HBI: Bad Core, Good Acquisition

Takeaway: We don't like the base business one bit. But HBI is sandbagging on acquisition accretion. That's tough to bet against, for now.

Conclusion: We think that HBI has some fiercely opposing investment characteristics right now. It’s got abysmal top line growth and tougher margin compares shaping up on one end, but low expectations for the addition of the (sandbagged) MFB acquisition on the other. In the end, while we don’t think HBI is comfortably investable here, we think that the stock falls into the ‘unshortable’ category for the next year (at least at this price).  



On one hand, the company is ‘growth challenged’. Let’s face it…HBI is buying Maidenform because it has to.  Since it anniversaried the Gear For Sports acquisition in 2Q11, HBI’s top line growth has averaged zero percent. Yeah, there’s perhaps a 1% hit from exiting the screenprinting business, but 1% growth in aggregate is hardly anything to get too excited about. Our biggest beef is that International and Direct-to-Consumer are both smaller today than they were two years ago. FX has been a factor, we’ll give ‘em that (though it hasn’t stopped others over this time period). But DTC, which should be the low hanging fruit for any company that owns its own brand – especially one that manufacturers vertically – simply can’t seem to grow. Ironically, the MFB acquisition will not improve the proportion of Int’l or DTC, it simply fills out a different part of HBI’s bra business in US mass channels and department stores.


On the positive side, the reality on Maidenform is that a) HBI got it for a steal, b) management lowballed on accretion as they simply add it to HBI’s model, c) there’s easy margin upside as HBI unravels failed MFB programs put in place over the past two years, and d) there further upside as HBI fills out its excess capacity with MFB business (i.e. transitions MFB to an insourced model from an outsourced model).  They guided to $0.15-$0.20 per share from MFB. Seriously? If we simply add on MFB’s net income after borrowing costs from last year – which was abysmal, by the way (worst in 8-years) we get to $0.25-$0.30 in accretion. When all is said and done, we think the accretion numbers will be at least 2x guidance in year 1, and could be closer to a buck versus management’s $0.60 guidance three years out.


The bottom line is that it does not matter one iota that sales are punk. We might start to see some positive benefit from HBI’s organic marketing initiatives in 2H – but that gives them maybe a point or two in growth.  The big upside begins in another two quarters when HBI gets 15% sales growth alone just from adding MFB. Along the way, cash flow looks good, and the company looks on track to pay down the debt associated with the deal just over a year after it closes. Organically, we’re not fans of this story by any stretch (challenged top line and cotton-led gross margin benefit coming to a close). But the reality is that the market won’t look at the ‘organic growth and margin characteristics’, it will look at reported numbers, and lowballed expectations.  As a merged entity, this one will be tough to bet against.


In preparation for HYATT's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “We have the Park Hyatt New York, which is expected to open in the second quarter of next year, which will bring us a very important luxury presence in this market. We're also developing a Grand Hyatt in Rio, another key market in Latin America.”
  • “Bookings for 2014 have increased by 10%. So the short-term booking trend is still very volatile. It's still very sensitive on a month-to-month basis and we continue to see that long-term bookings 2014, 2015 and even into 2016 look very healthy, look very promising. We don't see any issues there yet. Although, when you go back to last year August, September, October and you looked at 2013 and the booking trends were and compare it to where we are now with 2013, there has been quite of a wash, cancellation and push out into future years, and we continue to see that trend.”
  • “Overall, we see our booking experience as an indication that the booking window is lengthening.”
  • [How PCLN/Kayak will impact margins] “Well, I think the first thing to note is that the proportion of our total business that flows through online travel agency, broadly defined, without differentiating for a moment between aggregators and front ends like Kayak or opaque sites like Priceline is relatively modest. So it's, in the aggregate, not quite in the double digits."
  • “So one think I would, just to note is that, our primary application of our capital base on our balance sheet is to support our growth, that's our number one priority. We have been, more formally over the last year, been in the market and repurchasing shares."
  • “Dividend will continue to be on the table for discussion in the future.”



