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PVH/WRC: Finally

Takeaway: While the strategic and financial implications make a ton of sense – we see further upside from here.

 After nearly a decade of speculation, the timing finally aligned for PVH to capitalize on WRC’s operating shortfalls through 1H. With a business over-indexed to Europe and WRC in search of a transformative deal, Manny Chirico (CEO) moved in earlier this summer sealing a deal just 8-months into Helen McCluskey’s tenure. The reality is that a combined PVH/WRC makes sense and initial accretion projections are likely conservative. This is a win/win for both as the 22% increase in aggregate market cap today suggests, but we see further upside with $10 in FY14 EPS on the horizon.

  • Based on our estimates, Calvin Klein accounted for ~70% of WRC’s revenue base and ~80% of total EBIT. With the transaction valuing WRC at ~$2.9Bn and assuming a 5x EBITDA multiple for WRC’s Heritage businesses(Chaps, Speedo, and intimate brands Olga and Warner’s), the deal implies PVH paid a ~9.5x multiple for the CK business on FY12E estimates and under 8.5x FY13E pre synergies. This isn’t exactly a steal, but if you believe that WRC’s numbers are depressed, then it is attractive enough for a brand that has grown at a +13% CAGR at retail since it was acquired by PVH in 2003 and is expected to grow +8%-10% over the next 5-years.
  • At risk of stating the obvious for a deal so widely expected, the strategic fit here makes sense given that WRC is PVH’s biggest licensee. Layer WRC’s core business over PVH’s infrastructure while complimenting each company’s regional strengths – PVH in NA and Europe, WRC in Latin America and Asia. Not to be overlooked is the ability for PVH to control the presentation of CK in its entirety at retail, which should help reignite a struggling ~$700mm CK Jeans franchise.
  • With $100mm in costs targeted for elimination over the next 3-years as well as MSD-HSD revenue growth, PVH is looking to grow operating margins by nearly 50-75bps over each of the next 3-years.
  • With $1.00 in EPS accretion by 2015 likely conservative, investors will start looking at FY14 EPS approaching $10.00. With margin expansion under the combined entity expected to drive a high-teens earnings growth rate over the next 3-years, we think multiple expansion is likely. However, even if we simply take the upper end of PVH’s historical EPS multiple over the last decade of 16x, we’re looking at a $160 stock over the next 12-24 months suggesting a 20%+ annual return even after today’s 18% move.
  • Targeting early 2013 for closing the transaction.


Additional Highlights from the Call:

  • WRC operating teams expected to stay on to operate various brands with headcount reductions expected to be primarily in back office
  • PVH expects to pay debt down by $400mm/yr over the next 4yrs – focused on delivering as they did post Tommy deal
  • Looking to finance the deal with a $4.324Bn financing commitment in the form of both bank financing and unsecured notes
  • PVH will have more favorable leverage ratio post WRC deal (3.4x) than 2yrs ago when it bought Tommy (3.6x) – goal to get back down below 2.5x
  • With this deal PVH hurdles RL in retail second only to VFC in revenues
  • Deal shifts ~$100mm in WRC royalty revs to owned leaving a ~$170mm royalty base going forward
  • Plan to leverage Tommy’s European expertise to drive stronger CK apparel presence in Europe beyond today’s $1Bn in revs
  • Tommy growth opportunities via WRC’s Asia/Latin America presence upside to today’s plan – but don’t want to risk significant growth opportunity for CK by integrating Tommy too early (3-5yrs out)
  • Operate a $200mm Tommy business in Latin America today and $600mm Tommy business in through licensing
    partners that present an opportunity to integrate in the future
  • PVH assuming Chaps license (RL) does note continue re its accretion assumptions – currently in discussions with RL about this now
  • ‘no intention of selling it at this point’ – re strength of Speedo business.
    • Though ~$400mm+ PVH could get for Heritage business could help toward delivering if need be
  • WRC’s store growth plans under review. Underwear stores work, but would like to put underwear and jeans under same roof

 

PVH/WRC: Finally - PVH WRC 2

 

PVH/WRC: Finally - PVH WRC 3

 

PVH/WRC: Finally - PVH WRC 1

 

PVH/WRC: Finally - PVH WRC 4



























 


