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EAT TRACKING EXPECTATIONS

Brinker’s shares represent the best way to play casual dining on the long side, in our view, particularly if the jobs picture in the United States continues to stabilize.  This morning, Brinker reported 2QFY13 of $0.50, in line with consensus, and sales of $690mm slightly missing $693mm consensus.

 

In a difficult industry environment, Chili’s produced earnings in line with expectations.  While the top-line was weaker-than-expected, Chili’s still leads the industry.  The headline company same-restaurant sales growth figure was 1% but a holiday shift negatively impacted 2QFY13 comps by 60 bps, implying a 1.6% normalized comp versus 1.7% consensus.  3QFY13 should benefit 3QFY13.

 

Restaurant-level margin improved by 30 bps versus 2QFY12, to 15.7% of sales, but missed the consensus expectation of 16.1% due to lower-than-expected sales.

 

While not an impressive quarter, the 2QFY13 result demonstrated that Chili’s has invested in its brand to enable it to continue to take share.  Over the short-term, it’s difficult to discern the impact that Darden’s “price war” will have on Brinker.  Judging by management’s commentary today, the company does not see increased discounting as a threat to its progress toward achieving its guidance. 

 

Guidance for FY13 was reiterated at $2.30-2.45, or +17-25% growth versus FY12.  Same-restaurant sales growth for the year is still expected to be 2-3%.  Long-term guidance is for margin to be expanded by 400 basis points, driven by unit growth of 1-2% and same-restaurant sales of 2-3%, culminating in 10-13% EPS growth.

 

 

Near-Term Points Worth Noting

  • Comparisons are difficult for Chili’s over the next two months
  • The rate of industry hiring is decelerating
  • Food inflation is accelerating and pricing is challenging in the current environment
  • Competitive dynamics point to increased margin pressure, especially given the impact of Darden’s stated plan to sacrifice margin to gain traffic

EAT TRACKING EXPECTATIONS - brinker earnings recap

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


IGT F1Q13 REPORT CARD

Takeaway: IGT thesis remains intact: better capital deployment, strong EPS growth, and cheap valuation.

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

  • SLIGHTLY BETTER: While the topline was clearly ahead of the Street and our estimate we think that the the core results were weaker than the headline.  Product sales were strong but benefitted from the recognition of deferred units.  Core gaming operations continue to disappoint but gross margins and better cash flow were encouraging.  Overall, the EPS beat vs. our numbers was really a combination of the lower SG&A, R&D, D&A and rentention accruals in the quarter. 

2013 GAMING OPERATIONS REVENUE AND GROSS PROFIT

  • SLIGHTLY WORSE:  F1Q 2013 gaming ops revs fell 4% but margins showed improvement. Installed base was up 2%.  IGT is still targeting flat gaming ops yield in 2013 as well as better gross margins
  • PREVIOUSLY:  “In 2013, we expect Gaming Operations revenue and installed base to be about flat with 2012, while gross margin and profit per unit are expected to show modest improvements.”

 

GAMING EQUIPMENT SALES AND MARGINS

  • BETTER:  Product sales revenues soared 30% YoY and margins rose 4% YoY, both better than expected. Uptick in margins was due to higher non-box sales and discount sales were down significantly. $5MM in royalty settlement fees also helped.
  • PREVIOUSLY: “On the strength of our VLT business in Canada, Ohio, and Illinois, where we expect to enjoy leading ship shares, we anticipate our product sales revenue and gross profit to deliver double-digit increases, while gross margin may be slightly softer due to mix.”

IGTi REVENUE AND MARGINS

  • SAME:  IGTi revenues and margins were $1MM and 1% lower YoY, respectively.  Online casino customers, including Italy, rose 20%.
  • PREVIOUSLY:  
    • “Moving forward, we expect some additional costs and, in the short term, lower revenues and gross margin in our IGTi business as this restructuring plan is executed. On the positive side, these actions are anticipated to reduce annual operating expenses in our IGTi business.”
    • “At our IGTi group, we expect to see continued growth in our mobile real-money wagering business consistent with our past trends.”

