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JCP: Right On The Money

Pershing Square’s Bill Ackman can try to save his investment in JCPenney (JCP) all he wants but the market won’t allow it. Since JCPenney CEO Ron Johnson first presented his strategy to reinvent the department store concept as “America’s Favorite Store,” the stock has continued to decline in price as investors lose confidence in his ability to turn around the retailer.


Our Retail analysts have been particularly keen on shorting JCPenney over the last year and with good reason. On June 11th of 2011 (pre-Ron Johnson), Managing Director of Retail Brian McGough went on CNBC and in an interview with Maria Bartiromo, said that JCPenney would be lucky to earn a dollar on earnings per share in 2012. This was when the Street was at $2.77 per share. Estimates have come down meaningfully to $1.27 but still need to be revised down an additional 20%.


Today, Hedgeye CEO Keith McCullough shorted JCP in the Virtual Portfolio yet again based on our research and quantitative setup. We have shorted JCP 10 times in a row over the past 14 months and profited each time. Our bearish thesis isn’t going away anytime soon.



JCP: Right On The Money - JCP SSScomps



There are many reasons why we’re bearish. If you check the above chart, you can see that Comps were down 19% in the first quarter and aren’t expected to turn positive for the remainder of the year. Add in the capital expenditures associated with the rebranding of the stores, the inability to gain traction with the new pricing strategy, the nebulous outcome of how well these new stores will work and the lack of “exciting” and “quality” brands being offered and you can see the cynicism related to the company.



JCP: Right On The Money - JCP brandexposure



Courtesy of the Hedgeye Retail team, here is a brief synopsis of what JCP is focusing on over the next few months in its stores. Whether or not this roadmap gets you excited about the company is really in the eye of the beholder:


• This week, JCP will showcase its new store design that will rollout into its top 700 stores between now and 2015 to its top vendors.

• The focus in August will be on Blue Jeans, and 6 shops will debut with merchandise from Levi, Buffalo Jeans and Arizona (one shop in Men’s and one in Women’s per brand).

• The Levi shop will sell a variety of new styles for $40 a pair, and offer shopping help through an iPad-equipped “Denim Bar.”

• In September, JCP plans to open an Izod men’s shop, Liz Claiborne women’s, and one “JCP” branded shop per gender.

• In all stores, checkout counters will be replaced with comfortable seating areas and long tables boasting built-in iPads and wireless internet.

• In August, Town Square will begin offering free haircuts for elementary students in an effort to drive traffic during retail’s coveted “back to school” shopping season.

• JCP will scrap its 96-page monthly publication, and replace it with 2 weekly circulars that highlight the new merchandise being offered (i.e. denim in August).

Has Housing Bottomed ?

Conclusion:  Housing data in the U.S. has stabilized on the back of record low mortgage rates, but reversion to the mean of long term rates and a massive shadow inventory combine to make a meaningful housing recovery potentially years away. That said, even a stable U.S. housing market is positive for the U.S. dollar.

Our view of economic growth in the United States has been fairly obvious to those that have been reading our notes or met with us lately.  Specifically, we think economic activity is going to be lower than consensus expectations.  Of course, that is not to say that all is negative.  In fact, a key area of the U.S. economy that appears to be showing some stabilization is housing.  


The housing market is important for two reasons.  First, a house is the primary asset for many Americans.  As the value of a house increases, so does their net worth, and their confidence related to future spending.  Second, homebuilding and construction is a major driver of employment in the U.S.  As the chart below highlights, more than 2 million jobs were shed in the construction sector since 2006, of which almost none have come back. 


Has Housing Bottomed ? - Construction


As it relates to housing stabilizing, inventory has been steadily coming down since about the middle of 2010 and although inventory has ticked up slightly in the last couple of months, it still remains well below cycle highs.  The chart below highlights this trend.  In fact, according to the National Association of Realtors, NAR, reported inventory decreased to 2.39 million units from 2.47 million in May.  This is the lowest June inventory number since 2002. 


