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After predicting a consensus beating Q1, our projection is now even higher following the release of the March Louisiana numbers.



Louisiana released March gaming revenues yesterday and BYD performed much better than expected.  We had already predicted a strong quarter in our 04/13/12 note “THE REGIONALS: Q1 THOUGHTS”, but we’re upping that projection.  Our Q1 EPS and EBITDA estimates are now $0.12 and $133 million versus consensus of $0.08 and $126 million, respectively.  On their Q4 conference call, BYD provided Q1 guidance ranges of $0.06-0.09 for EPS and $120-127 million for EBITDA.


BYD will report earnings next Tuesday morning.  As always, Q1 earnings will not be the only story.  BYD should provide Q2 guidance on the conference call.  We’re above the Street for Q2 as well - $0.12 vs. $0.11 – but we expect management will once again be conservative with their guidance.  Accurate guidance should be in the $0.11-0.14 range but something lower like $0.09-$0.12 is more likely.


As measured by sell side ratings, BYD remains an underappreciated stock.  Our long-term thesis for domestic gaming is not positive but with BYD’s operational and financial leverage, better demand trends in the LV locals market and some of the regional markets should drive potentially significant EPS upside over the remainder of 2012.


The Macau Metro Monitor, April 20, 2012




According to a survey by the University of Macau, around 53% of visitors to Macau don’t gamble while visiting the city a new survey shows.  The survey involved 7,300 visitors, 61% of whom were from the mainland.

HBI: Golf Clap on a Triple Bogie

Let’s give ‘em a golf clap on forecast accuracy this quarter. Despite losing a nickel less than the guide-down, we think the stock was looking for something better. All in, we still think that the company is in denial as to the risks to its revenue and/or margins in 2H12. We’re 30-40% below the consensus for the next 3 years.


This was a horrendous quarter for HBI. But relative to expectations, it was right in line. In fact, we’ve got to hand it to management; with such massive moves in its Gross Margin line and the pricing pressure in its screenprinting business, we’d think that its forecast accuracy would be sub-par at best. But they came in right in line with nearly every line on the P&L. In addition, relatively all aspects of guidance that the company said 9 weeks ago remain completely unchanged. When all is said and done, the company lost -$0.27, and while better than the Street at -$0.33, we don’t think that this is anywhere near what the stock needs to rally.


Why? Keep in mind that the company reported its 4Q a few weeks late (2/15), and reported this quarter a week early. In the end, there was only 8-9 weeks between reports, and we’d venture as far as to say that the company did more conferences and roadshows intra-quarter than it ever has. The tone of its meetings has been extremely bullish, about both the state of the current business and the prospect of hitting a $4 earnings number in the future. Recent conversations we’ve had with the investment community lead us to think that the real concern for anyone who is short HBI is that the company would come out and print a profit this quarter. But clearly, it did not. We’ll give ‘em a golf clap for its forecast accuracy. But not much more. In addition, in alluding to 2013, management again referenced a low $3 EPS assumption. On the Q4 call, Rich suggested “one could reasonably model 2013 EPS potential in the low $3 range.” There was slightly more conviction in the low $3 reference this evening- “10% to 11% operating profit run rate is still a good assumption resulting in 2013 EPS potentially in the low $3 range”… still not exactly a raging endorsement.


While comments on the business remained largely unchanged, there was a slight softening as to management’s tone on its ability to pass through pricing. Also, we continue to be puzzled about HBI’s bullishness on cost inflation. The company believes that the industry acted very rationally this quarter, supporting its own strategy as well. It thinks that there is a paradigm shift going on at retail where higher costs = higher consumer prices, and higher margins for the supply chain. That’s where we simply disagree. It’s the consumer that decides whether or not there is inflation, not the fluctuation in input costs. The retailers might seem fine now, but all we need is for one major party to break rank, and the ballgame changes very quickly. The consumer will have no problem blowing up a paradigm shift.


The biggest positive that I’m being hit with by the bulls is that the company is committed to repaying debt, and having debt down from $1.8bn to $1.0bn by 2014. That’s great, and we’ll be the first to admit it. But that also assumes that the cash is there to achieve the goal. If HBI’s business turns down or if margins compress, then net income comes down, working capital goes up, and there won’t be anywhere near enough free cash flow to achieve those debt levels. Remember, it was in 4Q11 where the company said it would generate free cash flow of at least $192mm to meet the low end of the full year guidance of $100-$200mm. As a result of the business underperforming in Q4, they only reported $174mm for the quarter and $82mm for the full year, falling $18mm short of the low end of the $100-$200mm guidance. That’s certainly a hit to credibility. And we’re going to give them the benefit of two years? This is not necessarily an HBI thing, as they definitely helped their credibility somewhat this quarter. But it’s tough to guage that level of confidence for any company with limited visibility, a consolidated customer base, and high operational and financial leverage.


