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In preparation for PNK's FQ1 2012 earnings release Tuesday morning, we’ve put together the recent pertinent forward looking company commentary.



Pinnacle Entertainment Announces Agreements to Acquire Majority Interest in Retama Park Racetrack in Texas (4/26)

  • PNK will pay $22.8MM to acquire the 75.5% stake in RPL, comprising a purchase of debt securities and other interests related to Retama Park for $7.8 million and cash consideration of $15.0 million that will be used primarily to refinance Retama Development Corporation's ("RDC") existing indebtedness and to provide working capital.
  • In order to maintain continuity in the operation of Retama Park, the Company intends to provide bridge loans of up to $2.6 million to RDC in the near term, which are to be repaid upon closing of the Company's 75.5% stake purchase with the cash consideration contributed in that transaction.



  • "We are ramping up development and planning efforts for River Downs, and we are about to commence construction on an $82 million expansion at River City."
  • "Growth in trips and spend per visit from our most loyal guests has been a trend we've seen since the launch of
    mychoice in April."
  • "We will be starting a room refurbishing program in Lake Charles later on this year."
  • [Boomtown New Orleans] "And while we're pleased that margins at the property improved about 30 basis points, we believe there is an opportunity to drive profitable revenue growth, and we are implementing some measures to improve the property's performance in 2012."
  • "Bossier continues to be a difficult market.  We believe the market will continue to be under pressure for some time to come."
  • [Belterra] "And while we're pleased how things have started out in the property in 2012, we remain vigilant in our cost structure and our marketing programs to help set up this property for the future. We look forward to the opportunity to leverage our operations at River Downs once we get VLTs there to work in tandem with Belterra in the market."
  • "We are excited about our new facility in Baton Rouge. The project remains on our previously stated budget of $368 million, and we expect to have this facility open by Labor Day this year.  We expect to open sometime in August. We've incurred about $46 million in the fourth quarter of 2011 on the project and expect to spend most of the remaining $212 million through this year."
  • "Turning to Ho Tram in Vietnam, the project is on track and should open by the end of the first quarter of 2013."
  • "And finally, on River City expansion, we will begin construction of the garage later on this quarter. We expect to
    spend $20 million to $30 million out of the $82 million budget in 2012 with the rest of the spending being done in
    2013. We expect the garage construction to cause some disruption to River City this year, and it should come
    online in the early part of 2013. The hotel and the multipurpose room is scheduled to come online in the second
    half of 2013."
  • "We expect to spend between $50 million and $70 million in maintenance and other projects in 2012. The timing of some hotel room remodels, some F&B projects among others will be determined as we move into the year. We do have plans to touch rooms at all our hotels with the exception of the Four Seasons within our portfolio."
  • "As for Reno, as announced during the fourth quarter, we entered into two separate transactions to sell our assets
    there. The transaction that involves a casino resort is tracking to close sometime midyear. The company will
    realize about $13 million at closing. We also granted that same buyer an option to purchase a 27-acre land parcel
    for an additional consideration of $3.8 million. The other transaction, which was completely separate on the
    remaining acreage that we own there, fell through earlier this quarter, and we're in the process of remarketing that
    excess land currently."
  • "In Atlantic City, we have done great progress through the quarter in cleaning up the asset. We will receive a tax
    refund by the end of this quarter of $8.2 million, and we've resolved the Madison House litigation. As a result of
    these things, we expect the carrying costs for this asset to be substantially reduced in 2012 and beyond. We are
    retesting the market for the sale of this asset now that the cash burden to carry the land has been reduced greatly.
    We'll see how Revel opens as that will be – will surely create some buzz around that market."
  • [Belterra bridge opening]  "It's sometime in the first half of this year. But I would tell you it's helped a little bit and worthwhile noting, enough to note on the release and some of the comments, but I would tell you that it's not been a windfall."
  • "We're very careful about not letting corporate expenses creep up."
  • "Certainly, while there are things that will continue to improve this year, and there will be some noise associated
    with the garage at River City, and any disruption that may happen with the hotel refurbishment that we'll touch
    there, we do think that this structure that we have in place is one that is working well, and do think that there are things – most of the things that they've seen on the improvements are things that will be sustainable. And we
    continue to try to improve that structure going forward, and there are things definitively that you'll see that'll
    come through in 2012 that are not yet in those numbers, so."

Two Can Play This Game: FXY Trade Update

Conclusion: We’ve found an attractive price to re-short the Japanese yen, a currency we remain bearish on from a long-term TAIL perspective.


