In preparation for ISLE's FQ4 2012 earnings release tomorrow morning, we’ve put together the recent pertinent forward looking company commentary.



Feb 23 - FQ3 Conference Call

  • “Once Cape's open, we're truly sort of a de-leveraging story. We're probably leverage-neutral until Cape gets open. Once it gets open I think everybody is going to believe we're a de-leveraging story at that time. “
  • “I think, is that if it's gradual, if it inches its way up, it won't be near as dramatic as if somebody wakes up and it's gone up $1.00 overnight or $0.50 overnight. If it's a $0.10 here, $0.15 there, you got to understand, I mean in most of our markets it's not the trip to the casino, people aren't burning a tank of gas to come to the casino, it's the fact that they're spending $30 more a week on gas or $50 more a week on gas whatever overall that would have the impact on them.”
  • [Cape Girardeau] “Pending regulatory approval, we expect the property to be open in time for the Thanksgiving holiday this calendar year, at least a month ahead of our previous schedule.”
  • “For the rest of this year, we expect capital expenditures to be around $45 million with approximately half of that in Cape Girardeau.”
  • “Mississippi continues to be an issue, just in general. If you look across the entire state since the floods of the spring, it's been a real challenge.”
  • [Competition] “We're kind of seeing the same results that we're seeing in Kansas City [and Pompano]. We really haven't seen anything yet.”
  • “Lake Charles is probably the one place where we got a little work to do [on promotional spending] to get it in line with the revenue stream.”

HedgeyeRetail: Chart of the Day; BBBY E-mergency

BBBY’s recent acquisition binge is no coincidence. It’s core business metrics will look very different in the coming three years than they did over the past three.


1)      The ‘Amazon Risk’ story is well-telegraphed, but not well-quantified. Here you go…

  1. Only 1% of BBBY sales come from its e-commerce platform today. That rate has been declining as corporate resources have clearly been focused elsewhere. Unfortunately, e-commerce is something that is nearly impossible to close the gap on competitively without a meaningful capital investment.  While not a direct comp, WSM’s omni-channel model boasts e-commerce nearing 40% of sales.
  2. Demographics are an issue here... A full 65% of those currently using BBBY’s online services are over the age of 35. The younger on-line consumer is going somewhere else. When it comes to e-commerce, the young consumer is the good consumer. Additionally, industry data suggests that BBBY’s online exposure to the 55 & up demographic increased 272bps YoY to ~26% in 2011- bad for online spending. BBBY ranks 9th among the 94 companies we analyzed in terms of leverage to this spending group- WSM is ranked 24th.
  3. When looking at product overlap between BBBY and AMZN, our in store analysis suggests ~93% of product (exact match or very similar) sold through Bed Bath and Beyond stores can be purchased on 

2)      It’s base business is a good one, but not as good as some might think. BBBY outcomped the industry by an average of 6 percentage points from 4Q08-2Q11. This is the same time that the company consistently beat quarterly EPS expectations by an average of 20%, and it became known as one of the bullet-proof quality names in retail. It is definitely a quality name. But let’s not forget that this period of outperformance is the precise time it (helped cause and) benefitted from the bankruptcy of Linens n’ Things.


HedgeyeRetail: Chart of the Day; BBBY E-mergency - BBBY e mergency


HedgeyeRetail: Chart of the Day; BBBY E-mergency - BBBY chart 2 


CONCLUSION: Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market.


On AUG 31, 2011, we published a note titled: “PHILIPPINES: ONE OF THE BETTER STORIES IN GLOBAL MACRO”; the conclusion of the note was as follows:


“The Philippines is shaping up to be one of the better country-level fundamental stories in Global Macro over the intermediate term and our core three-factor quant model is supportive of our bullish thesis.”


Since that date, the country’s benchmark PSEi Index is up +14.2%, which roughly double the comparable return of the S&P 500 and, over that duration, +14.2% good for sixth place atop the performance leader board of the 84 global equity indices and SPX sector ETFs we track. Moreover, of the 48 international currencies we track, the Philippine peso’s (PHP) -2.2% decline vs. the USD since AUG 31 is good for 9thplace atop that performance leader board – meaning the dollar-based returns of US investors would have been far more protected relative to the vast majority of other international equity investments during this latest intermediate-term King Dollar breakout.


Additionally, Philippine President Benigno Aquino has stated in recent weeks that while he “prefers to let market forces decide [the peso exchange rate]”, he’s comfortable with a 5%-plus appreciation from current prices to the 41 per USD level and will seek to protect it in the event it depreciates towards the 45 per USD level (-4% from current prices). Relative stability on the currency front can’t be discounted as a positive factor in today’s environment of rising FX volatility – a phenomenon that has repeatedly eroded the earnings growth of developing-nation corporations in recent years (see: India, Brazil, Turkey, etc.).




From a forward-looking perspective, Philippine’s TREND-duration GROWTH/INFLATION/POLICY outlook remains quite supportive of further equity market gains over that timeframe and sober and proactive fiscal and monetary policy means the country has quite a few levers to pull in the event the situation in Europe takes a dramatic turn for the worse.