HBI remains political about changes at JCP – that it’s excited about the change. They might lose a little hosiery business there, but that’s all that’s in their plan. That’s a binary outcome, in our opinion. JCP is about a 5%-6% customer for HBI. Family dept stores = 15%. Mass channel = 50%+. Ron Johnson at JCP is going to competitively bid out each section in the stores to see which brand wants it more. JCP might get the revenue, but it will be at a lower margin. PLUS, any special product workup is going to upset Kohl’s, Target, WalMart, Sears, Macy’s, Dollar Stores, etc… This will be a domino effect with or without HBI. Also, be sure to remember that price competition at retail in higher end categories is often funded by discounts in more commodity categories (ie discounts on Polo at Macy’s will be paid for by Jones Apparel Group, PVH’s Dress Shirt biz, and underwear vendors like HBI). If HBI is savvy enough to please all of its customers, the cost of the growth is likely to go up.


All in, we took our numbers up by $0.10-$0.15 for each of the next three years, which is ENTIRELY due to a lower tax rate (down 500bps each year). Management mentioned a $3+ EPS number in 2013.  We don’t have that in the cards until 2015 at the earliest. We think this stock is just flat out expensive.



HBI Management Credibility Check.

Here’s a quick check as to what the company said it would do when it reported 4Q results versus both 1Q actual and 2012 guidance.


Wholesale Orders:

-Wholesale order slowed substantially in Dec, expect sell rate and orders to normalize


Margin Pressures:

-Both sales and profits should grow for the full year but sales and margin pressures expected to cause a loss for Q1 $0.27 loss in Q1

-Beyond Q1, Q2 operating margins should return to MSD-HSD Unchanged-  2H Gross margins expected to be low 30s with OM LDD

-Q3 operating margins should be DD


Free Cash Flow:

-Guided to $400-$500mm for 2012 Unchanged- Half of the reduction from improved working capital primarily through better inventories

-“FCF should be strong for the next number of years”

-Debt reduction a priority- goal for debt to be at $1.5bn in December 12 Unchanged



-2012 innerwear pricing solidified Unchanged- 95% of US volume locked

-Price gaps have been closing to more appropriate long term levels Unchanged- Reaching more normalized levels

-As pricing comes back, HBI will tactically give back value to the consumer (5 pack for 12.46 today will be a 6 pack for 13.46 tomorrow)

-Have removed volume offers to create every day prices despite the industry offering volume initiatives as sales drivers



- Gaining shelf space at retail primarily through Hanes Comfort Brand and socks as well as intimate apparel (trends encouraging) and hosiery Unchanged- Additional shelf gains in innerwear should help revs in 2Q and 3Q 

- Gear for Sports Operating profit expected to be $40mm in 2012 Unchanged 

- JCP: Have planned for an impact on intimates business which is included in guidance but not so much on the underwear business which is still set for expansion Unchanged- JCP’s goal for fewer more impactful brands said to fit right into HBI’s wheelhouse and plans for imagewear to be more quality focused vs. commodity


Guidance headed into the Call:


1Q12 Guidance: 

Sales: Estimating 1Q around $1bn BEAT

Excluding impact from outerwear, expect sales flat YoY through first 5-6 months Unchanged- sales ex imagewear and JMS expected to be flat through May with growth resuming with the help of shelf gains thereafter


Gross Margin: 900 bps of pressure primarily from screen print business Came in down 898bps


Expect flat SG&A in Q1 Came in down 1.7%


2012 Guidance:

Full year sales growth 2-4% Unchanged


Expect EPS $2.50-$2.60 Unchanged

Includes a $0.30 loss in imagewear (should occur half in Q1 and half in Q2) Unchanged- $0.18 impact in Q1 with the balance to take place in Q2


Interest expense should be down $15mm in 2012 Unchanged


FCF guidance: working capital headwinds should reverse and become tailwinds in 2012 Unchanged


Longer term prospects of the business:

Inherent long term guidance includes average operating margin of 10-11% in 2013 resulting in Low $3.00 EPS range Unchanged




Brian P. McGough
Managing Director


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.


BETTER: 1Q EPS of $0.30 came in at the high end of guidance ($0.26-0.30).  FY 2012 EPS was raised from $1.52-1.64 to $1.58-1.69.  2012 Worldwide REVPAR was increased to 6-8% from 5-7%.  2012 EBITDA guidance was raised by $10-25MM to $1,105-1,160MM. 


From Q4 conf call:  “As of year-end 2011, our group revenue pace for 2012 is up 9% and room rates continue to improve.  For group revenue booked in 2011 for the following 12 months, room rates are up 3%.”


SAME:  2012 Group room revenue bookings growth increased to 11% from 9%.  Only 2% of the increase was due to rate. 


From Q4 conf call:  “For the transient business, approximately 80% of our special corporate rates are now negotiated with room rates running up at a mid single-digit pace.”


SAME:  Room revenue from negotiated special corporate business rose over 9% in the first quarter. Group room revenue at comparable hotels increased approximately 6%.


