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




  • "In the Gaming Equipment sector, if you counted up all the gaming devices in North America today, about 13% of them would be Bally gaming devices. And yet, we've been shipping anywhere from 16% to 22% of the quarterly shipments over the past couple, three years. New openings, recent new openings would have somewhere around 19% to 21% of their devices be Bally gaming devices and the recent procurement from the Atlantic Lottery gave 25% of the gaming devices to Bally."
  • "Premium games are earning anywhere from maybe $30 to $65 a day. The wide-area progressives tend earn around $80 to $110 or $120 a day profitability, so this is the highly profitable segment."
  • "We just released Grease in March, and it's doing very well in the marketplace better than our expectations.  We've seen very little cannibalization"
  • "Michael Jackson is in beta test performing very well mechanically, and we think it's going to perform well when we launch it here in the next week."
  • "Our guesstimate is that it would be reasonable to get in the neighborhood of 750 each of these two games [Michael Jackson/Grease] placed over the first six to nine months from launch; and we would expect very low cannibalization of our existing WAP games because we have so few WAP games. So at $0.03 earnings for every 100 you place, you can see the powerful impact on earnings as Bally grows in this highly profitable space in gaming."
  • "We expect our mobile gaming initiative to be breakeven within the next 12 months and the iGaming to cost us a couple cents a share for the next 12 to 18 months overall."
  • "We've done a handful of tuck-in technology acquisitions over the last four or five years. We expect to continue to do that."
  • "We're very comfortable at a 2x leverage ratio, reasonably comfortable at 3x, and only get nervous up at the 4x level."
  • "Our international revenues are only about 19% of total, where some of our mid-size competitors maybe in the 30%-plus range. So it's a good long-term opportunity for Bally."
  • "Confidence in the consumer is not great, but it seems to be okay. At least it gives them a capital spend
    environment that is somewhat more predictable than they had a couple of years ago.  We have felt some modest increase in capital spend each of the last couple of years; this year being one and 2011 being one."
  • "The good news on systems is we have very good visibility there because, between Canada and Sun, we have a pretty good backlog of deliverables for the next two or three years. But we also have a great sales pipeline that feels like people are serious about spending on iVIEW DM now."
  • Dividends vs. Buyback: "Our view has been that we think at this point share buyback - because of the visibility we have and acquisitions are better use of capital. But we haven't ruled it out that we could change that over the next couple of years."
  • [Canada VLTs] "We were awarded a little over 1,500 games with about 6,000 game replacements. So, they will be for-sale units. We would expect to start selling those units in the second quarter of our fiscal 2013, probably take about three to five quarters to fill that order out."
    • "Within the class three machines in Canada, there's probably a good 60,000 to 65,000, we routinely replace those games. We're about a 20% player in class three there, but VLT is definitely a new initiative for us."



  • FY 2012 EPS: $2.37-$2.45
  • Product Sale guidance/outlook:
    • In 4Q "we expect to recognize units shipped to the two Ohio properties, with about a 21% ship share."
    • "Based on anticipated mix for our fourth quarter, which we expect will include multiple Ohio properties, we anticipate our Game Sales gross margin will decline slightly over the third quarter. However, we still expect our Game Equipment margins will approach 48% to 49% within the next few quarters, due to continued reductions in material costs on each of the Pro Series cabinets."
    • "We've continued to drive costs out of the Pro Series cabinets themselves. We have a path to drive cost out of a number of different components over the next really 6 to 9 months at this point that give us visibility into that 48%, 49% margin. So I think given ASPs, where they've been right around $17,000, $17,073 this quarter, we get to that 48%,49% margin just through cost cuts from here on out."
  • Systems outlook & commentary: 
    • "We currently anticipated that fourth quarter Systems margin will return to the higher end of our historical range of 70% to 75% based on mix. With respect to our effective income tax rate for the quarter, it was 37.2%, slightly higher than fiscal 2011, but still within our expected range for fiscal 2012."
    • "I expect that trend to pick up speed as we go along and every quarter, we'll probably be installing more DM than we had previously done. But I also expect software and services and maintenance and all of that to also continue to expand reasonably well."
  • Gaming operations commentary & outlook:
    • "We expect faster growth certainly in the WAP than we do the core premium games and some of the premium growth is coming at a little lower win as we expand internationally."
  • "We still have approximately $57 million remaining under our board authorized share repurchase plan and would expect to increase this amount in the coming months if necessary."
  • New market commentary:
    • "We expect Italy to be an important market for us in the long-term; however, the delays thus far have led certain customers to seek alternative products partially for certain VLTs previously committed to Bally."
    • "We've had good discussions with customers there, have signed several contracts and feel our products are well positioned for the market, which should result in us winning a fair share. We expect to begin initial VLT shipments in Illinois during the second half of calendar 2012, with the mix of sale versus lease to be determined by the contract terms, which are in various stages of negotiations now."
    • "We expect the Canadian installs to start reflecting in the revenue towards the end of this calendar year, towards the end of calendar year 2012."
  • "Our R&D and SG&A to grow at a somewhat lower percent of revenues, although we continue to invest aggressively in R&D."