Position: Short the Japanese Yen (ETF: FXY)


This afternoon, Keith re-shorted the Japanese yen in our Virtual Portfolio, which, is up roughly 70-80bps vs. the USD today – mere hours after the BOJ incrementally eased its monetary policy by expanding its Asset Purchase Program by +33% to ¥40 trillion yen!


Global currency markets are clearly sending a negative signal to U.S. policymakers, given that the USD can’t even catch a bid vs. the yen in the face of all that has occurred overnight. Portfolio positioning aside, that is not a good leading indicator for the long-term health of America under the current fiscal and monetary policy setup. And as the U.S. and Japan are highlighting, the international currency war is alive and well.


Digging deeper into the weeds, we can pull out one JPY-bullish nugget from the BOJ’s press release today: they are increasing their long-term inflation forecast (through MAR ’14) by +40% to +0.7% from +0.5% per annum. This puts them within 30bps of their +1% target from an expectations perspective, meaning they are less likely to “pursue powerful monetary easing” (Shirakawa’s own words) at the same pace over the intermediate term. Thus, expectations for BOJ balance sheet expansion over the intermediate term are being reined in, on the margin.


That said, however, the focus of our long-term bearish bias on the yen (woeful fiscal policy aside) has been centered on the changing BOJ board dynamics (still TBD) and Shirakawa’s expiring term, which ends in APR ’13. If the current degree of political pressure upon the BOJ is any indication, he will very likely be replaced with a dove that is highly committed to ending deflation through monetary policy measures – something Shirakawa isn’t fully on board with:


“Monetary policy alone cannot solve deflation… We are conducting policy at an appropriate pace. Easing of course isn’t something we’d continue to do every month.”


In the context of the evolving fundamental story, Keith’s quantitative levels are signaling to us that this is a good price to short the yen via the ETF “FXY”. Risk management levels are included in the chart below.


Darius Dale

Senior Analyst


Two Can Play This Game: FXY Trade Update - 1

Weekly European Monitor: Socializing Growth as Governments Crumble!

European Positions Update: Long German Bunds (BUNL)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +0.52 week-over-week vs +1.7% last week. Top performers:  Hungary +4.1%; Finland +2.7%; Italy +2.6%; France +2.4%; Austria +2.4%; Spain +1.5%.  Bottom performers: Slovakia -4.2%; Greece -2.6%; Russia (MICEX) -2.3%; Switzerland -1.9%; Denmark -1.8%.
  • FX:  The EUR/USD is up +0.26% week-over-week.  W/W Divergences: HUF/EUR +3.52%, TRY/EUR +1.49%, GBP/EUR +62%; SEK/EUR -0.78%, NOK/EUR -0.44%.
  • Fixed Income:  Portugal’s 10YR government bond yield saw the biggest decline of -131bps to 10.60% week-over-week. Did anything about Portugal’s fiscal risk profile change over the week?  --NO!  Greek yields fell -41bps to 20.96%.  Most other country yields we track were relatively flat on a week-over-week basis.  

Weekly European Monitor: Socializing Growth as Governments Crumble! - 11. yields



In Review:

The governments of Holland, Romania, and possibly the Czech Republic fell this week. Upps?!


Wrapping a bow around what is going on in Europe from the perspective of a united voice on the Eurozone’s sovereign and banking crisis to the impact of individual country government turnover is no easy task. Why?  Because there’s no such thing as a united voice across Europe and while citizens (and non-majority ruling government coalitions) have the best intentions in voting down their elected leaders, “fixing” Europe may be not only a question of said leadership, but the compromised and constrained nature of an uneven monetary union. In any case, what’s clear is that Greece was not the only country guilty of fiscal excesses across Europe, that it’s no longer just the streets of Greece that are filled with rioters, and it’s no longer just Greek governments that are being toppled.   


Righting the Ship: Damned if you do, Damned if you don’t


Fiscal compact? Growth compact? Compromised Compact? This week saw a continuation of the newly developing inflection in rhetoric on the region’s sovereign and banking imbalances: a shift in tone from outright budget consolidation to the worry of the impact to growth from such a policy. However, the size, shape, or funding of a “Growth Pact”, which was first uttered by ECB President Mario Draghi, but does not include the endorsement of the ECB’s balance sheet, is unclear.


