"Overall, we had a solid quarter marked by incremental revenue growth resulting from our refined business model, more favorable weather conditions than last year and an increasingly renewed asset base.  Even after adjusting for the fact that fiscal 2012 had an additional week when compared to fiscal 2011, we grew revenues and adjusted EBITDA."


- President and Chief Executive Officer Virginia McDowell



  • They have now collected all of their insurance recoveries
  • No R/C borrowings outstanding
  • $0.5MM of capitalized interest for the Q and $1.1MM for the year



  • Blackhawk, for the first time since ASCA opened, had market share growth. 
  • Have turned a corner in Vicksburg
  • Disruption impact of the consolidation of LA operations was in the range of $300k 
  • Pompano:  Coconut Creek opened recently but they have had improved promotions and the roll-out of their guest loyalty program.  Racing revenues have stopped declining.
  • Cash build is temporary as Cape Girardeau construction ramps and have notes that they will likely take out next year
  • Impact of the extra week? Just pro-rata the quarter.
  • Update on closing of Biloxi? 
    • Sometime in the summer
  • Cape Girardeau budget increase was infrastructure-related
  • New competition coming into Blackhawk over the next 6 months? 
    • They are in discussions with the new property owner next door and are going to work together to strengthen their pod of properties. They are also renovating the rooms there and using the Pompano as an example. Have done a lot to the slot floor, poker room, and putting in a new buffet.
  • No change in customer behavior/ spending patterns over the last few weeks
  • Any overly promotional markets out there?  Biloxi is really the only one there... very competitive for mid-week business.  Margaritaville opened without a big impact but is a very promotional environment there. Also saw an uptick in Kansas City.
  • Feels like there may be more M&A as companies' balance sheets are more in order and there has been compression in the bid-ask spreads.  They are always looking.



  • "We expect to open Cape Girardeau by November 1 of this year, two full months ahead of our initial schedule, and will complete the rebranding of Vicksburg within the next several months (F2Q13).  Further, as we continue to renew our asset base and provide guests with more options and more experiences, we have an aggressive schedule of targeted capital improvements planned for our properties during the coming months, including renovated hotel rooms, new buffets and a full rollout of our enhanced customer loyalty program."
  • "Black Hawk benefited from favorable weather conditions, completed facility enhancements, including renovations to the poker room and casino floor, and a reduced gaming tax rate compared to the fourth quarter of fiscal 2011."
  • "Pompano continued to exhibit revenue growth resulting from changes to our game mix, enhanced food and beverage amenities and the rollout of our enhanced customer loyalty program during the prior quarter, while competing with a major new expansion at our nearest competitor."
  • "Waterloo showed strong growth in adjusted EBITDA margins during the a result of operating improvements and reduced costs."
  • "Adjusted EBITDA margins decreased... primarily a result of severance and marketing costs resulting from the consolidation of our riverboat operations into a single facility.  We are benefitting from a lower cost structure in Lake Charles as a result of consolidation following the sale of our smaller riverboat in February 2012."
  • "Our properties in Mississippi continue to face difficulties stemming from a lagging economy in the area.  In particular, our property in Lula is facing increased competitive pressure from competing facilities in Arkansas.  However, in Vicksburg we benefited from operating improvements... partially offset by construction disruption associated with the ongoing rebranding of the facility."
  • "Kansas City property, however adjusted EBITDA decreased... primarily as a result of competitive market pressures following the opening of a new facility in the area during the quarter.  Our property in Boonville increased adjusted EBITDA margins... as a result of operating efficiencies and the introduction of the Farmers' Pick Buffet in the beginning of this fiscal quarter."
  • "We are currently renovating the 253 hotel rooms in the main hotel tower in Lake Charles and 237 rooms in the Isle Black Hawk Hotel.  We expect the $15 million complete refurbishment of the Lake Charles rooms to be completed by November 1, 2012.  In Black Hawk we are replacing carpet, wall coverings, and furniture at an expected cost of approximately $2.0 million, and expect to be completed by December 1, 2012."
  • "Intend to open additional Farmer's Pick Buffets in fiscal 2013 including at Cape Girardeau, Pompano, Black Hawk and Waterloo.  Additionally, we plan to add a Lone Wolf bar in our Waterloo facility."
  • "Expect to introduce [Fan Club loyalty] program to five additional properties during the first and second quarters of fiscal 2013, and intend to have it fully implemented across the portfolio by the end of fiscal 2013."
  • The expected cost of Cape Girardeau has been revised up $10MM to $135MM
  • "The appeal hearing for the gaming license awarded to Nemacolin Woodlands Resort for the final resort license in Pennsylvania was held on March 7, 2012. No date has been determined for an expected ruling on the appeal or the ultimate resolution of the matter.  We expect to begin construction on the property following a successful conclusion to the appeal process and receiving any other necessary approvals, and to open the property approximately nine months after the commencement of construction."
  • FY2012 capital expenditures were $75.2MM, of which $34.9MM related to Cape Girardeau, $0.7MM related to Nemacolin and $39.6MM related to maintenance capital and projects at our existing properties.
  • Net leverage, as calculated under our senior credit facility was approximately 5.7x 
  • Unusual items in the Q:
    • $112.6MM write-down to the value of Biloxi after the sale annoucement
    • Recorded a charge of $16.1MM related to the sale of our smaller riverboat and associated gaming license in Lake Charles, Louisiana, completed on February 9, 2012
    • Impairment charge of $14.4MM against the goodwill at our Lula property
    • Net revenues and operating income for the fourth quarter include $8.6MM of insurance recoveries 
    • Accrued approximately $2.0MM, including interest, in connection with a judgment issued in a legal case in connection with the Company's previously owned property in Vicksburg, Mississippi, which was sold in July 2006.  We are appealing the judgment and plan to vigorously defend our position.
  • FY2013 Guidance 
    • D&A: $76-78MM
    • Cash income taxes: < $5MM (primarily related to state taxes)
    • Interest expense (net of capitalized interest): $83-85MM
    • Corporate & development expenses: $40MM (including stock comp)
    • Capex: $140-150MM (including approx $85MM spent on Cape Girardeau)
    • Pre-opening of $5.5MM related to Cape Girardeau
    • FY13 will have 52 vs. 53 weeks in FY12

