TRLG: 1Q12 Report Card


Conclusion: TRLG’s beat confirms the strength in domestic premium denim trends as indicated by the 23% growth in the consumer direct channel on the heels of both Seven for all Mankind & Lucky Brand posting strong first quarter results. Although TRLG reduced second quarter guidance to be down year over year, the update was purely a result of intra quarter international trends coming in below original expectations despite strength in US Consumer Direct & US Wholesale. On the margin, this could have a greater implication on other premium denim retailers with greater international exposure- ie GES.    


What Drove the Beat?

Total company revenues increased +14% vs. +9E and guidance of +7-10%. US Wholesale posted its first quarter of positive growth since 4Q08 with US consumer direct same store sales up 13.3% contributing ~0.6 & ~13 points to the +14% results respectively. Gross margins missed slightly, but we'll give TRLG a pass given such strong top line and a 10 point sequential improvement in the sales/inventory spread (great SIGMA move). 



Deltas in Forward Looking Commentary:


In order to properly measure performance relative to original expectations, we look at 1Q12 results vs. management guidance headed into the quarter as well as any deltas in forward looking commentary beyond this quarter:



  • Full year: $450 million to $460 million; +7%-10% UNCHANGED
    • Korea: Down -$5mm UNCHANGED (-$1.2mm in 1Q12)
  • 1Q: +14% vs. prior guidance of +7%-10% BEAT
  • 2Q: Growth projections not given but reduced from prior +7%-10% REDUCED
    • While Consumer Direct & US Wholesale are expected to meet expectations, International sales have slowed below original internal expectations 


  • Full Year: $1.88 to $1.95 per share UNCHANGED
  • 1Q: $0.41 vs. prior guidance of $0.36 BEAT
  • 2Q: $0.35 vs. prior guidance of $0.39 REDUCED
  • Year End Diluted Share count of 25.2mm UNCHANGED

 Full Year Store Openings:

  • Global: 27 stores UNCHANGED
    • International: 14 UNCHANGED
    • Domestic: 13 UNCHANGED


Highlights from the Call:


Consumer Direct: +22.6%

  • Comp: +13.3%
  • Men's drove the results though women's colored denim was well received
  • Sportswear also performing well representing 33% of total consumer direct sales
  • Opened one store and closed one (total 109 vs. 96 LY)
  • Gross Margin (-180bps) reflecting increased markdowns in outlets to clear women's merchandise and competitively price women's sportswear
  • SG&A (-110bps) as percent of sales resulting from leverage in fixed costs
  • Branded store 4 wall operating margin +100bps to 40.2%
  • Total consumer direct operating margin (-80bps) due to gross margin reduction and additional field management/merchandise buying resources

US Wholesale: +2.8%

  • First Q of positive growth since 4Q08
  • Growth Driven by the men's business (specifically cords) and specialty store channel which was positive for the 8th consecutive quarter
  • Men's non denim collection was well received
  • Net sales to majors (-6%)
  • Net sales to off price channel flat
  • Gross Margin: (-30bps) due to competitive pricing in women's
  • OM +160bps due to reduced SG&A

 International: +3.6%

  • Driven by higher retail sales in the UK and Canada
  • Achieving good traffic flow in branded retail stores and are now focused on improving conversion
  • Retail sales +121% due to store count growing from 8 to 18 YoY
  • Partially offset by lower contribution from Germany and Korea
  • Opened 2 stores outside of the US in 1Q (1 in Canada, 1 in Japan)
  • Gross Margin +180 bps driven by sales mix shift to retail
  • SG&A +20.6% due to additional 10 retail stores YoY

 Core SG&A: +$900K

  • Down (-140bps) as % of sales due to sales growth
  • YoY increase due to incremental advertising expenses from national magazine and digital media spend consistent with 2012 plan

 Consolidated Gross Margin: -30 bps

  • Due to competitive pricing in selected styles

 Balance Sheet:

  • Ended the Q with $204mm in cash & no debt
  • Board initiated a quarterly dividend of $0.20/share & $30mm share repurchase program
  • Inventory +24%
    • Largest component is expanded retail store count +22% over last year
    • Expansion of wholesale in AMEA region also contributed

 2Q Outlook:

  • Reducing EPS outlook from flat at $0.38 to $0.35
  • Resulting from slowdown in International sales relative to prior guidance
  • Sales from Consumer direct and US Wholesale will not be enough to overcome anticipated softness in the international segment 
  • Combined 1H results will be slightly ahead of original guidance
  • Remain on track to open 27 stores globally- 13 in the US and 14 internationally with timing of openings to be similar to 2011
  • Anticipate $19mm in additional YoY SG&A expenses associated with new stores for the full year





Women's Business:

  • New product should kick in during Fall/Holiday season
  • Have some more trend setting product coming down the pike vs. product that has been following market
  • Women's trends looking less distressed/ripped 
  • Would continue to categorize women's as "stable"
  • Men's women's split currently 60% 40% men's to women's


  • Difficult to control pricing with gas and oil/cotton cots increasing
  • Trying to be more cost effective with treatments on women's side resulting in cleaner looks vs. vintage/washes
  • Need to be more price competitive in Canada vs. US pricing, need to be more consistent across the border, have made adjustments over the last 60 days which has had positive impact on the business
  • Looking to tighten the price range where volume is done for Women's from the current $178-$200
  • Unit sales similar in men's and women's with men's pricing driving gender outperformance

 Denim Trends:

  • Colored denim Looks to be strong through Spring/Summer next year
  • Seeing a lot more distress (ripped) denim on the men's side
  • Developing a vintage/non vintage trousers trend and are running corduroy more year round
  • Men's trends are driving the success in the business while women's is stabilized
  • Colored denim higher as a % of denim sales in wholesale vs. retail
  • Color contributing 40%-50% in wholesale
  • Slightly lower in retail where there is a fuller denim offering
  • International- Germany started with color late in Q4, 60-65% of denim color
  • Asia- 10% of denim offering is colored
    • Having more success in more branded style denim (iconic stitches) vs. cleaner lower priced denim

 US Consumer Direct Go Forward:

  • Q2 is an important time to be "wear now" headed into summer
  • Feel assortment is right headed into summer
  • Have seen incredible traction in shorts particularly men's

 FY2012 Top Line Guidance:

  • 1H international hasn't shaped up to expectations but 3Q merchandise more in line with original 1H plans
  • 1Q consumer direct strength expected to offset weakness in international early on and have some visibility into 2H strength through Fall bookings
  • Half of international is wholesale so fall order book provides good visibility into 2H

 International Consumer:

  • Consumers take more of a lifestyle approach to the brand
  • Seeing slimmer fits
  • German consumers trends have been a bit more dressy vs. casual
  • Male customer in particularly is loyal to the brand

 Outlet Store Comp:

  • Both formats had nice positive comps in 1Q12
  • Outlets were above the average
  • Full price stores were "very positive" (when asked if up DD)
  • 90 stores + e-commerce in the comp base
  • Made for outlet merchandise currently 50 50 in outlets in 1Q, will shift to 65% 45% in Q2
  • Healthy balance would be 60% 40% made for outlet vs. full price transfer

 Traffic Trends in the Quarter:

  • Flat in both retail and outlet
  • Conversion flat in full price stores
  • Conversion improved in the outlet stores which contributed to comp growth


  • Down $1.2mm in the quarter, right on track to be down $5mm in the year (unchanged)

 International Comp:

  • Only 3 stores in the comp base, not at the size to be included in the comp

 Gross Margin:

  • Have gross margin pressures much better contained
  • Adding newness & novelty to the line, price value relationship allows pricing increases
  • Sportswear is accretive to margins due to sourcing structure


  • Growth in SG&A primarily due to new stores and incremental spend in advertising


  • Includes all non denim bottoms(ie leggings & corduroy)
  • Sourcing opportunity helping margins in sportswear category
  • Graphic Tee business is "amazing"
  • Fabrication and fits have been upgraded
  • Have effectively built graphic design team- graphics are new, colorful


  • Linked primarily to door count growth and build of inventory in Europe
  • Expect 3Q and full year inventory growth to be due primarily to incremental sales growth
  • Anniversary international wholesale support in 2H12

 International EBIT Margins:

  • EBIT Margins down primarily due to Korea (-$1.2mm YoY in 1Q12)

 Product Costs in 2H:

  • Cotton hasn't really come down that much in terms of pricing coming down the pike
  • Fabric is made in America, a lot of which was purchased with higher cost cotton
  • Will provide an update on 2H costs next quarter


TRLG: 1Q12 Report Card - TRLF SIGMA


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.

OVERALL:  WORSE - Despite high hold, Las Vegas looked surprisingly weak with cash ADR and spend per trip struggling.


Here is the report card evaluating actual results against management's previous assertions.  

        • SAME:  international segment continues to be strong
        • WORSE:  spend per trip fell 1.7% YoY.  CZR mentioned previously that they were cautiously optimistic on customer spending in 2012; they continue to hold that view going forward.
        • WORSE:  cash ADR was worse than expected 
    • SAME:  on a consolidated basis, customer trips increased 1.4% YoY, in-line with CZR's outlook on seeing more customer trips overall.
    • BETTER:  revenues rose 6% YoY while customer trips rose in 1Q. 
    • SAME:  Horseshoe Cincinnati and Linq projects remain on track


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" 

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Volatility Playbook: Trading the Jobs Report

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

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 80.46%
  • SHORT SIGNALS 78.35%