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Today we bought the Morgan Stanley China A Share Fund (CAF) at $23.93 at 12:40 PM EDT in our Real-Time Alerts. Buying China back on an immediate-term TRADE Oversold signal in the CAF. See Darius Dale's intraday note on China for details in risk managing the catalysts for this position.


TRADE OF THE DAY: CAF  - image001

Key Retail Macro Chart

Takeaway: Key Retail Chart: Apparel inflation spreads, which have a direct gross margin impact, are trending slightly positive.

Here’s a key retail chart. With the apparel industry at peak margins (both cyclical and secular) there is one chart we look at more than any other – and that is the group’s margins compared to the spread between industry buying costs and selling costs. The trend suggests that buying costs are trending below the change in retail prices (ie margin bullish). We need a lot to go right in order for this to sustain itself throughout 2013. But it’s a positive trend nonetheless.  


Key Retail Macro Chart - macro2


Key Retail Macro Chart - macro1


Buffalo Wild Wings is screening less conclusively as a short as chicken wing prices have declined dramatically over the last few weeks.  We believe that the “conversation” around BWLD’s main input cost has changed significantly and this has important implications for our short thesis.


Hedgeye’s macroeconomic outlook has differed from consensus of late but market prices are vindicating the stance that a stronger dollar, and the lower commodity prices that tend to accompany that, is boosting the purchasing power of the American Consumer. 


From Buffalo Wild Wing’s perspective, the implications of this are two-fold:

  • Top-line demand should benefit from the stronger dollar, overall consumption growth
  • Chicken wing prices should come down as a derivative effect of a stronger dollar, lower corn prices

We believe that issues at the company level preclude us gaining sufficient conviction on the top line to suggest buying BWLD, but some facts pertaining to our short thesis have changed.



Traffic Still a Potential Problem


We retain a healthy level of skepticism that Buffalo Wild Wings will ultimately meet consensus expectations.  While the consumer, overall, seems to be holding up well despite the payroll tax increase, casual dining is not a point of strength.  We doubt there are any restaurant companies, particularly within casual dining, that have the power to raise prices 6% year-over-year and not see a drop off in traffic growth.  Management has implied that tests have “gone well” with the changes in how portions are sized (by weight versus number of wings) but we believe that bulls may be underestimating the sensitivity of traffic to price increases.




Wing Prices Coming Down?


Over the last year we have heard management’s tone on commodity costs change drastically.  This thorn in the company’s side may finally be going away as prices seem to be steadily declining.  Management is aiming to bring cost of sales down to 30%, from 32% in 4Q12.  This is largely dependent on how comps trend but wing prices coming down should make this goal easier to achieve. 


At this point, it is difficult to know where wing prices will trend, but if prices were to continue to trend lower, it could have a dual impact of improving sentiment on the stock and supporting EPS expectations.







Call with questions.




Howard Penney

Managing Director


Rory Green

Senior Analyst


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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




  • GOOD AND BAD:  Q4 was a big miss from consensus although relative to our estimates Borgata was the only real negative standout.  Guidance was also weak.  However, BYD made a big move in selling Echelon:  improves the balance sheet, removes the big overhang of a restart of that expensive project, and eliminates $16m in ongoing costs




  • WORSE:  Ex Peninsula, wholly-owned EBITDA post corporate expense came in at $65.7MM.
  • PREVIOUSLY: "We expect wholly-owned EBITDA after the deduction for corporate expense to be in the range of $70 million to $75 million."


  • SLIGHTLY BETTER:  Promotional environment has stablized.  BYD saw an improvement in trends starting in December and it has continued into 1Q.  Customer count is up; spend per visitor is down.  The higher end of database continue to do well.
  • PREVIOUSLY: "I wouldn't say that promotions have abated. I think they're at very much kind of the same state they were in through the summer. What we have seen is spend per visitor in the Las Vegas Locals segment flatten out."


  • WORSE:  Visitiation and spend per visit were lower in the casual gamer segment.  The market remains very competitive.
  • PREVIOUSLY:  "Our Midwest and South region...is currently the healthiest region of the domestic gaming industry and the most robust part of our business."


