Poor results in Las Vegas and high corporate expense drives an EBITDA miss



"We saw strong performance in our core business in the first quarter, driven primarily by gains in Las Vegas and in our online businesses. We continued to make progress on expanding our distribution network both on land and online, on leveraging our scale to drive efficiency and growth and on further strengthening our financial position."


- Gary Loveman, chairman, president and chief executive officer of Caesars Entertainment




  • Remain cautiously optimistic that their customers will increase spend per visit in LV over the coming months
  • Too early to tell what the impact of Revel will ultimately be
  • Octavius Tower - got great reviews.  Expect to bring the 3 luxury villas online in the coming months.
  • Unclear as to when MA licenses will be awarded but feel good about their chances of winning a license
  • LINQ project is progressing nicely.  They are encouraged by the caliber tenants that they are beginning to sign. 
  • Real money UK online gaming business continues to grow
  • CIE submitted an online gaming license in Nevada
  • Very happy with their acquisition of Playtika, which continues to perform well
  • They will focus on continuing to improve their capital structure throughout the course of the year as opportunities arise and market conditions warrant
  • Selling more equity will increase their float; they used proceeds to reduce debt
  • Just completed an amend and extend transaction
  • AC:  $7.1MM of tax reduction in the quarter and a $10MM deduction to past tax liabilities.  Added some new slots to AC which helped business.
  • IL/IN:  Increased competition in the Chicagoland region.  Saw some recovery in March when the bridge reopened.
  • Expect the managed piece of their business to become a more material part of their business.  Will grow with the opening of the Ohio casinos.


  • Las Vegas ADR was impacted by mix in the quarter as well as the difficult convention calendar comparison.  They think that the calendar is positive for mix and ADR for the rest of the year. 
  • Hold helped them a bit in LV and hurt them a bit in AC
  • Impact from Revel - it really too early to tell.  Valley Forge and Resorts World NY also just recently opened so it's really hard to tell.
  • Octavius Tower didn't help margins in Vegas, but it definitely generated some positive EBITDA in the quarter. Gaming revenue growth flow through was consistent with the past.  Lack of ADR growth didn't help.
  • The assessed values of the AC properties were just way too high so at least there is some relief.  In 1Q, they recognized two benefits:  1) $7MM benefit that will be ongoing per Q and 2) a $10.5MM refund of taxes overpaid in the past.
  • Cash:  $1,135 for the consolidated;  $896 at CEOC; $106MM at the CMBS entity; $133MM at the parent company
  • CMBS purchases are at the parent company level
  • Improved mix in future quarter and benefits from marketing efforts give CZR optimism that spend per trip will increase in Vegas in the coming quarter.  Some of the decreased spend this quarter also came from lower end segments
  • Nobu Tower:  280 Centurian rooms closed this quarter while they are working on the new tower. When the Nobu Tower opens at the end of this year they will be net room neutral - spending $30MM.
  • Biloxi, MS:  Have had some discussions to retire the asset down there and therefore they took a writedown. (basically they have a big slab of concrete there)
  • Don't think that they need to be more promotional per se, but rather do a better job in communicating their value proposition. The elasticity of promotional spending is actually quite low.
  • Online gaming timing:
    • AC:  Seems favorable and expect a favorable result, but the governor is moving slower than expected
    • Nevada:  In the event that there is not a federal bill, they have a few pieces of the legislation that need to be fixed.  Also, Nevada on its own is not large enough from a liquidity standpoint so that is an issue. 
    • Do not expect to be online in the US by year-end


  • "The increase in net revenues was due mainly to higher revenues in the Las Vegas and Louisiana/Mississippi regions, and from the Company's international and online businesses, including revenues related to Playtika, which was acquired during 2011, partially offset by a decline in net revenues in the Atlantic City region."
  • Trip and spend per trip statistics