We see Brinker as a leader in the casual dining category over the next several years as investments in technology and the introduction of new platforms should continue to differentiate Chili’s versus its most direct competitors.


We are cautious on casual dining as the group has strongly outperformed over the last year and consumer fundamentals have broken down.  Our call on 4/20/12, for “CASUAL DINING CAUTION”, was ill-timed from a price perspective; despite sales trends breaking down as anticipated, management teams effectively squeezed other parts of the P&L to manufacture beats in 2Q which helped sustain the casual dining outperformance longer than we had anticipated. 


That said, we currrently favor QSR over Casual Dining at this point but strictly on a relative basis.  There is one stock, within casual dining, that we do like over the intermediate-term trend: Brinker.  EAT, as the chart below illustrates, has been leading the casual dining space in its outperformance but we believe that this outperformance was largely down to real market share gains and operational efficiencies achieved through investment in technology.  The company’s Plan to Win is working and, we believe, constitutes a compelling reason to own the stock. 





Below we present three reasons to own Brinker in to the quarter and three reasons to wait until after the event or, alternatively, stay away completely. Either way, we believe this stock presents the most attractive opportunity in casual dining on the long side.


Reasons to be long into the quarter:


The comparisons are easy from an earnings growth perspective


As the charts below illustrate, the company has been comfortably comping difficult earnings growth numbers and we expect 4QFY12 to present an easier comparison for Brinker.  With Chili’s taking share from competitors, we see this aspect of the story as being a potential positive for the 4Q release.  





The company is taking share from its competitors via expanded programs supported by technological investments (little incremental labor, if any)


Much of the recent concern on the bearish side of the Chili’s debate has been centered on allegedly overly aggressive cost cutting by management within the four walls.  We would point out, as long-term (since 2Q10) bulls on the stock, that the bear thesis has shifted from costs to sales and back again but our confidence level is high, having taken the time to visit several different locations and understand the investment Brinker has made in the restaurant, that the market share being gained by the introduction of steak, flatbread, and other platforms, is highly accretive to earnings.  Technological improvements in the Chili’s kitchen, such as the impinger oven, have allowed restaurant managers to broaden the selection of offerings available to customers without incurring significant increases in labor costs.



The stock returns a healthy yield and will likely continue to return significant levels of cash to shareholders

This stock currently carries a 2% dividend yield and management continues to buy back shares.  The company’s payout ratio has been increasing and we see Chili’s, with industry-leading top-line performance, holding appeal for investors seeking dividend-yielding safety plays in the consumer space going forward.  That sentence may not sit well with many investors out there that have baggage when it comes to Brinker: past management teams have disappointed investors and many cannot bring themselves to get behind the name.  That’s why, despite the bullish sell-side sentiment, we think there is further room for this stock to go higher. 



Reasons to wait until after the quarter/not be long the stock period:


The stock has been on a tear (see chart 1)

Brinker has been a massive outperformer over the past couple of years and this has begun to cause some concern among investors.  The stock underperformed the S&P 500 by -2.1% and -2.3% over the past one-week and one-month periods, respectively.  We believe that any material disappointment could be met with a decline in the share price but would be buyers of the stock for the intermediate term on any significant sell off. 



Being bullish is consensus and the uncertain macro outlook could present a sizeable downside risk to the stock price

The sell-side is bullish on this name but, on a relative basis, remains more bullish on Darden and as bullish on Buffalo Wild Wings.  The macro environment (particularly employment) poses a big risk to casual dining trends but we see Brinker as the strongest player in the category.





The strength in the P&L has been down to overly aggressive cost-cutting and this will catch up with the company


We have visited numerous stores in different regions of the country and are confident that the margin improvement seen at Chili’s over the last couple of years has been down to improvements in labor efficiency and store productivity on the back of, primarily, sound investment in technology in the back of the house and, secondarily, in improvements in store operations – such as team service – that have benefitted both Brinker and employees alike while providing customers with better service.  The Gap-to-Knapp, which we estimate to have been 250 basis points in 3QFY12, is testament to that.





The most significant risk to owning this stock into earnings is mean reversion.  By virtue of the strong outperformance of the stock over the last couple of years, any disappointment in sales could cause the stock to decline materially.  However, we are confident that the company will continue to take share, outperform the industry benchmark, and return plenty of cash to shareholders via dividends and repurchases.