FNP/LIZ: Kate Japan Math

FNP’s is expected to take over ownership of its Japanese Kate Spade business later this year (Q4), which would add $1-$2 in value to one of our favorite longs near-term. While we expect the EPS impact to be a wash next year (+/- $0.02), it is likely to add $12-$17mm in EBITDA in F13 and up to $0.10 and $15mm-$30mm in EPS and EBITDA in F14. The bottom line 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 – we expect this deal to be no different.

Consider the following:

  • With 52 points of distribution, Japan’s store/door productivity is ~$1.4mm/store ahead of where we expect China is running and at nearly half Kate’s current store productivity.
  • Given that sales are up ~20% despite the tsunami impact, we’d expect productivity and sales to continue growing at a double-digit rate and likely exceed that growth over the last 12-months as FNP continues to grow its store base.
  • With $71mm in sales as of August ’11 and 20% growth, we assume Kate Spade Japan will generate revenues of ~$90mm by year end when the company expects to take sole ownership of the business.
  • The profits from this business will shift from being recorded in the Other Income line to being incorporated into the P&L as it becomes wholly owned. With operating profit margins in the HSDs, we expect Kate Japan to add $12-$17mm of incremental EBITDA in F13 reflecting modest margin expansion and $15mm-$30mm in F14 as the company realizes further margin expansion by leveraging existing headcount and operations in Asia.
  • COH has over 170 locations in Japan compared to Kate’s 52 suggesting a substantial runway for long-term growth. When COH took over control of its Japan business in 2001, it had 76 locations and $40mm in revenues. Today COH generates more than $700mm in revenues in the region. We think 20-25 locations over the next two years and $150mm in revenues by F14 is reasonable if not conservative for Kate.
  • The incremental addition of Kate Japan will add ~6pts to revenue growth in F13 suggesting 23% total top-line growth in F13 on top of high-teens growth in F12 (pro forma).

All in, this notes offering pushes out the duration of FNP’s debt maturity six years while reducing P&L volatility with the elimination of existing Euro Notes and most importantly the company assumes control over the Kate Spade Japan business. While these deals often result in minimal financial impact in early years, we think the earnings impact will be neutral in Yr1, but the EBITDA contribution from Kate Spade which already accounts for over 50% of the total is worth $1-$2 in value immediately. FNP remains one of our top longs.


Casey Flavin


FNP/LIZ: Kate Japan Math - FNP Japan EBIT


FNP/LIZ: Kate Japan Math - FNP SOTP w Japan




This is a company with long term top line tailwinds, easing input costs, and a best-in-class balance sheet operating in an industry that is consolidating. Yesterday, Keith bought Sanderson Farms in the Hedgeye Virtual Portfolio. Favorable supply metrics are driving pricing in the chicken market higher.  Corn is also going lower.  We’ve seen in the past that these two factors occurring coincidentally tend to drive the stock to outperform the market.


There are seasonal factors to be aware of in terms of how the name trades, but SAFM is a strong trade idea (three weeks or less).  We defer to Keith’s quantitative model, but seasonality in the stock suggests that it may be worth keeping this one on a leash that stretches, at most, from here to late-June.