  • Cash ADR remained flat at $92 in 1Q12 compared to 1Q11.  Occupancy also remained flat in the first quarter 2012.
  • "In Las Vegas, business from international visitors continued to drive growth in gaming revenues, as visitation to the city increased in February for the 24th consecutive month and the macro-economic environment continued to show signs of improvement."
  • LV revenue growth was "primarily due to continued strength in the international, high-end gaming segment and to the January 2012 opening to the public of the 662-room Octavius Tower at Caesars Palace. Hotel revenues in the region increased 5.2%, cash average daily room rates increased 1.0% to $95 from $94 and total occupancy percentages decreased 0.7 percentage points for the first quarter of 2012 from 2011."
  • AC: "Decline in casino revenues more than offset increases in non-gaming revenues. Trips and spend per trip by lodgers decreased while trips and spend per trip increased for non-lodgers. Property EBITDA increased in the first quarter 2012 from 2011 as a result of reduced property operating expenses, including the property tax settlement, which more than offset the income impact of lower revenues."
  • Louisiana/Mississippi region increased... "primarily due to an increase in casino revenues.  Trips rose in the first quarter 2012 from 2011 while spend per trip declined slightly." Property EBITDA increased ... due to increased revenues and reduced operating expenses and a $7MM insurance proceeds.
  • Iowa/ Missouri net revenue increased "due to increases in both trips and spend per trip... Property EBITDA increased .... due mainly to the income impact of higher revenues in the region."
  • "Illinois/Indiana region decreased... due to the impact of both reduced access to one of the Company's properties resulting from a bridge closure beginning in the first week of September 2011 that reopened in February 2012, and new competition in the region... Property EBITDA decreased... due mainly to the impact of lower net revenues."
  • Other Nevada net revenues decreased ... "due mainly to a decrease in spend per trip... Property EBITDA were negatively impacted by the decline in revenues."
  • Managed, International, and Other results increased ... "due mainly to increases in spend per trip at the Company's London Clubs properties and the addition of revenues from the 2011 acquisition of Playtika."
  • "To attract new members, we re-launched an enhanced Total Rewards with a free four-city concert tour that was followed by double-digit increases in online traffic and bookings at in March."
  • "We continued to strengthen our financial position, completing four transactions in the first quarter that have collectively added public equity and extended debt maturities. In April, we announced plans to issue up to 10 million shares of common stock from time to time, which will help us continue to reduce debt and invest in growth opportunities."
  • There was a $172.0MM charge in 1Q12, of which "$167.5MM was related to a non-cash impairment, related to a previously halted development project in Biloxi, Mississippi."
  • CZR reached a favorable Atlantic City property tax settlement in the first quarter 2012 which resulted in a decrease of approximately $17 million in property tax expense
  • 1Q12 "results include the recovery of business interruption insurance proceeds of approximately $7 million reflecting lost profits associated with temporary closures of three properties in Tunica, Mississippi in the first half of 2011, as a result of flooding."
  • Capitalized interest was $8.8MM
  • "During the first quarter of 2012, the Company recognized a gain on early extinguishments of debt of $45.8 million, net of deferred financing costs, due to the purchase of $118.7 million face value of CMBS Loans for $71.7 million."
  • "Estimates that Project Renewal and previous cost-savings programs produced $42.0 million in incremental cost savings for the first quarter of 2012" 

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We Don’t Make Widgets: TLT Trade Update

Conclusion: The math would suggest it is prudent to fade bullish manufacturing and export data at these prices, given their low predictive value for economic growth. Growth Slowing remains our fundamental outlook for the U.S. economy over the intermediate term.


Position: Long L/T U.S. Treasury Bonds (ETF: TLT).


But manufacturing is strong, right? Right.


Long before today’s ISM Manufacturing beat (76 years ago to be exact), John Maynard Keynes published The General Theory of Employment, Interest and Money. In that seminal work, Keynes laid the foundation for many economists after him to justify currency debasement in order to stimulate an economy’s manufacturing and export sectors in the pursuit of higher rates of GDP and employment growth.


Fast forward to 2012, we are entrenched in what Jim Rickards has labeled “Currency Wars” (also the title of his new book), whereby countries all over the world are pursing expansionary fiscal and monetary policy with the goal (stated or obfuscated) of having the cheapest currency. In few places is this more prevalent than the U.S., where the political agenda continues to be focused on stimulating manufacturing and export growth.


As we’ve seen with the resilience of the manufacturing sector in both the ISM survey and in the monthly employment figures, Obama and Bernanke are getting exactly what they want:


We Don’t Make Widgets: TLT Trade Update - 1


Unfortunately, their “victory” comes largely at the expense of domestic purchasing power and economic/financial market stability (refer to our 2Q12 Macro Themes presentation for more details). Perhaps more importantly, it should be duly noted that stimulating manufacturing and export growth in the U.S. is as good of a real world example of “focusing on the trees in lieu of the forest” as we can find. Manufacturing value added represents only 12.3% of the U.S. economy – down from 20.8% just over 30yrs ago. Additionally, that 12.3% is well below the OECD average of 16.1%.


