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Solid execution and quarter. July slowness moderates the enthusiasm. 



"We are pleased to report solid 2012 second quarter operating results. As a whole, the Company delivered its tenth consecutive quarter of simultaneous revenue, Consolidated Adjusted EBITDA and Consolidated Adjusted EBITDA margin growth."


Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment




  • Believe that at PNK's current share price, buybacks are a good use of capital
  • MyChoice:
    • Events were held in April to kick off the year’s program; attracted over 70% of their top 3 tiers
    • 9% increase in rated days and 8% increase in rated play
    • Universal card deployment should be completed by 1Q13
    • Marketing spend as a % of gaming revenue was actually down 60bps YoY
  • Slight softness in rated guests in April and May, offset by strength in June
  • Seeing overall customer spend unchanged on a per trip basis with just a slight reduction in the number of trips when compared to 2Q11
  • L’Auberge and Boomtown Bossier City had YoY gains in trip frequency, while River City experienced growth in both trips and spend.
  • St. Louis: properties gained 70bps of market share YoY.  Achieved an all-time record market share of 34.2% in May.
    • Marketing spend as a percentage of GGR declined 1.1% vs 2Q11
    • Had a very good hotel yield with cash revenue up 24% driven by continued optimization of demand between local guests and visitors to St. Louis
  • L’Auberge: Record setting quarter with all-time highs in gaming revenue, non-gaming revenue, net revenue and EBITDA. 

  • Belterra: they continue to outpace the market. Had strong hotel performance with cash revenue up 16%
  • Boomtown Bossier: Strong play from local customers drove growth of 1.2% vs. total market decline of 6%
  • New Orleans: Admissions were flat, while revenue per admission declined 3.3%.  Marketing reinvestment was flat YoY, they remain focused on appropriate levels of spend and visitation.
  • Vietnam: 30% tax rate on mass market play; VIP tax will be materially lower as commissions to junkets will be tax deductible
  • MGM Grand Ho Tram Phase 1A is expected to cost $487MM plus $50 million of cash on hand at June 30th at ACDL.  ACDL’s financial resources include: $175MM facility ($57MM); $30MM of loan commitments from Harbinger entities and expected $60 million funding. In order for Phase 1A of MGM Grand Ho Tram to open in the first quarter of next year, ACDL needs a working capital facility of $35MM, which should be in place by year end.
  • Ph1 of River Downs is expected to open in 2013
  • Think that the hotel at New Orleans will cause very limited disruptions and when completed, all of their properties will have hotel rooms.  Expect north of a 15% ROI.
  • Hotel renovations over next 18 months at L'Auberge: $17MM



  • The ACDL additional investment is contingent on the raise of the full $60MM
    • They expect Harbinger Capital to continue to invest their pro-rata share
    • Expect the capital raise to close over the next few weeks
  • Heartland is expected to be accretive. Asset is EBITDA positive. Will see the impact in 3Q. Should be accretive on all metrics since they paid for it in cash.
  • What have they seen in July: started off soft. There were some calendar issues with a weekend falling into June. 
  • They are near capacity at Lake Charles and the improvements at the property are really as a result of better yielding the property and bringing in a higher quality guest. 
  • Can maintain the corporate expense run rate this quarter. 
  • River Downs: have a great site with great access. They are looking to do a multi-phase development. Look to update the existing racetrack
  • They need to see about a 20% ROI before deciding to make additional investments in any of their properties
  • Excess land at Reno will continue to have property tax charges but a lot less than what they've been showing
  • L'Auberge: very high level of table game business. There were expenses related to relaunch of MyChoice for the year but that were recognized in 2Q.
  • Baton Rouge will focus to appealing to local and regional visitation. Have over 800k local customers. 
  • Ownership stake in ACDL will stay constant with the additional investment
  • No specific rules for Vietnam to comment on yet. The point of the hotels is to foster tourism. So expect that money will be allowed to be moved freely. Gaming is for foreigners and foreign nationals.