Just on Wednesday the European Commission called for a 6.8% budget increase for member states in 2013, a gesture of solidarity towards crisis-hit countries, however its passage appears unlikely after firm opposition from Germany, France, and the UK.


The existing rub in directing Europe is also centered around the politically compromised nature of Europe’s leadership: on one hand they have to answer to their citizenry that is largely voting against fiscal consolidation, yet on the other they must answer to the market, and associated cost (issuing debt) and growth pressures, if deficit and debts are not curbed through austerity. These factors are then compounded given deep structural drags, like high unemployment rates, low labor productivity, vulnerable banks, and further declines in housing and property prices ahead. Just today Spain reported an unemployment rate of 24.4% for Q1 and 52% for Spanish youths. As our DOR Daryl Jones said this morning: a generation of unemployed is not a positive leading indicator for the outlook of any nation or region.


This week we heard a few loud voices on the topic.  One came from Francois Hollande, France’s presidential candidate for an election vote next Sunday (May 6), who said he’d immediately call for a Growth Pack if he wins. As a reminder, Hollande rejects the fiscal compact, supports the issuance of eurobonds to finance infrastructure, industrial investment and employment; additional financing for the EIB; the implementation of a financial transactions tax that will help fund development projects; and the more efficient use of EU structural or regional development funds.


The other strong and opposing voice came from Bundesbank President Jens Weidmann, who said that while he also did not back down from his assertion that some of the of the ECB's emergency measures, including bond buying and easier collateral rules, threaten financial stability and could generate inflation. Weidmann said further:


“Monetary policy is not a panacea and central bank firepower is not unlimited, especially not in a monetary union… We can only win back confidence if we bring down excessive deficits and boost competitiveness. And it is precisely because these things are unpopular that makes it so tempting for politicians to rely instead on monetary accommodation.”


So where does Europe shake out from here? While the specific policy moves are uncertain, it appears increasingly more likely that Europe’s stronger nations will subsidize the weaker ones because politically compromised Eurocrats would rather save their own jobs than deal with the consequences of losing a party seat or answering to the question of letting a country default and/or exit the Eurozone.  Further, a win by Hollande on May 6thcould well spell France becoming an island state, without the strong working relationship with Germany’s Merkel, which could create a very divided voice on Europe’s go-forward strategy to assess its sovereign and banking issues.  


Switching gears, the broader data released in Europe this week (below under the section “Data Dump”), continues to show weakness in month-over-month readings in concurrent-to-forward-looking data. PMIs (Services and Manufacturing) for the Eurozone remain comfortably below the 50 line that marks contraction and fell from MAR and APR and five Eurozone Confidence figures slowed M/M. German data continues to show a bright spot (CPI came in 10bps to 2.2% in APR Y/Y and Services PMI rose to 52.6 in APR vs 52.1 MAR) however we’re not ruling out a slowing in Germany in the 2H due to underperforming economic expectations across the region.


Call Outs:

Holland:  Dutch PM Mark Rutte's government fell Monday after 1.5 years in power because it failed to win support for the budget bill from the populist Freedom Party, whose support was required to push laws through parliament. However, on Thursday the caretaker government received the vote of three left-leaning opposition parties to get an austerity package passed to ensure the government is on track to reduce its deficit from an estimated 4.5% of GDP this year to 3% next year. The measures include an increase in the sales tax to 21% from 19%, health-care cuts, and a pay freeze for civil servants. Savings will be at least €11 billion ($14.6 billion), according to figures provided by the government.


Romania: the government collapsed Friday after a censure motion filed by the opposition won approval in Parliament, the second time this year a Romanian government has crashed. It is unclear if president Traian Basescu will name a PM and/or if a new coalition will be quickly formed, or if an independent government will exist for the next six months until parliamentary elections are held.


Hungary: Hungary's government promised Monday to impose new taxes and make deep spending cuts this year and next, as it tries to persuade the EU—and jittery debt markets—that it can meet fiscal targets despite slowing economic growth.


France: Socialist presidential candidate Francois Hollande pledged to block corporate job cuts in France that may start soon after the May 6th vote. He said on France channel 2 television that he will not allow a wave of firings stemming from restructuring programs that some have postponed until after the election, adding that there needs to be a sense of responsibility among corporate executives.


CDS Risk Monitor:


Week-over-week CDS was largely down across the main countries we track.  Portugal saw the largest decline in CDS w/w, -107bps to 995bps, followed by Spain -26bps to 478bps, Italy -24bps to 452bps, and Ireland -11bps to 579bps. French risk is rising alongside an increased likelihood that the Socialist Hollande wins the presidency on May 6th, with 5YR CDS up 13% in the last month.    


