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




  • WORSE:  What can we say?  It was well understood that the top line was under pressure, especially in September, but BYD didn't deliver the margin improvement.  Q4 guidance was awful, a little too awful if you ask us.  Guidance looks low ball.



  • WORSE:  While EBITDA improved 8% YoY, it was less than mgmt's previous expectations.  BYD reduced overall marketing spend by over $1MM.  They started the Penny Lane initiative and will roll out Penny Lane throughout Midwest & South - giving players more bonuses more often.  BYD will launch a new advertising and marketing campaign in the coming weeks. 
  • PREVIOUSLY:  We believe these improvements in our operating margins are sustainable and as revenues grow, these improvements will drive even greater EBITDA gains. And as the Las Vegas economy continues to move in the right direction, the future for our Las Vegas Locals business looks increasingly positive.
  • And with $6 billion in the development pipeline, more jobs are on the way. Home building activity is at its highest level in years and existing home prices are up approximately 30% in Las Vegas over the last year. As these trends continue, they should drive increased consumer confidence. As a result, we are optimistic in our outlook for our Locals business.


  • WORSE:  Casual players pulled back sharply in their spend in September.  Paradise & Blue Chip were materially negatively impacted by new competition.  These markets are also impacted by government and military spending.  Delta Downs was a bright spot.  Diamond Jo grew visitation and gained 2% in market share.  Kansas Star grew but so did expenses as they opened the permanant facility to accomodate revenue growth.
  • PREVIOUSLY:  While gaming supply has grown in many regional markets, general economic conditions remain sound and our confidence in our business throughout the Midwest and South is as strong as ever.


  • BETTER:  Had a huge summer session and saw a solid 4Q. Higher property taxes reduced EBITDA by $2.1MM YoY.  Mgmt believes there is further upside in Borgata. 
    • Positive trends have continued into the third quarter, which is the height of the traditional busy summer season. Borgata is clearly moving in the right direction.
    • We're very comfortable with where we are at competitively, and the position Borgata holds and kind of the current EBITDA trajectory of that property. So, I think with respect to continued efficiencies of that property, like all of our businesses, that there are always opportunities to continue to refine these operations and find ways to operate more efficiently.


  • SAME:  Borgata will be aggressive in attacking the NJ I-gaming market. They have allocated a significant budget to attract players.  
    • Borgata leads the Atlantic City market by a wide margin and we are confident it will capture more than its fair share of the New Jersey online gaming market as well.
    • Together, we plan to offer a full suite of games, including poker, slots, and table games under the Borgata and Party brands, including PartyPoker.


  • WORSE:  Construction, disruption and road work contributed to a 14% decline in EBITDA.  BYD continues to improve yield on their Hawaiian charter service and believes in their long-term redevelopment story at Downtown.
  • PREVIOUSLY:  We're also seeing a significant uptick in visitor traffic, as Downtown's popularity grows. This is particularly noticeable at the Fremont, which benefited from continued growth in pedestrian traffic along the Fremont Street experience. Our Downtown business is clearly moving in the right direction and we expect positive trends to continue.


  • SAME:  4Q guidance does not include any potential benefits from property tax credits.  NJ Tax Court ruled that Borgata overpaid ~$48.5MM in property taxes and $10MM in interest.  The appeal process is ongoing and BYD still have appeals pending for 2011 through 2013 so the ultimate amount to Borgata could be much greater.
  • (Media reported $40-50MM Borgata tax credit for 2009/2010) We recently concluded the trial phase of an appeal of our property tax assessments for 2010 and 2011 and a positive ruling could result in refunds and tax credits as well as lower assessments going forward. We expect the tax score to make its ruling by the end of the third quarter


  • WORSE:  Borgata visitation was strong while visitation in the Midwest and South segments declined.
  • PREVIOUSLY:  It's really kind of a market-by-market situation. I think when we heard from others about visitation, it's typically been outside of the state of Nevada, and we can certainly echo that. It's really more, what we would call frequency, the number of times during a month a person is coming in as opposed to straight out visitation, which is simply the number of people coming through the business, in a number of cases, our visitation is up but our frequency is down. And typically what happens as frequency declines, spend per visit goes up, not surprisingly as people have so many dollars for entertainment. In certain markets, and Nevada obviously was a bit of a better performer here, you've seen some more consistency year-over-year in frequency than maybe in other parts of the country.


  • SAME:  The competitive environment is a market-to-market situation. 
  • PREVIOUSLY:  From a promotional environment standpoint, our marketing expense was flat year-over-year on and so, so we've been pretty consistent. I mean, how we choose to direct those dollars obviously changes, can change dramatically on a month-by-month, quarter-by-quarter basis, just to be as efficient as possible. And I guess my sense is that the promotional environment is similar to where we were last year at this time.