Has Housing Bottomed ? - inventory


As the supply of homes for sales has declined, we have seen some uptick in prices both nationally and in specific markets over the past couple of months.  The chart below highlights the Case-Shiller national median home price going back three years.  The national median home price, at least according to this series, bottomed in the first couple of months of 2012 and has been on the rebound for the last few months according to data through April. This is corroborated by data released from Zillow that shows the median home price nationwide was up 0.2% year-over-year in Q2 2012 for the first time in five years. 


Has Housing Bottomed ? - Price



Admittedly, though, the rebound in pricing has been modest at best.  In April 2012, the median home price was $139K, which was only up a mere 1.5% from the trough number in January 2012.  The prior low was nine years ago in January 2003. From the peak in April 2006, the median national home price is off by just under 33%.

In part, the arrest in the decline in home prices is due to the fact that mortgage rates have reached all-time lows.  Specifically, the 30-year conventional mortgage rate in the United States has been declining for three straight years and is currently at, literally, its lowest rate ever.  According to Bloomberg, the current national average mortgage rate is 3.59%; this is down more than 20% from year-ago mortgage levels.  

In the chart below, we compare U.S. existing home sales to the 30-year mortgage rate.  Not surprisingly, in the last nine months we have seen an increase in U.S. existing home sales as mortgage rates have hit historic lows. This isn’t a surprise given that, all else equal, the decline in mortgage rates have led to mortgage payments that are 8% lower on a year-over-year basis.  So demand for homes has increased as they have become cheaper based on financing rates, therefore home prices have ticked up.


Has Housing Bottomed ? - sales.mortgage


Clearly, mortgage rates have provided some back stop to the housing market in the short term.  Even if they haven’t arrested price declines from year ago levels, at least according to the Case-Schiller data, lower mortgage rates have seemingly helped put in a short term floor.  (The housing market is likely a key factor that underscores why the Fed will likely not raise rates meaningfully in the next few years.)


Has Housing Bottomed ? - caseshiller


One of the key risks to the housing market over the long run is a reversion to the mean in long term rates.   Over the past thirty years, the average rate on a 30-year mortgage is 8.75%.  From the current mortgage rate, a one percent increase in the mortgage rate would lead to an increase in the monthly payment of roughly 10%.  In the scenario that mortgages revert to the long run average, monthly payments would sky rocket by more than ~57%.  An increase in interest rates, even on the margin, is a key risk to any potential for stabilization in the U.S. housing market.


The other key risk to the current stabilization in the housing market is shadow inventory.  Broadly speaking, shadow inventory is defined as those mortgages that are more than 90 days delinquent on their mortgages, in default, and/or in modification.   In the chart below, we highlight a data set from Bloomberg that indicates that shadow inventory in the U.S. is at north of 4 million units.  Granted, shadow inventory has come down from its peak of more than 5 million units, the overhang remains massive. 


Has Housing Bottomed ? - A


In fact, if we add shadow inventory to the actually reported inventory number from NAR, the total housing inventory in the U.S. is somewhere around ~6.5 million units.   Based on NAR’s May adjusted annual rate of existing home sales in the U.S. of 4.55 million, this suggests almost sixteen months of inventory.  At sixteen months, this would be higher than the peak of supply in 2008.


Clearly, there has been some stabilization of the U.S. housing market.  This stabilization is reflected in both the stock market, where the S&P Homebuilder Index is up 26% in the year-to-date, and amongst homebuilders as the National Association of Home Builders / Wells Fargo builder sentiment recently hit its highest reading since March 2007.  Despite the enthusiasm of these two measures, we would caution on expecting an accelerating recovery from these levels because of both the large amount of shadow inventory and artificially low level of interest rates.




Daryl G. Jones

Director of Research





While there were some non-recurring issues, Q2 was a surprisingly big miss.



"During the second half of the quarter, business trends began to weaken, and that clearly contributed to softness in our results. We remain encouraged by results at our Midwest and South properties, where we maintained or grew share in each of our markets.   This bodes well for our acquisition of Peninsula Gaming, which is on track to be completed in the fourth quarter."  