ADJUSTED OPERATING MARGINS

  • BETTER:  Adjusted operating expenses were 32% of revenues for the first quarter compared to 34% of revenues in the prior year quarter.  IGT sees more room for improvement.
  • PREVIOUSLY: “For the year, adjusted operating expenses were about flat as a percentage of revenue, and we expect this trend to remain consistent into 2013.”

MEGAJACKPOTS  

  • WORSE:  Megajackpots drove gaming ops revenues and average revenue per unit per day lower.  Margins, however, did improve more than 200bps YoY as IGT managed their capital investment.
  • PREVIOUSLY: “We expect to stabilize our MegaJackpot revenues."

SG&A GROWTH

  • SAME:  F1Q SG&A grew about $10 million or 12% YoY, with almost the entire increase attributable to investments in Interactive. The YoY increase should moderate in 2H and particularly in 4Q as IGT laps the consolidation of Double Down.
  • PREVIOUSLY:
    • “The vast majority of the growth in SG&A this year has been related to our Interactive businesses. That's the IGTi business and then, obviously, the acquisition of Double Down. In fact, the base SG&A has grown less than double-digit dollars. So we would expect to continue to invest in the Interactive business, but at a rate that's less than the revenue growth expectations going forward. And then in the base business, we'd expect again low, low single-digit SG&A growth.”
      • Q: So if I think about that just empirically, maybe $30 million in incremental SG&A?
      • A: I think that's about right on the growth next year, recognizing that we have one more quarter of Double Down next year than we had in the prior first quarter

GAMING OPERATIONS CAPEX

  • BETTER:  Gaming ops capex was about $30MM in F1Q 2013.  IGT expects total capex to be at or below year-ago levels for FY 2013, however this quarter certainly ran materially below last year.
  • PREVIOUSLY: “I would think about capital in the Gaming Operations business as flat to down slightly.”

GAME OPS YIELD

  • SLIGHTLY WORSE:  Average revenue per unit per day in the first quarter was $46.80, down 7% over the prior year quarter and down 8% sequentially.
  • PREVIOUSLY: “I would expect that there will be continued pressure on yield, so we're taking active steps in the quarter and have been for the last quarter”

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IGT F1Q13 CONF CALL NOTES

Takeaway: Continue to like prospects over the near and intermediate term due to strong EPS growth, better capital allocation, and cheap valuation

IGT F1Q13 CONF CALL NOTES

 

 

"Our robust first quarter results.... provide a great start toward what we expect will be our fourth consecutive year of double digit growth in adjusted earnings per share from continuing operations"

 

- Patti Hart, CEO of IGT 

 

CONF CALL NOTES

  • Gaming operations:  remains challenged for a variety of reasons.  However, focus on profitability is bearing fruit. 
    • Continue to focus on managing this business for cash flow and profitability
    • That said they are encouraged by the performance of some of their recent releases
    • Developed a new rapid progressive that they will launch next month
    • They are launching more direct marketing programs for MegaJackpots
  • Product sales:  confident that they will continue to gain share
    • Takes the Cake and Dolly Parton very popular
  • Interactive:  impacted by the closure of their international poker network
    • Are now able to launch IGT titles to the online casino in a very efficient fashion. Still expect the DD acquistion to be GAAP accretive by 2014
  • Customer sentiment is improving towards IGT's products

