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GIL: A Binary Call On Pricing

 

Conclusion: Volumes are stabilizing. But playing the market share game in a commodity space in dangerous. 2H utilization should improve, but that's when GIL laps 30% growth largely from Gold Toe. Ultimately, this is all about pricing.


Volumes are stabilizing. But playing the market share game in a commodity space in dangerous. 2H utilization should improve, but that's when GIL laps 30% growth largely from Gold Toe. Ultimately, this is all about pricing. 


1)  Position in the screenprint channel: CREST data suggests unit sales have been coming in stronger than originally expected, running up +12% through February compared to management’s assumption of down -5%. The data suggests that the company is gaining share in the screenprint channel and we have no reason to dispute that. So, while margins will remain pressured, are likely to come in higher than originally planned. GIL's Q2 should reflect the third straight quarter of share gains after capacity constraints impacted share through most of last fiscal year, and GIL roared back with 25%+ cut in its price. In fact, Broder came out 5 weeks ago and noted that cotton is now priced at ~$1.00 for a t-shirt from ~$1.55 per pound at the peak, and almost all of it is being passed through to customers. In other words,  margins in the supply chain remain tight.  While Q2 typically represents GIL’s greatest share for the year, we expect 2H share to reflect incremental gains though we are still not convinced it will capture the 65% share in management’s plan as it competes against smaller players forced to be aggressive. If it does, GIL is likely to be buying it. Playing the market share game in a commodity space is wreckless. 

2) Gold Toe contribution: Q2 is the last quarter of a full incremental Gold Toe contribution with the deal lapping in April. While there has been substantial opacity surrounding the performance of this business since its inclusion, management confirmed that it remains ‘on plan’ to deliver $0.20 in EPS this year. Gold Toe accounted for ~$85mm in sales in Q1 and is expected to generate a similar contribution in Q2, or +22% total revenue growth. In addition, ~$0.05 in earnings implies ~$6-$7mm in EBIT contribution in Q1 and similar amount to what we expect in Q2. We have no reason to think this business is not moving forward as planned. Though it's very important to remember that a 20%+ kicker to GIL's top-line goes away next quarter. That kind of opacity definitely helped over the past year. Bye bye. 


3)  Input Cost/Pricing impact: While the inventory GIL is selling through at ~$0.95 cotton is closer to current prices, it’s still 35%-40% below where the company likely secured the inventory based on the typical 6-9 month production cycle. Lower prices in the screenprint channel (~70% of revs) continue to pressure margins slightly offset by HSD price increases in the Branded Apparel. We’re modeling gross margins of 16% below consensus expectations of 17% and -1100bps below year ago levels.


 

All in we are shaking out at $0.21 in EPS for the quarter with higher revenues of $521mm lighter gross margins relative to the Street. We’re assuming gross margins of 16% in Q2 reflecting a sequential increase from Q1 due to the absence of an inventory devaluation (= 7pts), the impact of manufacturing downtime (=3-4pts), and higher unit volume. Similarly, with the closure of Rio Nance 1 at the end of Q2 and higher utilization, we have margins up to 24-25% in the 2H and up 450bps next year to 23.5% reflecting 300-400bps from lapping the interruptions of the 1H F12, higher utilization, and improved manufacturing efficiencies. While we expect SG&A growth (+20%) to outpace sales (+12%) in support of retail and international initiatives, we expect operating margins to expand 366bps in F13. For the year we’re shaking out at $1.10 and $1.93 next year reflecting a 26x and 15x earnings multiple, and 16.5x and 11.5x EBITDA.