Weekly European Monitor: Socializing Growth as Governments Crumble! - 11. cds   a


Weekly European Monitor: Socializing Growth as Governments Crumble! - 11. cds   b


Data Dump:

Eurozone PMI Manufacturing 46 Prelim APR (exp. 48.1) vs 47.7 MAR

Eurozone PMI Services 47.9 Prelim APR (exp. 49.3) vs 49.2 MAR

Eurozone PMI Composite 47.4 APR (exp. 49.3) vs 49.1 MAR

Eurozone Govt debt as % GDP 87.2% in 2011 Y/Y


Eurozone Business Climate Indicator -0.52 APR (exp. -0.30) vs -0.28 MAR

Eurozone Consumer Confidence -19.9 APR vs -19.1 MAR

Eurozone Economic Confidence 92.8 APR (exp. 94.2) vs 94.5 MAR

Eurozone Industrial Confidence -9 APR (exp. -7) vs -7.1 MAR

Eurozone Services Confidence -2.4 APR (exp. -0.5) vs -0.3 MAR


Weekly European Monitor: Socializing Growth as Governments Crumble! - 11. conf 1


Weekly European Monitor: Socializing Growth as Governments Crumble! - 11. conf 2


Weekly European Monitor: Socializing Growth as Governments Crumble! - 11. conf 3


Germany PMI Manufacturing 46.3 Prelim APR (exp. 49) vs 48.4 MAR

Germany PMI Services 52.6 Prelim APR (exp. 52.3) vs 52.1 MAR

Germany CPI 2.2% APR Prelim. Y/Y (exp. 2.2%) vs 2.3% MAR 

Germany GfK Consumer Confidence Survey 5.6 MAY (exp. 5.9) vs 5.8 APR

Germany Import Price Index 3.1% MAR Y/Y (exp. 3.3%) vs 3.5% FEB


France PMI Manufacturing 47.3 Prelim APR (exp. 47.4) vs 46.7 MAR

France PMI Services 46.4 Prelim APR (exp. 50.1) vs 50.1 MAR

France Production Outlook Indicator -14 APR vs -15 MAR

France Own-Company Production Outlook -4 APR vs 8 MAR

France Business Confidence Indicator 95 APR vs 98 MAR

France Consumer Confidence Indicator 88 APR vs 87 MAR

France Business Survey Overall Demand 3 APR vs -8 MAR

France Producer Prices 3.7% MAR Y/Y (exp. 4%) vs 4.1% FEB

France Consumer Spending -2% MAR Y/Y (exp. -0.2%) vs 0.2% FEB


UK Q1 GDP Initial -0.2% Q/Q (exp. 0.1) vs -0.3% in Q4      [0.0% Y/Y (exp. 0.3%) vs 0.5% in Q4]

UK CBI Business Optimism 22 APR (exp. -18) vs -25 MAR

UK Public Sector Net Borrowing 15.9B GBP MAR vs 9.9B GBP FEB


Italy Consumer Confidence 89 APR [= lowest since data began in 1996] (exp. 96.2) vs 96.3 MAR

Italy Hourly Wages 1.2% MAR Y/Y vs 1.4% FEB

Italy Business Confidence 89.5 APR (exp. 92.1) vs 91.1 MAR

Italy Retail Sales 0.1% FEB Y/Y (exp. -1.9%) vs -1.1% JAN


Spain Mortgage on Houses -47.1% FEB Y/Y vs -41.3% JAN

Spain Producer Prices 3.3% MAR Y/Y vs 3.4% FEB

Spain CPI 2.0% APR Prelim Y/Y vs 1.8% MAR

Spain Retail Sales -3.9% MAR Y/Y vs -3.6% FEB

Spain Unemployment Rate 24.44% in Q1 vs 22.85% in Q4  [youth unemployment = 52.0%]