  • Authorized a $100 million share repurchase program
  • Development & growth project updates:
    • PNK filed a license application with the Ohio Lottery Commission to operate VLTs at River Downs
    • PNK intends to invest an additional $15.6MM in ACDL as part of a proposed $60MM capital raise. 
      • "The $60 million capital raise, if consummated, along with previously secured financing commitments and a yet-to-be secured working capital facility, is expected to provide sufficient capital for the opening of Phase 1A of MGM Grand Ho Tram. In addition, the $60 million capital raise is also intended to fund a signature Greg Norman golf course, which is expected to open in 2013, and other parts of ACDL's Ho Tram Strip master plan. Phase 1A of MGM Grand Ho Tram remains on track to open in the first quarter 2013."
    • PNK plans to build a 150-room hotel tower at Boomtown New Orleans for $20MM; expected to open in late-2013
    • In July, PNK acquired "the assets of Federated Sports and Gaming, Inc. and Federated Heartland Inc. Through the Heartland Poker Tour purchase, we acquired an impressive portfolio of brands and intellectual property that will help us advance a new line of business and our online gaming strategy...Plan to expand the Heartland Poker Tour and more extensively integrate its events into our property portfolio...Expect the Heartland acquisition to be accretive."
    • L'Auberge Baton Rouge: targeted opening on August 29, 2012, pending the receipt of applicable regulatory approvals. The development remains on the targeted budget of $368 million
    • River City,St. Louis: "The 1,600 space parking structure is expected to open by Thanksgiving Day 2012. Construction of the second phase of this expansion, a 200-room hotel and multi-purpose event center, is expected to commence this fall. We expect the hotel and event center to be completed in 2H13"
  • MyChoice: 
    • "Our mychoice guest loyalty program continues to drive play consolidation at our properties, and we have experienced significant increases in member retention since re-launching the program in April of last year. Our existing members are exhibiting greater loyalty, and we are attracting and engaging new guests."
    • During 2Q "mychoice continued with the implementation of a universal card system at several properties and the addition of new rewards for our most loyal guests in the form of Atlantis Bahamas vacations, luxury timepieces and new Mercedes-Benz lease options."
  • Property specific color: 
    • St Louis: 2Q "performance was driven by gaming revenue growth, more efficient marketing and general operating expense discipline."
    • Belterra's 2Q "performance was driven by gaming revenue growth and general operating expense discipline."
    • In 1H12, the use of medical pooling had a $0.9 million favorable impact on Adjusted EBITDA for Belterra and a $1.9 million negative impact on Adjusted EBITDA for St. Louis.
    • L'Auberge Lake Charles: 2Q "performance was driven by growth of gaming and cash non-gaming revenues, as well as more efficient marketing"
    • "New Orleans continues to experience difficult comparisons due to last year's elevated local economic activity created by the Deep Horizon oil spill cleanup and recovery efforts, which the property partially offset with operating expense discipline."
    • "Boomtown Bossier City continues to face a very competitive operating environment, but cost discipline has permitted the property to drive Adjusted EBITDA growth despite revenue challenges."
  • "The reduction in 2Q12 corporate overhead expense was driven principally by efforts to eliminate nonvalue added expenses at the Company's Las Vegas headquarters, as well as a ramp up of cost savings and property allocations related to the Company's shared service centers supporting our properties in the Midwest and Louisiana."
  • On June 26, PNK closed on the disposition of its Boomtown Reno casino-resort operations for $12.9MM
  • Cash: $203MM and R/C was undrawn
  • 2Q12 Capex: $90.9MM ($76.6MM of construction related to Baton Rouge). Through June 30, 2012, the Company has incurred approximately $299.5 million of the $368 million budget for L'Auberge Baton Rouge, excluding land costs and capitalized interest, and $13 million of the $82 million budget for the River City expansion project
  • Capitalized interest in the 2012 second quarter was $6.4 million


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




  • BETTER:  Solid execution and good quarterly performance overall.  Stock buyback announcement was a nice surprise.  Slower trends in July moderate the enthusiasm.