  • “As we look to the future, we're encouraged by several data points. First, group pace. Even though realized revenue for group business was down in the first quarter, overall group revenue production was up over 3% in the quarter.”
  • “Second, transient demand, the overall business climate in the U.S. was strength in manufacturing, technology, housing and other sectors, is supporting robust transient demand levels. Therefore, while we expect group demand to improve relative to what we saw in the first quarter, we still expect transient business to be a stronger driver of improved results this year.”
  • “Third, the economic and market conditions around the world are evolving. As we look around the world at various regional and individual economies, we believe that the hotels in Americas and ASPAC regions are likely to see stronger levels of RevPAR growth than hotels in the EAME/Southwest Asia regions over the remainder of 2013.”
  • “In China, the focus by the new leadership on austerity has and will continue to hurt F&B revenue, in particular in the short-term.”
  • “In India, the economy is starting to stabilize, while the country enters a national political process leading up to general elections in 2014. Nonetheless, the positioning of our existing portfolio as well as the hotels expected to join our portfolio over the coming year in each of China and India is very encouraging.”
  • [Renovations impact]  "We expect the impact to be towards the lower end of the previously mentioned $3 million to $6 million range per quarter for the next quarter or two. The impact is expected to decline as renovations of managed hotels are completed and year-over-year comparison issues recede.”
  • “As we discussed on our last earnings call, we are exploring sale options for six full service hotels in the U.S. This effort is moving ahead and we will update on the sale if and when closed. In all cases, we intend for these hotels to continue in our portfolio under long-term management or franchise contracts.”
  • “The $100 million to $120 million estimate on investment spending this year really relates to JV projects, which would include, for example, the Andaz Wailea Resort, which continues to make great progress. We expect a third quarter opening. And we have other construction projects that are underway in the U.S. and in Latin America through existing or new JVs, or in the case of our Hyatt Place construction projects in Omaha, it's on balance sheet development. So I would say that our activity and focus on new opportunities through both JVs and whole ownership continues to be a significant area of activity and a focus for us. And that's why we wanted to simply track this over time.”
  • “Our intention is to continue to be active through the cycle on both the buy-side and the sell-side.”
  • [Affordable Care Act impact] “We have already absorbed some of the costs for things like 100% preventative care and coverage of dependents through age 26. We know that the impact of implementation costs lie ahead and we can't really know how many associates who currently opt out from our plans will choose to participate beginning in 2014. However, we expect healthcare costs to continue to exceed inflation in the next few years and add some significant cost elements to the portfolio. But to be specific in quantifying the impact, it is too early at this stage.”
  • “I think the modeling disruption beyond the end of this year, we know now and we mentioned that the renovations in the key markets in Asia would continue into next year.”
  • “There are a couple of properties on which we continue to focus on our alternatives to what we have currently, places like Miami and Toronto, which if they come to pass and we start planning for something significant in terms of redevelopment, we will update you on that. But in terms of major renovations in our owned portfolio, we don't have any plans for anything like that in the foreseeable future.”


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




  • Despite an in-line to slightly below consensus quarter, BYD's tone and guidance was better than expected.  The company's exposure to Las Vegas and Atlantic City is looking more like an asset versus other regional gamers versus a 5 year liability.  


  • SAME:  BYD reported wholly-owned EBITDA (post-corp) of $132.3MM, in-line with its $132-137MM guidance range.  Borgata excluding the property tax adjustment earned $32.1MM, higher than its $27-29MM guidance range.  


  • BETTER:  The biggest surprise of BYD's markets as EBITDA grew 12% on flat revenues.  Mgmt believes operating margins are sustainable and the future looks bright.
    • "Our themed slot initiatives and related marketing programs that we discussed on prior calls have been quite successful. Looking ahead, we are optimistic about our prospects in the second quarter, which got off to a good start at the Orleans with a festival celebrating the American Country Music Awards."
    • "On a spend per visitor basis, we're running about flat, so sort of an improvement over the declines we had seen prior."