Howard Penney

Managing Director


Rory Green



A different picture than WMS


  • Unlike WMS who has only been providing significant customer financing for a few years, IGT has used its balance sheet for a long time
  • IGT began a big ramp in financing as replacements slowed in 2008.  Peak financing occurred in late 2009 and then steadily declined.  The level of financing has been surprisingly consistent over the past 6 quarters.
  • Market share has been relatively stable throughout the last four years despite WMS’s aggressive financing efforts



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Lower-Highs: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)


You’re not going to get the prices you sold into in early April 2012 (at least not yet), but you’re going to get the next best thing – lower long-term highs.


Fundamentally, it’s actually easier to make the sell call now than it was then. Back then at least #GrowthSlowing wasn’t as broad based (ask MCD, PCLN, or RL about that today). Back then, revenues/earnings on the company side were a lot better too.


Across our core risk management durations, here are the lines that matter to me most: 

  1. Immediate-term TRADE resistance = 1408
  2. Intermediate-term TREND support = 1381 

In other words, provided that 1381 holds – everything US Equities is fine, until it isn’t. In the meantime, I think we make lower highs as growth continues to surprise on the downside.


The volume signals I am registering are the most bearish I have ever measured in my career.




Keith R. McCullough
Chief Executive Officer


Lower-Highs: SP500 Levels, Refreshed - 1


CONCLUSION: We see a similar see a similar pattern in consensus storytelling and a similarly-asymmetric price setup as we did in the previous occurrences of our being bearish at cyclical tops in the US equity market and “risky assets” broadly (1Q08, 1Q10, 1Q11, 1Q12).


Extrapolating from anecdotes out of our institutional client base, we’d be willing to bet that the phrase: “I’m bullish because everyone is bearish,” has certainly made its way around the buyside in recent weeks.


Unfortunately for US equity bulls, its conceptually impossible for the majority of investors to be positioned in a contrarian manner all at once. Moreover, is it really contrarian to be bullish from here, or is that merely what many US equity investors are telling themselves to ease the broad-based feeling of cognitive dissonance shared by many domestic stock market operators?


Net-net-net, that is once again the key debate we feel investment teams should be having internally at yet another long-term lower-high in the US equity market, which was largely perpetuated by expectations of incremental Policies to Inflate out of the Fed/ECB.



On MAR 29, 2012 we published a timely note titled, “DEFINING ASYMMETRY: INVESTOR COMPLACENCY AT MULTI-YEAR LOWS” where the conclusion read:


“Measures of investor complacency are signaling to us asymmetric risk from an intermediate-term perspective. As such, we’re either at/near a cyclical top in “risky assets” or we’ve achieved “escape velocity” and are entering a new era of investing. We believe this is the key market debate to focus on.”


The note, which was a precursor to our 2Q Theme “Obvious Asymmetric Risks”, isolated a critical factor within our then-bearish intermediate-term view of US equities and “risky assets” broadly – broad based investor complacency. That call ultimately proved rather prescient all the way through to our JUN 1 note titled, “SHORT COVERING OPPORTUNITY: SP500 LEVELS, REFRESHED”:


“I think it’s safe to say that consensus now agrees with Hedgeye on Growth Slowing. Now we have to deal with cleaning up their mess. Alongside immediate-term capitulation, we’re finally seeing a Short Covering Opportunity.”

-Hedgeye CEO Keith McCullough (JUN 1, 2012)


To recap the score: 

  • The S&P 500 dropped -8.9% from MAR 29 to JUN 1;
  • The EuroStoxx 600 Index dropped -9.8% from MAR 29 to JUN 1;
  • The MSCI EM Equity Index dropped -13.4% from MAR 29 to JUN 1;
  • The JPMorgan EM FX Index declined -7.5% from MAR 29 to JUN 1; and
  • The CRB Commodities Index dropped -12.3% from MAR 29 to JUN 1, including a -19.6% drop in Brent crude oil and a -12.7% decline in high-grade copper. 


As we turn to today, we are once again approaching critical levels in the CBOE SPX Volatility Index (~15) and our own proprietary Global Macro VIX (~18-20) that have provided clean-cut sell signals for members of our team dating back to 2007. Comparing 4Q07 to today’s setup, we spot similar patterns of broad-based cognitive dissonance among US equity investors as those ahead of the largest global recession and financial crisis since the Great Depression based upon the OCT 9th concurrent bottom in the VIX (16.12)/top in the S&P 500 (1565.15).






The then-consensus view at that 4Q07 top was that the US equity market was “appropriately” discounting a continuation of then-peak earnings generation was obviously incorrect and lends credence to our view that the crowd is often most wrong at critical inflection points in domestic and/or global GROWTH/INFLATION/POLICY dynamics.