- Keith Smith, President and Chief Executive Officer of Boyd Gaming




  • Results in 2Q were clearly not in-line with their expectation or guidance.  In May, they started to see weakening of trends that impacted their business in May and June.
  • Believe that Borgata will remain a market leader
  • In the Midwest, they maintained / grew market share in all of the markets they operate in - which is why they are so excited about the Peninsula Gaming acquisition. Closing proceedings on schedule.
  • Continue to look for more options for Dania: selling or developing the site
  • Well-positioned to capitalize on i-gaming whenever it passes under the state or federal scenario
  • Will remain opportunistic in pursuing new growth opportunities
  • Las Vegas Locals:  Beginning in May and continuing through June they saw weakness from casual gaming customers. Weak sports hold and spike in benefits accounted for 2/3rds of the miss vs. expectations. Promotional environment has impacted their casual gaming customers but not their top players.
  • Downtown:  They began to pull back on marketing programs put in place last year as business was strenghening, but lower promotions led to a pullback in business.  They corrected that already.  They expect business to stabilize in 3Q and resume growth in 4Q
  • Midwest/South:  Blue Chip increased their market share.  Delta Downs posted double-digit EBITDA growth.
  • Particularly pleased with continued strength at IP and the introduction of B connected should benefit the 3Q.  Also seeing a benefit of operating efficiencies.
  • Borgata: New projects opened generated no incremental growth in the market.  Management claims that Borgata managed to gain market share despite new competition but Borgata's gaming share ex Revel has declined from 21.8% in January to 20.5% in June so not sure we agree.
  • Working on new programs in the Locals market to regain the casual gaming customers they've been losing
  • BYD Debt:  $2.8BN (increase due to pre-funded of $200MM equity contribution of PENINSULA acquisitions)
  • BYD cash balance: $327MM
  • At June 30th: $1.4BN o/s under their credit facility.  Secured leverage was 3.7x and total leverage was 7.1x.
  • Borgata debt balance: $816MM
  • Borgata cash: $34MM
  • Tax benefit in the Q, they are assuming a 35% tax rate for 2012
  • Room project from Borgata was completed in 3Q 
  • Guidance: 
    • EBITDA: Wholly owned: $77-82MM; Borgata: $47-49MM for Borgata
    • EPS: $(0.05) to $0.00
    • Last year there was a $4.6MM property tax benefit for Blue Chip in 3Q11 
    • Interest expense will also be $67-68MM in 3Q