  • BETTER:  Changes to Hawaiian schedule and refined marketing programs led to operating efficiencies.  Mgmt also saw a pickup in traffic particularly on Fremont Street.
  • PREVIOUSLY:  "We are diligently focused on improving operating margins in this segment as well, and we're successful in mitigating the impact of lower revenues on the EBITDA line...Overall direction of our Downtown Las Vegas business remains encouraging. We continue to enjoy a great relationship with our Hawaiian customers, providing this business a solid foundation."


  • BETTER:  While mgmt continues to be cautiously optimistic, they are seeing improvement in business trends. 
  • PREVIOUSLY:  "We are cautiously optimistic about the economic trends that have started to form late in the quarter and the overall direction of our business."


  • WORSE:  Ex IP, the segment would have reported flat EBITDA.  Iowa and Kansas were impacted by severe weather.      
  • PREVIOUSLY:  "We are optimistic that conditions should remain relatively healthy in our Midwest and South markets in the months ahead."


  • SAME:  The surveys at Wilton Rancheria will take some time.  Believes that property can open in 2016.
  • PREVIOUSLY:  "We are well positioned take advantage of several significant long-term growth opportunities, including our agreements with the Wilton Rancheria tribe in Northern California and Sunrise Sports Entertainment in South Florida. Both of these partnerships could provide significant growth opportunities to our company in the next several years."


  • SAME:  remain confident on being the 1st online gaming operator in New Jersey.  BYD is awaiting government approvals by the end of the year.
  • PREVIOUSLY:  "We're also quite optimistic about the potential of the emerging domestic online gaming market. We intend to be among the first to offer online gaming in the State of New Jersey and are confident that the Borgata brand will allow us to capture a substantial share of this lucrative market. We're evaluating the opportunity to offer online poker in Nevada as well and are determining the best way to enter what is shaping up to be a robust yet crowded market."


  • MIXED:  Kansas Star achieved significant revenue growth (we believe 13% YoY) but also incurred much higher operating costs due to the opening of its new arena. 
    • "Marketing spend was unusually low during Kansas Star's introductory period in early 2012, and this quarter's results reflect more realistic customer reinvestment levels. We expect these trends to continue and visitation should grow further with the opening of our arena, capable of seating over 6,000 guests. This property continues to perform in line with our expectations and remains on track to generate about $100 million in EBITDA on an annual basis."
    • "Kansas Star today has 150-hotel rooms in total. We'll be increasing that to 300 in the next 18 months or so per our agreement with the state and our hotel operator."


  • WORSE:  Gulf Coast market (ex Delta Downs) has not grown.  The opening of the Golden Nuggest raised the promotional environment (though IP marketing expenses dropped).  IP was particularly weak on the slot side. 
  • PREVIOUSLY:  "I would tell you that the market is certainly, as we knew going in, a very, very competitive market. State of Mississippi issues numbers by sort region within the state and you have those handy. And the IP for us has been much more of an efficiency story than a revenue growth story, and we think as a result of that it has had a meaningful contribution to stock price and equity valuation, because we bought it at the right price and very much improved margins and EBITDA contribution at that property, and expect that to continue."

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Surprising in-line quarter with decent guidance. BYD's LV/AC exposure becoming an asset vis a vis the other regional operators.



"We are making significant progress toward our strategic goals of strengthening our balance sheet and positioning ourselves for continued growth.  Operating efficiencies and effective marketing programs drove solid growth across our Las Vegas properties.  And Borgata posted year-over-year gains as well, after factoring out the impact of a tax charge.  Our Company is moving in the right direction, and I am optimistic about the outlook for our business."