Switzerland Exports -2.5% MAR M/M (exp. 1%) vs 12% FEB

Switzerland Imports 4.6% MAR M/M vs -12.2% FEB

Swiss watch exports +18.9% in March, slowed less than expected in HK and China

Switzerland UBS Consumption Indicator 1.22 MAR vs 0.90 FEB

Switzerland KOF Swiss Leading Indicator 0.40 ARP vs 0.09 MAR


Ireland Property Prices -16.3% MAR Y/Y vs -17.8% FEB

Ireland PPI 2.6% MAR Y/Y vs 2.3% FEB


Sweden Consumer Confidence 4.7 APR (exp. 1) vs 0 MAR

Sweden Manufacturing Confidence -1 APR (exp. -1) vs 1 MAR

Sweden Economic Tendency 100.9 APR (exp. 100.5) vs 101.7 MAR

Sweden PPI 0.2% MAR Y/Y (exp. 0.1) vs 0.5% FEB

Sweden Retail Sales 4.5% MAR Y/Y (exp. 3.4%) vs 3.5% FEB


Finland Unemployment Rate 8.5% MAR vs 7.7% FEB

Finland Consumer Confidence 10.4 APR (exp. 9) vs 8 MAR

Finland Business Confidence -2 APR (exp. -2) vs -5 MAR

Finland House Prices 0.9% in Q1 Y/Y vs 0.9% in Q4

Belgium PPI 3.18% APR Y/Y vs 3.37% MAR



The European Week Ahead:


Sunday: Apr. UK Hometrack Housing Survey


Monday: Mar. Eurozone M3 Money Supply; Mar. Germany Retail Sales; 1Q Spain GDP - Preliminary; Feb. Spain Total Housing Permits, Current Account; Apr. Italy CPI – Preliminary; Feb. Greece Retail Sales


Tuesday: Apr. UK PMI Manufacturing


Wednesday: Apr. Eurozone, Germany, and France PMI Manufacturing - Final; Mar. Eurozone Unemployment Rate; Apr. Germany Unemployment Data, Unemployment Change and Unemployment Rate; Apr. UK PMI Construction, Lloyds Business Barometer; Mar. UK Net Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals, M4 Money Supply; Spain Manufacturing PMI; Apr. Italy PMI Manufacturing, New Car Registrations, Budget Balance; Mar. Italy Unemployment Rate – Preliminary, PPI; Greece Manufacturing PMI


Thursday: Eurozone ECB Policy Meeting, Announces Interest Rates; Mar. Eurozone PPI; Apr. UK Nationwide House Prices, PMI Services, Official Reserves; Apr. Spain Unemployment MoM


Friday: Apr. Eurozone PMI Composite and Services - Final; Mar. Eurozone Retail Sales; Apr. Germany and France PMI Services – Final; Apr. UK New Car Registrations; Spain Services PMI; Apr. Italy PMI Services


Sunday: Probable French Election Run-off; Greece elections; Regional German Election in State of Schleswig-Holstein



Extended Calendar Call-Outs:

30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.


1 July:  ESM to come into force.



Matthew Hedrick

Senior Analyst



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%

VFC: FQ1 Report Card


Conclusion: Overall, good numbers out of VFC. The company had a headline beat that will get people jazzed, but underlying results are even better. In fact, when you strip out all of the one-times between this year and last, you’re looking at closer to +18% EPS growth vs +7% reported. As it relates to the Timberland acquisition, which appears to be going well, our sense is that it was a penny dilutive ($0.11 in EBIT less $0.12 in interest expense), suggesting that organic earnings were +19% vs last year. In light of Q1 results, the company is taking up full-year expectations by $0.15 to $9.45 ahead of the Street at $9.40, which is sure to promote the first of what we expect to be multiple upward earnings revisions over the course of 2012.


What Drove The Beat: Gross Margins were light and investment spending was higher, but the top line trends are encouraging and all non-outdoor businesses picked up on the margin driving a better than expected bottom-line. Jeanswear accounted for 3pts of growth while Contemporary, Imagewear, and Sportswear combined contributed another 3pts to the top-line.


VFC: FQ1 Report Card - VFC S


Deltas in Forward Looking Commentary (updated view in red):

2012 outlook includes:


2012 revenues should increase by approximately +15% (17% in constant dollars) > no change (now excludes $70mm related to sale of John Varvatos = 1% better)

Excluding Timberland, revenues should rise by approximately 6% (8% in constant dollars). > no change

“We're still cautious about the macro environment both here and abroad given the mixed economic data that we're seeing, so we think it's prudent to wait and get another quarter or two under our belts before we consider taking a stronger stand on revenues.”

GM: Gross margin in 2012 should expand by approximately 70 basis points> no change

EBIT%: should expand by approximately 20 basis points (net of a 30 basis point negative impact from higher pension expense)

Timberland’s operating margin should exceed 11% in 2012. Excluding Timberland in both 2011 and 2012, the operating margin in 2012 is expected to improve 40 basis points from 13.6% to 14.0%, including a 40 basis point negative impact from higher pension expense.