CZR 3Q REPORT CARD

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

 

 

OVERALL

  • Same:  EBITDA fell short of expectations but could've been worse.  Management commentary was very similar to that following Q2  

ATLANTIC CITY

  • MIXED:  Net revenues declined 4.1% YoY in 3Q due to lower casino revenues, largely resulting from a decline in trips.  Property EBITDA grew 12% YoY due to decreased property operating expenses resulting from cost savings initiatives and lower property tax assessments.
  • PREVIOUSLY:  
    • "The Atlantic City region, as you're well aware, has been challenged for a number of years and continues to be challenged. However, the growth decline in that region has started to mitigate and, as we move forward with the annualization of Aqueduct and the annualization of Revel, we would expect that to continue to improve."
    • "Our margins at Atlantic City are under tremendous pressure as revenues continue to decline. Many of the properties there operate unprofitably for reasons that are very hard to understand. And so, we continue to look at all manners of adjustment we can make to try to keep our operating expenses as low as possible."

VEGAS

  • MIXED:  While net revenues were slightly higher, property EBITDA fell 5% YoY because of the increase in property operating expenses.  Also, CZR estimates that the negative impact caused by Project Linq construction activities reduced EBITDA by ~$5-10 million.  Spend per trip increased 7.8%, due primarily to strength in the international high-end segment.  Promotional allowances were also higher.
  • PREVIOUSLY:   "It's one of the challenges in this business, we're still facing the same number of guests, we're servicing the same number of visitors, putting them to bed, waking them up, parking their cars and alike, but the amount of revenue we enjoy is a bit diminished from that. And there is no reason that I can see in the immediate future that would suggest the general macroeconomic conditions that have led to that results are going to be much different."

HORSESHOE CINCINNATI

  • SAME:  Horseshoe Cincinnati is planned to open Spring 2013
  • PREVIOUSLY:  "Horseshoe Cincinnati is well under construction. That's going to open at the end of the first quarter or early into the second quarter."

LAS VEGAS ROOM RENOVATION 

  • SAME:  The renovation of Imperial Palace was estimated to have reduced net revenues by approximately $10 million to $15 million.  CZR expects meaningful ADR improvement when all the renovations are done. 
  • PREVIOUSLY:  "We are going to renovate a large number of rooms next year in Las Vegas. If you were to ask, where we've cut back on maintenance capital for the last few years, it's really been in Las Vegas and it's primarily been in the room renovation category. So next year, we're planning to do a significant number of rooms, probably touching nearly all of the properties themselves. There will be a significant renovation at Caesars Palace of 550 rooms."

BALTIMORE

  • SAME:  Harrah's Baltimore is proceeding with plans to open a gaming facility in Baltimore in the middle of 2014. 
  • PREVIOUSLY:  "The State of Maryland's Video Lottery Facility Location Commission granted a license to our consortium, paving the way for us to begin building Harrah's Baltimore, which will feature 3,750 VLTs. The consortiums are beginning to seek necessary permit and construction is likely to begin in 2013 with an opening targeted for the second quarter of 2014."

HARRAH'S ST. LOUIS CLOSING DATE

  • SAME:  CZR expects to close the acquisition in 4Q.
  • PREVIOUSLY:  "We also announced that sale of Harrah's St. Louis, which we expect to close by the end of year."

GROUP CONVENTION BUSINESS

  • SAME:  4Q won't see much difference from 3Q but CZR is encouraged by 2013 and 2014 trends.
  • PREVIOUSLY:  "I think the general trend remains favorable.... I doubt that much of that is going to change in the remainder of this year, but I think as we look forward to 2013, I think it's likely to be a little bit more encouraging."

CZR 3Q CONF CALL NOTES

CZR 3Q CONF CALL NOTES

 


"Thanks primarily to growth in our interactive operations and a continued emphasis on expense reductions, we achieved about the same net revenues and Adjusted EBITDA as in the third quarter of 2011, despite more competitive markets and the challenges posed by the continuing weakness of the U.S. economy. Reflecting the sluggish economic conditions, customer visitation declined in all regions and spend per trip declined in several regions. However, Las Vegas saw a nearly 8% increase in per trip customer spending and Iowa-Missouri and Louisiana-Mississippi experienced modest increases in spend per trip."

