We advised not staying short, but staying away, from this stock on the print.  That ended up being the wrong call; the sell-off we were looking for happened more abruptly than we were expecting.  We still see risk in the stock from here.  Below we offer some takeaways and a recap of the quarter.



Buffalo Wild Wing’s quarter (recap below) was disappointing.  Same-store sales missing expectations and, more predictably, elevated food costs led to a 7% miss on the bottom line.  Here are the key takeaways:


1. Management layered on roughly one point of price in July bringing the total run rate to 3% for the third quarter.  On September 3rd, with the rollout of revised menus, the company will take an additional 1%, bringing the run rate to 4% for the fourth quarter.


HEDGEYE: We believe that Buffalo Wild Wings’ competitive set may be broader than some think.  Running price at 4% versus Food Away from Home CPI at ~3% could negatively impact traffic.  CMG struck a cautious tone when discussing price, and consumer demand in general, on its earnings call last Thursday.  Even with much less price on the menu than a year ago, CMG is not seeing an uptick in traffic that some were expecting.  CFO John Hartung said, on price, “when a lot of restaurants get resistance, when they increase prices, they either see resistance and people spending less on each visit or they visit less. We don't usually see that. So last year when we raised prices, we didn't see any kind of decline in transactions. We didn't see any kind of decline in average check.”  If Chipotle is observing some incremental softness in consumer demand, we believe it is reasonable to assume that all restaurant companies are experiencing it to some degree.



2. Management lowered FY12 guidance from 20% net income growth, provided on April 24th, to 15-20% net income growth.


HEDGEYE: We believe that there is further downside to that guidance.  Our range of expectations is for EPS growth of between 11-14% for FY12. 



3. The commodity cost set up for this company is not favorable.  Corn prices remaining elevated suggest that chicken wing prices may take longer to fall than many have been anticipating.   Management said, “It’s hard to believe that wing prices could go much higher”.  Chicken wing prices were up 86% versus 2Q11 levels and the remainder of the commodity basket was up roughly 3% year-over-year.  For 3Q to-date, wing prices are tracking roughly 70% above 3Q11 levels.


HEDGEYE: An upgrade on the EPS miss last quarter was based on the chicken wing conversation turning from higher prices to lower prices.  We believe that consensus is now much less certain about chicken wing prices declining in the near future, particularly given recent movements in the grain markets and the ongoing struggles of the food processors within the chicken industry. 



4. Same-restaurant sales growth for 3Q to-date at company-owned stores was +6.8%.  This implies a sequential acceleration in two-year average trends from 2Q.


HEDGEYE: In his monthly write-up, Malcolm Knapp mentioned a shift from June to July related to the fourth of July this year that favorably impacted casual dining revenues this month.  Additionally, management mentioned one additional UFC event versus the same period last year that will benefit traffic for the quarter.  Other non-recurring factors in the third quarter include a positive impact from the NFL adding Thursday night games versus 3Q11.  Despite these positives, there are many other variables, such as the elasticity of demand, that remain to be seen.  Our sense from this conference call was that the Wall Street community is far less trusting of this management team today than it was in April when the company last reported.  The line of questioning was far more skeptical and we believe appropriately so. That management can navigate the delicate path between protecting margins and not overly discouraging traffic in the current cost environment is less than certain.  



2Q12 Earnings Recap


BWLD missed on the top-line largely due to comps coming in at 5.3% at company-operated restaurants versus 6.1% consensus.  Earnings per share of $0.62 also missed the Street’s target of $0.67 as food costs “moderated” the company’s earnings growth, according to management.  Earnings per share grew 7.7% year-over-year versus 15.8% consensus. The tables below offer further details.










Howard Penney

Managing Director


Rory Green





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:  Even international was worse, the one area we thought was performing well.


  • WORSE:  EPS guidance remained unchanged at $0.98-$1.04, even though 4Q will have 22MM less shares outstanding.  Despite the IGT's denial's on the call we can all do the math which implies a 2 cent reduction in EPS


  • SAME:  operators are optimistic in their intent to purchase but some anxiety still remains
  • PREVIOUSLY:  "I would say the mood is improving but still tempered. I think we're all wondering about the economy as we go into this election cycle, and then, post-election, kind of what things look like next year. And I think there's always a great intent to make investments and then just stopping short of actually making it at the same robust level....I would say people are enthusiastic but still a little anxious."