  • What are they doing to mitigate impact of Revel in AC?
    • They are taking care of their top customers
  • Why were EBITDA margins so weak in AC given that promotional expenses were low? 
    • Property taxes increased by $2.5MM YoY so their tax rate there continues to move up.  The property tax issue will continue to impact them until the outcome of their tax appeal. 
    • Pulled back on some marketing dollars to see what was going to happen as Revel opened.  They are reinvesting at a higher rate in their customers going forward.
    • Some of the new food outlets in the market also took away some of their dining customers and traffic through their building
  • Guidance for AC only assumes a 5% decline compared to the 20% decline this quarter, despite the property tax issue not going away
    • They had some self-inflicted revenue loss by not marketing as aggressively as they were (didn't want to fight trialers)
    • 3Q is the strongest period of time and they are really seeing a limited impact on their gaming customers from Revel.  They don't expect to see a "material" impact from Revel until 4Q
  • Borgata room revenue is strong, slot and table business is strong...last year, they were closed for a few days because of the hurricane last summer.  So the comparison is also easy. Think that Hurricane Irene hurt 3Q11 results by $5-6MM.
  • In the LV locals market, they are focusing on where they have seen growth in the market:  casual gaming segment - so they are enhancing penny games. 
  • Kansas Star results really mirror normal openings - with an initial surge of first time visitation and then a more normalized level of business. The full facility opening will also give them a boost. 
  • Backing out the IP, results don't look so good.  The other adjustment is that there was a $2.8MM non-recurring property tax adjustment. Excluding that piece they would have been up slightly.
  • Bad luck impact on the sports book in the locals LV market? Baseball, parlay cards...many favorites won in the quarter. They are one of the largest Parlay writers in town.  Impacted them by $1MM in the Q.
  • Where is the low hanging fruit in improving results at Peninsula?
    • This is a very well run company with very strong margins.  However, there are some opportunities centered around purchasing efficiencies (food/insurance) and marketing. 
  • Thought process with the other Florida property since they already own Dania?
    • The site is very high quality (Saw Grass Mills Mall and Bank Atlantic Park). Think that IF there is a gaming expansion opportunity in Florida, that is a more attractive site than Dania
  • CA opportunity: The tribe does NOT have land in trust but they don't see that as being a large obstacle.  Land getting put in trust should happen within 1-2 years.
  • Will take out the existing Peninsula debt after the acquisition closes with their commitments
  • Max leverage covenant steps down to 7.25x at the end of the year, is that an issue? 
    • No, they don't anticipate it will be an issue. Only if they receive a management fee from Peninsula will that benefit their covenants. The Peninsula assets will be in a separate subsidiary. 
    • They plan on receiving a management fee
  • No significant cash outflows from either of the 2 new development projects
  • BYD is self-insured on the healthcare benefit side.  It is difficult to predict exactly what the costs will be.
  • As Revel has continued to add their amenities and assets, they have been continuing to refine their marketing programs and have become more aggressive.  The market as a whole is varied on marketing aggression - some are cutting back and others are very aggressive.
  • Midwest/South promotional spend are stable expect Biloxi, where they have decided to reduce marketing at IP vs prior owners.
  • Secured leverage ratio isn't a pressure point for them going forward - they have plenty of cushion. They are generally comfortable with their covenant levels.
  • Liquidity:  right now, they have very limited capex needs so they are ok with $50-100MM but normally they want $100-150MM available, exclusive of cage cash requirements (at Q end, it needs to be $100-105MM). Will increase when Peninsula gets consolidated. 
  • Their other M&A activities don't impact their thought process on acquiring MGM's stake in Borgata
  • CA project: 30 miles north of Sacremento.  Scale and scope discussions are a bit premature.



  • Locals Las Vegas: "Visitation and spend-per-visit among our top-tier customers remained strong during the quarter. However, EBITDA was negatively impacted by lower hold in our sports books, higher expenses associated with employee benefit programs across the country, and declines in business volumes from casual gaming customers."
  • Downtown: "Certain changes in our Hawaiian marketing programs aimed at reducing costs had a temporary impact on business volumes, but we expect those effects to reverse themselves in the third quarter"
  • "Delta Downs, Treasure Chest and the IP produced solid results during the quarter.  Blue Chip reported strong results as well, after factoring out a nonrecurring $2.8 million property tax adjustment in the year-ago quarter."
  • "The IP contributed $47.3 million in net revenues and $11.5 million in EBITDA to regional results during the quarter.  Net revenues at the property declined 9.1% from the second quarter of 2011, while EBITDA rose 23.9%.  Revenue was impacted by more focused marketing programs, while significant improvements in operating margins drove EBITDA gains. We recently introduced our B Connected player loyalty program at the IP, and expect to start driving additional profitable business to the property in the third quarter."
  • "Results were impacted by higher property taxes, as well as lower volumes due to new competition in Atlantic City.  However, Borgata continued to lead the Atlantic City market by a wide margin, increasing its market share during the quarter, and we expect the property to deliver a strong performance during the summer season."
  • Peninsula Gaming acquisition: "In early June, the Federal Trade Commission granted Boyd Gaming an early termination of the waiting period required under Hart Scott Rodino. Subject to the satisfaction of various closing conditions, Boyd Gaming anticipates this transaction will close in the second half of the fourth quarter of this year"
  • "Boyd Gaming today announced that it has reached separate development agreements for new projects in Broward County, Florida and Sacramento County, California.
    • In Florida, Boyd Gaming has entered into an agreement with Sunrise Sports Entertainment, LLP, the operator of the BankAtlantic Center, a major entertainment venue in south Florida and home to the NHL's Florida Panthers. This agreement provides the Company the opportunity to take advantage of the potential of expanded gaming in south Florida at the site of the BankAtlantic Center.
    • Agreement with Wilton Rancheria, a federally-recognized tribe located about 30 miles southeast of Sacramento, California, to develop and manage a gaming entertainment complex.  The deal is subject to the receipt of all required local, state and federal approvals, a process we believe will take approximately 24 months