Fundamental Outlook

The key to our call on Sanderson Farms is chicken pricing and the supply dynamics within the chicken processing industry that largely drive that factor.  By tracking pullet placements, we can understand the supply cycle within the chicken industry and compare that to the performance of Sanderson Farms’ stock versus the broader equity market.  Chicken pricing responds positively to reductions in supply, as the chart below shows.  In general, when the chicken supply cycle goes into liquidation – as pullet placements turn negative, prices begin to recover, and the stock recovers along with it.  The long term correlation between Sanderson Farms’ stock and Whole Chicken Prices (1995 to present) is 0.91.


IDEA ALERT: LONG SAFM - pullets v pricing



Corn prices are crucial for this company’s margins and the top line benefits of strong chicken pricing are best translated into profit growth when feed costs are favorable.  The chart below highlights the year-over-year decline in corn.  If the dollar continues to strengthen, corn is likely – at least in the near term – to continue to come down. 





Examining the trend in the annual change in pullet placements, we can break down the longer term cycle versus the relative performance of Sanderson Farms’ stock versus the broader equity market, or S&P 500.  As the first chart of this post highlighted, pullet placements declining typically drive higher chicken prices.  Historically, the liquidation stage of the chicken supply cycle has proven to be a prescient time to buy Sanderson Farms’ stock.  As the charts below indicate, buying SAFM as pullet placements contract can yield significant rewards relative to the S&P 500.


IDEA ALERT: LONG SAFM - pullets vs safm rel 97


IDEA ALERT: LONG SAFM - pullets vs safm rel 01


IDEA ALERT: LONG SAFM - pullets vs safm rel 07


IDEA ALERT: LONG SAFM - pullets safm rel 07 bad


The Tail (three years or less) View

The chart below highlights the potential for Sanderson Farms to outperform the S&P 500 over the next 2-3 years as the impact of supply contraction continues to drive pricing.  We have been cautious to tailor our view on Sanderson Farms to fit our macro team’s view on commodities and corn specifically.  If corn prices continue to move lower, we expect the benefits of higher chicken pricing to translate to improved earnings and stock price appreciation.  The beginnings of the current liquidation cycle has coincided with strong outperformance versus the S&P 500 (March 2011 to present) of 15% but we see further upside given the magnitude of the draw down in chicken supply and the implications of similarly large liquidations historically. A major difference between this liquidation cycle and prior cycles is that it is taking place in the midst of a much weaker economic period than prior cycles.  However, we believe that SAFM is a staple, certainly relative to the S&P 500, and expect this name to outperform significantly over the next two-three years.


IDEA ALERT: LONG SAFM - pullet vs corn SAFM outperf1


Quantitative Levels for SAFM








Howard Penney

Managing Director


Rory Green



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Claims Headwinds to Persist for Another Two Months

Initial jobless claims fell by 6k last week to 377k. Incorporating the 6k upward revision to the prior week's data (389k vs 383k), claims were lower by 12k. Four-week rolling claims rose 1.75k to 378k. For reference, rolling claims bottomed on a YTD basis at 355k on 2/25/12. The upward drift in the 3+ months since then has been 23k. We would expect another 10-15k in upward drift over the next two months before the trend begins to reverse. 


Overall, sentiment around employment remains weak. The most recent jobs report was unequivocally weak and the broader trend in claims has been negative. This trend will continue through July/August before reversing in September.


To be clear, the underlying trend in claims is positive. We look at the YoY trend in NSA claims to avoid the faulty seasonal adjustment factors. NSA claims continue to trend approximately 10% lower on a YoY basis. 
















Meanwhile, the Yield Curve Continues to Pancake

The 2-10 spread widened 5 bps versus last week to 140 bps as of yesterday.  The ten-year yield increased 4 bps to 166 bps. To put this in perspective, if spreads hold where they are now, the 3Q12 sequential change will rival what we saw in 3Q11, an ominous sign for bank margins. With Operation Twist set to end on June 30, all eyes will be on Bernanke at 10am this morning for clues on the next round of curve manipulation.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 


INITIAL CLAIMS: TWO MONTHS TO GO - Subsector Performance




Joshua Steiner, CFA


Robert Belsky


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Market Hangovers

This note was originally published at 8am on May 24, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You come home, and you party. But after that, you get a hangover. Everything about that is negative.”
-Mike Tyson


Yesterday Keith, myself, and our head of consulting, Michael Lintell, had a meeting with one of our long term subscribers in our New Haven office.  Not only does this client have a great long term track record in their respective market (which happens to be Europe), but they are massively outperforming this year as well.  I won’t get into the intricacies of our discussion, but at the end of the meeting we all collectively agreed that this is not the type of market that you want to trade with a hangover.