  • BETTER:  IGT received 900 units in FQ3, previously they had expected to maybe get some in Canadian units out by the 4Q
  • PREVIOUSLY:  "We feel very good about our position there, that market is going through a huge replacement cycle in fiscal 2013 and 2014; for us, it is kind of a once-every-10-year opportunity, so when it comes, you have to really be prepared. We feel like we are prepared. We still think we might get some [Canadian VLT] in the September quarter. It just kind of comes down to timing and revenue recognition issues. It's really going to be more of a 2013 event. There may be 1,000 contracts or so that sneak into September. But we... obviously got a very good share from the first announcement and we're hopeful that those kind of trends continue."


  • SAME:  management continues to say Double Downs is performing ahead of expectations. But monthly daily users fell 7% QoQ. We'll split the difference - perhaps results were better than IGT expected but not quite as good as the where investors would expect things to be performing given the price tag paid and margin dilution.
    • "On your projections, EBITDA should roughly triple from here, and that would equate to a purchase multiple of roughly 6.5 to 7 times EBITDA on 2014. Are we in the same ballpark?"
      • "So I would say your math makes sense in this kind of a worst-case, and we think there's actually a lift from that in the business, just based on the R&D that has been spent years ago, and putting some legs on that R&D as we repurpose a lot of our content into the social gaming space and monetize it, again, when it's been sitting on the shelf."
    • "We expect slight margin pickup there in the back half"


  • MUCH WORSE:  Patti admitted that heightened competition, lower MegaJackpots yields,  and most importantly poor product performance, had negatively impacted their gaming operations performance
    • "We're generally pleased with our WAP product performance. It continues to perform as expected.  Really, the quarter was really just a mix to the lower earning units and we expect continued improvement sequentially over the remainder of the year."
    • "So I feel like we have a nice lineup of product in the bag of the sales folks at this particular point in the game ops side."


  • WORSE:  lower units sales in Europe and South America drove a miss in this segment and IGT admits that they have no visibility here.  So much for market share gains
  • PREVIOUSLY:  "Our international business pace continues to accelerate, with improvement in both quantity and quality of order flow."


  • MUCH WORSE:  at 48.9%, it is 3% lower QoQ.
  • PREVIOUSLY:  "We had an isolated non-standard cost situation in our Asia-Pac region in the quarter, so we are anticipating that the gross margins across the board... will pick up between now and the year – and the end of the year back to more normalized levels."


  • BETTER:  North American unit sales were one of the very few bright spots this quarter. The earlier than originally guided to shipments to Canada made all the difference between hitting consensus estimates and the reported beat in this segment.
    • "Our outlook is positive for North American replacements. It will, we think, continue to strengthen throughout the year, we will expect North American replacements to grow modestly over the remainder of the year...the replacement market is going to be flat to growing has kind of been IGT's stance now for about six months. 
    • "We've recognized 8,100 units. I think that's a comfortable kind of six month rate for us that we feel very comfortable with."


  • SAME:  Scioto Downs VLTs, Toledo and Cleveland casino were all recognized in the quarter
  • PREVIOUSLY:  "Our current forecast is that the Ohio properties will be recognized in June." 


A pretty big miss but you wouldn't know it by the tone of the conference call



"Against the backdrop of an inconsistent global economic recovery, we are generally pleased with this quarter's results and remain on track to meet our fiscal year 2012 financial goals.  The recent announcement of our $1 billion share repurchase is further evidence of our confidence in the outlook for IGT."


- Patti Hart, CEO of IGT



  • While some areas of the business fell short of their expectations, other areas excelled. 
  • International results were mixed.  Confident that international will be a strong contributor to growth in the future.
  • Expanding their Interactive business into mobile applications
  • About where they expected to be at this point in the year.
    • It is surprising that IGT thought the quarter would be this weak
  • They claim to be pleased with their revenue growth in the Q? Seriously?
  • Interactive generated $43MM in the Q
  • 62% gaming operations margin for next quarter
  • The gaming operations business remains extremely competitive
  • Game sales: Shipped 900 Canadian VLT units. More used unit sales lowered ASPs.
    • We thought that these were just new units
  • Expect gross margin of 52% for product sales in 4Q
  • Have repurchased 10% of their share count this year so far.  Anticipate returning $500MM of cash to shareholders (including dividends) in FY12
  • They are reiterating the same guidance for the year, despite the lower share count...ongoing fundamentals have clearly gotten worse.


