Is PG the Canary in the Staples Coal Mine?

PG reported Q3 EPS this morning, beating consensus by $0.03 per share, largely on the strength of cost savings.  However, Q4 guidance was below the Street, which is odd as the company essentially maintained (took up the low end by $0.02) its full-year view (updated for Venezuela on 2/21).   There seems to be some bad sell-side math involved, but regardless, the market isn’t treating the stock all that kindly today after what has been a very good recent run.   At 14% of the XLP, PG’s weakness is dragging the broader staples sector lower, displaying significant underperformance relative to the broader market.

Some folks we have spoken with have called PG the canary in the coal mine with respect to the staples rally, but we aren’t quite there yet.  While PG’s results were “meh”, we don’t think they are sufficient to derail what have been the primary drivers of the strong performance of the staples group – yield, low volatility, as well as expectations that the group is poised for top-line improvement and margin expansion.

However, we don’t believe that CL’s results (tomorrow) will be a positive catalyst for the broader staples group.  Meanwhile, MO’s print should be constructive for the best performing staples sector on our screen today (tobacco).   All things considered, we continue to see limited upside to estimates across the staples group for the next one to two quarters.

 What we liked:

  • Beating EPS estimates is always better than the alternative
  • +3% organic sales growth is consistent with the company’s year to date performance
  • Productivity savings continue to provide income statement flexibility
  • Continued strong U.S. market share performance
  • Higher marketing spend in the quarter

What we didn’t like:

  • Q4 guidance was weak relative to consensus, but that seems to be bad modeling on the part of analysts
  • Company seems to be playing games with organic sales growth guidance – full year stays at 3-4% despite having reported +2% in Q1 and +3% in Q2 and Q3 – 4% is all but  impossible at this point.  On the flip side, on Q2, the company took up its full-year organic sales growth guidance to 3% to 4% from 2% to 4% when it became apparent that 2% growth was unlikely.  Full year sales growth guidance should have gone to 2-3%, with one quarter remaining.
  • Pace of gross margin improvement slowed
  • Only modest improvement in FCF (+$32 million year over year)

We don’t know for sure that the fat lady has started singing for the staples group, but what we do know is that, at some point, valuation will matter and that someone should at least let the fat lady know that we are going to need her sooner rather than later.


Call with questions as we have run out of colloquialisms,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

DPS - OK Results and a Poorly-Timed Short Call Help the Stock

Top line hit consensus and core EPS beat by $0.07, with the CEO citing weather and a weakened consumer as responsible for the softness in Q1 volume results. Convenient store trends still look good, and lower gas prices behind an increased marketing spend could be beneficial in the coming quarters.


What we liked:

  • Core EPS ahead of consensus ($0.53 vs. $0.46), up 15% for the quarter
  • Revenue in line with consensus at $1.38B, up 1% (price/mix +3%; volume -2%)
  • Reaffirms FY EPS $3.04-3.12; and 3% FY net sales
  • Reported GM 57.2% vs 57.1% last year
  • Hawaiian Punch comps will be easier in 2nd/3rd quarters
  • Incremental brand investment behind the launch of  the TEN platform, expected to exceed $30 million
  • Increased marketing spend scheduled for 2H


What we didn’t like:

  • Commodity costs increased this quarter, in apple prices in particular
  • Packaging and ingredient costs are expected to increase COGS by 2% in 2013, on a constant volume/mix basis
  • Non-carbonated volumes mostly hit hard, -4% (Snapple -2%, Hawaiian Punch -14%, Mott’s +11%).
  • Continued softness in restaurant (QSR) trends
  • Weakness in TEN launch, a strategic Carbonated Soft Drink (CSD) with less calories playing to the wellness trend


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst



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






  • "We have 9% or 10% of the revenue, but we have doubled the amount of EBITDA in the project and less interest than our expense."
  • [Cotai] "The trick is getting out of the ground and that will take most of 2013. Then in 2014 and 2015, we'll finish the job and get the structures and interiors installed. So, the labor situation for this phase has been handled already. As you know, we're financed at less than 2% for this project... The government has been very cooperative in giving us the labor we need to do the next phase of our construction."
  • "New junket space on the first floor has been performing very well but it's tables that have resulted from a reshuffling of tables elsewhere in the building so it isn't necessarily 14 incremental tables; it's 14 tables that we're getting higher yield out of by removing tables from elsewhere on the property. So, it's part of our continuing efforts to increase yield from our existing gaming units."
  • [Slot high-limit room] "It's being done in three phases so we don't impact our current business levels. Phase 1 has just completed. Phase 2 will begin after Chinese New Year and finish in mid-April. Phase 3, which includes the addition of private slot suites, will finish in August of this year."
  • "We all agree that the news in China is healthy. The news in Asia is healthy and most likely to continue. So that's the kind of feedback we're getting."
  • "On the 1st of January, the new smoking law came into play, which banned smoking in 50% of the square footage of casino spaces in the city. Frankly, looking at the numbers, anecdotal evidence, consumer feedback, it's been very marginal in terms of effect to the business. We haven't seen anything at this point that makes us unduly concerned."
  • [Cotai] "Will we get our tables for our hotel? Yes. We will. Our plans, our tables, our casino layout has been approved by the government. They don't let you build the building and not give you tables in China. That's part of the approval process."