  • SAME:  L'Auberge Baton Rouge will open on August 29
  • PREVIOUSLY:  "We expect to open, in full, L'Auberge Baton Rouge late August this summer."


  • SAME:  admissions and marketing reinvestment were flat YoY.  Management continues to focus on appropriate spend and visitation levels.
  • PREVIOUSLY:  "It's something that's on all of our mind on a regular basis that we have seen declining revenues there. It's a variety of things, including competitive pressures in that market. We've pointed out that especially on the West Bank, there's a change because of what happened with the Deep Horizon disaster a couple of years ago. I don't want to use that as an excuse. We... can compete better than we are in that market, and we're focused on doing that through specific program changes at that property."


  • SLIGHTLY WORSE:  L'Auberge, Bossier City spend/visit didn't increase but trip frequency did.  New Orleans spend/visit declined 3.3%.  River City saw a rise in both trip frequency and spend/visit.  However, July has started off soft. 
  • PREVIOUSLY:  "Our revenue per admission continues to grow across the portfolio and we remain extremely disciplined about how and when we spend resources in managing the business."


  • BETTER:  2Q EBITDA margin increased 426 bps YoY to 24.5% 



  • SAME:  have filed with Ohio Lottery Commission to operate VLTs.  1st phase will be open in 2013.
  • PREVIOUSLY:   "We expect to begin work at some point this summer.... our ability to get a project off the ground this year and having that first phase that may open as early by the end of next year it's pretty high."


  • SAME:  ACDL's $35MM working capital facility should be in place at the end of 2012.  Remain on track for 1Q 2013 opening.
  • PREVIOUSLY:  "At Ho Tram in Vietnam, the project is on track for an opening by the end of the first quarter of 2013."


  • SAME:  expect the transaction to close at the end of 2012.
  • PREVIOUSLY:  "Our total investment will be about $23 million of which $10 million has already been deployed. We expect the second phase of the transaction and remaining investment to close in the second half of 2012. Retama lost about $1.5 million last year on an EBITDA basis but we expect to improve this once we manage through operations and integrate the property into our portfolio. Obviously, should there be an expansion of gaming at racetracks in Texas – we will manage that operation as well."


  • SAME:  parking garage is on track to open by Thanksgiving Day 2012.  Construction of Phase 2, a 200-room hotel and multi-purpose event center, is expected to commence in Fall 2012.  The hotel and event center should be completed in 2H 2013.
  • PREVIOUSLY:  "As the temperatures climb in the summer and that walk from further away gets to be more troublesome for folks, we may see a deeper impact. Our point here was that in the first quarter, we didn't see much of an impact at all out of that additional walk. So we'll see how things go as the summer progresses. We do expect the garage to be operational by the end of the year. So hopefully before the snow and winter come at the end of the year, we'll have that garage operational. So once that garage is finished, we will then break ground and build that hotel. And we believe we can have that hotel done by the end of 2013."


  • BETTER:  2Q Corporate expense of $5.0MM was lower than 1Q's $5.4MM and 4Q 2011's $5.6MM.  Management believes they can maintain this level going forward.
  • PREVIOUSLY:  "So, I think that is for purposes of your model, certainly a reasonable run rate."


Strong quarter, solid guidance



“In the first half of 2012 we achieved back-to-back 36% increases in quarterly adjusted EPS growth in an economic environment that remains uncertain.  Underlying this growth is strong execution from each of our businesses and diversified product offerings well positioned to capitalize on consumers’ desire to travel. In addition, we benefited from capital allocation that included the return of capital to shareholders.” 