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




  •  WORSE:  "The stock went up that much for this?"  MGM missed in every region and proved our contention that a meaningful Las Vegas recovery is still far off.


  • SLIGHTLY WORSE:  MGM slightly missed Street expectations for LV 3Q EBITDA.  LV 3Q REVPAR was +3% YoY, in-line with guidance.  Luxury/international segments did well. 
    • LV 3Q REVPAR: +3%
    • The international is still strong. I mean I think our competitors saw that as well. We certainly did at our luxury properties.


  • SLIGHTLY WORSE:  Slot growth is slowing due to harder comps.  Mgmt will upgrade Supreme Land with 60-70 more premium slot machines in 2014. 
    • It seems to be pretty strong right across the mass segments.
    • We were able to drive main floor table game volume up 11% and revenue up 29% year-over-year with our continued focus on table yield management and strategically targeting the premium segment. Slothandle increased by 11% during the quarter and we remain the market leader for a single property in terms of slot gross gaming revenue.


  • MIXED:  4Q REVPAR flat guidance was than what Street expectations.  They are seeing Q1 2014 as almost a record for convention business with convention mix approaching 16% and convention room nights approaching record levels.  MGM is also optimistic on FY 2014 as currently 88% of the room nights are booked, higher than the typical 80% booked at this time of year.  However, mgmt was hesitant to give 2014 REVPAR guidance.
    • Convention trends for 2013 remained in line with our expectations that we had coming into the year. Our second quarter convention mix increased slightly and our rate grew mid single-digits. We continue to see moderate growth in convention room nights going into the third quarter and based on that, along with some solid retail booking trends we're seeing, we expect REVPAR in the third quarter to be up 3%.
    • These strong sales trends are solid indicator for our business in 2014 and going forward, and our 2014 pace remains up double digits. Recall in March of 2014, we have CON/AGG big citywide convention back in Las Vegas; some150,000 attendees usually show up for that show.
    • [Convention 2014 ADR] It's pacing right now up about mid single-digits right now in terms of its pace.
    • But looking beyond that, we're seeing significant pace increases in each of the second, third and fourth quarter next year. In fact, we're up at least high single-digits each quarter next year when you're looking at the non-CON/AGG piece of the business. So we're pretty excited about the pace of 2014 and the traction that we continue to make in the important segment of our room booking pace on the convention and meeting side.
    • Convention room nights as a percentage of mix, Robin, we're pacing right now for 2013 at about 14.5% to kind of 15% is the range that we're pacing with rate being up over last year.


  • SAME:  NY/NY and Monte Carlo remodeled sections will open in Spring 2014
  • PREVIOUSLY:  Next year, we'll see quite a bit of growth, we think, at New York-New York and Monte Carlo because they'll both benefit from the capital we're spending this year to significantly upgrade their food and beverage offerings and retail offerings and their street frontage.


  • BETTER:  Crystals continue to perform well.  3Q EBITDA was up 26%. They added 3 tenants in 3Q and another tenant in October.
    • Crystals had its best quarter ever, up 21% year-over-year. And we continue to add tenants as our second Starbucks is now open and we recently executed two additional leases.
    • Crystals is doing better literally every month. 


  • SLIGHTLY WORSE:  EBITDA was negatively impacted by $17MM due to low hold but missed even after adjusting hold.  Table drop increased by 12% YoY.
    • Our hotel business continues to improve due to greater brand awareness and increased convention room nights. This was our best REVPAR quarter ever at $194.
    • Aria had a little bit of a challenge for the quarter, partially because they held really well last year and they had some pretty strong play. But I would say the play is still there, maybe one or two customers that may came in last year, didn't come in this year for the quarter. But the solid base is still there. We're seeing a good volume of people coming in. And I think we're pretty happy with the international number.
    • Drop at Aria is up for the six months and so is the win in baccarat


  • SAME:  Maryland decision will be made by year-end.
  • PREVIOUSLY:  We think those presentations will happen in either late September or October. They've indicated a final decision is still expected by year-end. We're extremely excited about this opportunity and feel like we have the winning proposal.


  • SAME:  Licensing will be decided in November 2013.  Final decision is expected in April 2014.
  • PREVIOUSLY:  In Massachusetts, we had a big win with the special election in Springfield to approve the host city agreement. Now the company is finalizing the details of our RFP response, which is due by the end of this year. We think we can play a major role in the revitalization of that city in Western Mass and we look forward to delivering a very comprehensive proposal to the state. The state has indicated that that final decision is expected around April of next year.


  • SAME:  3Q corp expense was $51MM while stock comp was $6MM.  For 4Q, MGM projects ~$50MM in corp expense and $7-8MM in stock comp.
  • PREVIOUSLY:  We expect corporate expense to be in a range of $45 million to $50 million per quarter for the remainder of the year. Our stock compensation is estimated to be approximately $6 million to $7 million in the third quarter and depreciation expense is estimated to be consistent with the second quarter.