  • "Obviously the convention business is the one that allows us the most stability to forecast what's going on. We feel really good about 2013. We are tracking above in room nights. We're tracking above in rates. We're seeing the same kind of strength going on into 2014. So that's going to lay the base and we hope that's going to really maximize a great hotel year. Obviously, we will still be focused on bringing in hotel guests who want to engage in every part of our non-gaming business. Super Bowl is this weekend and we are heartened with the business that we have coming in... Chinese New Year is right around the bend. So, we're very hopeful for a great first quarter."

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The Hedgeye Restaurants Team, led by Howard Penney, will be adding McDonald's (MCD) as a short to Hedgeye's Best Ideas List on Thursday, April 25th and we will be hosting a conference call at 11:00am EDT titled, "MCD: FLYING TO CLOSE TOO THE SUN" to detail our bearish stance on MCD FY13 EPS versus expectations.  






  • MCD stock is too far ahead of underlying fundamental performance of the company
  • MCD needs a new "Plan to Win"
  • Changing consumer preferences and competitive pressures are impacting U.S. business



Attendance on the live call is limited. If you are not a current client of our Restaurants research please email to obtain the dial-in information for this call and a copy of the presentation, or to learn more about our research. Please note there may be a fee associated with this call for non-subscribers.


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




  • BETTER: BYD's focus on operating margins finally began to show dividends as they came in with a pretty handy beat.  There was even renewed optimism that Locals revenues may actually turn the corner in coming quarters.





  • BETTER:  Operating efficiencies drove the higher than expected EBITDA.  BYD is cautiously optimistic going forward.  The Orleans, in particular, is doing well.  Spend per visitor in 1Q is flat.  March revenues improved dramatically from January/February or 'relatively flat' YoY. 
    • "We saw reasons for guarded optimism in this region later in the quarter, as business trends started to improve. The declines we saw in October to November moderated in December, and that positive trend has continued into the first quarter."
    • "Customer accounts are up. Spend per visitor is down."


  • BETTER:  They had solid traction on their marketing and advertising initiatives. EBITDA margins beat our expectations across the wholly owned portfolio
  • PREVIOUSLY: "We refined our marketing and advertising programs and made significant changes on our casino floor, and we began to see the benefits of this in the fourth quarter as visitation strengthened month-by-month across our Locals business. In 2013, we will continue looking for ways to improve our core business, not just in Nevada, but across our portfolio.


  • BETTER:  Consumers are becoming used to higher payroll taxes but offsetting that were the tax refunds coming in, improvements in investment portfolios, and strengthening economic conditions across many regions
  • PREVIOUSLY: "As other companies in our industry have already reported, gaming customers   nationwide pulled back in the fourth quarter due largely to economic uncertainty surrounding the elections and the fiscal cliff. While we actively worked to mitigate the impacts of these trends on our business, they did affect our operations. These trends continued into the first quarter. Our customers are now adapting to the impact of higher payroll taxes that took effect January 1; continued uncertainty from Washington over federal spending and taxes is affecting consumer behavior as well."


  • SAME:  Unemployment has declined below 10% and the pace of jobs have been accelerating. The housing continues to be in recovery mode.
  • PREVIOUSLY: "We are encouraged by signs of continued improvement in the Southern Nevada economy. The unemployment rate has been declining in recent months and home prices rose substantially throughout 2012. Las Vegas is still far from the boom years, but the trend is in the right direction, and we believe we will see modest improvement throughout this business in 2013."


  • WORSE:  Business levels have been weak.  BYD is focused on improving operating margins and continues to be optimistic with the upcoming redevelopment of Downtown.
  • PREVIOUSLY: "Visitation remains solid, especially among our Hawaiian customer base, and we gained 250 basis points in market share from the third quarter to the fourth, further expanding our leading position in the Downtown market. We believe those positive trends will continue. Our Hawaiian business remains strong and we will benefit from the ongoing redevelopment of Downtown, which continues to drive new business, new visitors and new residents into the area."


  • SAME:  Marketing spend rose in the quarter compared with the abnormally low levels during its introductory period. BYD expects visitation to grow, particularly with the opening of a 6,000 room arena in late June.  Kansas Star remains on track to generate $100MM in annual EBITDA.
  • PREVIOUSLY: "Looking ahead to the first quarter, Kansas Star will be comparing to a strong introductory period, when it was able to generate robust visitation with very little marketing spend. That is obviously not sustainable and customer reinvestment has increased to more realistic levels. Winter weather has presented more of a challenge in the first quarter of 2013 as well. But we remain quite optimistic about Kansas Star's long-term potential and we expect that Kansas Star's margins will remain the highest in the Peninsula portfolio and project that the property will generate about $100 million in annual EBITDA going forward."