Q&A

  • What was the CA number shipped in the Q? 1,600 units.  Expectation for CA remain consistent with what they have previously disclosed.
  • Domestic replacement market is continuing to bump along as they expected.  They remain cautiously optimistic on overall replacements and their ability to take more share.
  • High-Five's recent success in the social gaming space?  Not concerned about them in the social gaming space, despite their ability to make good games.
  • Gaming operations yield performance?  Still possible to get to flat YoY yields by YE but are monitoring that.  Their approach to gaming operations is a fulcrum approach: Doing a lot to market direct to consumers on their social gaming platform. They will not chase yield through inefficient capital allocations. Will not use capital to drive yield. 
  • Size of the ASP decline in NA: really primarily VLT driven, but they also had lower MLDs as a % of total shipments in the quarter which were particularly high last year. Expect margins to be comparable to prior year in non-box sales.  Less discounting in the quarter on boxes also helped margins.
  • Game operations margins were improved due to lower jackpot expense and lower D&A
    • There is more room for D&A to continue to go lower and help margins.  However, they are also working hard on licensing fees to contribute to margins.
  • Ship share in December?  Pretty confident that it remained in the high 30's.
  • Success metrics of their game operations: time of games in the field, churn in their install base, yields, measure effectiveness of direct to customer marketing.  MegaJackpots have been traditionally a hit driven business. 
  • Is the $30MM of capex for game operations sustainable? They will put more capital to work if they find appropriate opportunities. They still expect to be at or below last year's capex number.
  • Reason that the acquisition related costs were down was because they re-marked their expenses at year end. They don't do as comprehensive of a review each quarter. Retention and amortization is static throughout the year but retention payment will likely go up throughout the course of the year. 
  • Discounts in NA for game sales were down materially in the quarter. The environment remains very competitive as it has been over the last year.
  • They aren't updating guidance because it's just too early in the year and there is no extraordinary reason to raise or lower guidance right now. There is a lot of timing in play in some of the sizable orders. International markets are still struggling. Also, underlying trends in gross gaming revenues for the market as a whole are also fluctuating.
  • Operating expense increase YoY is almost all attributable to the investments they are making in the Interactive business
  • Outlook for international? Continue to invest in that business. The market is difficult to predict. They are still looking for slight growth in the year. 

 

HIGHLIGHTS FROM THE RELEASE

  • EPS outlook of $1.20 to $1.30 unchanged
  • Gaming operations: 
    • YoY revenues fell due to lower MegaJackpots and was partially offset by higher lease operations
      • Install base: 56,800 (+2% YoY)
      • Yield: $46.80 (-7% YoY)
    • Gross margins improved 200bps "primarily due to an increase mix of lower-yielding higher-margin lease operations games and lower jackpot expenses"
  • Product Sales:
    • Revenues "increased 30% to $235 million in the first quarter, due to increased North America machine sales related to Canadian and Illinois VLT customers, as well as increased non-machine intellectual property licensing fees"
      • 7,200 units recognized and 6,800 shipped (5,100 replacement) 
    • "North America gross margin increased... largely due to increased non-machine revenues, which included $5 million of royalty settlement fees."
    • The YoY drop in ASPs in NA was "mainly due to an unfavorable pricing mix related to increased VLT sales."
  • Interactive: DoubleDown sales were better than expected while IGTi was weaker
    • DoubleDown: Revenues of $41.3MM and gross margin of 60%
      • DAU: 1,462MM; Booking per DAU: $0.31
    • IGTi: $11.6MM of revenues at a 51% gross margin

TRADE OF THE DAY: DRI

Today we shorted Darden Restaurants (DRI) at $45.98 a share at 12:43 PM EDT in our Real-Time Alerts. We are re-shorting one of Hedgeye Restaurants Sector Head Howard Penney's Best Ideas (on the short side). Nice short selling opportunity at the immediate-term TRADE overbought signal; we shorted on green, we'll cover on red.

 

TRADE OF THE DAY: DRI - DRI


TAP - MillerCoors STRs Shake out some weak shorts

One of our preferred shorts (TAP) is up over 1% today – SABMiller reported STRs (shipment to retailers) of (1.1%) for the 4th quarter and STWs (shipments to wholesalers) of (-1.4%) for the MillerCoors JV in which both TAP and SAB participate - both results likely ahead of admittedly modest expectations.

 

The result represents sequential improvement from Q3 where STRs declined 2.4%.



Before investors break out the champagne (or beer), some context is needed – Q4 is the easiest STR comp of the year for MillerCoors, lapping a down 3.3% in Q4 2011.  Further, the spread between STR’s and STW’s (30 bps) indicates that only a small bit of the build-up in distributor stocks was worked through this quarter – STRs declined more than STWs by 70 bps in Q1 and 170 bps in Q2, corrected by 20 bps in Q3 and 30 bps in Q4.



Bottom line, the incremental information today isn’t enough to shake us off our short thesis, but was apparently enough to shake out some weak shorts.



Being early on shorts is painful, we get it – and while we recognize TAP is inexpensive, and shorting inexpensive names isn’t our go to move, we are sticking with our “cheap, for some very good reasons” meme that we have been running with on TAP.

 

Call with questions.

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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