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VFC: EPS and Inventory Still Too High

We've been negative on this one for a while, though admittedly wish we were louder into this earnings report.  Anyone who thinks that a global company with a portfolio of core cash flow generators layered with younger growth brands could escape the worldwide recession is out to lunch.  Now it's time for VFC to play catch up with the rest of their apparel brethren and take their lumps on margins while aggressively cutting inventories. 

 

The Street has cut numbers substantially for the next quarter, but the full year appears to be settling out in the middle of management's provided range of $4.70 to $5.00.  We think these numbers are still too high.  We're getting to something closer to $4.50.  The inventory clearing process (while ultimately positive for FCF) will hurt gross margins big time over the next couple of quarters.  With 50% of the problem lying in the European denim business, we think it will take some time to work through the inventory.  Last time we checked there weren't many major off-pricer's in Eastern Europe or Scandinavia.  Admittedly, 4Q is still a toss-up at this point given the easy margin and topline compares that resulted from the most volatile shopping season on record - but we don't have the confidence that management can proactively drive the entire portfolio this far out when it has so much on its plate. 

 

However, a couple of points are clear to us:

 

Inventories are coming down (-4% in Q1, should be -10% for the year) but it will take some time to get to manageable levels. Along the way, there will be gross margin pressure that likely persists throughout the remainder of the year. It does not take much GM% erosion to get to management's guidance. But forced inventory reduction could easily take out an extra point or two. Remember, VFC has been an apparel conglomerate for a number of years disguised as a growth company. Meaningful inventory reductions have not been part of the equation here for a long time.

 

Newer brands are finally showing signs of weakness as evidenced by a decline in 7 For All Mankind, negative sales in the outdoor segment, and negative mid single- digit comps in the newly-built retail operation.

 

Cost savings remains on track, but even cutting $100mm this year cannot offset leverage loss on the top line. This is not the kind of company where it pays to cut costs in a meaningful way. Portfolios of retail past (the JNY's and LIZ's of the world) virtually destroyed their respective businesses by cutting too much muscle.

 

While not the biggest takeaway from the quarter, we found it interesting that 7 For All Mankind reported sales declines, even with new store growth helping to grow the topline. We're not sure if it makes sense to continue to roll out high cost retail flagships when customers don't seem as interested these days in $200+ denim. We realize the brand is still evolving but it's never a great sign when a growth vehicle stops growing. Unfortunately, the success of The North Face is extremely difficult to replicate...

 

We wonder how quickly VFC can layer on acquisitions to offset the focus and reality of slowing core brands and maturing young brands? Is the long rumored DC shoe deal going to re-emerge? It better... (and at a fire-sale price).

VFC: EPS and Inventory Still Too High  - vfc sigma


ASCA: FROM BULL TO AGNOSTIC

We wrote about the potential for a big quarter in our note "ASCA: INCENTIVE TO BLOW OUT Q1".  However, the quarter was even better than our most optimistic scenario.  Property EBITDA beat us at every property and increased YoY at every property, save East Chicago.  Competing with Harrah's used to be a tough business.  All together, corporate EBITDA increased 21%.  We're in a recession?

 

ASCA: FROM BULL TO AGNOSTIC - asca q1

 

Margins were the story as revenues were just flattish.  Certainly, ASCA had an incentive to beat the quarter, as we discussed in the 4/12/09 note.  ASCA will be in the market to raise subordinated debt or extend the maturity of its credit facility.  The current credit facility expires in November of 2010.  Our thesis was that the credit markets needed to be pried open and a big quarter would be a good start.  Regional gaming credits trade at a big spread to other similarly leveraged consumer sectors because they are, well, gaming.  MGM, Station, Harrah's, etc. continue to weigh on the sector.  The "collusion" of strong regional gaming earnings releases (ASCA, PENN, PNK) could change that.

 

ASCA closed up 21% on the day, and rightfully so.  We are now projecting EPS and EBITDA of $1.48 and $379 million, respectively, for 2010.  We took a hack at EV/EBITDA as a valuation tool (4/20/09 - "GAMING REGIONALS:  THE FALLACY OF EV/EBITDA") since it doesn't incorporate refinancing risk or increasing cost of debt for companies with nearer term debt maturity or covenant issues.  For ASCA we've incorporated the incremental borrowing costs of a refinancing into our 2010 estimate so we will look at both EV/EBITDA and FCF yield for the stock.

 

After the big move in the stock and a significant hike in our EBITDA and FCF estimates, the stock looks like it is valued pretty close to perfection.  EV/EBITDA and FCF yield on our 2010 projections is 6.6x and 14%, respectively.  In the 4/20/09 note we pegged fair value at 6.9x and 15%, respectively.  Multiples could go higher and we are open to debate, but we'll sit tight for now.