  • SAME:  MGM Cotai construction is progressing really well.  Piling/sitework will be done by the end of the year.  Basement/tower construction is up next.  MGM continues to target an early 2016 opening with a budget of $2.6BN.
  • PREVIOUSLY:  We are now anticipating an early 2016 opening.

EL Sustains Growth in 1QFY14

Despite investor fears, over the past month, of slowing momentum in the prestige beauty category, The Estée Lauder Companies produced a strong set of 1QFY14 results and reiterating its outlook for the fiscal year ending June.


Summary: EL continues to invest in growth and we continue to view the company as a category leader over the coming quarters. Ahead of earnings season, we highlighted the underperformance of EL as an opportunity for investors on the long side as peer weakness, and investor concerns that the stock had outgrown the company’s fundamentals, weighed on performance. We continue to have confidence in the long-term benefits of the SMI as the company focuses on cost savings supported by strong and sustainable organic sales growth as a driver of earnings.



What We Liked In EL 1QFY14 earnings:

  • EPS beat: $0.76 Adjusted EPS vs $0.73 consensus
  • Gross margin expanded 81 bps vs 4QFY13 22 bps decline
  • Mgmt reiterating top line guidance of 6-8% and a raised low end of EPS range
  • Organic sales growth of 6% erased fears of a more dramatic slowdown that some were expecting following NPD data as well as peer company commentary
  • Sales in EM picking up slack in core markets: 1Q Asia Pacific LC sales grew 11% while EMEA LC sales grew 7%
  • New product innovation resonating with consumers
  • High margin luxury brands achieving double digit growth
  • Dividend raised 11%


What We Didn’t Like In EL 1QFY14 earnings:

  • Only 2% organic sales in the Americas segment despite new brand launches
  • FY14 FX impact expected to be 1-2% vs 1% 1QFY14
  • “Temporary softness in U.S.” from 4QFY13 has continued into FY14 – becoming less temporary?
  • Inventory days moved sharply higher, increasing risk if future sales don’t materialize


Other Noteworthy Points:

  • Operating income declined, yoy, as the company increased investment spending behind recent major product launches
  • 2QFY14 guidance of $0.99-1.04 falls below the Street at $1.21 but, according to mgmt, this is due to the lapping of a favorable timing shift in 2QFY13.


Quantitative View:

Our macro team’s quantitative view of the stock is dictated by the intermediate-term TREND line of $69.19.


EL Sustains Growth in 1QFY14 - el levels 1031



Rory Green

Senior Analyst


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


MAR 3Q REPORT CARD - mar123 



  • MIXED: Q3 was solid and general commentary favorable.  Q4 guidance was a little weak but understandable given MAR's exposure to the DC area.  Stock buyback was a little light



  • SAME:  Transient and leisure trends continued to be the engines of growth in 3Q. Transient REVPAR increased 7% as business benefited from improving the mix of high rated retail business.  Weekend REVPAR rose 9% at Marriott, 10% Courtyard and 12% at Ritz-Carlton.  
    • Leisure business was hot. Weekend REVPAR rose nearly 8% at the Marriott brand, 9% at Courtyard, and 9% at Ritz-Carlton. Overall, REVPAR increased over 7.4% in North America as the business continued to improve their mix of luxury business eliminating discounts and selling more rooms at high retail room rates.
    • Transient demand is a very powerful bright spot. If we get towards the end of the fall and when we're doing our planning and continue to see transient perk along at that kind of pace, I think we will be captured by the strength of that business and will not look to group up in a way that would push some of that business away.


  • BETTER:  Group REVPAR rose 3%.  2014 pace for NA group bookings have increased from 2% in 2Q to 4% in 3Q.  Group revenue booked in 3Q for CY2014 was up 14% YoY.  60% of 2014 group business on the books. 
    • We look at Q4 being actually fairly strong with group revenue on the books up about 6% from the same time last year from last year's fourth quarter. But Q3 is essentially being flattish.
    • Bookings for 2014 and all future years, which were up above 18% in the quarter
    • I think for the Marriott Hotels & Resorts brand in the United States, we're in the 50% [range booked]...we should be something like 65% to 70% by year-end.