  • WORSE:  Sandy really hit AC hard with EBITDA falling 63% in 4Q.  Guidance was also well below the Street for Q1.
    • "Atlantic City.... the... environment remains competitive. Weakness was concentrated in our table games business, where both volume and hold fell year-over-year. This accounted for almost the entire EBITDA shortfall. Still, there were encouraging signs as our slot and non-gaming business showed growth. Borgata remains the undisputed market leader and we expect it will be Atlantic City's premier destination resort for years to come."
    • "Revel spent a lot of marketing dollars, they were very aggressive in buying business, in trying to gain trial and gain some traction. We increased our promotional dollars slightly. If you look at some of our slot promotional credits, they're up slightly year-over-year, but not substantially, and not compared to what the rest of the market is doing."


  • WORSE:  4Q revenues fell 2% YoY while EBITDA dropped 8% YoY, even though BYD gained 250bps in market share.  
  • PREVIOUSLY: "As expected, we saw growth resume in our Downtown business segment in the third quarter and we anticipate this positive trend will continue in the fourth."


  • SAME:  Introduced 1,000 new penny slot games in 4Q
  • PREVIOUSLY: "The Las Vegas Locals business remains extremely competitive...we're continuing our efforts to grow business from casual players. Penny denomination games are popular with these guests and are one of the few segments of the Locals market to show growth in recent months. So we've recently taken steps to ensure we are well positioned in this area and are nearing completion of the rollout of some 1,500 new penny themes across our Southern Nevada properties. Starting today we have begun to aggressively promote these new games. While we believe this initiative will be attractive to slot players, video poker will remain an essential part of our business, especially among our core players. We will continue to offer our guests what we believe is the most competitive video poker product in Las Vegas."


  • WORSE:  BYD took a impairment writedown of $17.5MM on its Shreveport facility.  Their 'best' property, Delta Downs grew 2% in state-reported gaming revenues in 4Q.
  • PREVIOUSLY: "We know that in certain markets like Tunica, Mississippi and Shreveport, Louisiana, there is a significant amount of competition both within the specific geographic market as well as within neighboring states. But I've got to tell you, I feel awfully good as to where we perform in those markets relative to our competitors that post those results. And you can see it in the revenue numbers that are published especially in Louisiana as it relates to Sam's Town Shreveport."


A Look Back at the Month in Consumer Staples

This note was originally published March 03, 2013 at 13:14 in Consumer Staples

February saw 4/7 sectors in our universe outperform the broader market (non-alcoholic beverages just underperformed the S&P 500 during the month).  Tobacco lagged on regulatory concerns and the protein sector suffered when TSN suggested that trends in the current quarter were weaker than originally anticipated.


A Look Back at the Month in Consumer Staples - Sector performance YTD


This month we added something new - we took a look at the sector’s performance by P/E quartile – unsurprisingly, the 3rd quartile (P/E ratios between 16-20.7xs) had the strongest monthly performance (HNZ was in this quartile).  The HNZ transaction drove multiples broadly higher in large cap staples name, several of which traded in the same P/E range – CL, CLX, PEP.  MDLZ was the weakest performer during the month and the only negative performance within that P/E quartile.


A Look Back at the Month in Consumer Staples - Monthly PE by Quartile


Similarly, within the 2nd P/E quartile (P/E ratios between 13.3 and 16.0x), HNZ appeared to have been the primary driver of monthly performance – CPB was the best performer in that quartile (+12.1%).  The quartile’s performance also benefitted from KMB (+5.3%) and GIS (+10.3%).


The 1st P/E quartile (P/E ratios less than 13.3xs) was all about STZ (+36.7%) – the quartile would have been up 1.7% but for STZ.  A second of our preferred names, (STZ, at the time, being the first) ADM, was a significant contributor to the quartile’s performance, +12.4% on the month.


Higher multiple names in the sector had a good month was well, with SAM (+10.8%) and BNNY (+17.0%) the best performers.  Multiples expanded across all quartiles as prices continued to move higher and estimates for 2013 were lower to unchanged coming out of Q4 earnings season for most sectors (protein being the notable exception).


A Look Back at the Month in Consumer Staples - Beginning End of Month PE by Quartile


A Look Back at the Month in Consumer Staples - EPS Revision Chart


Consistent with a broad-based rally in the consumer staples sector, there hasn't been a significant divergence between high and low beta names.  If anything, lower beta names have outperformed in the wake of the HNZ acquisition, likely setting the stage for some mean reversion in lower beta names as the takeout speculation wanes.


