- Regional operators only recently began commenting on the decline of casino visitors but the trend has been evident since 2H 2012.
- In Q2 2013, mature gaming markets admissions declined 7% YoY
- Indiana casino visitors, in particular, have been hit hard by the opening of the Ohio market. Ohio, meanwhile, has performed below expectations.
- This trend highlights the secular weakness of an aging demographic with few inroads made in penetrating younger generations.
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.
This note was originally published July 30, 2013 at 18:21 in Retail
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.
RRGB remains on the Hedgeye best ideas list as a SHORT.
RRGB is scheduled to release earnings before the market opens on 8/15. Given that RRGB is one of the last casual dining companies to report 2Q13 EPS, it should be no surprise that they will likely miss the revenue estimates due to the soft sales environment prevalent within the industry.
Heading into the print, our primary question remains unanswered: In a slowing sales environment, can RRGB prudently manage the expense line while reinvesting in the core business? This concern arises as the company is in the midst of a core brand revival that has consensus expecting significantly improved traffic trends in the quarter. While these efforts may prove successful over time, we believe this is unlikely to occur in 2013.
The list of casual dining companies that have seen estimates revised lower following 2Q13 earnings releases is quite long, as RT (-83%), BJRI (-8%), CAKE (-2%), and TXRH (-1%) have all been revised down over the past month. While RUTH (+7%) saw EPS revised up, we would rightfully point out that the company competes more in the fine dining segment as opposed to the hyper competitive bar and grill category. Given the current secular trends, we believe there is a high possibility RRGB will report a miss on both the top and bottom line in 2Q13.
Over the past month, consensus estimates for 2Q13 revenue growth have fallen from +7% to +5%, while EPS estimates for the same period have remained steady at $0.66 or +26.9% growth. With 2Q13 revenue estimates having been toned down, we believe 3Q13 guidance is too aggressive, as consensus is looking for EPS growth of +37% on revenue growth of +8%.
Consensus expectations are for same-store sales of +2.7% and +3.0% in 2Q13 and 3Q13, respectively. While these may be high, more concerning to us is the expectation for traffic growth of +30 bps and +70 bps over the same period. Considering the industry is experiencing a noticeable decline in traffic, this would indicate that RRGB is picking up that market share. We view this as unlikely.
HEDGEYE – We don’t believe the current brand transformational initiatives will be enough to fix the secular decline in traffic the company has been experiencing since 1Q12.
RRGB’s food costs are estimated to decline -17 bps Y/Y in 2Q13, after falling -59 bps Y/Y in 1Q13. The company is selling more liquor, which is helping its food cost trends, but we believe red meat will continue to see significant inflation over the balance of the year.
HEDGEYE – We believe any benefits RRGB experiences in 1H13 will reverse and, ultimately, negatively affect margins in 2H13.
The labor cost line should be a point of concern for RRGB. The company saw labor costs rise +34 bps in 1Q13 and the Street is looking for labor costs to be flat Y/Y in 2Q13.
HEDGEYE – With the probability of a top line miss very high, we suspect the company will see some labor deleverage in 2Q13.
Other Operating Costs
Over the last three years, lower other operating costs has been a big source of operating margin improvement for RRGB. Since peaking at 22.6% of sales in 2Q10, other operating costs has declined more than 200 bps to 20.5% on a LTM basis. In 1Q13, other operating costs declined -6 bps Y/Y and is expected to decline -20 bps Y/Y in 2Q13.
HEDGEYE – We believe RRGB’s brand transformation initiatives will require some investment and, without a significant improvement in traffic, the company will have a difficult time leveraging this line.
As it stands today, the Street is expecting the company to post margin improvement on the back of lower food costs and by leveraging other operating costs. Consensus estimates are for operating margin improvement of +45 bps Y/Y to 5.56% of sales. This would be RRGB’s best operating margin line since 2Q08, when operating margins were 6.37% of sales.
HEDGEYE – We view this as unlikely, given the slowing sales trends and the investment needed to transform the Red Robin brand.
Highlighted in the chart below, 31.3% of analysts rate RRGB a Buy, 56.3% rate RRGB a Hold, and 12.5% rate RRGB a Sell. Further, short interest has moved lower since early July and now makes up 9.23% of the float.
HEDGEYE – While EPS estimates have begun to move slightly lower over the past 3 months, we would contest they are still too high.