EPS: Adjusted earnings per share is expected to rise to approximately $9.30. (raised to $9.45) Included in this guidance is the anticipated negative impact from 1) foreign currency translation, which is expected to reduce earnings by $0.41 per share (now $0.35), and 2) higher pension expense, which will negatively impact earnings by $0.19 per share. Timberland should earn approximately $1.10 per share in 2012 (no Chg) (excluding acquisition-related expenses estimated at $0.20 per share (now $0.23)). On a GAAP basis, earnings per share are expected to increase to approximately $9.10.


Solid revenue growth across all coalitions, highlighted by 25-to-30% growth in Outdoor & Action Sports

By Segment:

Outdoor & Action Sports:

  • 25-to-30% growth in Outdoor & Action Sports (incl. a full year of revs from Timberland) > no change
  • The North Face & Vans +mid-teen rev growth each in constant dollars
  • Timberland: expected to add +$1Bn > no change

Jeanswear: planning for mid-single-digit revenue growth in 2012.

Imagewear: planning for mid-single-digit revenue growth in 2012.

Sportswear: planning for mid-single-digit revenue growth in 2012.

Contemporary Brands: planning for mid-single-digit revenue growth in 2012.


FCF: which could exceed $1.1 billion. > no change

CapEx: of approximately $375 million. > no change



Highlights from the Call:

  • Mgmt increasingly confident in ability to deliver on updated 2012 guidance (now $9.45 in EPS vs. $9.30 prior; $0.06 from less severe Fx impact)
  • In light of concerns re China, still in its infancy re VFC investment - only four platforms there currently (Jeanswear - Lee, North Face, Vans, and Kipling)
  • DTC - expect to open 110 new stores across all brands (primarily Vans, TBL, North Face) driving +15% growth yy to 20% of total revs by F12
  • $375mm in CapEx to grow the business in F12, nearly 2x historical rate of sales (and VFC still expected to generate $1Bn+ in FCF in F12 as well)
  • Outdoor & Action Sports:
    • Still seeing solid sell-through despite seasonal abnormalities
    • Fall order book is up low-double-digit
    • North Face up 14% in Q1; DTC up +20%; on track to hit $2Bn in revs this yr
    • Up HSD in Europe; 'tremendous growth' in Asia
    • Global rationalization plan to reduce SKUs by 15% by fall 2013
    • e-com now in 5 countries (Italy, Spain, UK, Sweden and France) - Germany Austria, and Netherlands in 2H F12
    • Vans up +25% in Q1; DTC up +18%
    • Up 50%+ in Europe and high-teen in Asia
    • Launched 3 new stores in Q1; and e-com in 7 new countries in May (UK, Germany, Netherlands, France, Ireland, Austria and Sweden)
    • Timberland revs down slightly in NA (seasonal impact); Europe up +LSD and Asia up strong double-digit
    • Focused on growing wholesale and DTC distribution
    • Launching apparel next fall 2013 for spring 2014
    • Earthkeepers still running strong
  • Jeanswear:
    • Up HSD in Asia (higher than recent trends due to timing of shipments)
    • Lee Brand up +6%; Europe lower Asia up +HSD
    • Share gains in jeans and total bottom at mid-tier dept stores
    • Riders by Lee launch in dept stores later this year
    • Wrangler: Int'l up +8% (Asia up mid-teen, Europe softened Northern & Eastern Eur offset by Southern Europe)
    • Americas up low- double-digit strong at mass market and Western Business
    • Launching new fleece and easy care shirts later this year
    • Expanding into five-star premium line and footwear as well

 Revs: +31%

  • Organic up 12% (+14% cc)
  • Warm weather drove stronger sales and early shipments
    • Imagewear - 20% growth in both Bulwark and RedKap uniform brands
    • Licensed MLB and NFL apparel business up as well
    • Sportwear - Nautica up both at retail and wholesale; Kipling up over 50%+
    • Contemporary Brands - "feel we are turning the corner here"
      • even posted +18% revenue growth
      • Splendid and Ella Moss both up over 20%

 GM: -150bps (vs discussion of -100bps)

  • Core on plan down ~100bps due to higher jeans product costs, gross margin for TBL was lower than expected
  • Taking aggressive actions to move cold weather product - expect to be clean by 2H