-Keith Smith, President and CEO of BYD



  • 2 transactions (Echelon and Dania):  Generated $400MM, eliminated $20MM in annual expense
  • Positive momentum in business trends
  • Locals
    • All 4 locals properties had YoY growth in EBITDA
    • Believe operating margins are sustainable
    • Future looks positive
    • More jobs on the way in Nevada
    • Existing home prices up 30% YoY
  • Midwest and South
    • Ex weak results at the IP, EBITDA would have been flat
  • Borgata
    • Well ahead of expectations
    • Positive trends have continued into 3Q
    • Confident in capturing online gaming share - poker, slots, table games
      • On track to be the 1st to offer online gaming in New Jersey, awaiting govt approval
  • Rancheria tribe - early design work under way
  • LV Locals: kept costs down despite no revenue growth
  • Downtown LV:  1) changes to Hawaiian schedule led to efficiencies; refined marketing programs 2) uptick traffic at Fremont Street
  • Midwest and South:  increased capacity affected Gulf Coast properties. Iowa and Kansas impacted by severe weather.  
  • Peninsula:  significant revenue growth at Kansas Star.  Late June, opened 1,600 seat arena - completing phase 1 of expansion plans; confident for margin improvement in Kansas Star.
  • Borgata:  tax court expected to make its ruling by the end of the 3Q - positive tax ruling could occur
    • Table share drop share increased by 300bps
    • Increased promotional activity have not affected Borgata
    • Prepared for online gaming launch in 4Q
  • Debt: $3.7BN ($1.2BN- Peninsula); debt has declined $260MM; $305MM incremental available at Boyd, $30MM available at Peninsula
  • Cash: $119MM (Boyd) $30MM (Peninsula); retired $216MM 6.75% notes (saved $14.5MM in annual interest expense)
  • Secured leverage: 3.7x out of 4.5x; total leverage: 6.5x out of 7.75x
  • Borgata debt: $796MM - $4MM outstanding under $60MM credit facility
  • Borgata Cash: $34MM
  • Borgata will retire $40MM of 2015 senior notes at $103.  Redemption will occur in August
    • Interest expense savings will result in $3MM/year
    • $22.5MM CRDA refund; recorded a $5MM write-down in the quarter
  • Capex: $36MM ($11MM at Peninsula, $7MM at Borgata)
  • 3Q guidance:  wholly-owned EBITDA post corporate:  Boyd $120-125MM; Borgata: $44-46MM
  • 3Q EPS guidance (assuming 35% tax rate):  loss of 2 cents to income of 3 cents

Q & A

  • Continue to be cautiously optimistic
  • Expect modest revenue growth in LV Locals market
  • Visitation trends depend by market; Nevada did better than other markets
  • Borgata:  continue to have opportunities for operating efficiencies
  • Peninsula margins:  Kansas Star had higher operating costs ($1.3MM property tax difference- will appeal on this)
  • Peninsula performing as expected
  • I-gaming:  Bwin providing software; if Bwin launches their own product (B2C) and regulators approve, BYD gets 10% and it will be under the Borgata banner.
  • Locals promotional environment:  last to similar year; marketing expenses flat YoY
  • Borgata guidance:  soft hold in 2Q 2012; expect margin improvements to continue to Q3; expect some revenue growth; momentum has picked up post Sandy; guidance does not include potential tax refunds
  • Gulf Coast market has taken a pause (ex Delta Downs) 
  • Opening of Golden Nugget raised marketing spend in market
  • IP weakness was on the slot side; reduced marketing in 2Q
  • Golden Nugget in Lake Charles:  good news; will drive traffic from Houston
  • Wilton Rancheria project:  surveys will take some time; probably a 2016 opening

What’s Big Tobacco Saying About E-Cigs?

Below we’ve collected Big Tobacco’s Q2 earnings call commentary on electronic cigarettes. A common thread among the big four (LO, RAI, MO, PM) is excitement to participate in the category, focused investment behind it, but cautious optimism on the runway for e-cigs as a category and general uncertainty on just how the FDA will regulate e-cigs in the future.


LO led the group in terms of bullish sentiment on claims of strong incidence of repeat trialing (conversion) of e-cigs, whereas the others suggested conversion rates still remain low or that it’s too early to measure results. 