For those that have never had a hangover before, Wikipedia defines a hangover as follows:


“A hangover is the experience of various unpleasant physiological effects following heavy consumption of alcoholic beverages. The most commonly reported characteristics of a hangover include headache, nausea, sensitivity to light and noise, lethargy, dysphoria, diarrhea, and thirst, typically after the intoxicating effect of the alcohol begins to wear off. While a hangover can be experienced at any time, generally speaking a hangover is experienced the morning after a night of heavy drinking. In addition to the physical symptoms, a hangover may also induce psychological symptoms including heightened feelings of depression and anxiety." 


Arguably the way the market is trading currently, with the SP500 down 5.7% for month to date, it is creating feelings of depression and anxiety in many stock market operators.  In effect, a market hangover over that is akin to taking down too many Jägerbombs the night before (for you old timers a Jägerbomb involves dropping a shot of Jägermeister into a glass of Red Bull and then chugging it).


The last five days of trading are prime examples as to why you need all of your wits about you.  Yes, some investors with true long term duration don’t have to adjust exposures and worry about monthly or quarterly performance, but the reality is that most of us do have to worry about short term performance.  In a market like this, the only way to really capture marginal performance, especially when correlations are heightened, is to “buy ‘em” when other people are selling and “sell ‘em” when other people are buying.


In the Chart of the Day, we emphasize the volatility of the last week.  The SP500 started the period at 1,328 then traded down to 1,295 then ripped up to 1,331 and then dropped back to 1,300.  Much like a hangover, that kind of short term volatility can be nauseating.  We actually look at it in a positive light and use it as an opportunity to adjust exposures accordingly, and gain performance edge.  While everyone’s strategy is unique, email our head of consulting at if you want some help developing a more proactive risk management strategy for your portfolio.


Obviously the key driver of recent volatility in equities is Europe.  This morning we are getting more of the same.  On one hand European equities are at the highs of the day and respecting yesterday’s late day rip in U.S. equities.  On the other hand, there remains little chance of resolution to the sovereign debt mess in Europe, especially given the shifting politics.


Currently, the positive sentiment is centered on increased chances of Euro-area deposit insurances and the growing likelihood of Eurobonds that were supposedly discussed at yesterday’s summit.  In reality, though, no new progress was made and the next summit is not until June 28th.  Frankly, European Central Bank President Mario Draghi probably summarized it best yesterday when he said:


“Euro bonds make sense when you have a fiscal union, otherwise they don't make sense. They are the first step towards a fiscal union.”


We have said it many times, a monetary union is no union at all without a strong political and fiscal union.  Until that occurs, the Euro is doomed to fail.


The one global macro market that is slowly shifting from being in hangover mode to recovery mode is natural gas.  In our best ideas call yesterday, we emphasized our shift from being long term natural gas bears to getting more constructive on natty. Some of the key reasons are as follows:


1.   Bottoms are processes, not points. And after a 3.5 year bear market in gas that saw the front-month NYMEX contract fall 80%, we think that bottoming process is in motion; front-month gas has bounced convincingly off the $2/Mcf level, gaining 30% in a month to trade over $2.60/Mcf, and has regained its TRADE and TREND lines on our quantitative model.


2.   Production growth is slowing, and will continue to slow. Gas production is already slowing on the margin: +4% YoY in early May versus +9% in 4Q11. We see that decline accelerating as oil prices move lower. Our research indicates that the average full-cycle cost to produce 1 Mcf of gas in North America is ~$5.50/Mcf ($2 cash cost and $3.50 PD FD&A cost), which suggests that producers in aggregate are well below breakeven.


3.   Demand from the power sector is surging and won’t stop. The U.S. power sector has responded to the low gas price by increasing consumption 44%, or 7.5 Bcf/d, YoY in the first week of May, taking market share away from coal, nuclear, and hydro in a short amount of time.


4.   The 2012 storage issue is priced-in. We will hit storage capacity this fall. That is probably the most consensus opinion on natural gas there is in the market right now. In fact, in an April 2012 survey of investors and industry professionals, 78% said that we will hit storage capacity this year.


5.   From a long-term perspective, sentiment is still bearish on natural gas. From 1995 – 2006, non-commercial traders (hedge funds, mutual funds, etc.) were net neutral on natural gas. Only since 2007 have non-commercial traders been heavily, consistently, and correctly short the commodity.


Just like real hangovers, most hung over markets will eventually recover.  We believe natural gas is one of those markets.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Market Hangovers - CotDay


Market Hangovers - VPP

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