 SG&A: up +30.5%

  • TBL drove SG&A rate by ~100bps

 EBIT: +12.5% vs. 14% last yr

  • TBL impacted EBIT% by 100bps; pension another 30bps
  • Accounting chg boosted last yr by 40bps so on apples to apples OM would have been similar yy

 Adjusted EPS

  • TBL contributed $0.12 in EPS excl $0.03 in acquisition costs
  • Other items….Fx and pension = $0.09 hit; last years $1.82 included +$0.11 from a tax settlement and LIFO acctg chg
  • So, underlying core earnings growth was actually up +$0.32, or 19%


  • Cash = $326mm
  • Expect to generate FCF higher than $1.1Bn


  • No change to TBL, or higher pension expectations
  • Fx impact expectations now $0.06 less
  • Fx = ~$0.10 EPS benefit for every $0.05 move in Fx (upside if rates stay constant)
  • GM = comfortable with guidance
  • Revs = keeping view despite taking out $70mm related to John Varvatos 


  • Most challenging due to seasonality re TBL - likely to impact EPS by ~-$30mm, or -$0.20 in EPS
  • Combined impact of TBL, Fx, and pension should impact EPS by -$0.29
  • As such expect a decrease in Q1 EPS growth yy




Open-to-Buy Positioning in Europe:

  • Expected a bit softer fall bookings, which materialized, but still expect North Face to grow for the full year
  • Don't yet have full visibility on fall bookings yet - expecting very strong year for Vans 

TNF fall bookings

  • Global Bookings up LDD
  • Asia very strong up DD, Europe a bit softer (UK customers had bankruptcies)
  • Neutralizing the bankruptcies is Europe, expect to see a few percent growth in Europe
  • In U.S. seeing fall bookings in-line with prior year

Inventories - Seasonal Impact:

  • TNF really strong growth and sell-through in seasonal categories similar to 2011
  • TNF Inventories at retail in a good position
  • Some retailers sitting on higher inventory, but fall bookings and sell-through give mgmt confidence in FY outlook
  • TBL, impact of weather tougher than expected, working through this
    • Working on diversifying brand so not so seasonal going forward
    • A few domestic TNF retailers did give back some inventory which is reflecting in current backlog as they have committed to new orders

Vans E-Commerce:

  • Launching Van’s e-commerce in Europe next month
  • Leveraging TNF E-commerce “back half” which includes systems and fulfillment as well as deliveries to supply chain
  • Maintain focus on the brand dynamic so that the sites speaks its relevant parts to the target consumer 

Trip to China:

  • Timberland is the inflection point resulting in the trip to China
  • Making a great deal of progress with the Asia Pacific Business
  • Approaching $1bn mark in that business 


  • Don't have full visibility into what fall looks like
  • Expect the $1Bn incremental contribution from TBL on track
  • 10% annual growth still the target still applies - adjusted to single-digits in 2012 due to Fx 


  • Have taken pricing up only 1/2 re to cost increases
  • Current goal is to hold pricing where it is today
  • 15% SKU rationalization reflecting the rightsizing of the collections to really maximize the overall output and creativity with improved margins as a result 

Outlook EPS Upside:

  • $0.15 higher despite revenues the same
  • Varvatos losing $75mm in sales, but profitability across brands higher than expected
  • Pretty well locked in right now (most of 3Q and half of 4Q) for denim
  • Intent is to hold pricing in jeanswear (recall VF only raised prices 1/2 of cost increases)


  • Replenishment was a bit softer than expected while booking coming in as expected
  • Int'l have to look at China and India (Jeans is biggest business in both), China is most profitable jeans business in their portfolio in any region

Contemporary Brands:

  • Splendid and Ella Moss up +20% mostly an Int'l opportunity
  • Has been running at a DD rate for a while now
  • Sevens has been the bigger drag here, both wholesale and retail grew in Q1 up +18%
  • Premium denim has been strong last 6-9 months


  • TBL opportunity to strengthen core FW collection as well as Spring apparel assortment (coming online Fall 2013)
  • Expectation for 10% growth in 2013 driven by addition of apparel, expanded assortment and channel penetration  - also to leverage DTC platform & in Int'l there is still oppy 

Change in Confidence in Europe:

  • Have seen some stabilization recently in weaker markets, haven't seen a deterioration
  • Last year grew +16% in Int'l markets despite turmoil last year
  • Still expect DD growth across Western Europe