A Look Back at the Month in Consumer Staples - Beta Chase 3.3.13


This is a familiar chart for those of you who have been following our work - it is also the chart that keeps us broadly cautious across the sector.


A Look Back at the Month in Consumer Staples - Staples Forward PE 3.3.13 


The anomalous relationship between the XLP and the 10 year that has existed since 2009 persists...


A Look Back at the Month in Consumer Staples - XLP vs. 10 year 3.3.13


...despite the fact that the yield of the XLP has become marginally less attractive (combination of the yield on the 10 year creeping up and the price performance of the XLP).


A Look Back at the Month in Consumer Staples - Yield spread


Some clients have suggested to us that the move up in the group post-HNZ has been short-covering - the data doesn't appear to bear that out.


A Look Back at the Month in Consumer Staples - Short Interest February


Finally, our "XLP vs. Economic Surprise" chart suggests that continued strength in the economic surprise index could signal a pause for the staples sector.


A Look Back at the Month in Consumer Staples - XLP and Economic Surprises 3.3.13


Where does that leave us?


We are going to focus on three charts - overall sector valuation, "beta chase" and economic surprise.  These suggest to us that we could see a pause in the staples sector as sentiment surrounding the broader economy improves, valuation becomes more relevant and takeover speculation recedes.  We would look for relative underperformance in the lower quality, lower beta names that have seen a move up in the wake of HNZ (TAP, GIS, CPB).  Our most/least preferred list remains relatively unchanged:


Most preferred

  1. ADM - play on upcoming crop year (BG should work as well)
  2. BUD - least expensive large cap staples name (replaces STZ on our preferred list due to unfavorable risk/reward)
  3. CAG - valuation remains compelling, estimates remain too low
  4. NWL - valuation + stealth housing play

Least preferred


  1. KMB - robust valuation plus deteriorating earnings quality (CL works here as well)
  2. TAP - valuation support but zero business momentum
  3. GIS - run up post-HNZ is unwarranted (CPB eventually, but not yet).


Didn't think we'd ever see it but BYD creates value by selling Echelon which overshadows still difficult fundamentals



"Our highest priority is strengthening our balance sheet.  The sale of the Echelon site is another important step in the ongoing effort to improve our long-term financial position. While we remain committed to the Las Vegas market, we determined that developing a large-scale project on the Las Vegas Strip was not consistent with our current strategy. We were also encouraged to see sequential improvement throughout the quarter in our Las Vegas Locals business, as our initiatives in this market began to pay off.  We remain focused on improving our core business, successfully integrating the Peninsula assets, and finding new ways to drive revenue and EBITDA growth throughout the business."


- Keith Smith, President and Chief Executive Officer of Boyd Gaming.




  • Echelon transaction: was completed this morning and funds have been received ($157MM); will use proceeds to repay debt; the sale will remove $16MM in annual costs associated with this site 
  • Customers have turned cautious in past couple of months due to economic uncertainities (i.e. fiscal cliff); higher payroll tax also affecting consumer behavior.
  • North California/South Florida agreements offer additional opportunities
  • LV locals:  low hold at sports book affected results.  Trends improved in December and it has continued into the 1st Quarter.
    • Also introduced 1,000 new penny slot games 
  • Promotional environment in locals markets is stabilizing
  • Sees modest improvement in LV Locals in 2013
  • Visitation from Hawaiian base has been good; gained 250bps in share in Downtown market; believes that the performance will continue to be strong.
  • Midwest/South: remain competitive market; while core players held up, casual gamers spending and visitation declined
  • Delta Downs:  annual record in EBITDA and coin-in
  • Kansas Star:  property opened 5 new F&B outlets in December; will open 4,200 ft arena by mid-2013
    • 1Q guidance:  will see higher marketing spend; winter weather has been a challenge. But still optimsitc on generating $100MM in EBITDA annually
  • Borgata: forced to close Oct 28-Nov 2 due to Sandy; saw 5,000 room cancelations in Oct/Nov.  23% market share in January.
  • Peninsula:  prelim purchase price accounting for the acquisition will impact D&A and interest expense:
  • Corporate overhead from Peinsula - will allocate $3MM in 2013
  • Total debt: $4BN ($1.2BN-Peninsula, $1.5BN outstanding on credit facility)
  • Cash: $158MM ($32MM Peninsula)
  • Secured leverage ratio: 3.89 vs 4.25x covenant
  • Total leverage ratio:  7.35x vs 7.7 covenant
  • Dania/Echelon will allow ratio to improve by a half turn
  • Borgata debt: $811MM ($20MM oustanding under their $60MM credit facility); cash balance was $34MM
  • 2013 corporate expense: $46MM ($4.5MM from Peninsula)
  • 2013 depreciation: $90MM (Peninsula), $137MM (Boyd), Borgata ($60MM)
  • 2013 Boyd interest expense: $285MM ($86MM Peninsula-$15MM related to purchase price accounting for Peninsula note, $84MM Borgata)
  • 2013 capex: a little above 100MM ($15MM Peninsula, $11MM Kansas expansion $20MM Borgata)
  • 1Q guidance:  Wholly-owned EBITDA after corp expense: $125-$130MM; (Borgata $25-27MM)
  • 1Q EPS: loss of 5 cents to loss of 10 cents (includes purchase price accounting representing 11 cents or $15MM)