  • Why in the world would they do the buyback ahead of such a nasty quarter?
    • They don't see the quarter as a miss: Double Down is performing better than expected. North America shipments are better than expected. They had some one time used unit sales into Mexico that negatively affected ASPs.
  • Big difference between shipped and recognized units this quarter
  • The reason for such a large range of guidance for one quarter has to do with:
    • Few thousand VLTs shipping next Q
    • Little IL VLTs in the F4Q
    • A few new Ohio properties that can go either way
    • Some import/export issues that have nothing to do with the business
    • Double Down has some new products launching
    • Poor international visibility
  • Double Downs 
    • Focusing on expanding across platforms and geographies and rolled out less games this Q which is why users slowed
  • Would like to see the trend of replacements in NA increasing YoY
  • Have a little IL and Canadian units included in their guidance now; they did not include them in their previous guidance
  • Lower margins on product sales next quarter is partly driven by the very competitive environment.  Their AVP and MLD units were down materially as a % of their mix. Since Canada and VLTs are going to be a big part of their business going forward, they will have lower prices and margins.
  • Excluding VLTs and used unit sales, the unit pricing would have been flat
  • Game ops margins ex DD was 60% 
  • Implicit guide down is due to margin challenges in gaming operations and international sales. 
  • Gaming operations yields continues to slide. They are adjusting their thinking about putting out lower yielding products and taking what they can get.  Competition is really hot in the WAP area, the economy is weak and they have some WAPs that aren't performing.  They have made some personnel changes to address some of the product issues. 
  • Double Down user growth from here?
    • The first priority is to expand the platform to mobile and geographic exposure
    • Then they are focused on adding the IGT content
    • So basically they don't expect to have MAU growth until the two above happen. 
    • Will their bookings per unit decrease when they go mobile? No comment but their competition has lower bookings per user on mobile. Mobile is still a small piece of their business so it's not impacting them yet.
  • They will have better ASPs next quarter but units need to be way higher to make the guidance
  • Double Down looks like a dilutive business so far, when will that change?
    • It's not dilutive 
    • There are other Interactive businesses in there, not just Double Down
    • Will continue to invest in those businesses as long as they believe in the growth there
  • There was nothing extraordinary in the R&D and SG&A 
  • Will they have to take an impairment on the Double Down purchase?
    • No, they don't believe that they will need to take a writedown. If anything they just wrote up their contigent payment. The added verbiage on writedowns had nothing to do with an impairment charge down the road. 
    • They are more focused on mining revenues from their existing users than customer acquisitions. Their plan is to grow users and revenue per user. 
    • The impairment language has to do with the fact that they will be reevaluating the earnout payments
  • The competitive environment has remained constant in terms of product and price for over a year at this point
  • Had sizable used unit sales in their unit numbers
  • Video poker: their competitors are making some moves but time will tell on how successful they will be.  The video poker customer is not one that likes change.  Their strategy is to tweak the product but to stick to appealing to the core player.
  • Evaluate the pricing on their WAP games based on each individual situation.  On a case by case basis, they will do what they can to maintain floor space, other times they relinquish floor space rather than cap yields.
  • In the quarter, they recognized Scotia Downs
  • They don't currently expect that OH legislation will allow for route operators
  • Expect that a handful of IGT games go into the Double Down platform this year. Want to wait until they have the broadest reach possible. Will see the broader language conversion come online in calender 2013.