TNF International Drivers of Growth:

  • e-commerce, rolling out into new markets
  • DTC opening stores in TNF (40 stores total today)
  • Geographic opportunity in a Pan European market, not just a couple markets
  • Most underpenetrated in Russia, Poland, Czech Rep, also Scandinavia, Germany (only 10 doors vs. competitor that has ~150), and France

TBL Fundamentals:

  • GM right in-line with core average - expected it to be higher

View of VFC Portfolio Strategy:

  • Seasonality is not a primary factor when evaluating deals
  • Mgmt does look at how they can strengthen a brand to drive upside - had this oppy in TBL

Inflation Outlook:

  • Expect a few percentage points in inflation on an annual basis moving forward (From wage and cotton)
  • Investing heavily in brands to offset bottom line pressures
  • Feel the company is well positions from a brand and innovations perspective for the long haul



Q1 should be decent but performance past the opening of SCC will be key



Galaxy should eke out a small beat this quarter.  However, what investors really care about is Galaxy’s ability to hold its own against SCC.  We know that Galaxy’s market share remained high for the first two weeks after the opening of SCC.  If volumes hold up, the stock’s recent momentum should continue, barring a big VIP slowdown.


As we wrote about on April 24, 2012 in "SCC NOT IMPACTING LVS SHARE YET," SCC has not yet boosted LVS’s share. Meanwhile, Galaxy’s share is chugging along at 20-21%, in-line with their share in March.  To be fair, it’s still too early to tell what kind of impact SCC will ultimately have on Cotai.





We project that Galaxy will report HK $2,028BN of EBITDA and gross revenue of $13.2BN with Galaxy Macau holding a little high and Starworld a little low.


Galaxy Macau

We are estimating Q1 revenue of HK$7.143BN and Adjusted EBITDA of HK$1.204BN.  

  • Gross gaming revenue of $6.9BN
    • HK$5.05BN of gross VIP win
      • RC Volume of HK$170.7BN
      • Hold:  2.96%
      • During the first 3 quarters of operations, Galaxy Macau’s average hold rate was 3.2%.  Therefore, we consider this quarter's hold rate normal.  
    • Mass win of HK$1,530MM
    • Slot win of HK$296MM
  • Net non-gaming revenue of $265MM
  • Rebate & commission rate of 1.28% or 43.3% or HK$2.19BN
    • We assume 60% of VIP business is revenue share-based and 40% is RC-based
  • Gaming premium of HK$32MM
  • HK$119MM of non-gaming related direct expenses
  • Fixed costs of HK$918MM


We estimate that Starworld will report revenue of HK$5,580MM and Adjusted EBITDA of HK$786MM 

  • Gross gaming revenue of $5.46BN
    • HK$4.8BN of gross VIP win
      • RC Volume of HK$176.4BN
      • Hold:  2.74% compared to a hold of 2.91% (excluding this last quarter) since opening
      • Using Starworld’s historical hold rate, gross VIP win would be HK$325MM higher and EBITDA would have been HK$46MM higher
    • Mass win of HK$562MM
    • Slot win of HK$70MM
  • Net non-gaming revenue of $117MM
  • Rebate & commission rate of 1.25% or 45.5% or HK$2.2BN
  • Gaming premium of HK$15.5MM
  • HK$29MM of non-gaming related direct expenses
  • Fixed costs of HK$420MM

Other stuff

  • City Club contribution of HK$42MM
  • Construction materials revenue of HK$423MM and EBITDA of HK$105MM
  • Net corporate costs of HK$110MM

Tough Spot: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI), Basic Materials (XLB), and SPY


Any time I’m short and the market is remotely against me, I get questions. Right now, I’m getting the most questions I’ve ever had. With Growth Slowing and the US Dollar in free fall again (down 6 of the last 7 weeks), that makes sense. This is a tough spot.


The other big short-term reasons why this is a tough spot are: 

  1. Month-end markups – that can last until midday on Monday when the fun cops start watching (last day of April)
  2. iQe4 expectations – at this point, I really have no idea what the next product upgrade looks like, or if it’s coming
  3. Immediate-term TRADE resistance is higher at 1409 

In other words, we can easily take the elevator up, every hour, on no volume, up to 1409 and make lower-highs. And then take the windows, again, on the way down.


Tough spot. Such is life for those of us who still expect to win and lose.



Keith R. McCullough
Chief Executive Officer


Tough Spot: SP500 Levels, Refreshed - SPX

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