CRI: 2Q Report Card


Conclusion: Strength in Carters' wholesale drove the beat this quarter – and we’ll give them that, but that alone isn’t enough to support a stock with such lofty expectations. Importantly, with little delineation and differentiation of product by channel, stronger wholesale performance is actually competing against CRI’s own retail. In fact, this has been reflected by the decline in new store productivity. With Carter’s retail accounting for nearly 2/3 of 2H revenue growth and ~50% of CRI’s top-line in F13, the company is increasingly reliant on increasing the volume of less productive stores. It should come as no surprise then that store growth has continued to increase over each of the past two years at +14% and +17% in F11 and F12 respectively up from +10% in F10. This is simply not sustainable. Assuming CRI maintains this rate of growth, it would hit its ~600 store opportunity threshold by F14 – then what? We think it will have blown up it's wholesale business long before then -- there's your risk. 

Lastly, the timing of management choosing to go dark on AUR disclosure for “competitive reasons” headed into 2H just smells bad. With product cost pressures now turning to a tailwind down -10% in 2H, the company will have to continue to post solid gross margin results for EPS to meet or exceed current guidance. The opacity in AUR disclosure does little to increase confidence in that regard.

All in, we’re reducing our 2H EPS numbers by $0.05 to $1.45 primarily reflecting higher SG&A spend (e-commerce and marketing) offsetting stronger trends at wholesale. At the time of writing this note, consensus was at $1.84 for 2H and $2.67 in F12 and $3.38 in F13. We’re at $2.40 and $2.95 respectively. If our estimates prove correct, this name has another 25-40% downside from these levels.


CRI: 2Q Report Card - CRI S


Accountability and Outlook: Here’s a look at CRI’s variance between guidance and actual, as well as the outlook for 2H vs. expectations:


CRI: 2Q Report Card - CRI Table


Highlights from the Call:

Comp trends:

  • +1% in each of the brands
  • Carters:
    • April: -3.4%
    • May +2.2%
    • June +3.9%
  • Oshkosh:
    • April: -1.9%
    • May: +6.
    • June: Roughly flat
  • Expect a 2 point shift into Q1 primarily due to Easter shift and unseasonably warm temperatures
  • Current comp trends tracking to plan
  • Not seeing a traffic problem and of the 33 remodels to date, see sales upside due to traffic

AUR Trends:

  • Pulling back on disclosure for competitive reasons
  • "But we continue to make good progress on pricing"

Carter's Wholesale:

  • No customers have seen any major issues with their business resulting in any shifts in demand
  • 4 out of top 5 customers had growth in excess of 10% in 1H
  • Continue to receive positive feedback
  • Have moved Christmas up and could potential see goods in stores within a month
  • Outlook for the business is good

2H Guidance:

  • Didn’t feel the need to increase guidance every 3 months, but have a good growth plan in sales and earnings for the year 
  • First half was far better than envisioned
  • 2Q is the least significant quarter of the year with 2/3 of profitability in the remainder of the year
  • Contniued decline in off price sales will impact 2H wholesale results


  • Second full year of doing business online
  • 1mm square foot DC just north of Atlanta
  • Product is flowing in- wont be shipping out until later this year
  • Margin benefit will be significant- pay a healthy premium to third party provider
  • Carters e-commerce would reach near a 10% operating margin

Direct Sourcing:

  • Previously worked with Li and Fung as a sourcing agent
  • Goal is to be complete over a 5 yr timeframe
  • Canada currently does direct sourcing and the margins are higher
  • Have hired a very talented team over the past 5 years to head up the intiaitive

Product cost outlook:

  • Outlook is good and continues to be good
  • Fall cost for both brands are down about 10% after being up 20% last fall
  • Still not back to normalized levels from 2 years ago
  • Seeing visibility in spring 2013 which could be down 10%
  • Level of clearance sales is down meaningfully which is benefitting margins
  • Off price sales might be half of what they were last year

SG&A Outlook:

  • Directionally, SG&A will rise as a percentage of sales
  • As the business evolves the GM will improve but SG&A as a % of sales will increase
  • Largely driven by Canadian ops, DTC, e-commerce, etc.