 

- Gary Loveman, Caesars Entertainment chairman, chief executive officer and president

 

 

CONF CALL NOTES

  • AC properties are closed but none of them have suffered material damage. Hope to reopen in the next several days.
  • PA reopened this morning
  • They do not expect to exceed their deductible insurance
  • Will convert Bill's Gamblin' Hall and Saloon property into a boutique lifestyle hotel
  • Pursuing a plan to attract more mid-week meeting business by constructing a convention center. Will seek financing from the city.  
  • Enhancing their Caesars.com website to help with online bookings
  • Very active in using social media as a marketing tool and are expanding mobile applications onsite
  • Horseshoe Cleveland:  welcomed over 2MM members since opening
  • MA:  preparing their JV bid with Suffolk Downs
  • Focused on gaming legalization in several states 
  • LV:  Cash ADR decreased by 2.2% with occupancy in the mid-90s
  • AC:  Benefited from lower property taxes and margin improvements through cost saving initiatives
  • 250 rooms that were out of service at their Biloxi property that have recently reopened 

 

Q&A

  • Booked estimates of the St Louis divestiture.  The prior estimate needed to be adjusted and they booked the adjustment this Q. The Region would still have been slightly EBITDA positive without the adjustment.
  • Group business in 4Q12 in LV? Doesn't think that they will see a large difference in the 4Q vs. 3Q
  • They are looking to sell the golf course in Macau; any proceeds need to go to CEOC.
  • Capex guidance: $520-560MM for 2012.  2013 will have higher capex than 2012 - a lot in Las Vegas
  • Cash outlays for Baltimore will not be significant
  • High end strength in LV on the international side but promotional expenses were also higher. Generally, reinvestment in the high end international are higher than other players, but in this quarter the two are not correlated.
  • Managed category increase is due to Cleveland.  Employees are CZR's employees - they book revenue and expenses there and will have the same treatment for the other Ohio properties.
  • Did hold have any meaningful impact on the quarter? No.
  • They are trying to staff much more efficiently to compliment demand patterns
  • Experienced $50.8MM of cost savings in the Q and identified $204.3MM of future cost savings (marketing efficiencies, tax strategies)
  • Did not buy back any debt in the quarter
  • Expect an increase in ADRs post room renovations in LV
  • Feel like they are close to a CFO hire
  • Have nothing to announce on the London Clubs

 