At 8.2x EV/EBITA, RRGB is trading at a slight discount its Casual Dining peer group at 8.8x EV/EBITDA. Despite trading at this discount, it is important to remember that RRGB’s valuation is at peak levels and we believe, for now, it is appropriately valued below its peer group.
HEDGEYE – We believe the whole group is likely to see multiples revised lower in the current quarter.
The company is hosting its 2Q13 earnings call on Thursday morning at 10am EST. We'll post on anything incremental after the call.
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Takeaway: The case for incremental monetary easing amid fiscal tightening (via the consumption tax hike) grows louder in Japan.
- On both a QoQ SAAR and YoY basis, the most recently reported economic growth deltas were extremely low quality in nature as the government continues to be largely the only game in town as it relates to economic activity in Japan.
- In the context of Japan’s private sector growth being too weak to orchestrate a smooth handoff from the government, we believe the BoJ may be forced to accelerate its balance sheet expansion over the intermediate term – especially if the consumption tax is going to be hiked as currently outlined in Japanese fiscal policy.
- It should be noted that quantitative setup on the dollar-yen cross (i.e. Bearish TREND) is only a few days young and needs to hold below TREND for a few weeks to confirm the move. If, however, the move is subsequently confirmed, we would certainly alter our fundamental bias to a stance that is a more neutral on the Japanese yen, or perhaps even outright bullish if the US and Japanese growth data supports that conclusion.
- If implemented, this fundamental shift would likely provide us with a ripe opportunity to short Japanese equities for the first time in a long time; the Nikkei is up +59.3% from its TTM low and the trailing 1Y and 3Y correlation coefficients between the USD/JPY spot rate and the Nikkei 225 Index are +0.96 and +0.97, respectively.
- For now, however, we are inclined to maintain our negative bias on the Japanese yen (TREND and TAIL durations) and our positive bias on Japan’s equity market (TREND duration). The aforementioned scenario analysis is just our way of thinking out loud as we patiently wait and watch for confirming or disconfirming signals.
On balance, Japan’s 2Q13 GDP report was not good. Real GDP slowed to +2.6% QoQ SAAR from +3.8% in 1Q13 [revised down from +4.1%]. That headline figure was 100bps shy of the Bloomberg consensus estimate of +3.6%.
On a YoY basis, Japanese real GDP growth did accelerate to +0.9% from +0.3% prior, but, much like the headline QoQ SAAR figures, the YoY growth deltas were extremely low quality in nature as the government continues to be largely the only game in town as it relates to economic activity in Japan.
QoQ SAAR deltas:
- C: +3.1% from +3.4% prior
- I: -0.4% from -0.7% prior
- G: +3.4% from +0.2% prior
- Exports: +12.5% from +16.8% prior
- Imports: +6.2% from +4.1% prior
- Private Demand: +1% from +2.5% prior
- Public Demand: +4.2% from +1% prior
- C: +0.9% from +0.3% prior
- I: -4.7% from -5.1% prior
- G: +1.9% from +1.1% prior
- Exports: -0.3% from -3.3% prior
- Imports: +0.8% from +0.4% prior
- Private Demand: +0.3% from -0.1% prior
- Public Demand: +3.3% from +3.5% prior
It could be argued that the lone “bright spot” from this morning’s data release was that the GDP deflator accelerated to -0.3% YoY from -1.1% prior; that was the fastest reading since 3Q09. Indeed, Japanese policymakers are starting to get their first whiffs of the inflation they so desperately seek, but it remains well shy of their +2% target.
In the context of Japan’s private sector growth being too weak to orchestrate a smooth handoff from the government, we believe the BoJ may be forced to accelerate its balance sheet expansion over the intermediate term – especially if the consumption tax is going to be hiked as currently outlined in Japanese fiscal policy.
Recall that a pretty severe recession followed the last time Japan hiked its consumption tax back in 1997; the move cost then-prime minster Ryutaro Hashimoto his post and ultimately forced the BoJ to ease monetary policy. The USD/JPY gained 36 handles from JUN ’97 to SEP ’98 when a globally-coordinated intervention stopped the yen from crashing.
For now, all signs on that front support a status quo outcome (we’ll know for sure in late SEP/early OCT when the Cabinet Office makes its “final decision” post the final revisions to this morning’s GDP report); Finance Minister Taro Aso, Economy Minister Akira Amari and BoJ Governor Haruhiko Kuroda – all of whom will be on Prime Minster Shinzo Abe’s tax hike panel – are in favor of the move.