Channel Acquisition:

  • Establishing a sourcing team in Hong Kong to support international partners
  • Opening a third party logistics center in Hong Kong
  • Now product will go from Asia to Hong Kong without going to Georgia first
  • Earning impact is immaterial


  • Girls product offering is working which had been the weaker component over the years
  • Gender split is 50/50 for OshKosh; girls is currently running at a slightly higher percentage with girls outperforming

Gross Margin:

  • Majority of upside was driven by Carter's business
  • Child of mine has been a  good margin performer
  • Started to ship fall product and costs are down about 10%
  • Inventory position is dramatically better than a year ago
  • Will continue to see a mix shift benefit
  • At wholesale, customers are focused on maintaining strong pricing via product offering, brand presentation and ease of shopping

Canadian Comps:

  • Cobranded comps +5%, nameplate comps -12%
  • Experienced a significant pull forward in demand into Q1
  • Overall first half was down about 1.5% due largely to outerwear and warmer weather


  • Planning for pricing to be flattish in 2H
  • Spring 2013 pricing will be similar to Spring 2012 pricing

14% pretax margin goal:

  • Current business is much different relative to 2010
  • Expect it will take 4 or 5 years to get back there


  • OshKosh bookings ex off price down slightly


  • Down slightly in the quarter
  • But the quality was more significant
  • Conversion is up at record highs

OshKosh Mall initiative:

  • Looking for the best real estate- not avoiding malls where product is already being sold



MCD: What’s In A Dollar (Menu)?

McDonald’s is shifting around its menu in an attempt to wean customers on to its Extra Value Menu. At first glance, a shift in menu pricing may not seem like a huge deal for a company the size of McDonald’s. But the move could leave investors hungry for returns as inflation costs and a general disdain for higher prices being passed on to consumers hit the stock price.


McDonald’s (MCD) reported its second quarter earnings this week, noting that earnings had declined 4.5% due to FX risk, namely a stronger US dollar. The company produced a profit of $1.35 billion, or $1.32 per share, compared with a profit of $1.41 billion at $1.35 a share during the same time last year. This was a disappointment for investors to say the least.


So as we look at what lies ahead for MCD in Q3, there’s a very important shift occurring that we believe could negatively impact earnings down the road. That shift is the pricing structure of the menu at McDonald’s. Like many other fast food restaurants, McDonald’s has had a “Dollar Menu” for some time now. Consumers are used to it being there and can get behind something that costs a buck. In this era of inflation and higher commodity prices, however, it remains unprofitable to operate the Dollar Menu.



MCD: What’s In A Dollar (Menu)? - CPI home away from home



In an effort to compromise, MCD went and created the “Extra Value Menu,” which includes the following : 20-piece chicken McNuggets, double cheeseburgers, chicken snack wraps, Angus snack wraps, medium iced coffees and snack-sized McFlurries, plus up to four regional options.


This falls in line with the overall change in pricing structure of the McDonald’s menu, which now consists of four different tiers (combos are excluded): Premium: $4.50-$5.50+ / Core: $3.50-$4.50 / Extra Value Menu : $1.20-$3.50+ / Dollar Menu .

In summary, McDonald’s has taken more costly items like burgers and soft drinks off the Dollar Menu and shifted them to the new Extra Value Menu, replacing them with cookies and ice cream. Believe it or not, there’s a lot of risk in taking away cheap burgers and fries from customers, as Hedgeye Managing Director of Restaurants Howard Penney explained in a note from earlier this year:


We see this as a big risk for MCD.  If customer preference is to have the drink and fries as part of the dollar menu then there is a risk that this change negatively impacts customer satisfaction.  The company told us that a “mini-combo meal” offering may bundle the fries, burger, and drink but a decision has not been made on that yet.  Still, ordering the $1 items individually is being taken off the table.”


Americans are still reeling from the effects of inflation and are opting for items on the cheaper menus instead of the $6-8 combo meals on the core menu. That puts a squeeze on McDonald’s profits and is a factor that cannot be ignored come this fall.  With the company taking price in the U.S. of 3% versus last year, in line with the BLS’s Food Away from Home CPI measure and below Food at Home CPI, customers may be less impressed by McDonald’s value proposition that in years past.


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:  WYN produced a 2 cent beat over prior guidance and continued to deliver on their promise of returning cash to shareholders




  • LITTLE WORSE:  Excluding the impact of currency, the quarter was flat YoY on a SS basis.  Rentals transaction volume was down though but constant currency increases in price per transaction were better due to mix.
  • PREVIOUSLY:  “We continue to see a stable environment for our rental businesses over in Europe. We've said that that's what we expected. When we entered the year, we said that's what we saw through the first quarter after the first quarter call, and now with April and May in the books, we'll see the exact same thing." 