In addition to his team’s victories on the policy front since his inauguration in JUN ’10 (six-year term), President Aquino has won over investors with his reform agenda, a core tenet of which is tackling the perception of corruption that has casted a dark shadow over the Philippine economy over the years. The recent conviction of foyer Chief Justice Renato Corona for illegally concealing his wealth sends a powerful message that neither corruption nor tax evasion will continue unabated under Aquino’s watch. That’s a positive for international investment flows into the Philippine economy – particularly from investors who are rightfully becoming less enamored with the TAIL-duration fundamental outlooks in some of the more notable developing nations like China, India and Brazil.


In the current investing environment where inflows continue to be hampered by the economic and financial market volatility stemming from excessive gov’t intervention, taking share is the best outcome any country can ask for. No doubt, Philippines has been taking share; as recently as today, Aquino and his team won an additional $650-$750M of foreign direct investment into his $200-plus billion economy from UK corporations. The next stop on his international road show is the US, where Aquino and his trade, finance, energy, defense, tourism, transport and foreign affairs secretaries will meet with President Obama on JUN 8. We expect additional “wins” as US corporations/investors may find the Philippines to be an increasingly attractive destination for diversifying their EM exposure.


All told, Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market. Furthermore, we believe fiscal and monetary policy levers as well as the country’s reliance on domestic (i.e. not external) demand for economic growth should keep the PSEi Index outperforming in an environment of continued Global Macro headwinds.


Darius Dale

Senior Analyst



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FNP/LIZ: Driving Kate Spade Int’l


In an 8K released this morning, FNP announced that it will be offering $150mm in 10.5% secured notes due 2019 with the intent to:

  1. Pay for all or portion of expected exercise of the buyout option for a 51% interest in Japanese JV partner Sanei International
  2. Repurchase $37.1mm of 5% Euro Notes (€28.6mm)   
  3. Effect the redemption of the remaining €52.9mm aggregate principal amount of Euro Notes outstanding (not due until July 2013)

The bottom-line here is that we’ve never seen a higher-end brand take back control of its content and distribution and it not be a positive event.

Here’s what this means for FNP:

  • It’s further reducing the remaining Euro Note position and the related volatility embedded in the Other Income line on the P&L at a time when the USD is strengthening = Positive.
  • It’s taking over majority control of Kate Spade’s Japanese business similar to what the company did in China last summer, increasing FNP’s control over international brand growth (~15%-20% of brand sales) in the process = Positive.
  • Less volatile, but more expensive debt. This comes as a bit of a surprise in the current interest rate environment. However, the company is effectively pushing out the duration of its debt exchanging debt due in 2013 for debt now due in 2019 so it’s about a wash.
  • As for the EPS impact, there is a fair amount of variability here primarily as it relates the profit contribution of the JV. We will have a more detailed analysis on this to follow.  In looking at the initial net impact on interest expense alone, it results in $11-$12mm of incremental expense when accounting for the increased rate, change in cash balance, etc., which equates to ~$0.06 in EPS dilution. Assuming a similar structure to Kate’s China JV in which wholesale sales are still realized as such, but now FNP realizes incremental profits in the Other Income line, and depending on the number and productivity of doors in Japan as an offset, this may end up being an accretive deal from Day 1.

We expect the company to continue to reduce and eliminate the remaining Euro Note exposure over the next few quarters in light of USD strength – patience here has proven prudent. With the balance sheet greatly improved, we don’t think $40-$50mm in incremental debt is a concern relative to this time last year.

That said, while we would have liked to see it at lower rates, this move gives FNP greater control over Kate Spade’s international growth trajectory. With Kate accounting for over 50% of EBIT, we like this move in aggregate. We’re at $0.66 and $1.00 in EPS in F13 and F14 respectively (pre filing). FNP remains a top long idea.

Casey Flavin



FNP/LIZ: Driving Kate Spade Int’l - LIZ SOTP




  • Number of 1st time visitors and proportion of visitors that gambled at all-time low
  • Unless new visitors are attracted, growth will be challenged
  • Vegas as a gambling destination becoming less attractive – could be bad for margins



June ECB Presser YouTubed

--Below we’ve dictated the major highlights from the ECB’s Q&A press conference this morning. A few key take-aways include that President Mario Draghi remains hands off in issuing another “bazooka” to the market, noting the effects of the 2nd LTRO have not been fully realized; he didn’t rule out another LTRO or the re-engagement of the SMP down the road. But more than anything, he reaffirmed the need of individual governments to stay the course of fiscal consolidation, the fruits of which he indicated may not be born out tomorrow, but could take 10 years. He kept his cards tight and was optimistic that much work can be accomplished by Eurocrats in the upcoming Summits and meetings to limit tensions, but noted that there is no “silver bullet” to solve the Eurozone crisis. On the ESM getting a banking license he did not provide an explicit answer, but argued the merits of an amendment or not.