HIGHLIGHTS FROM THE RELEASE

  • Trips across all regions decreased in the third quarter of 2012 when compared with the same period in 2011, resulting in a decline of 4.9% on a consolidated basis, due mainly to economic and competitive pressures as well as hurricane-related property closures in the Louisiana/Mississippi region in August 2012.  The overall increase in spend per trip in the third quarter of 2012 was attributable to a large increase in the Las Vegas region due primarily to strength in the international high-end segment, as well as modest increases in the Iowa/Missouri and Louisiana/Mississippi regions
  • In August 2012, we issued $750 million in new debt due 2020, with proceeds used to refinance debt maturing in 2014 and 2015 and to increase liquidity. In conjunction with this transaction, which closed in October, we extended the maturity of approximately $958 million of term loans from 2015 to 2018 and beyond, and repaid approximately $479 million of term loans under our credit facilities.  
  • Challenging macro conditions and new competitors negatively impacted some of their regional results. Our consortium with Rock Gaming and others is proceeding with plans to open a gaming facility in Baltimore in the middle of 2014, and we will apply for a license to build a full-scale gaming-destination resort in Boston in an alliance with Suffolk Downs. We've also begun booking meetings and conventions for the spring 2013 opening of the new $450 million. Horseshoe Cincinnati being developed by Rock Ohio Caesars LLC, a joint venture in which we have a 20% ownership interest."
  • "During this quarter, we expect to complete the previously announced sale of Harrah's St. Louis for $610MM and plan to use the proceeds from the sale to reinvest in our core properties and invest in growth opportunities. One example is our anticipated renovation and rebranding of the Imperial Palace, which we are renaming The Quad. We expect to upgrade significant portions of that property, including the casino, public spaces and guest rooms. The reconfiguration of the casino and its entrances will enable direct access from the Linq and make the Quad what we believe to be one of the most easily accessible casinos on the Strip."
  • LV: 
    • "Increased casino revenues were mostly offset by decreases in food and beverage and other revenues combined with higher promotional allowances."
    • "Revenues rose slightly, despite the negative impact on results caused by Project Linq construction activities, including the closure of O'Shea's casino in May 2012, the closure of several retail outlets at Harrah's Las Vegas and the ongoing renovation of the Imperial Palace, which the Company estimates to have reduced net revenues by approximately $10 million to $15 million."
    • "Trips were relatively flat, while spend per trip increased 7.8%, due primarily to strength in the international high-end segment."
    • "Hotel revenues in the region were relatively flat.... due in part to the 662 additional Octavius Tower rooms, offset by a decrease in cash average daily room rates...and a decrease in total occupancy."
  • AC: 
    • Revenues decreased "due mainly to lower casino revenues, largely resulting from a decline in trips. Trips by lodgers and non-lodgers declined 4.5% and 5.1%, respectively...due mainly to new competition in the region. Spend per trip for lodgers and non-lodger decreased 2.8% and 4.1%, respectively."
    • "Expects the market to continue to be challenged by local and regional competition."
    • "Property EBITDA increased ....due mainly to decreased property operating expenses resulting from cost savings initiatives and lower property tax assessments"
  • LA/MS:
    • "Revenues were negatively impacted by the closures of two casinos in the region as a result of Hurricane Isaac in August 2012, which contributed to a 6.2% decline in trips."
    • "Loss from operations was $183MM...  non-cash intangible asset impairment charges of $176.0 million, as well as a non-cash tangible asset impairment charge of $13.0 million and a $20.2 million charge for exit activities related to the halted development project in Biloxi, Mississippi."
    • "Estimates that the negative impact of Hurricane Isaac on its income from operations and Property EBITDA was approximately $4 million"
  • Iowa/Missouri:
    • Revenues declined "due mainly to a decline in casino revenues resulting from new competition in the Kansas City market"
    • "Income from operations and Property EBITDA increased... due mainly to a reduction in property operating expenses resulting from the refinement of estimates of costs remaining in the discontinued operations of the Harrah's St. Louis casino as a result of the imminent closing of the transaction."
  • IL/ IN:
    • "2012 net revenues... increased slightly. Spend per trip declined while increased competitive pressures in the region resulted in fewer trips, despite the reopening earlier this year of the bridge that allows direct access by customers to the Company's Southern Indiana property, which closure affected the property starting in early September 2011."
    • "Income from operations for the third quarter of 2012 increased...  due mainly to higher revenues together with reduced property operating expenses as a result of cost savings initiatives. The increase in Property EBITDA reflects higher revenues and reduced property operating expenses"
  • Other Nevada: 
    • 3Q net revenues decreased ... "due mainly to a decline in casino revenues. Trips to the properties in the region, as well as spend per trip, declined... due to local competitive pressures, and the Company expects the market to continue to be challenged." 
    • "There was a loss from operations of $75.2 million..... due mainly to non-cash intangible asset impairment charges of $103.0 million."
    • "Property EBITDA decreased slightly... due mainly to the income impact of lower revenues, partly offset by reduced property operating expenses."
  • Managed, International & Other
    • "Net revenues ....increased.. 40.3%... due primarily to higher revenues associated with the Company's growing interactive operations. Net revenue increases were also attributable to the opening of a new managed casino, Horseshoe Cleveland, which began operations in May 2012, including an increase in reimbursable expenses for Horseshoe Cleveland that is presented on a gross revenue basis, thus resulting in an increase in net revenues and an equally offsetting increase in operating expenses."
    • "Loss from operations increased.... due mainly to non-cash intangible asset impairment charges of $124.0 million... and increased corporate expenses. Increases in corporate expenses were attributable to the consolidation of certain functions at corporate, and increased stock-based compensation expense." 
  • "Interest expense, net of interest capitalized, increased by $65.4 million, or 14.5%... due primarily to  higher interest rates as a result of extending the maturities of the Company's debt combined with higher debt balances compared with the year-ago quarter, and a $66.2 million decrease in mark-to-market gains on derivatives resulting from $6.2 million of gains in 2012 compared with gains of $72.4 million in 2011, partially offset by $33.9 million of lower amortization of deferred losses in accumulated other comprehensive loss.
  • Capitalized interest in 3Q: $9.5MM
  • "The effective tax rate benefit for the quarter ended September 30, 2012 and September 30, 2011, was 30.8% and 29.6%, respectively.  The reason for the increase in the quarterly rate at September 30, 2012 is that the negative impact to the 2012 rate, which is primarily caused by nondeductible goodwill impairments, was relatively less than the negative impact to the 2011 rate, which was primarily caused by nondeductible foreign losses and nondeductible losses on company-owned life insurance policies"