  • "The company is reiterating its fiscal year 2012 guidance for adjusted earnings from continuing operations of $0.98 to $1.04 per share. This guidance assumes our fully diluted weighted average shares outstanding will be 291 million for fiscal 2012"
  • "Revenues increased 13% to $301 million in the third quarter, primarily due to increases in the interactive businesses. Excluding the interactive businesses, revenues were flat." 
  • "Gross margin decreased to 59% from 62% in the third quarter, primarily due to the inclusion of the interactive businesses and lower MegaJackpots yields"
  • "Excluding the positive impact from the interactive businesses, average revenue per unit per day in the third quarter was $50.20, down 4% sequentially and 7% over the prior year quarter, mainly due to lower MegaJackpots yields and a higher mix of lower-yielding units in the installed base."
  • "Double Down monthly users were 5.2 million as of June 30, 2012, a decrease of 7% when compared to March 31, 2012" but daily bookings per day increased to $0.25 from $0.24 last Q
  •  Product sales: 11.6k shipments recognized vs. 12.6k shipped
    • NA: 8.2k (3.1k new, 5.1k replacement) recognized and 8.7k shipped
      • ASP down 8.5% YoY and 12% QoQ to $13.1k
    • International: 3.4 units recognized, 3.9k shipped
      • ASP down 9% YoY and 14% QoQ to $15.1k
    • "Average machine sales price decreased 11% in the third quarter, mainly due to an unfavorable pricing mix related to increased lottery and used game sales." 
    • "North America gross margin increased to 56% from 55% due to higher production volumes"
  • "Excluding the revenue and operating expenses associated with the interactive businesses, total operating expenses increased 140 bps as a percentage of revenue compared to the prior year quarter, largely due to unfavorable bad debt provisions"
  • Debt increased $280MM as a result of funding the $400MM buyback announced on 6/14. 21MM shares were delivered under the ASB on July 2.  "The company may receive additional shares until the completion of the repurchase period, which is expected to end during this calendar year."
  • IGT also repurchased 2MM shares of stock in the open market under its previous authorization at an average price of $14.48 per share for a total cost of $25 million.

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In preparation for LVS's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



Sands plans to start Parcel 3 construction in Cotai by November 2012 (July 19)







  • The infrastructure of Macau continues to build, continues to get better and of course, we're dependent on the Chinese economic condition, which we feel is we'll have some level of softness from time to time, but overall is very well positioned for the future.”
  • I don't think on a mass market basis we've seen anything negative whatsoever. I think the conventional wisdom is that things are slowing in China, which affect us. We haven't seen any credit problems in junket. We haven't seen any real problems in our cage in terms of the requests for more money, but I think generally the competitive environment of Macau has said that things have slowed in May, but I wish I could give you a reason for it. I wish I could tell you that it's a trend. I don't know that it is and certainly not going to know it's a trend for another couple of months at least, but one must remember that May, even though it was down to only a 7.3% growth, was still the second best month in Macau's history for the gaming revenue.”
  • “None of the junkets we do business with have been crying the blues to us.”
  • “We're still getting requests for more VIP rooms in site 6, which we've allocated capital for to build and if we're not under construction now, we're all designed and ready to go to add an additional 60 to 70 tables in VIP on site 6.”
  • [Mass tables]We will be sitting with about 27% of the total table count in Macau by January of next year. We sit with about 24% of the table count now.”
  • [VIP table share] “About 20% of that table count is VIP.”
  • “The Sheraton, 4,000 room-Sheraton, which is two phases, will be open fully complete by the end of January and will pen 1,850 rooms, by the end of this September.”
  • “Right now the company, though, when you look at the amount of spending that we have remaining on Sands Cotai Central, it's about $1 billion this year, about $300 million next year and about maybe $200 million the year after that.”
  • “I think what you're seeing statistically is there has been a small drop in VIP gross for the whole Macau market. It was growing in the 30s% a month. It's now growing in the 20%s. Some of the sell side have predicted it'll grow a little bit less than that. However, if you look at the statistics over the last six months, our VIP share has improved.”
  • “We're already managing our costs. I was looking at the numbers just a couple of weeks ago and our costs are way down right away. I mean, first of all a lot of our costs at the operating level are in the gaming area itself. They automatically reduce if you don't have the volumes, and from a cost management standpoint we run the highest margins in Macau by far, and our company is built now as a high-margin company.”
  • “I think over the next five years, you should be talking somewhere between 10% and 15% growth a year.”
  • “Our plans to open the second phase, Phase IIA, I guess it's called, of Cotai Central by mid-September. And I think the last Phase will go to either December or January."
  • [Lot 6] “The government is committed to lenders to provide 400 tables. They gave us 200 tables for the opening the first of the two mass casinos. And they're going to give us, presumably, the second 200 tables when we go to open our second casino.”
  • “Lot 3 can hold 3,600 rooms.”
  • “Our mass business in Plaza is off the charts. We should get more tables in there.”
  • [SCC]  “We're fully occupied in the month of May. We opened, all the rooms are committed to. We had some... physical issues in the rooms and the hotel getting it done in April. It's fully operational except for one junket, on the third week of May, the last junket rolls in there of, the 12 that'll be there. We expect a full hit in the month of May and we feel very, very good the [inaudible] of operators we've assembled there.”
  • [Revamping VIP product at Venetain] “We'll start renovation shortly and I think you'll see a big change there.”