Our take-away is the ECB is now marginally closer to cutting rates, reengaging the SMP, or providing additional non-standard measures at its next meeting in July, however, for now the ECB wants to see the outcome, if any, of the 28-29. June EU Summit. The work of individual governments to consolidate fiscally and solve for this "crisis" remains Draghi's unrealistic crutch.



At the Governing Council of the ECB meeting today the ECB kept the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 1.00%, 1.75% and 0.25%, respectively.


ECB President Mario Draghi announced that the council decided to continue conducting its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 12th maintenance period of 2012 on 15 January 2013.


Draghi did not drift far last month’s statement. On the growth outlook he said that the Eurozone economy should recover gradually, however he quickly followed that on-going tensions continue to dampen underlying growth momentum.


The June 2012 Eurosystem staff macroeconomic GDP projections are -0.5% and 0.3% for 2012 (UNCH vs previous projections) and between 0.0% and 2.0% for 2013 (vs 0.0% to 2.2%).


The ECB’s inflation forecast was in-line, namely that it would stay above 2% in 2012 and should fall below 2% in early 2013.


The June 2012 Eurosystem staff macroeconomic projections for the Eurozone foresee annual HICP inflation in a range between 2.3% and 2.5% for 2012 (vs 2.1% to 2.7%) and between 1.0% and 2.2% for 2013. 


On the money supply he reiterated that the underlying pace is subdued, with the M3 annual growth rate at 2.5% in April, down from 3.1% in March. Draghi noted that the annual growth rate of loans to the private sector declined to 0.8% in April (from 1.2% in March), owing to negative loan flows to non-monetary financial intermediaries. At the same time, monthly flows of loans to non-financial corporations and households were moderately positive in April and the annual rates of growth stood at 0.7% and 1.5% respectively in April, broadly unchanged from March.


You can find Mario Draghi’s Introductory Statement to the press conference here:




Highlights from the Q&A:


-Was the decision to keep rates unchanged unanimous?   MD: a few members would have preferred to have a rate cut today. I’d say not many.


-How does the ESM get a banking license?   MD: the present structure forbids direct recapitalization of banks. There two opposing ways to view this. One is that banks could recapitalize without the debt of the country going up by using the ESM. However, if the ESM is used to recapitalize banks, then the ESM will take on bank shares and become a shareholder? The question is that the ESM was not born to be a shareholder. The answer is still not clear. 


-Will we see further extensions of collateral and lower requirements?   MD: we have to assess funding conditions of banks. We do not think all of the effects of the 2nd LTRO have been exhausted.


-Is the efficacy of rate cut limited?   MD: we think the rate is appropriate but have to keep in mind liquidity constrains and tension in financial markets.


-What is the state of fiscal consolidation across Europe?   MD: Great strides have been made. The full benefits of fiscal consolidation may take 10 years time.


-What is the ECB’s position around cutting to the zero bound?    MD: as you know we never pre-commit.


-How effective have the LTROs been?   MD: there’s plenty of liquidity in some areas, shortages in other areas. Some issues throughout Eurozone have nothing to do with monetary policy, which we will continue to evaluate.


-Is the market over reacting to the developments in Europe? What’s your comment to George Soros’ three month deadline for Europe to find a solution?   MD: I don’t see how one/he can put a deadline on the complexity of Eurozone issues. Certainly there is a sense of concern. There is fragmentation across markets. The fears are not incorrect. What observers however underestimate is the strength of the political commitment of the governments of the Eurozone states. We’ve had many years of price stability and strong growth. We must figure out how to deal with this long term goal [of stability and growth] with the near and intermediate tensions. We just need to clarify this decision.


-You’ve left the window open for another LTRO, what about a reactivation of the SMP?   MD: the instrument is there, it is temporary and not infinite. This applies to both facilities.


-Can Spanish banks receive help without going through the Spanish government?   MD: the question revolves around if the banks want access to the EFSF or not. Very soon, probably Friday, the first assessment by the IMF on the recapitalization needs of Spanish banks will be available. But we will have to also wait for the assessments of firms hired by the government to review the banks. Any decision on EFSF should be based on realistic assumptions and needs to recapitalize the banks.


-If ECB brings interest rate below 1%, it would be at level last seen in response to the Lehman Brothers collapse. Is the environment this time around comparable to the Lehman period?  MD: the answer is no. To a great extent we know what the problems are today, which wasn’t the case for Lehman.


-There are many concerns that the debt crisis in Europe is spreading to the rest of the world, what message would you send them?  MD: it is true that there is a capacity of Euro crisis to effect rest of world. But if you carry this reasoning too far, then we are really saying that the USA is a small, closed economy. I don’t find this to be the case. Europe may have its problems, but many other countries also have their own problems they must deal with. This may be the message at the G20 summit in Mexico. All countries must work together, to address their own problems, and then worry about spillovers of policy, or lack thereof, in other economies.



Matthew Hedrick

Senior Analyst

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