And while we are certainly aware that consensus can remain correct longer than many individual funds can remain solvent, we remain keen to get loud ahead of what we see as pending sell-offs in US equities (1Q08, 1Q10, 1Q11, 1Q12); today we see a similar see a similar pattern in consensus storytelling: 72.5% of S&P 500 companies that have reported Q2 results have beat on the bottom line, overshadowing the 58.9% of companies that have missed top line estimates and a -548bps sequential slowdown in the YoY growth rate of aggregated SPX sales to +0.5% (per Bloomberg Professional).


Needless to say, we see a similarly-asymmetric price setup as we did in those previous occurrences of broad-based cognitive dissonance. Best of luck picking your spots on the short side out there.


Darius Dale

Senior Analyst

Idea Alert: Covering RL

Conclusion: We’re keeping a TRADE a TRADE. The company is doing everything right, but it’s not immune. Earnings power is underappreciated, but we think we have time. For now it’s rangebound.


Keith covered our RL short this morning on the print. We shorted it into the print as a TRADE – simply because top line expectations were high, SG&A is headed up, they just lost their CFO, the global macro climate presented a perfect opportunity for RL to guide down, and this is a consensus long.


After a sharp initial sell-off, the stock is hanging in there reasonably well – most notably it is holding Keith’s $144 level. Breaking (and holding) that level would put $138 in play.


There’s not much that really changed our thought process here. We like the name more and more the further we go out in duration, and we have the earnings in our model to prove it. But the realization of $12 in EPS will not happen in a vacuum.


The reality is that this is the first time in three years that RL missed to this magnitude in its own retail stores. Comps of +1% do not exactly instill the confidence we need to bank on a 2H top line acceleration. They can make it up in the (higher margin) wholesale business, but let’s face some facts… if any power brand like RL wants to find some dollars, they turn to wholesale, not retail. Retail is the best barometer of a brand’s trajectory.


One of the positives is that they are beginning to see the benefit from input cost relief, and that should only improve from here. Unlike brands like Carter's, Hanesbrands, and Gap we think that Ralph has the brand power to keep most of the margin upside. But we’re mindful about ‘granting’ both margin upside AND top line acceleration starting 90 days out. That’s a long time to wait with a lot of unknowns.


Ultimately, where the Street shakes out over the next day or two with earnings estimates will be critical.

In the interim, Keith will do what he does…manage risk around a high conviction longer-term research call by trading a range which today stands at $144-$153.


Based on the research we have in front of us today, we’d need to see that $138 to step up and buy right now.


There are two things that could change that:


1) Time. We think that as each day draws closer to getting past 2Q, the stock has a better shot of working as margin pressure eases relative to last year's compares.


2) The Research. The reality is that the volatility in the business environment has never been greater than it is today. If there’s anyone who will be left standing, it will be RL. But there’s simply limited visibility past the upcoming quarter (where RL likely sandbagged). Could comps at retail be up 10%? Yes. Down 10%? Yes. We’ve got low single digit comps in our model for the remainder of the year. If we gain confidence in them later in the quarter, then all else equal, the stock might make sense here for the intermediate-term. But we don’t see the need to rush.



We have included below our RL Idea Alert from Monday, August 6


Idea Alert: Covering RL - RL Levels

We shorted RL into the print for a TRADE. To be clear on this one, there’s a sharp delineation between where we like RL over each duration. In the event of a sell-off, we'd be looking for a point of entry once the dust settles to get involved with what could be $12 in earnings power. 


TAIL (3-Years or Less): This is one of our favorite TAIL ideas, as we think that the consensus is underestimating RL’s 3-year earnings power by  nearly a dollar. When we add up the opportunities by country, product category, and most notably – by channel (ie, we think that people are underestimating the leverage inherent to this model.  Specifically, we’re looking at nearly $10 in EPS next year, and over $11.50 the year after. A 10% premium to the market suggests a stock near $175. A 1x PEG is $200+ over 2 years.


TREND (3-Months or More): RL still has a full 75% of its (March) FY left to go, so the company will be guarded into the print. RL laps European category expansion (intro of Polo FW), Denim & Supply, FX, and double digit retail comps – which are tougher to bank on this year.


TRADE (3-Weeks or Less): The company has every reason in the world to offer up a cautious outlook – given all that’s going on in the world – especially Western Europe (it has minimal exposure to China) and the clear trend of other companies putting up weak numbers. Add in the Olympic spending, tough wholesale and store productivity comps, and our analysis that stretches to find more than 10% of CFO changes that end up being a near-term positive earnings event, and we’re more inclined to be on the negative side of this print. This is a perfect ‘buy on pullback’ stock. 

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