     


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LVS YOUTUBE

In preparation for LVS's 3Q earnings release Thursday, we’ve put together the recent pertinent forward looking company commentary.

 

 

 

 

UBS & DEUTSCHE BANK GAMING INVESTMENT FORUM (10/1), 2Q CONFERENCE CALL (JULY 25)

 

MACAU

  • "Phase IIB [SCC] will open progressively starting in October, with the vast majority really kind of after the 1st of the year, with another 2,000 hotel rooms."
  • "We think that we've got some opportunities to grow margins obviously with the initial margin at the Sands Cotai Central being a little bit below what our historical margins are at the Venetian as a result of the mix of business being more heavily weighted toward VIP. We think as the mass market grows, both at Sands Cotai Central and really across the portfolio of properties in Macao, with the mass margins being significantly higher than the VIP margins, that we would anticipate margin expansion on a consolidated basis."
  • "The Sands Cotai Central spending stretches out into that kind of 2014, early 2015 timeframe. That's mostly as a result of retainage payments. The vast majority of the spending would be completed by 2013, a little bit into 2014, and then retainage payments after that."
  • [Parisian] "We expect to spend approximately $600 million and then in 2014, about $1.2 billion, if will, on the Parisian, with the remaining spending in 2015 and then a tail of that into 2016."
  • SCC: "The hotels are enjoying strong occupancy, including 61% in April, 74% in May, 85% for the month of June, and the ramp continues into July."
  • "The air conditioned walk-over bridge connecting the Venetian and Four Seasons to Cotai Central opens in January of 2013."
  • [Premium mass]  "We believe that that segment will continue to grow and we believe we'll be a player in each of the three sub segments because of the amount of tables we have to offer, the rooms, the retail, especially Sands Cotai Central is built for that." 
  • "We've continued to collect from the junkets as we have in the past and really see no deterioration from that perspective. Our reserves are growing a little bit just from a prudency standpoint. Against that total amount of receivables, we've got about a 15% reserve that's outstanding."
  • [Promotional environment] "Junket segment has remained pretty much fixed.  There's competition on the slot, ETG and mass table side.  We haven't seen evidence of that, but it makes sense to me that they will be moving in that direction because that's where the growth is." 

SINGAPORE

  • "We've got about $192 million in reserve, or about 1.9% of the total credit draw, which gives you an idea of really how small the potential for bad debt really is. That reserve's about 29% of receivables, excluding open programs and less than 30 days accounts outstanding, and then additionally, life to date, the reserve is about 6.9% of rolling win, which is within the range we've discussed before....We're not going to change our credit policies and change our promotional policies. We stay consistent."
  • "The number of Singaporeans that come into the property is approximately 25%."

OTHER

  • "Group rooms business and pricing is picking up for 2013. We are investing for the future in Las Vegas, renovating 1,000 rooms in our Venezia tower, remodeling and redesigning the gaming floor at the Venetian, and introducing a whole new entertainment offering in the fall."
  • "With the redemption of the preferred stock in November of last year, that will benefit, obviously, the 2012 earnings per share numbers, all leading towards a strong EPS growth."
  • "In 2012, probably expect to have maintenance capital between $450 million and $500 million and then going to 2013 and 2014, about $450 million each, and that's really spread around the portfolio of properties that we have."
  • "With regard to Spain, obviously, we would need to see enabling legislation. We would like to see clarity with regard to kind of the economic situation there."

WMS YOUTUBE

In preparation for WMS's F1Q 2013 earnings release Thursday, we’ve put together the recent pertinent forward looking company commentary.

