THE MACAU METRO MONITOR, AUGUST 13, 2013
REVAMP FOR SJM GAMING CONTRACT; KEEPS HARBOUR DREDGING Macau Business
SJM will have its gaming concession revised but the company will still be in charge of dredging the harbour and get the associated tax break, worth about MOP806 million (US$100 million) last year. Secretary Tam will review the contract’s provisions on dredging and the location of SJM’s casinos.
Dredging work will be transferred to SJM from parent company Sociedade de Turismo e Diversões de Macau SA, director Ambrose So said. The Gaming Inspection and Coordination Bureau said SJM would keep its tax break: a discount of 1% point on the urban development, tourism promotion and social security levy, now 2.4% of gross gaming revenue.
TODAY’S S&P 500 SET-UP – August 13, 2013
As we look at today's setup for the S&P 500, the range is 34 points or 0.56% downside to 1680 and 1.45% upside to 1714.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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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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