-Stephen P. Holmes, chairman and CEO, Wyndham Worldwide




  • Results came in 2 cents above the high end of their guidance due to strong results in their lodging and VOI segments
  • Rental & exchange produced stable results despite turmoil in Europe
  • Have repurchased 73.8MM since going public
  • Baseline FCF of $600-700MM assuming capex of $200MM (50% of which used to fund growth business - Apollo/Voyager, etc)
  • Signed a deal with HPT for 20 hotels/ 3,000 rooms.  Conversions are scheduled to occur next week and will add Wyndham hotels and Hawthorne hotels in the system.
  • They are working on signing more hotel deals and retaining existing franchisees.  Believe that Apollo initiatives are going to help with retention.  Bookings are up 24% as a result of better functionality and content.
  • Expect system growth in:
    • EMEA: 8%
    • Latin America: 15%
    • APAC: double
  • Continue to be confident in the resiliency of their rental business.  95% of their rental business comes from Landal, Novosol, Hoseason.
    • Most of the locations are drive to destinations for northern Europeans & Germans
  • Launched a new reservation system for their rental business for their UK cottage and parts brands
  • Consolidated 23 separate ResortQuest sites under the Wyndham Vacation Rental umbrella
  • Completed another successful release of RCI.com and added 75 resorts to their system mid-year 
  • As a result, 41% of total transactions in the quarter occured through the site
  • WAAM 2.0: sell 3rd-party inventory and offer consumer loans. Signed thier first deal late last year and started sales this quarter.
  • In litigation with the FTC in relation to data breaches at Wyndham Hotel properties. Believe that FTC claims are meritless and do not believe that there will be any material impact on the company.
  • Over 6 years they have reduced their share count by 29%
  • Expect that their available FCF will be $1BN in 2012 (assuming increased leverage per higher EBITDA)
  • Hotel group performance:
    • Adjusted EBITDA increased 5% excluding inter-segment fees
    • NA RevPAR improvement was primarily a result of higher ADR
    • International RevPAR was up 2% in constant currency
    • 16,400 terminations - higher than expected due to steps taken by WYN to weed out underperforming hotels
    • Pipeline activity is up 3% YoY and 5% QoQ
  • Exchange & Rentals performance:
    • Last year included a $4MM benefit from Gulf Spill settlement
    • Weak economic conditions, negatively impacted the number of transactions but higher prices due to mix change helped
  • VOI business performance
    • 13.500 new owners were brought into the system (annual goal of 27,000 new owners per year)
    • WAAM 2.0 accounting will run inventory through their balance on a just in time basis.  Will pay for the inventory shortly after the sale. They have $60MM of inventory on the balance sheet related to WAAM 2.0
    • WAAM 1.0+2.0 sales increased 58% YoY
    • Improvement in EBITDA reflects higher VOI revenues and would have increased 19% excluding inter-segment fees
    • Higher loan losses reflected higher sales and limited portfolio performance improvement.  Thought that they would have seen more improvement though. They were also impacted by a scam encouraging their owners to default on their loans.  
    • ABS capital markets remain robust
  • EBITDA of 6-8% for the next 5 years and sustainable FCF of $600-700MM, meaning that they should have a $1BN of FCF to return to shareholders each year
  • Guidance: 
    • Lodging and VOI to be at the high end of their ranges 
    • Rental and Exchange revenue to be a the low end of the range for revenue and mid-point for EBITDA
    • Corporate expense to be at the high end
    • 3Q12 EPS $1.07-$1.10 is below the street due to seasonality and share count differences 