It is our view that, if the Cabinet Office proceeds as planned with respect to the consumption tax hike, the BoJ is likely to accelerate its balance sheet expansion to help make sure the economy doesn’t lose any momentum on the growth and inflation fronts. That, on the margin, would be bearish for the Japanese yen.
To review our negative bias on the Japanese yen (TREND and TAIL durations) and our positive bias on Japan’s equity market (TREND duration):
- While enthusiasm for the Abenomics agenda may come and go in the immediate-term, we believe investors are broadly underestimating the structural impact of imposing a +2% inflation target and +3% nominal growth target in Japan. To put that in context, the trailing 10Y averages for these metrics are -0.1% and -0.5%, respectively. Japanese policymakers have a lot of hay to bale on the monetary easing front if they are to even sniff their lofty targets within the proposed 2Y time frame.
- Assuming Japanese policy stays the course and our view that the US economy has finally turned the corner from a growth perspective is ultimately proven prescient, a compressing real interest rate differential will also put pressure on Japan’s currency from a capital flows perspective. Consensus expects real 2Y JGB rates to hit -2.5% by EOY 2014 (down meaningfully from -0.4% by EOY 2013); this compares to a forecast of -1.3% for real UST 2Y rates by EOY 2014 (down slightly from -1.1% by EOY 2013). More importantly, this inflection is also being confirmed in the swaps market: 2Y swap rates in Japan are now trading at -1.57% on a real basis (subtracting the 2Y breakeven rate from the swap rate); that compares to -0.88% for the US. As recently as mid-MAR, those metrics were meaningfully inverted at -0.10% and -1.98%, respectively!
- In the context of intermittent spikes in volatility in the bond and forex markets, we have maintained that the risk-adjusted outlook for Japanese stocks is decidedly less sanguine than consensus assumes given the reflationary tailwind of currency debasement. The caveat here is that this headwind can be offset via absolute returns that are now likely to be increasingly predicated on economic and fiscal reforms (corporate tax cuts, labor market deregulation, fiscal consolidation, etc.), as well as large-scale portfolio rebalancing by Japanese households. To that tune, only 6.8% of Japanese household financial assets are held in equities vs. 14.4% for the Eurozone and 32.8% for the US.
In spite of what we’ve outlined as arguably the most credible and well-articulated bull case for both the USD/JPY cross and Japanese equities, both are broken from an immediate-term TRADE perspective and flirting with breakdowns on our intermediate-term TREND duration as well. The risk management levels to watch on that front are as follows:
- USD/JPY (last price = 96.55): Bearish TRADE = 97.72 and Bearish TREND = 97.13
- Nikkei 225 (last price = 13,519): Bearish TRADE = 14,091 and Bullish TREND = 13,336
It should be noted that quantitative setup on the dollar-yen cross is only a few days young and needs to hold below TREND for a few weeks to confirm the move. If, however, the move is subsequently confirmed, we would certainly alter our fundamental bias to a stance that is a more neutral, or perhaps even outright bullish if the US and Japanese growth data supports that conclusion.
If implemented, this fundamental shift would likely provide us with a ripe opportunity to short Japanese equities for the first time in a long time; the Nikkei is up +59.3% from its TTM low and the trailing 1Y and 3Y correlation coefficients between the USD/JPY spot rate and the Nikkei 225 Index are +0.96 and +0.97, respectively.
Patience should pay dividends for those inclined to wait and watch here.
From the outdoor ice hockey rinks of Thunder Bay, Canada, to inside the boardroom of an NHL owners' group. CBC's Lisa Laco catches up with Hedgeye CEO Keith McCullough, partner in the new NHL ownership group in Phoenix.
Takeaway: A quick look at stories on Hedgeye's radar screen.
Keith McCullough – CEO
Prosecutors and F.B.I. Examine JPMorgan Over Losses (via DealB%k)
Google, Facebook among toughest interviewers: Their questions revealed (via Silicon Valley Business Journal)
Recognize the name on this building? > Moving to the Taft Mansion, a Yale Conservative Group Seeks a National Presence (via New York Times)
Daryl Jones – Macro
Gold Shorts Cover At Fastest Pace In 13 Years (via Zero Hedge)
Josh Steiner – Financials
Tom Tobin – Healthcare
The new normal? Shift to outpatient care, payer pressure hit hospitals (via ModernHealthcare.com)
Matt Hedrick - Macro
Greece will need more bailout loans by 2014, Bundesbank believes (via The Guardian)
Howard Penney – Restaurants
McDonald's franchisees not leaving brand despite tension (via NRN.com)
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.