 

 

YOUTUBE FROM FQ4 2012 CONFERENCE CALL (8/6)

  • "We expect economic conditions and the gaming industry sentiment to remain challenging....We believe it will take several quarters of meaningful improvements in general economic conditions before we see operator confidence build to the point where they're notably increasing annual capital budgets, and right now we're not expecting such a rebound."
  • "We expect to see little, if anything, in meaningful improvement in the replacement market in fiscal 2013 compared to fiscal 2012. In addition, we continue to expect an overall reduction in demand for shipments to new casino openings and expansions over the next 12 months."
  • "For our first quarter, we expect revenues to approach the levels of revenues in the September 2011 quarter with stronger revenue growth in the back half of the fiscal year."
  • "We expect R&D in fiscal 2013 to increase to a range of 15% to 16% of revenues and that SG&A depreciation will also increase as a percentage of revenues."
  • "We expect to continue to maintain particular emphasis on increasing the mix of Wide Area Progressive units and our proprietary Adaptive Gaming technology units." 
  • "Given the current marketplace environment coupled with the expected range of VLT pricing and ongoing market pressures, average selling price in fiscal 2013 is likely to see greater variability on a quarterly sequential basis depending on the product mix in the given quarter. On a quarterly basis, we expect fiscal 2013 will follow the path over the last several years with September being the quarter with the lowest revenues and operating margin followed by sequential growth expected in each of the subsequent fiscal quarters."
  • "Our floor share of new casinos continues to average in the high teens."
  • "We believe our success with conversion kit sales reflects the improvements in game content and, most importantly, results in the ongoing upgrade of our game content across existing casino floors, a key goal in addressing our customers' focus on earnings performance."
  • "With a healthy number of open orders for participation units, we expect growth in the installed participation footprint in fiscal 2013. We do expect aggregate capital spend on gaming operations equipment and property, plant and equipment to decline in fiscal 2013 by 20%. The participation footprint expansion, coupled with placements of VLTs in Illinois, of gaming machines on operating leases and the completion of two large PP&E projects in early fiscal 2013 will continue to drive higher depreciation in fiscal 2013."
  • "We expect the increased spending on operating expenses will largely offset the increased gross profit contributions from higher revenues in fiscal 2013."
  • "During the June quarter as well as throughout fiscal 2012, we used our financial flexibility to support our customers in their purchase of new gaming machines to refresh their casino floors. In light of their constrained capital budgets, we believe this to be a prudent and practical use of our financial strength and we expect this to continue throughout fiscal 2013. We have continued to experience bad debt expense at 1% or less of revenues and our percentage of age notes over 90 days remain below our competitors, so we will continue to use prudence and discipline in the granting of credit."
  • "Our social gaming pursuits were bolstered by the Phantom EFX acquisition and we recently directly published a suite of slot-based games with our Jackpot Party Casino on Facebook. I'm pleased to note that the initial beta results are far exceeding our expectations."
  • "The competitive pressures from a [participation] product standpoint have never been this aggressive.... the for-sale product business is very competitive as well." 
  • "In Q4 we saw a $700 increase quarter over quarter, which we expected. I don't think you'll see any major upticks or downticks in the pricing going forward. I think when we have our new cabinets coming out next fiscal year, there will be an opportunity for us to look at price again and hopefully the market conditions will be more improved there."
  •  [Flattish EPS FOR 2013?]  "We didn't give that guidance, but if you are interpreting that literally, it's probably pretty close."
  • "So I think ASP, the upside is limited for fiscal 2013 on ASP. But I do believe that in the second half of the year when we launch our new products and cabinets and form factors, we'll have an ability to see an uptick in our pricing. But I'm not sure, given the first half, if it will offset it enough."

Starbucks As a Macro Play?

Takeaway: The top-line performance of Starbucks ($SBUX) is highly levered to the strength of the US economy.

Starbucks releases its earnings tomorrow, and our Restaurant sector research team expects the company to report a shortfall versus both sales and earnings estimates for the quarter.

 

As the chart below suggests, Starbucks sales are highly levered to employment and the overall health of the economy. Industrial production is a good proxy for the overall health of the US economy.

 

Starbucks As a Macro Play? - star


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 80.64%
  • SHORT SIGNALS 78.61%
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