From the Q4 conf call:  “Our hotels in Japan have seen a remarkable recovery since the March 2011 tsunami. Demand from domestic Japanese travelers has led the recovery, but we expect growing numbers of international guests and easier comparisons in 2012. “


SAME:  Japan continues to improve. Occupancy of the Tokyo Ritz-Carlton totaled 71% in 1Q.


From the Q4 conf call:  “The economy in Europe is concerning; government related travel has been weak in the UK provinces for some time largely due to government austerity programs…We're sort of assuming that we have modestly positive RevPAR in Europe, plus two points or three points in comparable hotels.”


SAME:  Comparable hotel RevPAR increased 3% in the quarter, which is encouraging considering management warned about the softness of the European economy.  International gateway markets were stronger than regional markets in Europe with increase in demand coming from the U.S., China and India.  In London alone, RevPAR rose 9% in the first fiscal quarter. The company was cautiously optimistic on the balance of the year, but a lot of uncertainty remains.


From the Q4 conf call:  “While we can't predict future political unrest in the region, impact from the Arab Spring began in February 2011 so most of 2012 should at least benefit from easier comparisons.” 


WORSE:  RevPAR in the Middle East declined 6% in the quarter, as political unrest and a struggling market in Egypt offset any benefit from higher oil prices.  MAR continues to expect easier comps as the year goes on.


From the Q4 conf call: "San Francisco, Los Angeles, and Chicago were strong while some markets in the Eastern US lagged a bit.  West Coast markets had both a strong transient business and last minute group bookings."


SAME:  Continue to see a bit of a shift from the Eastern US strength to Western US.  New York, Philadelphia, Chicago, and Boston are all doing well.  Management categorizes the recovery in the US as broad based vs. just impacted gateway cities.


From the Q4 conf call:  “At year end, our pipeline increased to over 110,000 rooms worldwide with nearly half of the rooms in international markets.  Today, roughly 40% of our worldwide pipeline rooms are under construction and another 10% are pending conversion.”


BETTER:  Pipeline of hotels under construction, awaiting conversion or approved for development increased to approximately 115,000 rooms (5k higher than previous guidance), including over 51,000 rooms outside North America.  However, management did note that openings in 2012 will be negatively impacted by slower construction in Asia and longer conversion lead times.


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

    • BETTER – PENN exceeded 1Q EPS guidance by $0.18. They raised FY 2012 EPS guidance by 26 cents to $2.48.
    • SLIGHTLY BETTER– Management had indicated on their Q4 call that they weren’t sure whether the consumer was back.  On this call they said they feel better about the consumer, particularly in Las Vegas, and saw a slight uptick in spend per visit. However, revenues were only slightly better than expected.
    • MUCH BETTER – PENN was expecting declining margins in those properties where cannibalization was taking place.  Instead, 1Q margins improved even in the face of competition as PENN reduced VIP marketing spend and saw improved margins at the lower end of their database.  Margin improvement drove most of the EPS upside.
    • BETTER – Cannibalization was not as high as what PENN had originally thought from Maryland Live!, Kansas Speedway, and Rivers Casino in Illinois.
    • SAME– FY 2012 guidance assumes no disruptions to Argosy Sioux City amid ongoing negotiations with the City of Sioux City. Still hoping for mid-year resolution 
    • BETTER – FY 2012 guidance includes an extra quarter of management fees

Not Decoupling: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU); Short Industrials (XLI)


Since Keith is out of the office performing some proprietary “field analysis” with his family at Disney World, I’ve been handed the pen on our quantitative risk management update. Fundamentally, we remain bearish on U.S. equities from a TREND-duration perspective and recent quantitative signals are confirming our non-consensus view.


This confirmation is highlighted by the U.S. equity market (as measured by the S&P 500 Index) failing to eclipse its immediate-term TRADE level of resistance (formerly support) at 1,395. Simple moving averages aside, that’s an explicitly negative PRICE/VOLUME/VOLATILITY signal. Across durations, our updated risk management levels are as follows: 

  1. SELL TRADE = 1395
  2. BUY TRADE = 1356
  3. BUY TREND = 1348 

Not Decoupling: SP500 Levels, Refreshed - SPX


Talk of the U.S. being a “safe haven” or its outright “decoupling” is what it is and we are not all surprised to see those kinds of phrases bandied about by consensus at yet another cyclical market top, insomuch as “raising cash” tends to dominate consensus recommendation at cyclical troughs. All told, we continue to view such process-starved analysis as constructive of asymmetric mean reversion opportunities on both the long and short side across various asset classes.


Not Decoupling: SP500 Levels, Refreshed - 1


Not Decoupling: SP500 Levels, Refreshed - 2


While it remains to be seen if 2012 will play out similar to 2011, one thing we are certain of is that this is definitely not the 90’s.


Darius Dale

Senior Analyst

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