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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




  • WORSE:  A big miss and below conensus guidance for Q3




  • WORSE:  Economic activity worsened in May and June and BYD saw an impact on their business
  • PREVIOUSLY:  "Economic fundamentals supporting our business are strengthening and we anticipate this trend will continue."


  • SAME:  Top tier customers are continuing to be spend
  • PREVIOUSLY:  "The higher end of the database is certainly the area where we continue to see strength, I mean, that the customers we know the best they're obviously most entrenched with our brands and that segment continues to grow, I think at a very healthy pace."


  • WORSE:  Despite the addition of a new competitor and renovations at another (Golden Nugget), the market has not grown.  While the impact on BYD's casino business has likely been in line with their expectations, F&B has taken a big hit and that has also impacted traffic to their property.  The promotional activity in AC has been rational but Revel has definitely stepped up promotional activity.
  • PREVIOUSLY:  "The guidance we provided incorporates some expected impact of Revel along with some offsetting and marketing expenses, the new marketing programs that we would anticipate to make sure that our customers continue to visit the Borgata along with additional efficiencies that we have built in over the quarter so that we can continue to manage the business and not only create the best experience, but maximize the profitability of the property."


  • WORSE:  business from casual gaming customers have softened.  Low hold from BYD's sport books and higher benefit expenses also hurt this segment.  
  • PREVIOUSLY: "We are seeing some positive factors as strip frequency from our customer base continues to grow and is now at the highest level in three years. Looking ahead, we expect steady EBITDA growth in our Local [LV] business."


  • WORSE:  BYD had pulled back on marketing programs but that tactic backfired.  BYD also reduced weekly flights from five to four.  However, BYD is confident the slowdown is only temporary as they have reinstated their marketing programs. BYD expects business to stabilize in 3Q and resume growth in 4Q
  • PREVIOUSLY: "Looking ahead, there is a lot of excitement about the progress that has been made in Downtown Las Vegas in recent months. The overall gaming market is expanding and its long-term outlook is encouraging. The Smith Center for Performing Arts and the Mob Museum opened during the first quarter, giving people new reasons to come to the area. These are exciting times in Downtown Las Vegas and we expect to see steady growth in visitor traffic as the renaissance of Downtown continues."


  • SAME:  cost efficiencies drove the property to continue to run ahead of expectations
  • PREVIOUSLY:  At this point, the IP is exceeding our expectations and we see considerable additional upside for the property.  I think there is certainly some upside from the 25.9% [margin] that we posted.  B connected...goes into play live there next week.  We think that is a big, big plus from a customer experience perspective and customer reward perspective. The summer is the peak season in the Gulf Coast market....there is a small new player coming online here in the next month or so, which we don't think will have an impact on our business, but, nonetheless, will mix things up a little bit."


Surprisingly solid results and guidance



“While second quarter regional gaming market revenues generally softened from the pace of the first quarter, six of the sixteen properties that Penn National Gaming operated for both periods recorded year-over-year revenue increases. More significantly, eight of these sixteen properties generated adjusted EBITDA gains in the second quarter relative to the comparable year-ago period.  Reflecting these results, our second quarter revenue and adjusted EBITDA both exceeded guidance."


- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming




  • Believe that they had a good quarter. View this year as a transitional year and that's what is turning out to be given all the openings and competitive pressures. Therefore, they are pleased with the quarter's results.
  • Relative cannibalization in the quarter was what they thought it would be at the company level. 
  • Relative to guidance, Columbus was already factored into 4Q.  They did increase the guidance for CZR St Louis (2.5MM of pre-opening but haven't included the EBITDA contribution or related interest impact given the uncertainty of timing).  D&A guidance did increase - which includes $4MM of accelerated D&A for the Ohio tracks. 
  • Compared to last year, in 3Q, there was $20MM of EBITDA associated with the sale of Maryland Jockey Club
  • There are also $5MM of pre-opening expenses in 2012 vs. 2011
  • 11 of their properties grew EBITDA margins. They are doing a really good job on keeping a handle on costs and reacting to the local environments
  • They do not assume any improvement in the business environment for the balance of 2012



  • Toledo:  slightly surprised with good June. Seeing good trends in developing their database. F&B is really exceeding their expectations.  Dealers are becoming more efficient, so there should be ongoing improvements to their table performance. They grew the market in Toledo (i.e. Detroit area) which is really positive.
  • Columbus: What they have seen in Toledo, doesn't necessarily translate to Columbus.  Toledo is a more "gaming experienced" market than Columbus. Most of the Toledo surprise is because the market has been exposed to Detriot gaming for a while which could have resulted in quicker penetration.
  • MD Live impact on Charlestown: Still very early. They are still expected to add more product over the next few months. The impact has been a little less than they expected, but it's still really too early to say. MD Live also has an impact on Perryville and Penn National to a lesser extent, so overall, it's been somewhat in-line with what they expected. Again, the first month impact is usually not the full impact of the opening...it takes another few months for things to settle out. 
  • Governor has until Aug 20th to expand legislation in order to get on the ballot in MD.  They view the whole process there as sleazy. They have argued that slots at the racetracks is really the only solution and yet the government has not been receptive to them and prefers a "backroom" deal with National Harbor. High level of disgust with the process. Even if they come out with a "competitive" bid process, it likely won't be "competitive."  Clear that the "fix" is in.
  • Was the HET transaction one off or are there more one off deals at sub 8x to be done? They are always interested in building their roots in key markets in the US at the right price. Have their "hands full" but are always looking for opportunities. They are also looking at international opportunities. PENN's strategy is simply growing FCF/share. That underlies all they do, not just growth for growth's sake.
  • Returning cash flow to shareholders? They will do what they can to increase FCF/share which could include share buyback...they do have the preferred maturing in 2015.  Redeeming that instrument is an attractive option that will have a dramatic impact on increasing FCF. That said, its not the only option they look at.
  • They have not changed the impact of MD Live on the 3 properties they thought it would impact. 
  • Riverside is the closest casino to Kansas Speedway and they expect it to have the largest impact there. They have tried to gain share from their competitors though who have been very aggressive at maintaining their slot business. Generally the margins there have held up at Riverside, despite the double digit revenue declines. Speedway is still continuing to ramp, especially on the slot side.
  • Cash: $204.1MM 
  • Debt: bank debt $1775BN, 2.1MM of cap leases; bonds 325MM
  • Capex 184.5MM (154.2MM project capex and 30.2MM maintenance capex) 
  • $3MM of capitalized interest; Guidance of $2.2MM in 3Q and $800k in 4Q
  • Project capex guidance: 160MM (3Q), 88.9MM (4Q)
  • Maintenance capex guidance: 23.7MM (3Q), 21.2MM (4Q)
  • $10MM application fees on Ohio VLT's in the 3Q but not a lot of project capex related to the Ohio tracks in 4Q. 
  • Consumer trends: Things haven't gotten any worse, they've been stable. Things are "ok".
  • Impact on Lawrenceburg from Scotia? They are seeing an impact. The property generates almost all of their impact from Ohio. They were a little surprised about the severity of the impact given the limited facilities there. However, they believe that Columbus may have less of an impact then they expected... they also expect an additional impact from Columbus opening.  So they overall estimated impact hasn't changed.
  • Sioux negotiations: Remain mystified by some of the parties in Iowa. State has decided that they prefer land-side properties.  Can't allow the state to proceed with the precedent that they are setting for other operators. The idea that you can pull a successful license from a high performing operating is "madness". They had been in discussion with their partners and the state to move the site. Then the commission announced that they would do an RFP. Then they came to an agreement with their partner to move their site, but the commission rejected that and decided to move forward with an RFP. However, the events underway have not impacted the performance of the facility.  They hope that the commission realizes that PENN has done a great job operating that site and that no one will really do a better job there. PENN has no intention to cease operations there but they can't control the other side. This will be a big fight. 
  • St Louis: how much capital do they need to invest to convert the property to a Hollywood? They are pleased with how the property is doing in the interim period. Still developing internal budgets for what they want to do. Timing is still 4Q, including getting through the regulatory process. It's also complicated getting in a place to being able to operate the property since CZR's has a much more centralized operating model. Mgmt team is changing out, which is not their norm. Most of the guys there now are leaving for other positions at CZRs.
  • Canada: they will be meeting with representitives in Ontario to explore opportunities in that province. They are very early in the discussion process.
  • Hoping to break ground before end of 2012 on the Ohio tracks. They will be very disciplined on spending capital to make sure that they get a good return: $250-275MM/per facility capex.
  • Thinks that i-gaming is more likely to be a state by state route. They are in talks with a number of parties but haven't committed to anything. They are also fighting against States giving the lotteries the i-gaming opportunity vs their casino operators.
  • Scotia Downs: more challenging location and not up to the same standard as their Columbus facility. Not a big read-through to their Columbus property. They are doing well there. 
  • Impact of Baton Rouge? Have been open about it being a disaster in terms of impact on PNK and PENN. Expect a pronounced impact since that market has been shrinking.  Would love to be wrong on this one. They just don't believe that PNK will be able to turn Baton Rouge into a destination market.
  • LV locals:  Still a very sluggish market. Promotional activity is a little more rational than it was. They continue to pair back their promotional activity as well.
  • Don't anticipate any impact of VLT's in IL since many facilities already had illegal devices. Didn't have an impact in West Virginia.
  • Their revenue guidance implies big declines in 4Q: expect cannibalization impact, Baton Rouge kicks off in September, Aurora and Joilet should continue to see some declines. Saw very little impact when Rivers opened up. Riverside impact of Speedway.
  • All of the Ontario licenses are going to be up for bid to be privatized. Not sure about CZR's Windsor.