Can’t Ignore These Crummy Data Points

Apparel took a nosedive in the sporting goods channel over the past week based on the latest SportscanINFO numbers. I'm quite surprised, actually, given that the trend has been so strong in the 5 weeks prior.

 

Can’t Ignore These Crummy Data Points - Footwear Apparel   Chart

 

This is not a 'sample issue' as the numbers also rolled over for footwear according to NPD (released late afternoon). The calendar lines up well - so no Easter issues, and weather does not appear to have been a major factor. The last biggie we looked for is a sample issue whereby a retailer (like Joe's, etc...) went bust and skewed the sample. But no dice on that front.

 

Bottom line? It was a lousy week. Period.

 

Can’t Ignore These Crummy Data Points - Sports Apparel Categories Table


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%

Squeezy Eats Last: SP500 Levels, Refreshed...

We can't say that we didn't warn the shorts - now we'll make some sales into their bids to cover as we surpass this morning's immediate term call for SPX 877 and push towards my refreshed immediate term target of 881 (dotted red line). Some people call this trading - I call it proactively managing predictable risk.

 

Higher highs are bullish, and the levels of support that I am looking at below (green lines in the chart) are also manifesting into higher lows (bullish). Alongside a US Dollar and Volatility Index (VIX) that are breaking down, this is all good, provided that you are a buyer of down moves associated with the Swine and the Stress...

 

Chasing on the long side or covering your shorts up here is not what I'd be doing. Trade the range with a bullish bias. Keep it tight. Stay disciplined on your levels.


KM

Keith R. McCullough
Chief Executive Officer

 

Squeezy Eats Last: SP500 Levels, Refreshed...  - sp500n


Heli-Ben Stays At Zero

These Fed decisions used to be so much more interesting. Now all Ben Bernanke has to do is follow the herd. He is now "seeing signs of consumer spending stabilizing" - gee, thanks for the memo. After a generational short squeeze in the Consumer Discretionary stocks, it's good to see that someone over at the Fed still pays attention to prices that are being marked-to-market.

 

Heli-Ben's decision making process is perfectly predictable at this point. This is feeding a baby bear market in the VIX, and being long this stock market, I am cool with that. On the margin, proactively predictable behavior provides a capitalist with opportunity. Now that the man has cut to zero, the only thing left is to do is "employ all the available tools" that will ensure that the free money machines remain open for business.

 

In the end, this politicization of the US Federal Reserve compromises the long standing integrity of the US Dollar. And I guess, as sad it is, this will continue to REFLATE asset prices from a rational price levels.
KM

 

Heli-Ben Stays At Zero - ben


ASCA: CONF CALL HIGHLIGHTS

AMERISTAR 1Q09 EARNINGS CALL: 

 

- Very confident that the impressive margin trends are sustainable throughout the course of the year

 

- Amendment should insure compliance with debt covenants through Nov 2010

 

- Black Hawk Colorado - 3 important regulatory changes

  • Operate 24/7 vs 18/7
  • Increase max bet limits from $5 to $100 which will allow them to expand table games (introduce craps & roulette)
  • Hotel to open on schedule & on budget in Fall 2009 - 540 rooms

 

- Anticipate a slight decrease in market share in 2Q09, since last year they strategically launched a marketing campaign to gain share.  Although share may decline, margins should be better

 

- Transition to nimbler and stronger organization should position them well in a recover

  • Guest service shows that they are stable or improving along all metrics

 

- Loss limit removal in Missouri is a big net positive, even after the higher state gaming tax rate

 

- Amendment will cost roughly $2MM per month in incremental interest

 

Q&A

 

- How much further can they improve margins/sustainability?

  • Confident that they continue to drive y-o-y improvement but unclear of what each Q's margins will be

 

- Confident that they can exceed past margins in Black hawk with new regulations and hotel openings

 

- $60MM left to spend to complete Blackhawk as of March 31, 2009

  • Will open the hotel in several stages but be 100% open by YE
  • Hotel will probably will be a little dilutive for the first few Q's will add deprecation of $1MM per month
  • They add table games and not have a big difference in slots

 

- ASCA no longer focuses on market share, they have a profitability strategy

  • Using their hotel in St Louis to grow profitability

 

- Dividend reinstatement? Thoughts?

  • Once they are done with Blackhawk they will have plenty of FCF to de-lever quickly despite dividend payments

 

- Would like leverage to be below 4.75x before year end 2009, ultimately they need to adjust composition of Sr debt (reduce it and issue non-sr)

 

- East Chicago, what drove the massive improvement in performance?

  • Horseshoe opening last fall hurt them
  • Just operating in a similar manor as the rest of their properties (New GM)

 

- Will average $12MM per Q on corporate excluding stock comp expense going forward

 

- Is the smoking ban discussion in Indiana off the table?  

  • Pretty much - today is the last day to do anything

 

- How much cage cash do they need to run the company?

  • Need 60-65MM of cash on hand to operate - not just cage cash though, includes working capital

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