  • Thoughts on M&A opportunities in the current environment:
    • There is a small uptick in deals coming to the market.  Seller expectations are still high.
    • Pipeline is a little stronger than last year at this time
  • VPG continued to trend consistently throughout of the quarter.  Think that they will likely come in at the high end of the range of their guidance. Their team has done a spectacular job at driving tour flow.
  • HPT deal contribution:
    • Management deal but they aren't adjusting their guidance.  This was built into their rooms guidance and is why they are comfortable with their FY room guidance growth.
  • Vacation rental business: they did see changes in some trends within certain markets.  Weather in the UK has been just miserable and that impacts them as well.  There was no meaningful trends to point out though - some markets were stronger and some were weaker. If you remove the FX, pricing actually improved 4%. Feel really good about how the brands performed.  Bookings visibility in the summer suggests continued stability in the business. They have seen a compression into the booking window though. 
  • Is the strength in the securitization business helping smaller players sell their inventory and in turn boost RCI membership? 
    • They don't think so. Their stats are strong but don't see carryover to smaller developers.
    • There were 2 new groups that accessed the ABS market in the 1Q but no one in 2Q
  • Southeast was a little weaker this quarter than other segments. There were some weather related issues in the SE that impacted some travel. Orlando has been strong and Bonnet Creek is doing really well. 
  • Need to purchase about $150MM per year to complete certain projects and with that, they have about at least 4-5 years of inventory. In addition to that, they also increased their WAAM participation and also took some inventory back.
  • Why are consumer revenues flat with higher VOI sales?  Less consumers want to finance and they tightened lending standards.
  • They increased their inter-segment fees for their brand partly as a result of the MAR/VAC transaction 
  • Guidance on full year tour flow implies a sequential slow down in 2H.  Tour flow is something that they manage with marketing dollars.
  • Strategy for growing APAC rooms. Not all of their brands are in APAC. Have managed agreements for Wyndham and Ramada.  Expect a big pick up in business development in that region over the next 3-4 years. 
  • Dividend payouts vs. repurchases? 
    • Dramatically increased their dividend over the last 3 years and their intent is to increase it in line with their earnings growth but more actually since shares are decreasing
  • Any impact on change in the Pentacostal holidays in May and June and impact of the Olympics?
    • Not seeing any impact from the Olympics yet. They are starting in August and that's already a busy travel period for UK.
    • No impact that they could discern from the Pentacostal holiday shift
  • International RevPAR number is 2% in constant currency and with FX down 1.5%
    • China is growing fastest in terms of the unit count - but they have the lowest RevPAR and the highest concentration of economy brands. Therefore, international growth is impacted by mix shift 
  • Attrition in the system that has occured over the last few quarters
    • There is natural attrition and significant amount of self-inflicted attrition due to failure to meet brand standards
    • They have started to see an improvement in receivables from franchisees
    •  They have been adding a lot of franchisees though
  • Is there any reason to provide financing to franchisees to help them renovate?
    • No, they don't want to be a lender of last resort to drive system growth
    • In UUP hotels they do provide some construction financing, similar to other brands



  • 2012 Guidance was raised for the outperformance in the quarter and the lower forward share count: 
    • Revenue: $4,425 to $4,600MM (Unchanged)
      • Street: $4,549MM
    • Adjusted EBITDA: $1,040-$1,055MM (increased low end of the range by $10MM)
      • Street: $1,054MM
    • Adjusted EPS: $3.10-$3.20 (vs. prior guidance of $3.00-$3.15)
      • Street: $3.14
    • Diluted share count: 147 (vs. 149)
  • During the quarter, the WYN repurchased 3.8MM shares of its stock for $190MM at an average price of $49.35
  • On July 19, 2012, WYN "completed a term securitization transaction involving the issuance of $300 million of investment-grade asset-backed notes at an advance rate of 90% and an overall weighted average coupon of 2.66%."
  • Lodging segment:
    • System RevPAR: +5%; domestic RevPAR +8% (hit low end of FY guidance of 5-8% RevPAR growth)
    • # of room declined 0.8% YoY (below FY guidance of 1-3% growth)
  • Vacation exchange and rentals
    • "In constant currency and excluding the impact of acquisitions, revenues were flat."
    • "In constant currency, exchange revenues were flat"
      • Average # members: -2.3% (below FY guidance of -2% to Flat)
      • Revenue per member in constant current: +2% (high end of FY guidance of 0-2%) 
    • "Excluding the impact of foreign currency and acquisitions, vacation rental revenues were flat"
      • Vacation rental transactions: -0.9% or down 3% on a SS basis (below FY guidance of 4-7% growth)
      • Net price per vacation rental in constant currency: +4% and down 4.5% in actual currency (above FY guidance of -3% to 0%)
    • EBITDA Margins were down 580bps YoY
  • Vacation ownership
    • Gross VOI Sales: +12% 
    • Volume per guest: +6% (above FY guidance growth of 2-5%)
    • Tour Flow: +5% (above FY guidance growth  of 1-4%)
  • Balance Sheet
    • Cash: $285MM
    • Debt: $2.3BN
    • VOI receiveables: $2.8BN
    • VOI inventory: $1.1BN
    • Securitized VOI debt: $1.9BN


