Jack in the Box reported a solid quarter, albeit one that caused confusion in after hours trading, beating EPS on an adjusted basis and raising FY12 EPS guidance.  The only slight disappointment was Qdoba same-restaurant sales, particularly among the franchised locations.  JACK remains one of the “cheapest” companies in the space from a valuation perspective.  We expect this multiple to be revised higher over the next three years.





Restaurant level operating margins were particularly robust, increasing by 4% year-over-year.  The most important news from the quarter was the company’s decision to outsource its distribution business.  While there are little details about the impact on financials, our initial reaction would be positive; selling non-core assets currently used in this business will be positive for returns and margins. 


During the first four weeks of 4QFY12, according to the press release, same-restaurant sales have tracked above 3Q results.  For the full fiscal year 2012, management raised the mid-point of the EPS guidance range by 10% to $1.53 (consensus $1.43) on the back of higher Jack in the Box same-restaurant sales guidance slightly offset by lower Qdoba same-restaurant sales guidance.


We continue to believe that this company is well positioned to continue to produce results worthy of a higher valuation multiple as the restructuring of the company enhances future profitability, margins, and returns.  At 7.2x EV/EBITDA, with EBITDA growth accelerating ahead of expectations, we believe that JACK could see 2-3 turns in multiple expansion.  On this basis alone, Jack in the Box has $10-15 in upside from the current stock price.







Howard Penney

Managing Director


Rory Green



MGM: Beating Around The Bush On Guidance

MGM’s earnings report for Q212 was a largely negative story across the board. Our bearish stance on the company continues as worse-than-expected numbers hit several metrics at the company, which we’ve outlined below. The story here is bookings: basically, people aren’t booking hotel rooms as much as the industry would have hoped.



MGM: Beating Around The Bush On Guidance  - destroyedperf



Hedgeye Gaming Sector Head Todd Jordan broke down the bookings situation as follows:


•        The convention mix was a little worse than expected. While MGM predicted convention mix to increase YoY during 2Q [at least +1%], there was a patch of softness from May-June that led to a drop off in yearly convention bookings. MGM’s convention mix for 2012 is trending at about the 14-15% mix level (2011 mix was 14.7) which is below earlier predictions.

•         While MGM predicted RevPAR growth for the year to be at least mid-single digit, 3Q RevPAR will be down slightly with weakness in bookings in May/June. Our analysts think it’s too early to make a call on how 4Q will shake out.


Revenue per available room (RevPAR)is only going to get worse and this is one of the biggest factors out there for hotels. However, one very disconcerting comment that management mentioned on yesterday’s earnings call was its guidance for Q3: "We've already seen an improvement in customer trends here in the third quarter.”


Management’s statement seems contradictory. If one had been paying attention to the market today, they’d have noticed that (PCLN) and (OWW) were getting absolutely CRUSHED, down –17.2% and –25.5%, respectively. Why? Their management teams came out and noted that bookings and other metrics in the leisure space are way down.


And that is why we remain bearish on MGM.

HBI: Pinched at JCP?


MFB announced on their call today that they will be building a JCP shop to showcase its brands. This matters for HBI with MFB a primary competitor. Consider the following:

  • While HBI’s brand portfolio is largely skewed towards men, the women’s intimates business accounts for ~40% of HBI’s Innerwear business and ~20% of sales overall.
  • The Innerwear business accounts for half of HBI’s EBIT.
  • If we assume that women’s is at a comparable margin if not slightly below men’s and that JCP accounts for ~2% of women’s Innerwear sales then we’re looking at roughly $5-$6mm in EBIT at risk, or $0.04-$0.05 in EPS.
  • Anecdotally, HBI’s (Playtex, Bali, and Barely There) brands represent the largest portion of JCP’s bra offering at roughly 17% with MFB at half the size accounting for ~10%. While a MFB shop doesn’t automatically eliminate HBI from contention, the likelihood is very high.
  • This might appear modest with consensus EPS of $2.55 in FY12, but it’s just one example of increasingly disruptive competition HBI and others have to manage through as a result of JCP’s evolution and open-for-bid Shop process.


Casey Flavin


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.71%


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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