  • Guidance: 
    • Net Revenues: 3Q: $699.3MM (below consensus of $729MM);  FY12: $2,872.5MM (below consensus of $2,921.5)
    • Adjusted EBITDA: 3Q: $184MM (below consensus of $188MM);  FY12: $769MM (above consensus of $765)
    • EPS: 3Q: $0.55 (below consensus of $0.59); FY12: $2.46 (below consensus of $2.51)
    • FY12 Share count: 105.9MM 
    • Pre-opening of $24.3MM in 2012 and $8.5MM in 3Q
    • D&A of $243MM in 2012 and $61.2MM in 3Q
    • Non-cash stock comp of $29.7MM and $7.2MM in 3Q
    • 39% tax rate
  • "Reported adjusted EBITDA was impacted by $0.8 million of costs not anticipated in the guidance related to our agreement during the second quarter to acquire Harrah’s St. Louis, which we anticipate will close in the fourth quarter. The Company’s second quarter 2012 adjusted EBITDA margins declined compared to the prior year due to a $6.6 million increase in preopening and acquisition related transaction costs. However, adjusted EBITDA margins are consistent for both periods once these costs are excluded."
  • "Second quarter results benefited from a full quarter’s contribution from M Resort which we owned for just one month during last year’s second quarter, as well as a full quarter’s contribution from our joint venture at Hollywood Casino at Kansas Speedway which opened February 3. In addition, we benefited from approximately one month of results from Hollywood Casino Toledo which, to date, has performed very well."
  • "We have seen continued positive results across the organization in terms of enhancing operating efficiencies and maintaining a disciplined approach to marketing and promotional activities."    
  • "Harrah’s St. Louis.... acquisition will be funded through an add-on to our existing Senior Secured Credit Facility, which will result in a short-term increase in our total debt to adjusted EBITDA leverage ratio to 3.32 times from 2.79 times at June 30, 2012.  We currently expect the... transaction to close in the fourth quarter of 2012, at which time we will re-brand Harrah’s St. Louis with the Company’s Hollywood-themed brand, which is now successfully deployed at twelve of our properties across the country. We are currently establishing the budget for re-branding the facility, refreshing areas of the gaming floor and aligning our IT and reporting functions"
  • “With the late June filing of our Video Lottery Terminal (VLT) license applications, as well as our formal request to relocate our Beulah Park racetrack in Columbus to the Mahoning Valley and Raceway Park in Toledo to Dayton, we are making measurable progress towards our planned construction of two new $150 million integrated racing and VLT facilities... The state will receive $125 million per facility in licensing and relocation fees, as well as a new recurring tax base, while the Company believes the facilities will deliver attractive returns on invested capital."
  • "We are pursuing new gaming opportunities in Western Massachusetts; for our jointly owned racetracks in Texas; and in Maryland where we are advocating for legislative approval for slots at our Rosecroft Racetrack in Prince George’s County to help provide a long term solution for the state’s struggling horse racing industry. Whether Governor O’Malley will call a Special Session of the Legislature to consider gaming expansion remains to be seen, but Penn National will continue to aggressively push for the inclusion of Rosecroft as a potential sixth gaming location in the state at the current gaming tax levels."
  • “We are disappointed with the Iowa Racing and Gaming Commission’s recent decision to not approve an extension of our operating agreement with our qualified sponsorship organization through March 2015 as well as their decision to request applications for a new land based facility in Sioux City. We have filed a lawsuit to protect our interests and continue to explore our options related to this matter."
  • Our revised 2012 guidance assumes, among other things, a continuation of recent consumer trends, the current expected opening date for our Columbus facility, and the impact to operating results in several markets related to new competition as outlined in the assumptions which precede the guidance later in this release