GIL: A Binary Call On Pricing - GIL Sentiment Monitor

 

GIL: A Binary Call On Pricing - cotton chart

 

 



GIL Forward Looking Commentary from 1Q12 call headed into 5/3/12 (2Q12) Conference Call:


Revenues:

Full year: $1.9bn

Printerwear Business: $1.3bn

Branded Apparel Business: $0.6bn

2H industry demand expected to be flat YoY when demand fell (-8%) in 2011

Assuming market share of 65% in the US Distributor Channel


2Q12: $500mm

Assuming 5% decline in industry shipments from US wholesale distributors to US Screenprinters in 2Q12

Expecting Strong Growth in Printwear due to penetration in international markets and some inventory destocking by distributors in the U.S. wholesale channel, and also increased market share

 

Gross Margin:

Pricing: Printwear Pricing expected to be slightly lower than Q1 for the balance of the year

 

Every 1% change in net selling prices for Printwear impacts projected EPS for the balance of fiscal 2012 by approximately U.S. $0.09

 

Pricing will reflect 4th quarter increases for the balance of the year which did not reflect full pass-through of high cost cotton

 

Cotton Cost: In line with 1Q12 and significantly higher than 2Q11

 

2H costs expected to be significantly lower than 1H based on cotton futures

 

Inventory at peak cost expected to be consumed early in 3Q12

 

Earnings:

Full year: $1.30

Second Quarter: $0.20

Higher cotton YoY expected to impact Q2 ESP by ~$0.70

Partially Offset by manufacturing efficiencies & Gold Toe

For every 1 million dozen change in demand for activewear, EPS is impacted by $0.05

 

Capex

Full Year: $100mm

Free Cash Flow:

Full Year: $75-100mm


Inventories: Expect to end F12 with unit volume slightly higher vs. last year

 

Rio Nance V: Will become the lowest cost facility for Activewear & Underwear

Expected to be fully ramped up by the end of F12

Expect additional production capacity and manufacturing efficiencies in F13

Temporarily retiring Rio Nance 1 at the end of 2Q12 and evaluating the modernization of Rio Nance 1 which would provide further cost efficiencies in the future


 


AN: Luxury Autos on a Tear

AutoNation April unit sales indicate a slowdown in growth despite increasingly favorable compares. That said, premium luxury auto unit growth is on a tear. 

 

AutoNation reported a 3 point deceleration in total unit sales growth slowing to +12% in April despite more favorable compares. That said, the 'premium luxury' segment, which accounts for ~19% of AN units,  put up 10% growth and although 200 bps below the total unit growth, underlying trends have accelerated from +7% in January to +15% in April (Chart1). Conversely, everything that's not premium luxury, representing ~80% of units sold and in line with overall trends, slowed 4 points sequentially +12%. As expected for the non luxury segment, 2 years trends have declined from 12 month highs of +27% in February to +10% last month.

 

AN: Luxury Autos on a Tear  - AN monthly 2 yr

 

AN: Luxury Autos on a Tear  - AN monthly units

 

 

 


ASCA 1Q REPORT CARD

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:  BETTER - ASCA delivered another beat bolstered by the perfect storm of mild weather, an extra leap year day, a favorable calendar, and great margins

 

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

 

CUSTOMER TRENDS

    • SAME:  Customer confidence hasn't changed much. People are still cautious in their spending habits.
  • MARGIN FLOWTHROUGH
    • BETTER:  Adjusted EBITDA set an all-time company record at 32.7%. 
  • ST. CHARLES BRIDGE CLOSURE
    • SAME:  After 3 years of the bridge being closed, ASCA's customers have adapted to the closures and have found different routes to access the property.  While net revenues saw a small decline, EBITDA improved by $1MM YoY and margins were 240bps higher YoY
  • NON-CASH STOCK COMP
    • WORSE:  Stock comp was $5.4MM, above company guidance of $4.5MM-5MM
  • CAPITAL SPEND
    • SAME:  Capital spend came in at the lower end of its guidance ($31-36MM).  ASCA spent $16.9MM for its Springfield site, in-line with its $16MM guidance.  Total 2012 capex (excluding Lake Charles project) remains unchanged at $85-90MM.
  • NET INTEREST EXPENSE
    • SAME:  Interest expense was in-line but as a result of the planned construction of Ameristar Lake Charles and the recent debt offering, and based on current interest rates, ASCA raised FY 2012 net interest expense guidance to $109-114MM from $103.5-$108.5MM previously.  
  • CORPORATE EXPENSE
    • BETTER:  Corporate expense was $12.1, lower than ASCA's guidance of $12.5-13MM.
  • DEBT REDUCTION
    • BETTER:  Reduced debt by $29.8MM in Q1, higher than the $20-25MM guidance 
  • TAXES
    • BETTER:  Took tax elections that will lower quarterly blended tax rate 3-4% points for future quarters