  • “We've gotten to maturity in less than two years. So from now on you're going to see gradual increases in the Singapore market mostly from the VIP scenario because our hotel is running at capacity now and has been for a year.”
  • [Customer demographics] “The great majority of these people appear to be in factories consumer goods and export businesses. And that's why they have money in the banks in Singapore and Hong Kong... which are easily accessible to them. It'd be hard to say what percentages, but I would say the percentage of real estate development people that we have is probably in the single digits would be my guess.”
  • “We also have mass market help from the new MRT station, the cruise terminal that will open and...  the Botanical Gardens that will open I think this November."
  • “Marina Bay Sands has become a really a significant retail destination. We have over 300 stores there driving traffic as well. So I think you'll see moderate... but consistent growth."
  • “Our hotel's running in the high 90%s, it's sold out most of the time on 2,500 keys at a very high rate.  The room [to grow] is really in the casino.  I would expect a high single-digit growth there over the next number of years.”
  • “We also have a plan to add some VIP rooms on the third tower, which we're waiting for approval on, which will give us some very high end play.”




  • We'll go up to 30% to 35% equity in any property we do or any resort development we do. We will not go above that and we will go for development financing for the rest of that for the rest of those projects.”
  • “We're extremely comfortable with the 1.5x, but if we were to ... lever up to really develop projects...we're also comfortable the 2.5x. It's tough to envision today based upon our cash balance... the cash flow that we generate on an annual basis or even if we're in a development mode for us to kind of really increase above that 2.5x.”
  • “Our cash build, if you look at the analyst consensus numbers on this side, you can see that by the end of 2013, we'll be looking at about $6 billion of cash and about $8.5 billion in 2014."
  • “Our priority list is Japan, Korea, Vietnam and Asia, and we're looking at Toronto, which is getting very active, about a possible lakeside location for an integrated resort here in Canada.”
  • [Spain] “But we will make a decision probably on the location sometime this summer.  When that decision is made there are certain situations that have to go on with the land, et cetera, but more important there is legislation that could take anywhere from 6-7 months to pass with the grants and incentives that we require. So at the absolute earliest in Spain you're talking about maybe sometime in mid-2013 that you would actually start spending any really serious money.”
  • [ROI hurdle on Spain] “20% is our hurdle. Don't forget, that's 20% cash on cash, it's a higher return on equity obviously.”
  • “What happens in the FCPA investigation is that an outside law firm was hired by our audit committee as an independent firm to do the investigation. That investigation completes on the 30th of June. It's just – we're almost 30 days from finality, and that investigation gets turned over then to the Department of Justice, and we would expect that by some time towards the fall, the end of the year, that would conclude.”
  • Win percentage on VIP: “The 200-day moving average is 2.90% in Marina Bay Sands. Total Macao and Singapore properties 3.05% on a 200-day moving average…. 3.31%, total Macao.”


Yesterday my colleague and head of Financials, Josh Steiner, posted the note below. European capital markets were tagged hard again today following yesterday's announcement of short selling bans in Spain and Italy.


Spanish and Italian equity indices flashed a negative divergence today, closing down -4.8% and -2.7%, respectively. And sovereign yields bounced, with the 10YR jumping to 7.62% for Spain and 6.60% for Italy; this is a record high for Spain! Needless to say, Europe's "floor" is not fully priced in. 


If you'd like to receive Josh Steiner's work, please email



Short Selling Bans Are A Great Indicator of Further Downside to Come

This morning, Spain and Italy banned short selling of all stocks, Spain for 3 months and Italy for one week. How will that work out for them?


If history's any guide, not well. Here's a look at how two short selling bans in the past fared.


1. On 8/11/11 France, Italy, Spain and Belgium banned the short-selling of bank and insurance stocks. As the following chart shows, the Euro Stoxx Bank Index went on to lose 21% of its value over the month following the ban.




2. On 9/18/08 the SEC banned short selling of Financial stocks. While there was a big one-day squeeze, the XLF went on to lose 76% of its value over the six months following the ban. 




We have been, and remain, bearish on the Global U.S. Banks (C, BAC, JPM, GS, MS). One of the central tenets has been European counterparty exposure. As European bank stocks fall, they pull the U.S. Global banks down with them. As the two charts above suggest, short selling bans suggest there's more downside to come for both European and U.S. banks.  


Joshua Steiner, CFA


Robert Belsky




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).

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.