  • BETTER:  2Q VPG was 6% higher, ahead of FY2012 guidance of +3.5%.  Management says it’s likely that VPG will come in close to the top-end of the 2-5% guidance range for 2012.  Business is still on pace to add 27k new owners in 2012.
    • “We had expected kind of a mid-single digit VPG growth and we ended up with a, I think, 11% VPG growth for the first quarter. We're not suggesting that that's the pace that we're going to remain at going forward.”
    • We expect VPG growth to moderate somewhat throughout the year as we lap the rollout of the credit prescreening program. Consistent with last year, we expect to add 27,000 new owners in 2012.


  • SAME:  Management still expects to spend about $125MM developing timeshare for the foreseeable future
    • I don't see us going back, ever going back to the model we had before where we were building at a pace of $600 million of build a year in order to fuel the kind of growth that that business was on. Right now, we're spending $125 million a year to finish the development of inventory that we already have on our balance sheet. And that's a pace that we'll be at for the next eight to 10 years. And then after that we may go more heavily on this WAAM model and not even have that much development in the future


  • SAME:  WYN repurchased 3.8MM shares for $190MM in 3Q and continues to see value in their stock at current levels
    • We continue to believe that share repurchase offers a compelling return, and with the $750 million increase as of market close yesterday, we have $940 million available in our share repurchase program


  • SAME:  We've made significant progress over the past two years with one of our key Apollo initiatives,  Revenue in room nights across the brand portfolio are up approximately 20% from this channel year-to-date in part due to improved content and Web functionality.
    • Wyndham Hotel Group continues to make progress in executing its Apollo initiatives, which is a series of technology projects focused on improving our value proposition to franchisees. Our franchisees will be able to measure our results by the number of direct room nights we deliver to overall bookings, primarily through online strategy. Our goal is to capture the maximum amount of online traffic and then convert these online visitors to stay-in guest. Remember that the launch of our new hotel brand websites and improved content were the first step in our Apollo plan to drive more room nights through our online direct distribution channels. Preliminary results have exceeded our expectations with brand booking increases averaging over 10%


  • SAME:  They launched the 2 planned initiatives on schedule; namely consolidation of their 23 ResortQuest rental sites into an single platform under the Wyndham Vacation Rentals brand umbrella and an integrated reservation platform for the UK cottage and parts brands.
  • PREVIOUSLY: In the second quarter, we expect to launch two significant initiatives. First, in North America, we will consolidate 23 Rental websites into a single improved site. Second, in Europe, we will integrate the inventory and reservation platform of our UK cottages, parts and lodges brands into a common property management system, a change the will enable further yield management and operational efficiencies


  • SAME:  Completed another successful launch of with improved click to chat functionality.  Expect online transactions to improve exchange margins by 225bps from where they were in 1Q 2008 when they started initiatives.  In 2Q, 41% of transactions were booked online compared to just 13% when they started the project.
  • PREVIOUSLY: The strength of RCI's technology continues to pay off with online transaction penetration growing to over 40%, up more than 400 basis points from last year.

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CAT - Backlog Declines & Backlogs Drives the Stock


CAT: Backlog Decline Implies Weak Orders


  • Despite the move up in CAT today, which we view as short covering driven, weak backlog trends support recent underperformance in the shares.
  • Backlogs declined for first time since 3Q 2009, as the company drew down backlogs in todays “beat.” 
  • As shown below, months of backlog are highly correlated with CAT’s relative performance.
  • Implied orders (estimated as change in backlogs plus revenue) declined 3.0% y-o-y after posting 12.2% growth y-o-y in 1Q2012.  That is a significant deceleration.
  • Something has to give: orders will need to rebound, production will have to be cut, or backlogs will be drawn down.  The current macro data does not suggest a near-term order rebound to us.
  • CAT has been one of the primary beneficiaries of what we view as unsustainably high levels of resource capital investment.  Slowing activity in China is a risk to mining capital spending.
  • Though CAT has an excellent competitive position and a strong franchise, we believe that the shares are overvalued from a cyclically adjusted perspective. 
  • While the months of backlog is still relatively high, historically that has presented an exit opportunity. 


CAT - Backlog Declines & Backlogs Drives the Stock - cat vs months backlog



Orders vs. Revenue:  Implied orders rates now trail revenue, as indicated by backlog declines.



CAT - Backlog Declines & Backlogs Drives the Stock - change in backlogs



BA is not CAT:  For those noting a slight decline in years backlog at Boeing Commercial Aerospace this quarter, that metric is negatively correlated with relative performance.  A change in a 5 month backlog has more relevance than a change in a 7 year backlog.  Though we are well into the commercial aerospace cycle, we think Boeing still has room to run.



CAT - Backlog Declines & Backlogs Drives the Stock - ba rel vs backlogs



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."

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