Big Tobacco’s push into e-cigs began last year, and of the big four, LO was the first out of the gate purchasing Blu last April. As we show in the table below, both RAI and MO are launching their e-cig versions this month and next month, while PM commented that it may have ambitions to get in the market in 2016/17. 


What’s Big Tobacco Saying About E-Cigs? - vv. ecigs


Lorillard’s e-cig Blu holds the number one dollar share of the total e-cig market at ~40% followed by NJOY (private) at ~30%. Across the xAOC channel (= all channels excluding convenience), the leading brands include: Blu (44.5%), FIN (20.6% share), Mistic (11.7% share), and NJOY (10.8% share).


U.S. e-cigs sales were projected at $150MM in 2011, $500MM in 2012 ($300MM across retail channels and $200MM over the internet), and are estimated to be around $1-2B in 2013. Currently e-cigs represent 1% or less of the portfolio of any Big Tobacco company, however we think there is a huge runway for converters in the $90B annual tobacco industry and believe e-cigs may be the first truly new consumer product in the markets in many years. They offer a compelling alternative to traditional cigarettes and offer the consumer a much different experience than a nicotine patch or gum.


The involvement of Big Tobacco in the category should continue to lend credibility to e-cigs and accelerate growth; we expect e-cigs to be margin-enhancing to the combined cigarette category for Big Tobacco and 2014 to be a breakout year for them, having tested the waters in 2013.




E-cigs were a hot topic on the call. LO reported that Blu achieved net sales of $57MM in the quarter with over a 40% retail market share. In the quarter it added its e-cigs to 30K retailers to bring its total to 110K retailers.


LO said Blu’s topline grew year-over-year, but was flat sequentially due to the rollout of its new rechargeable kit. LO only sold rechargeable Blu units in 2 of the 3 months out of the quarter as it took one month to draw-down inventory of its old model before the June 24th launch of its new model to replace the older version.


LO, unlike RAI or PM, was very bullish in its commentary on repeat purchases of its e-cig, and confident that although the new rechargeable kit is sold at break-even for the company, the razor-razor blade model of the kit-cartridge will prove profitable.  As of Q1 2013 (no update on the call), disposables accounted for 51% of its e-cig sales. We believe the company will be pushing to expand its more profitable rechargeable business at the expense of less profitable disposables, and we think the new rechargeable is a catalyst for this shift, and should be margin enhancing as distribution and investment behind the brand expand.


Feedback according to CEO Murray Kessler on e-cigs from retailers is very positive given the opportunity for higher margins versus other tobacco offerings.  On who is switching to e-cigs, Kessler offered up it’s typically users of less tar cigarettes. He added, this is another reason why he expects less cannibalization with its full-flavored menthols or even its new Newport non-menthol Golds.  




The company looks to continue to invest in its e-cig brand Vuse in the back half. It opened its earnings call by underling that it’s excited that Vuse is expanding into its first major market, Colorado. In the Q&A, the company noted that Vuse will grow to have a commanding presence in the e-cig market, already out in 500 retail stores in the first week, with a flavor profile it calls superior to its competitors.


On industry trends, it claims it’s too early to talk about the consumer response, but said retailers are extremely positive. It noted that while e-cigs have strong trialing, so far the conversion rate is low. RAI also said that while its products may have product displays at retail locations that are available to the customer, the actual product is located behind the counter and access is clerk-assisted.



Responding to questions if E-cig have any impact on cigarette volumes this quarter, management gave no color beyond that e-cigs are having some impact. It noted that they’re thinking about what the size is now and what it can be down the road and there is a lot that has yet to be resolved: what the regulatory structure could be, and depending on that, the impact on the size of the category. Further they’re not sure about what excise taxes may be.


On playing catch-up to LO with its MarkTen, the CEO said we're still in the early days in the e-vapor category, and he’s confident that MarkTen will be a strong player in the category.  He added that MO’s strategy remains to maximize the core business while taking appropriate steps forward with innovation. He said, in e-vapor category we want to learn our way in.