We Don’t Make Widgets: TLT Trade Update - 2


Turning to exports, outbound shipments have averaged just 13.4% of the U.S. economy over the last four quarters – hardly comparable to the 70.7% share garnered by PCE.


Perhaps these data points explain why manufacturing has had little predictive value in determining U.S. growth. In the analysis below, we regressed the QoQ % change of the quarterly average of the ISM Manufacturing Report on Business with U.S. Real GDP QoQ SAAR – in concurrent fashion and with a one-quarter lag. Needless to say, the fit isn’t tight at all; we’d argue that this is because manufacturing doesn’t move the needle on the slope of U.S. growth. Manufacturing does, however, move the needle on the slope of consensus storytelling about the U.S. economy – as evidenced by today’s melt-up.


We Don’t Make Widgets: TLT Trade Update - 3


As such, we are sticking with our process and siding with the Treasury bond market rather than what we see as a topping equity market, as the former continues to trade in line with our call for slowing domestic growth. Our quantitative risk management levels on 10yr yields are included in the chart below.


Darius Dale

Senior Analyst


We Don’t Make Widgets: TLT Trade Update - 4


Domino’s Pizza posted a soft quarter, missing on sales as we were expecting.  From here, for now, we are neutral on the stock given the large correction on the news.  DPZ missed EPS expectations of $0.49 by 2 cents.  International comps also fell short while domestic comps were an unequivocal bomb versus the Street.


Our view of today’s print is that this was more a function of slowing pizza trends than any self-inflicted wounds from the company.  That said, we believe that Pizza Hut’s dinner box and other promotional items from competitors may have taken share from Domino’s as the company’s promotions focused on non-pizza side items.  In what seems to be a strategy to drive unit economics to a place where franchisees feel more of an incentive to help grow the unit count, management’s marketing strategy seems aimed at higher margin items likeac the Cheesy Bites (4Q) and Parmesan Bread Bites (1Q).   The company said, “Our focus is on helping our franchisees generate strong store profits and to turn those profits into new stores so that our domestic store growth rate improves.” 



  • Top line may have been impacted from marketing focus on side items.  Pizza promotions better driver of traffic.
  • Weather was not a significant factor.
  • Technology continues to drive sales; 30% of orders were digital (versus a year ago) in the U.S. and 7% of total orders were made from a mobile device.  The recently launched Android app accounted for 1% of orders in the quarter.
  • International store growth remains strong and management offered encouraging commentary on weaker stores being “weeded out” of the system.
  • 2% system comps (2.1% franchise, 1.6% company) for the domestic business was spun as being in the long term guidance range, which is it, but even bears were not anticipating such a weak comp. 

DPZ: COLD PIZZA - dpz pod1



  • Promotion of the side item was effective in raising awareness of these items and driving margin higher. 
  • Operating margin increased year-over-year from 28.7% to 29.8% as a result of a change in the mix of revenues attributable to fewer company-owned stores and increased franchise revenues.  Franchised domestic same-store sales gained 2.1% while domestic comps were up 1.6%.
  • Food costs: -140 bps as cheese block prices for 1Q were $1.52 versus $1.69 a year ago
  • Labor costs: -110 bps
  • Occupancy: -80 bps
  • Insurance and Other: +40 bps




  • Store level unit growth is not expected to be a factor for the company in the near term.  Over the medium term, raising store level profits is crucial to getting that drive back.
  • Europe remains a concern with well-broadcast economic issues persisting.  Management seems satisfied with how it is holding up but it is a potential worry.
  • Stronger franchisees have been growing by buying stores that are not performing as well, or are even distressed, and as that trend eases there should continue to be fewer closures.
  • Food basket inflation for the year is expected to be between 1-2% (unch).
  • 35-40% of the company’s intended purchases for 2012 are locked in.
  • The marketing message will be more evenly balanced between promoting check and traffic over the remainder of the year.  Artisan pizza is a focus this quarter as well as early week carry out special and other side items.
  • G&A is currently trending lower but the company expects higher G&A versus 2011 for the full year.


Other Points of Interest

  • Technology has been a tremendous driver of business for Domino’s and will continue to be.  However, in terms of the competitive advantage that it has offered the company versus competitors, we believe that that is waning rapidly as Papa John’s, Pizza Hut, and even smaller chains invest in their own digital ordering capabilities.  Management described technology as the “biggest leveragable competitive advantage” both domestically and internationally.
  • There are now more Domino’s stores outside the U.S. than within the U.S. 
  • Gas prices, for Domino’s, have the greatest impact on the company’s business through the effect on long term commodity prices.
  • We expect sentiment around this name to turn marginally more bearish.  A lot of the questions on the call seemed to lead management toward positive statements but management did not bite.  According to Bloomberg there are currently no sell ratings for DPZ.


