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CHART DU JOUR: STRIP SLOTS – A SECULAR DECLINE

Rationalization or decline, call it what you will but we don’t see it as a good trend

 

  • At 46,000 and still declining, the number of slot machines on the Strip is back to levels not seen since 1993.
  • Regional gaming expansion has had its impact and that pressure won’t let up with a significant number of new markets likely over the next 5 years.
  • Unfortunately, a lot of profit margin lies in slots and bad demographics should continue to be a headwind.

 

CHART DU JOUR: STRIP SLOTS – A SECULAR DECLINE - vegas1


DRI SQUEEZING THE PIPS

Takeaway: $DRI took managing earnings to a new level in 1QFY13. Declining AUV's & industry-lagging trends do not bode well for the rest of the year

Darden reported a beat this morning driven by lower tax rate($0.02-0.03), reduced labor costs as a percentage of sales, and increased promotions at Red Lobster.  Darden’s EPS came in at $0.85 for 1QF13 versus expectations of $0.83.   We are not convinced by this beat and do not believe that FY13 comparable restaurant sales guidance is within reach.  Earnings sustainability is also a question given that comparable restaurant sales are negative and labor costs are being cut so severely. 

 

Income Statement

  • Revenues came in 0.2% above expectations
  • Restaurant level profit beat based on significant reduction in labor and other expenses but cost of sales were not as much of a benefit as expected because of increased promotional activity
  • Operating Profit missed due to increased G&A focused in part on advertising for Red Lobster and Olive Garden
  • Net Income and EPS beat helped by the tax rate (24% versus 26% expectations) benefit of $0.02
  • Average unit volumes at the Big Three declined -1.3% year-over-year after declining -2.3% in 4QFY12

DRI SQUEEZING THE PIPS - dri income statement

 

The table below highlights 1QFY13 comps at Olive Garden, Red Lobster, and Long Horn versus our expectations. 

 

DRI SQUEEZING THE PIPS - dri comp surprise

 

FY13 Guidance

  • Darden guided to 1-2% blended “Big Three” same-restaurant sales growth for the year
  • Food basket inflation is expected to be in the range of 0.5-1.5%
  • Unit growth of 5%
  • Total sales growth of 9-10%
  • EPS growth of 5-9%

 

Red Lobster  

 

During the quarter, Red Lobster repeated last year’s feast promotion, offering a four course seafood meal of $14.99 but ran the initiative for three weeks longer than last year.  Rather than finishing the quarter with crab fest, as it did in 1QFY12, Red Lobster offered endless shrimp for the last two weeks of 1QFY13.  Endless shrimp was effectively pulled forward and this negatively impacted mix in August.  We estimate that Red Lobster lagged the Knapp Track Casual Dining comparable restaurant sales index by roughly 350 basis points during 1QFY13. 

 

DRI SQUEEZING THE PIPS - rl POD1 1

 

 

Olive Garden – “New Promotional Constructs”

 

Olive Garden continues to disappoint from a same-restaurant sales and operational perspective.  The same esoteric lines on new “constructs” still punctuate management’s explanation of how Olive Garden’s turnaround is going to come about.  The remodeling initiative is set to begin, in earnest, in the second half of FY13.  We expect Olive Garden to lag the industry for the remainder of the year.  In terms of expectations, the Street is expecting a rebound in comps that we do not see as likely.  Olive Garden same restaurant sales lagged the industry Knapp Track index by roughly 60 basis points.

 

DRI SQUEEZING THE PIPS - OG SRS

 

 

LongHorn Steakhouse

 

LongHorn continues to be the bright star in Darden’s sky as same-restaurant sales grew 3.6% as two promotions and the lunch menu introduced in 2QFY12 drove sales in excess of expectations.

 

DRI SQUEEZING THE PIPS - LH pod1

 

 

Quantitative Levels

 

Keith’s quantitative model shows the immediate-term TRADE range for DRI at $54.66-$57.18.

 

DRI SQUEEZING THE PIPS - dri levels1

 

Howard Penney

Managing Director

 

Rory Green

Analyst


IL LICENSING ACCELERATES

Takeaway: New markets should be a big boost to the slot suppliers in the coming years and Illinois VLTs is providing a near term lift

At least something is going right in Illinois

 

 

Yesterday, the Illinois Gaming Board released a list of all licensees as of September 20th.  The list included 333 licensed establishments, implying approval of an incremental 153 establishments in September.  This is an acceleration over the 92 licenses granted in August.  To date there have been no establishment licenses revoked and only 10 establishments have been denied licensure.  There has been one terminal operator who had their license revoked along with one manufacturer and 22 terminal operators that have been denied licensure.  Currently there are 2,381 establishments pending approval, up 35% from August.

 

Starting in September, authorities began actively pursuing enforcement against locations operating “grey” machines.  Those found in violation of the law will be charged with Felony action.  The crackdown on "grey" machines should continue to boost the demand for legal VLTs.

 

Each location is allowed to operate a maximum of 5 machines so 333 approved locations implies a current maximum market size of 1,665.  We expect that about 1,000 VLT's will get shipped to IL in the September quarter with IGT machines comprising the majority of those machines.  Our best guess is that 3,000 VLTs will be shipped to IL in 2H2012 and by the end of 2013, the market should consist of about 10,000 units.  We expect that the majority of VLTs will be for sale with manufacturers providing financing to the route operators.  We are hearing that ASPs should be in the mid-to-high $12k range.