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ASCA 1Q12 CONF CALL NOTES

Weather and calendar proved helpful, but ASCA shows the days of margin improvement are not quite over

 

 

"Mild winter weather, highly efficient operations and leap year contributed to a quarter where we eclipsed $100 million in Adjusted EBITDA for the first time, as well as established all-time records for Adjusted EBITDA margin and Adjusted EPS."


- Gordon Kanofsky, Ameristar's Chief Executive Officer 

 

 

CONF CALL NOTES

  • Everything that could have gone right this quarter did go right for them
  • 1Q is usually their strongest quarter, so that's something that investors need to take into account
  • A good chunk of Council Bluff's growth came from taking more marketing share in a growing market
  • Low tax rate was due to some tax elections they took 
  • Reduced the add-on rate on their R/C given their lower leverage rate in the Q
  • 3.33x interest coverage vs. 2.0 covenant
  • Sr Leverage 2.72x vs. max of 4.0x
  • Pro-forma for notes issuance:
    • 4.94x Leverage
    • 2.13x Sr Leverage 
    • 3.15x Interest coverage
  • Don't expect to borrow much under the R/C in 2012 to fund the Lake Charles project.  Houston is 142 miles away from their property.  Hope to get regulatory approval to commence construction in July. 
    • Demographics similar to St. Louis market
    • 1.5MM more adults in Lake Charles than St Louis (including Houston) and income is 40% higher
    • Total # of competitors are the same
    • Think that any Texas gaming legalization is low probability and far away.  Ballot initiative would be needed to legalize gaming and they believe that would occur during a Presidential election which is 4 years away
  • Springfield MA office will be staffed by a government relations employee.  They are very excited about their location and have broad support from the city of Springfield.

Q&A

  • Kansas City:  they were very well-prepared for the new competition.  They benefited from weather and leap year- so it's a bit too short of a time line to draw a conclusion of the competitive impact.  They are the farthest away from Kansas Speedway.
  • They stretched their max leverage when they did the stock buyback.  They are generating a lot of cash over the next 24 months.  Therefore, their leverage should max out at around 5x, right before opening Lake Charles.  They can also do a pro-forma of their first quarter performance of the property - which would bring leverage down to where they are today.
  • $80-85MM of normal maintenance capex for the year
  • Think that there is tremendous opportunity to grow the market in Lake Charles.  Thinks that L'Auberge is also going to be ok and that they will create a resort cluster.  There will likely be some cannabalization but it's more likely to hit other properties in that market.
  • Customer sentiment now:  Consumers have had lower utility bills offset by higher gas bills.  People are still being guarded by what they are spending. Hard to say that there is an economic boom going on. 
  • April's calendar isn't as good as last year.  So don't get too excited about the regional #s when they come out.
  • Any impact from the shut down of Grand Vicksburg?
    • No - it was too small to matter
  • East Chicago bridge situation is moving very slowly. Their customers in that market have learned how to adjust since the closure 3 years ago. They just completed a major room renovation in the property. Their main competitor in that market doesn't have a hotel. If the bridge gets rebuilt that will help them but they are not relying on that happening.