  • I-gaming NJ opportunity: $200MM-$1BN; will leverage opportunity with Bwin
  • Kansas Star trends:  has already developed a very strong following. 
  • EBITDA impact from LV sports book unfavorable win:  half of the difference in YoY EBITDA; 
  • Focused on improving balance sheet
  • LV locals: customer count is up; spend per visitor is down; higher end of database continue to do well
  • Peninsula acquisition mgmt fee structured: 2% of net revenues and 5% of EBITDA (effective as of closing of transition and also in release)
  • Echelon:  LVE will receive $187MM
  • Echelon:  $16MM recorded as returned pre-opening (storage, insurance, security, property tax)
  • Delay in tax refunds hurting consumer
  • Dania: was running at a loss of $4MM per year
  • Refinancing of sub notes? Possible.
  • LV locals:  MGM building arena in 2013 will create jobs.  A lot of momentum coming from current LV projects.
  • I-gaming will operate under the Borgata license; MGM, as 50% owner, will also participate in the site.
  • Tax loss carryforwards:  Echelon: $750MM tax loss; Dania: $60MM tax loss
  • Average interest cost on Borgata debt:  $400MM at 9.5%; $400MM at 9.75%
  • Southern Lousisiana: strongest consumer market in the country based on strong gas/oil markets in Texas
  • Borgata property tax appeal:  going to trial in late March
    • Other AC property tax appeals:  have already settled with the city and received substantial tax credits
  • Capital allocation:  will use FCF in maintenance capital and debt repayments; acquisitions will only be in the future (greenfield will be the farthest on the list)



  • Echelon transaction:  A portion of the proceeds will be paid to a third party to fulfill the Company's obligations to LVE Energy Partners, LLC.  Following this payment and other closing costs, Boyd Gaming expects to receive approximately $157 million in net proceeds from the transaction.
  • 4Q Adjusted EBITDA was $100.9 million, compared to $114.3 million in the year-ago quarter. 
  • 4Q Wholly-owned Adjusted EBITDA was $86.8 million, an increase of 13.7% from the fourth quarter of 2011. 
  • Significant items excluded from Adjusted Earnings in the 4Q 2012 include the $993.9 million impairment charge associated with the Echelon site; $39.4 million of impairment charges associated with the Company's excess land holdings in North Las Vegas and Pennsylvania; and a $17.5 million impairment charge associated with the Company's gaming license in Shreveport, La.
  • LV Locals:  Business levels strengthened at our Locals properties toward the end of the quarter.  This was primarily attributable to the introduction of an expanded offering of low-denomination slot product throughout the market, and related marketing programs
  • Downtown:  Due to previously announced reductions in BYD's weekly flight schedule, revenues declined at their Hawaiian charter service.  EBITDA at our Downtown operations was flat YoY before several one-time charges.
  • Midwest and South:   Regional operations were impacted by softness in visitation among casual players.
  • Peninsula:  From November 20 to December 31, 2012, the five Peninsula Gaming properties contributed net revenues of $56.9 million, and Adjusted EBITDA of $21.2 million.  The segment reported substantial growth from the prior year when Peninsula was a standalone company, due to a full quarter of contributions from the Kansas Star Casino, which commenced operations on December 20, 2011.
  • Borgata:  Adjusted EBITDA was $14.0 million, down from the $37.9 million reported in the fourth quarter of 2011.  Results were impacted by the effects of Superstorm Sandy, including the closure of the property for five days. 

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