Howard Penney

Managing Director


Rory Green



PSS/WWW: Buy NewCo


Let's face it. No one has ever HAD TO look at either WWW or PSS. Now we're left with the same high-quality leadership at WWW, but at a significantly larger company. This story has legs. 


With WWW trading down on the news of the PSS/WWW deal, we see it as a buying opportunity. While WWW paid $1.32Bn the PLG business (10x EBITDA) at the higher end of expectations, the accretion to next year’s EPS after 1x costs are absorbed is attractive and appears conservative.

  • For starters, WWW is assuming MSD-HSD sales growth for the PLG group over the next few years, which we think is very conservative.
    • Over the last two-years, this business has grown in the high-teens and we think this business could and should grow in the low-to-mid-double-digit range reflecting ~12% growth at wholesale and ~6% growth at retail. Even if we were to assume that the retail business (primarily Stride Rite) remains flat, we’re still looking at +9%-10% revenue growth here. These are not heroic assumptions and reflect a slowdown from current growth rates as reflected in the table below. We can't imagine that WWW management, which we view as the small cap footwear equivalent of VF Corp (i.e. very good) would buy into a permanently lower-growth story with no plans to leverage existing platforms.
    • With 90% of PLG’s revenues generated domestically, WWW should be able to leverage existing distribution channels that it’s established to drive PLG growth with 1/3 of sales coming from overseas. This is expertise Sperry lacked under its prior structure, which should drive continued growth at wholesale.
    • At Saucony, athletic footwear continues to outpace the industry particularly running. We see little reason this brand should grow less than 10% in 2012. The traction it has gained among elite runners over the past three years can't be given back easily. 
    • As for Stride Rite and Keds, if WWW can get these brands to grow at a MSD rate, we think the PLG business could grow in the teens.
  • In addition, total PLG operating margins were 6.9% in 2010 and while F11 margins came in at 3.6% due primarily to retail store underperformance, we think this business could run at a HSD margin or higher with the drag on retail removed.
    • Included in these assumptions is $16mm in incremental amortization offset by the initial impact of $8mm in identified synergies, which will start to be realized in F13 as reflected in the table below the full benefit of which should be realized by F14.
    • Further, given the scale of WWW’s supply chain and operating team, we’d expect additional SG&A leverage opportunity.
  • Our biggest concern is all the IFs just mentioned. WWW has proven to be extremely astute at integrating new content, turning around existing brands, and growing brands that already have relevance with the consumer. This, however, is a short cruise into uncharted waters, to say the least. WWW is acquiring four brands with over $1Bn in revenue -- equal to 65% of its existing size. The saving grace is that Matt Rubel did them a favor by consolidating back office for PLG under one roof, which makes it a cleaner sweep with lower risk for WWW.
  • WWW will be taking on approximately $1.275Bn in debt in the form of $900mm in term loans and a $375mm notes offering at LIBOR + 200-300 suggesting ~$50mm in interest expense and a net debt/EBITDA ratio of 4.2x. The company expects to get that down to 2.2x by the end of F14 suggesting ~$250mm in annual debt reduction and ~$40mm in interest expense as reflected in our table below. Additional considerations include a 25% tax rate and ~49mm shares outstanding.

WWW has historically traded around 14x forward earnings. With earnings of approximately $2.75 this year and ~$3.00 in F13. At 14x this year’s EPS we think there is only $1-3 of the deal currently reflected in the stock. We think EPS accretion could be closer to $0.50 in F13 compared to the range of $0.25-$0.40 suggested and could be up to $1.00 in incremental EPS in F14 vs. a suggested range of $0.50-$0.70, which is worth at least $6-$8 in value today. This implies a $45-$47 stock 10%-15% above current levels with additional upside from PLG 2-3 years out. Given the synergies available and what appears to be conservative growth assumptions for the PLG brand over the next several years, we like $4 in earnings power at this price.


Casey Flavin



PSS/WWW: Buy NewCo - WWW EPS Accretion


PSS/WWW: Buy NewCo - WWW EPS Accretion F14


PSS/WWW: Buy NewCo - PSS PLG Table



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