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



  • SAME:  There wasn't much change in guidance (it was just a little better) and the quarter was generally in-line.  Given the pessimism, however, PENN performed quite well.  




  • SAME:  has not gotten better but not getting worse on consumer spending behavior


  • MIXED:  In the Kansas City market, ASCA, CZR, and to a lesser extent, ISLE have been very aggressive in preserving their slot business but PENN is not going to be undisciplined in its reaction.  LV locals promotional market has been slightly more rational than a few months ago.  
  • PREVIOUSLY:  "There's rational promo environment out there."


  • SAME:  Cannibalization, overall, was in-line with management projections.  Maryland Live! has adversely impacted Charles Town and Penn National properties.
    • "It's clear that the cannibalization immediately is not as strong as what we've been indicating in our previous thought process. So that doesn't mean that the cannibalization doesn't happen. It just seems to be a little bit more delayed than we had in our original numbers."
    • "Maryland Live! versus Charles Town, I mean, certainly we are incorporating a bit of that. We think that the cannibalization, original cannibalization thoughts may have been a little bit accelerated in terms of the immediate impact. So we have pulled that back just a little bit."


  • WORSE:  LV locals market remains sluggish 
  • PREVIOUSLY:  "We started to see a little bit of improvement in the Boulder Station numbers for the Las Vegas locals....continue to show improvement to the overall performance in the M. But again, we're still early on in this, and it's going to take a couple more quarters going forward into this year and into next year for this to completely take hold. So we're off to a decent start this year, but there is more to come."


  • SAME:  L'Auberge Baton Rouge will be a 'disaster' for the Baton Rouge market
  • PREVIOUSLY:  "I think there is going to be very, very modest growth in this market, and I do think there is going to be significant cannibalization of the two existing casinos that are in that market. So we don't anticipate that there is going to be a good story in Baton Rouge once Pinnacle does open there. So we think the market is fairly well saturated and there will be modest overall growth. Probably not too different than what you're going to see in Atlantic City with the Revel opening that just occurred, given how saturated that market is, we see similar kind of effect in Baton Rouge. So we're preparing for lower business volumes and therefore ready to adjust our cost structure to accept a new paradigm of business levels."

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