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Shifting Landscapes







Keith McCullough was hard at work yesterday updating the Hedgeye Virtual Portfolio. We covered several shorts to book gains, including Novagold (NG) and Baker-Hughes (BHI). We also shorted two huge names that we’ve been increasingly bearish on over the past year: JP Morgan (JPM) and JCPenney (JCP). We recently did a full breakdown of JCP and our bearish case for the stock on our website. Please use the URL below if you’d like to read it:


JCP: Right On The Money: http://app.hedgeye.com/unlocked_content/22086-jcp-right-on-the-money



While the 10-year US Treasury yield continues to make new lows on a weekly basis, Europe is headed in the opposite direction. Yields continue to climb and set new highs all over the place, including some of the headliner countries like Spain and Italy. Spanish 10-year yields, even if marginally off their highs of the morning, are north of the 7.5% line. If you’re craving returns and don’t mind the heightened risk environment, you can find it in the Eurozone.



It appears that President Obama still has an edge in the upcoming November election. On Tuesday, we released the latest results of our Hedgeye Election Indicator (HEI – link below), showing that the President’s chances of being reelected declined by 70bp, reversing a multi-week upward trend.


A NBC News / Wall Street Journal poll out this morning shows that President Obama holds a 10-point lead on the question: who would make a better Commander in Chief? At the same point four years ago, a Pew poll showed that McCain led Obama on the same question by 15 points. Still, the race between Mitt Romney and Barack Obama remains close and spirited as the countdown until November ticks away.


Hedgeye Election Indicator Results: http://app.hedgeye.com/unlocked_content/22070-president-obama-s-reelection-chances




Cash:  Up                   U.S. Equities: Down


Int'l Equities: Flat Commodities: Flat


Fixed Income: Flat         Int'l Currencies: Flat





This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.




TAIL: LONG            



SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.









Tweet of the Day: “226 AAPL-loaded hedge funds desperate for Bernanke put to avoid margin call bonanza” -@zerohedge


Quote of the Day: “Few people can see genius in someone who has offended them.” –Robertson Davies


Stat of the Day: Caterpillar Inc (CAT) reported. The company reported a second-quarter profit of $1.67 billion, or $2.54 per share, compared with $1.02 billion, or $1.52 per share, a year earlier. Revenue rose 21 percent to $17.37 billion. Street consensus was $17.11 billion. The company also confirmed that China sales are slowing year-over-year, essentially confirming the growth slowing story in Asia.






CRI: First Chink in the Armor


Conclusion: This is the first chink in the armor for CRI. It’s still one of our top shorts.

  • CRI beat and we won’t take it away from them. Carter’s wholesale revenue and profitability looked good, but the implication of lower margins in 2H is the first chink in the armor that we’ve been concerned about.
  • They took down 2H EPS guidance to $1.58-$1.68, we were at $1.50 vs. the Street at $1.84 and we’re likely staying there.
  • While wholesale looks good, the weaker than expected retail comps are a concern and is something that management is going to have to give an answer to on the call. Particularly due to the fact that as we’ve been saying, this is a brand with little delineation, or product differentiation by channel, which will impact owned-retail in the 2H.
  • Inventories looked good on a sequential basis, but keep in mind that the Bonnie Togs acquisition closed on the last day of the quarter last year. While reported inventories were down -18%, excluding BT they were up +11%. This still suggests a 14pt improvement in sales/inventory spread to +9%, but is not as gross margin bullish as implied.

CRI: First Chink in the Armor - CRI S



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