 

HIGHLIGHTS FROM THE RELEASE

  • 2Q12 Outlook: 
    • D&A: $26.5-27.5MM
    • Interest expense: $28-29MM (including non-cash interest of $1.3MM)
    • Tax rate: 39-41%
    • Non-cash stock comp: $3.5-4MM
    • Corporate expense: $12-13MM
    • Share count: 34.3
    • Capex: $20-25MM
  • 2012 Outlook:
    • D&A: $105-110MM
    • Stock Comp: $14.8-15.8MM
    • Interest expense: $109-114MM (non-cash interest expense: $5.3-5.8MM)
    • Capex: $160-165MM (including $75MM related to Lake Charles)
    • Corporate expense: $52-53MM
    • Share count: 34.5
  • "We are excited about our recently announced plans to develop our ninth property -- a $500 million casino hotel spa project in Lake Charles, La. We intend to construct a high-quality property that will cater to patrons from southwest Louisiana and east Texas, including the Houston metropolitan area, which is one of the country's largest and most underserved gaming markets."
    • ASCA plans to develop a "casino with approximately 1,600 slot machines and 60 table games, a hotel with approximately 700 guest rooms (including 70 suites), a variety of food and beverage outlets, an 18-hole golf course, a tennis club, swimming pools, a spa and other resort amenities, and approximately 3,000 parking spaces, 1,000 of which will be in a garage"
    • Mid-2014 opening
  • "Council Bluffs...continued to benefit from market share growth in a strong market."
  • "The year-over-year improvement in net income was mostly attributable to efficient revenue flow-through, a $15.7 million reduction in the income tax provision due to certain income tax elections and the absence of non-operational professional fees in the current period. We anticipate the tax elections will lower our quarterly blended tax rate by three to four percentage points for future quarters." 
  • Debt: $1.9BN with $285MM available on their R/C
  • Net Leverage Ratio: 4.88x vs. 6.5x
  • "On April 26, 2012, we issued $240.0 million principal amount of 7.50% Senior Notes due 2021. These notes were issued under the same indenture as the $800.0 million principal amount of 7.50% Senior Notes due 2021 that we issued in April 2011. The new notes were sold at a premium to the principal amount, resulting in a yield to maturity of 6.88%. The net proceeds from this offering were $244.0 million, of which $236.0 million was used to repay all the outstanding indebtedness under our revolving credit facility.... After applying the proceeds to the outstanding revolving credit facility, we had $496.0 million available for borrowing under the revolving credit facility."
  • Capex: $31MM 
    • "In January 2012, we spent $16.9 million (including fees and commissions) to purchase approximately 40 acres of land in Springfield, Massachusetts as the site for a possible future casino resort"

DECK: Legal Victory Not What it Seems

DECK awarded a huge legal victory for which it will probably never see a penny. But the implications for the brand are positive given current sentiment. 

 

The good news is that Deckers won two lawsuits in the Northern District of Illinois totaling $686 million to the company. The bad news is that it is against 3,007 China-based web sites selling fake Uggs. Even if the defendants were US companies, this would be held up in appeals for years. But the fact that they are Chinese? Let's not hold our breath. 

 

But on the plus side, DECK was granted a permanent injunction, which will help its counterfeit policing activities, and will also be given any cash that has been seized from 'hundreds of financial accounts' linked to the counterfeiting, including funds held by PayPal. 

 

Perhaps most important is that this hardly helps the short case about the brand losing relevance. We've yet to see such severe penalties surrounding brands that no longer matter. DECK Is one of our favorites post the 1Q sell-off. 


MACAU IN-LINE, LVS BETTER BUT STILL BELOW TREND

Total GGR grew 22% to HK$24.3 billion, toward the high end of our HK$23.5-24.5 billion estimate.  Market shares are below.  Galaxy was the clear winner this month, despite the opening of Sands Cotai Central (SCC) on April 11th.  LVS had a better finish to the month but April market share still came in below recent trend despite the opening of SCC.  We do believe that LVS held low in the month but also that the VIP volumes were probably disappointing.  

 

MACAU IN-LINE, LVS BETTER BUT STILL BELOW TREND - MACAU234

 

MACAU IN-LINE, LVS BETTER BUT STILL BELOW TREND - macau2345


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