrigued by the idea.  Now, of course, he may have just been trying to be polite, but I think the better answer is that a key reason he was, and remains, one of the world’s great investors, is his ability to have an open mind and change opinion.  In effect, he showed incredible mental flexibility.


I highlighted the quote above to flag the simple fact that Mr. Robertson went on CNBC to emphasize how negative the macro was at the literal 2011 bottom of the stock market.  In fact, since September 13th, 2011 the SP500 is up more than 15% and the Euro Stoxx 100 is up more than 23%.  On an annualized basis, those moves would equate to some of the best annual equity index returns in the last hundred years.  So, was Julian Robertson wrong based on his dour September 13th, 2011 macro outlook?  Well, that ultimately depends how his portfolio was positioned for the last four months.  My guess is that Mr. Robertson and his protégées managed the environment quite effectively and kept their feet moving.


Interestingly, on September 13th our CEO Keith McCullough (he is on the road today in Boston) wrote the Early Look and while we shared an eerily similar fundamental view as Mr. Robertson, Keith wrote the following that morning:


“Great short sellers in this game have one thing in common – they know when to cover . . . I’ve written 2 intraday notes in Q3 of 2011 titled “Short Covering Opportunity” (one on August 8th and one yesterday). Yesterday’s call to cover shorts generated as much questioning and feedback as any time I think I have ever made a call to cover shorts since the thralls of early 2009. This is an important sentiment indicator.”


In hindsight, making the aggressive short covering call on September 12th of last year was the correct call.  Some might call it luck, but for us it was born out of our global macro process.  Now, arguably, we probably should have gotten even more aggressively long.  As always though, the first step in the stock market business is to not lose money.


Coming into 2012 we were as bullish as we’ve been in awhile.  One of our key 2012 macro themes was that the rate of global growth slowing would bottom.  In our macro models, marginal rates of change in growth are critical, but as critical is monetary policy, which influences growth.  On January 25th of 2012, the FOMC released the policy statement post their December meeting, with the key line being:


“In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”


So, in one fatal swoop, The Bernank extended the Federal Reserve’s depression level monetary policy out another year.  Monetary policy influences our outlook on inflation, which influences our outlook on growth and equity returns.  Hence, we reversed course following the FOMC policy statement noted above.  Now, maybe that’s Bad Macro, or maybe it’s smart macro.  The data suggests it’s the latter.


In the Chart of the Day, we’ve attached an analysis that looks at inflation versus the price to earnings ratio of U.S. equities from 1978 to 2008.  The r squared between CPI, the proxy for inflation, and P/E is very highly correlated at 0.76. As the curve demonstrates, inflation is bad for equities.  That’s not a guess, that’s a fact based on the data and underscores our shift in outlook post the FOMC statement in January.  Some call this mental flexibility, for us it is process. So far, by the way, we’ve been wrong on U.S. equities in the shorter term duration.  That said, fighting the Fed worked in 2011.


While I am on the topic of Julian Robertson this morning, I would like to give him credit for more than being one of the best money managers of our time and an incredible mentor of young money managers. I would also like to acknowledge his leadership in philanthropy.  As Albert Einstein said:


“The value of a man resides in what he gives and not in what he is capable of receiving.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now 1717 – 1761, 113.42 – 118.27, 1.31 – 1.33, 78.51 – 78.94, and 1330 – 1360, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


Bad Macro - EL Chart 2 9


Bad Macro - VP 2 9

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