On marketing plans for MarkTen the CEO noted that because the products contain nicotine, they’ll put appropriate warnings on the product, which it will bear despite the fact that it is not currently regulated by the FDA. It’s target audience is adult smokers and vaporers, and noted that the company will take the appropriate steps so that the product doesn’t reach an unintended audience.




In the Q&A there were a couple questions on E-cigs. CFO Olczak kept his words brief but said that the market is difficult to estimate, and he doesn’t think it is more than 1% of the industry, which itself might be a high estimate. He believes demand and interest overall is much stronger in the U.S. than in Europe and that what’s distinguishing the category is its lower price points versus traditional cigs, and that the taste profiles don’t compare. He cannot size up if the category will be one with staying power, or one that is a fad. Finally, he hinted that PM could get involved in the market in 2016/17.


Matthew Hedrick
Senior Analyst 

COH: Was, Is, And Will Be A Value Trap

Takeaway: 4Q validated our concerns about COH. Until mgmt takes down expectations (when mgmt fully churns in Jan), it will remain a value trap.

Conclusion: The 4Q print validated our concern that revenue growth cannot coexist with a 30%+ margin at COH. We think that the revolving door in the C-Suite synchs with our view, but that the company won’t let more realistic margin expectations seep into the consensus view until Frankfort has fully transitioned in Jan. We wish the company would just take down expectations – as our sense is that it is cheapish (15x) on a beared-up margin level. But until that happens, we face downward earnings risk to earnings of up to 25%. Maybe not a great short, but definitely still a value trap.



We have not been a fan of Coach by any stretch for much of this year, and the 4Q print hardly warms us up to the name. If there is anything that gets us more excited about COH it is the fact that the stock is 10% less expensive now than it was at yesterday’s close. But unfortunately, valuation is not a catalyst, and there's still downside to street estimates.


Fundamentally, the release confirmed what we’ve been concerned about – that revenue growth and a 30%+ EBIT margin cannot coexist peacefully at Coach. It’s abundantly clear that the company continues to lose share in its core business (women’s handbags in the US) as brands like Michael Kors, Kate Spade and Tory Burch muscle in on Coach’s territory. International continues to be a bright spot for growth, but markets like China have a long way to go before they can make up for share loss in the US.


Men’s and Footwear are great…but make no mistake, these are more expensive businesses – both in terms of R&D and marketing, but also as it relates to the working capital requirements of the business. Think about it… a handbag SKU might come in 3 colors. But a footwear SKU comes in 3 colors, and then each of those in a spectrum of 18+ different sizes. We’re not saying that footwear is a bad business, but simply that the level of capital required to grow is greater than COH is accustomed.


All of this leads us to the biggest component of the release, which is that Mike Tucci (President North America) and Jerry Stritzke (President and COO) both resigned and will be leaving in August. (For what it's worth, we've always thought that Tucci was money in the bank. He's a big loss. Stritzki is too.). So within a 12-month time period, we’ll see the exit of these two gents, plus Reed Krakoff and CEO Lew Frankfort (who becomes Executive Chairman in January).


Our sense is that the Executive Management team (who has better information than we do) sees where the company is headed – into a period of increased investment spending needed to build out the organization to maintain Coach’s standing as a World Class brand. This would result in a lower realized margin level – presumably something in the mid-20s at best.


The biggest problem we have with the stock is that company still has not embedded this lower guidance into expectations. While we don't don't condone it, we see where they’re coming from. Would Frankfort, Tucci, Stritzke and Krakoff want margins to be taken down in their final days at the helm after such a long run of success? No way…


We think that COH will continue to tread water as a value trap until the new team is fully in control, after which we’re likely to see the top line capitulate (unlikely), or (more likely) expectations for margins come down. If we look at a $6bn top line in 2 years at a 25% EBIT margin, we’re looking at $3.50 in EPS power.  The good news is that the stock is not very expensive on that number at 15x. The bad news is that the consensus is sitting at $4.66. We’re not in a rush to get ahead of what could be as much of a 25% downgrade in EPS expectations over 12 months.  

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