 

DETAILS ON PENDING APPLICATIONS:

Distributor:  4 (Cadillac Jack IL, Gametech International, Golden Route, PDS Gaming-IL)

Manufacturer:  3 (Cadillac Jack, Gametech, Golden Route)

Supplier:  6

Technicians:  39

Terminal handlers:  166

Terminal operators:  13

Establishments:  2,381 pending

 


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The Trouble With China And Japan

Takeaway: War is unlikely, but election outcomes and economic growth are certainly at risk in both countries.

Over the last few weeks, there have been daily protests in China against Japan over territory in the South China Sea. Over 500 protests have occurred daily with the Chinese government rarely interfering, which is odd in the sense that the government is usually keen to keep demonstrations of this sort on lock down. The questions that outsides looking in have been asking are: what’s going to happen? Will the two countries undergo a trade war or a military conflict?

 

Military action is an unlikely scenario; both sides have too much to lose and are too interdependent on one another. That said, however, our Macro team believes that as the territorial dispute drags on, economic growth is potentially at risk as trade protectionism kicks in and sentiment becomes depressed. With the militaristic undertones of current policymakers on both sides in full swing, the conflict is unlikely to be resolved soon.

 

Hedgeye Senior Analyst Darius Dale brings to light what could happen as we head into 2013:

 

Both China and Japan have leadership transitions/parliamentary elections on the docket in 2013, so it would seem that maintaining a strong geopolitical face is in the interest of policymakers in both countries. Leaders who engage in defending the sovereignty of their nation tend to resonate well with their respective populace.”


What's In A Dollar?

WHAT’s IN A DOLLAR?

 

 

CLIENT TALKING POINTS

 

WHAT’S IN A DOLLAR?

Jerry Seinfeld would probably say something along the lines of “what’s the deal with the US dollar these days?” Well, Jerry, the US dollar broke its 6 week spell of falling lower and lower and is now up for the week. You know what that means? A Dollar Holler smashes commodity prices in the face of Ben Bernanke and his policy of inflating prices and easing the markets. The CRB Commodity Index is down -4.4% week-to-date. You have to remember that when trading these markets, there is correlation risk to be had. Get the US dollar right and you’re going to get a lot of other things right, including oil, gold and even the stock market.

 

 

TREASURY TROVE

The 10-year Treasury is an instrument which many consider to be among the safest in the world. When people flock to Treasuries, driving yields lower, they’re looking for a safe haven play; a way to allocate capital while still earning some kind of return, even if it’s only 100 basis points or so. Well now that Ben Bernanke has extended QE3 and encouraging rampant stock market orgies of epic proportions, we’re seeing the 10-year yield climb higher. 10-year breakevens are testing new all-time highs and the current 1.76% yield will probably go higher by the end of the day as long as there’s no drastic news about the issues in Europe.

 

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: DOWN  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

WENDY’S COMPANY (WEN)

Our conversations with Wendy’s franchisees indicate that sales have been trending sequentially higher in 3Q versus 2Q. We believe the company is about to announce the end of the company’s Sisyphean breakfast initiative after a prolonged “testing” phase. Given the capital demands on the company over the next few years as it invests to upgrade its asset base, shifting capital from the distraction that has been breakfast is a positive. The tail is less certain as it will take years for the system to rejuvenate the asset base and push out the older franchisees that don’t want to make the necessary investments to bring the asset base in line with contemporary industry standards..

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“If you waited in line earlier then 7am for an iPhone 5 today, you need to get a job. $AAPL” -@MarketShot

 

 

QUOTE OF THE DAY

“I didn't really say everything I said.” –Yogi Berra

                       

 

STAT OF THE DAY

CRB Commodity Index fell -4.4% week-to-date.

 

 

 


Idea Alert: UA


Keith added UA back on the long side of the Real-Time Positions yesterday. Pressure in retail/apparel presented an opportunity to buy back one of our favorite TAIL ideas. There’s no chance to the research call. While this is one of our favorite TAIL ideas, look for us to keep a TRADE a TRADE on this one.


On a TAIL duration (3-Years or Less):

  • UA should put up $3bn in revenue by ‘14 – impressive given a $1.5bn print in 2011.
  • It’s tough to find any name out there growing EBIT in the 25-30% range. This translates to over $2 per share in earnings at UA’s current margin structure (which we think is sustainable). Simply put, UA was built to be expensive.
  • There’s no fundamental reason why footwear should not attain share at least in line with lesser brands like New Balance, Reebok, Brooks, Saucony…Admittedly it has not happened yet, but will – the big risk is that it costs them more to do it.
  • International is also next on the docket with the hire of Charlie Maurath.
  • All in, it’s true that it faces a stiff competitor in Nike, but barriers to entry here are immense, and UA has already invested to jump that hurdle. Few others have.
  • In addition, UA has ~2x the Direct-to-Consumer exposure as Nike – that’s one of the benefits of building a business without a legacy wholesale model that’s dependant on dinosaur retailers to conform to its marketing plan.

Near-term TRADE duration (3-Weeks or Less) factors:

  • Our estimate is 7% ahead of the Street in the upcoming quarter reflecting strong sales trends and share gains in both apparel and footwear.
  • Apparel sales have continued to outpace the broader industry posting greater than 2pts of share gain quarter-to-date.
  • Meanwhile, footwear sales have reaccelerated since early June reflecting the early success of the new Spine platform and launch of UA’s new basketball line.
  • On the flip side, UA just lost its SVP/Sourcing, which is not good. Also, DKS writing off its investment in UK’s JJB is not great for UA’s int’l growth given the relationship between the two. We’re more concerned with perception than reality, but the facts can’t be ignored. When concerns are high, we’re buyers.

Idea Alert: UA - UA TTT







 


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