Solid quarter, cheap stock


"We saw positive momentum across our operations in March, driving first-quarter results that were ahead of our previous expectations. We were particularly encouraged by improvements in our Las Vegas Locals business, as we were able to generate EBITDA growth for the first time in more than a year"


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



  • Expect to see better results from their initiatives as external factors abate.  
  • Feel good about the overall direction of their Locals business
  • Borgata: Remains the clear market leader 
  • Cautiously optimistic about the trends they are seeing:  investment portfolios growing, refund checks arrived, people are getting used to higher payroll taxes, Locals economy is improving (home sales, unemployment, etc.).  
  • They are seeing the highest level of development on the Strip that they have seen in years.
  • In AC the recovery from Sandy is strengthening as they enter their peak season
  • On track to complete the sale of Dania Jai Lai in May
  • Starting to see full benefits of the Peninsula acquisition
  • Intend to be amongst the first to offer online gaming in the state in NJ and are evaluating the best way to offer online poker in Nevada
  • Saw strengthening conditions in many of their markets, especially in the Locals markets.  Orleans has done well.
  • Diligently focused on improving operating margins in the Downtown market. 
  • South: difficult comp to a year ago Q. Delta Down still posted an all-time record quarter. 
  • Marketing expense was unusually low at Kansas Star when they first opened. The current spend run rate is more normal. This property remains on track to generate $100MM of EBITDA
  • Focused on improving margins in coming quarters
  • Balance sheet:
    • Debt: $4.1BN ($1.2BN related to Peninsula) 
    • Cash: $322MM ($30MM related to Peninsula) includes proceeds from Echelon sale. Post Q close a portion was used to redeem debt
    • Leverage: 3.89x Secured Leverage vs. 4.5x Max. 7.0x leverage vs. 7.75x covenant
  • Corporate expense includes $1.1MM for Peninsula
  • Increase in D&A is due to inclusion of Peninsula
  • Interest expense was $93MM excluding the LVE.  Interest expense should decrease by $2.5MM/Q as a result of the redemption of the notes.
  • Guidance for 2Q13:
    • EBITDA: 
      • Wholly-owned:  $132-137MM
      • Borgata:  $27-29MM
    • Tax rate of 35%
    • EPS: -$0.02 to $0.03



  • Comparables are getting easier. Locals seems to be recovering but it's too early to call what they are seeing a trend given what's happened in the past
  • What was the biggest driver to the strong margins in the Locals market?  On the marketing side they had solid traction on their initiatives.  Staffing was also much more efficient. 
  • Think that the size of the i-gaming market in AC will be in the range of the numbers being projected
  • Think that i-gaming will be a nice addition to their business over the next few years. Not worried about the impact on their brick and mortar operations.
  • Any impact from the table game offerings in MD?  Too early to tell.  Unclear how last year's storm will impact AC this year
  • Locals:  on a spend per visitor basis, they are running about flat. 
  • BWIN will provide most of the software, the capital commitment is really around the marketing expenses. Those expenses typically come out of the revenues generated anyway.
  • No significant change to the promotional environment in AC.  Some small pullback in marketing. 
  • Promotional activity is normal in the locals market
  • No plans to raise equity to reduce leverage
  • Property tax appeal at Borgata is currently awaiting trial. Feel confident that they will get a rebate.
  • More streamlined labor levels? 7000-8000 employees in Nevada. Just adjusted labor to demand levels.
  • Kansas Star is a locals market-oriented casino but the permanent facility should attract a broader base of players
  • No change in capex plan for 2013
  • Biloxi market is a very competitive market.  IP has been more of an efficiency story vs. a revenue growth story for them.  They have done a good job increasing the EBITDA at that property and that should continue.
  • With respect to the LV Strip, they are very interested in being on the Strip at the right time and with the right asset



  •  "As we look forward, we are excited by the potential of our online gaming strategy.  New Jersey and Nevada are now laying the regulatory groundwork for online gaming, and other states are considering legalization as well.  This emerging business provides a compelling opportunity to significantly grow and diversify our business, and we intend to take full advantage of it."
  • Las Vega locals: "Our new slot initiatives and associated marketing programs continued to perform well during the quarter, while EBITDA benefited from improved operating margins."
  • Downtown:  "Declines were the result of softness in business volumes early in the quarter.'
  • Midwest & South: "Winter weather impacted business levels early in the quarter.  However, trends began to improve across the region in March."
  • "The Peninsula properties performed in line with our expectations, including the Kansas Star, which opened a permanent casino and five new food and beverage outlets in late December."
  • "Borgata significantly outperformed the Atlantic City market in slot, table game and poker revenue, further increasing its leading market share as the region continued to recover from the impact of Superstorm Sandy." 

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