  • WORSE:  China's performance dragged down the Asia Pac's region RevPAR performance by 3% in the Q. Austerity still having effect on business.  Additional government meetings and restrictions on banquets take effect in January 2014 but comps will be easier.
    • Chinese economy looks to us to be performing, maybe it's growing a little bit weaker than it did a year or two ago but still, broadly recovering with really powerful trends in domestic travel particularly in China. And so, we see, even within this quarter, we saw Shanghai, for example, I think up about 6% in REVPAR – 5%, excuse me; while Beijing, by comparison, which is more dependent on government and had a little bit of that pollution hangover, was down something like 5%. Folks have asked about supply growth in China and clearly there has been some supply growth, it varies a little bit market by market. I suspect we'll continue to see supply growth be fairly high, but we expect we'll continue to see the Chinese economy produce more and more domestic travelers as well as global inbound travel growth and still think it's an extremely exciting market to bet on long-term.


  • SAME: The Middle East and Africa segment reported a 13% RevPAR decline in 3Q.  MAR expects mid-single digit RevPAR in 2014 from the region
  • PREVIOUSLY:  In the Middle East and Africa, across all brands, constant dollar REVPAR increased 11%, a result that is likely to reverse in the second half of the year, given the recent events in Egypt. Long-term, the region offers terrific opportunities and our pipeline today includes nearly 45 hotels.


  • LITTLE WORSE:  Government shutdown played a part in the lowering of North America and Worldwide REVPAR (chart above) for 4Q 2013 and caused the company to take down the upper end of guidance by 50bps.  For 2014, MAR expects 4-6% REVPAR growth vs HOT's 5-7% projection.
    • Our REVPAR outlook for 2013 assumes a steady-as-she-goes view of North American and European demand, and a more conservative view of demand trends in Asia and the Middle East.
    • What we see is sort of expectation of REVPAR growth in the plus 5%-ish, a little over 5%, hopefully, like we've done the last couple of quarters, for the next couple of quarters. We know that we've got better group bookings on the books for the fourth quarter than the third, so there's maybe a little bit more upside in the fourth quarter. So to drive the full-year numbers to something in the 6% to 7% range to us seemed very difficult. Group business I think on the books now for fourth quarter is plus 6%



  • SAME:  $2 million of pre-opening costs largely related to two EDITION hotels in 3Q.   
  • PREVIOUSLY:  Pre-opening costs for our EDITION hotel are expected to total $5 million for the year, of which we've already booked about $2 million in the first half.


  • BETTER:  MAR expects to return $1BN to shareholders through share repurchase and dividends.
  • PREVIOUSLY:  We expect to return $800 million to $1 billion to shareholders through share repurchase and dividends.


  • SAME: They have identified 30 sites and approved a dozen projects. The first hote is expected to open in Milan in the Spring of 2014.
  • PREVIOUSLY:  I think have got a dozen or so specific MOXYs that either have already been approved or are pending committee approval. And I think we'll open our first roughly the end of the first quarter of 2014.


  • WORSE:  -70bps in REVPAR from government impact in 3Q.  -1% REVPAR impact due to government shutdown for 4Q. 
  • PREVIOUSLY:  Government weakness is the overwhelming cause for weakness in the greater D.C. market. You see a little bit of a difference between urban D.C. and suburban D.C. because I think when you get to urban D.C., more of that business is independent from the government, so it would be your prototypical lawyers and lobbyists and tourists coming to see D.C. and folks doing business with D.C. companies of which there are a number. But aspects of D.C. which are less reliant on government, which is why there's relatively more strength there than there would be in the suburbs.


  • SAME:  Strong performance in Eastern Europe offset declines in London, enabling us to raise REVPAR 2%. Excluding London and Olympics impact, European REVPAR increased 4%.  Unrest in Egypt reduced  REVPAR in the Middle East by 3%.
  • PREVIOUSLY:  The third quarter will be tough because of the Olympics. The fourth quarter comparisons will be much easier and we would expect, as a consequence, Europe hopefully will strengthen as we go through the balance of the year. On the negative side, we've got Egypt, which is falling apart, and I probably shouldn't say that way, but from a hotel perspective, it's not looking very good. Our hotels are running at much lower occupancies today than they were even in the second quarter. And I think those comparisons will be tough because of that market.


Ugly quarter/guidance and misleading press release comments about October didn't help. But guidance looks too ugly.



"Our third-quarter performance fell below our expectations, as solid results in July and August were offset by significant weakness in September in many of our markets.  However, October year-over-year results have shown improvement in most of our operations. Despite a challenging operating environment, we continued to make encouraging progress in many areas of our business.  Our Las Vegas Locals business grew EBITDA for the third consecutive quarter.  In New Jersey, Borgata generated strong results, and we are now finalizing preparations for real-money online gaming in that state.  And we further strengthened our balance sheet, bringing our Company's total debt reduction to more than $500 million so far this year."


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




  • Weakness in September was concentrated in their Midwest & South region
  • Improved their FCF by more than $70MM annually this year
  • Eliminated $20MM of operating expenses from non-core assets
  • LV Locals:  Seeing benefits of the refinements they have made to their marketing programs.  Applying the same initiatives across their Midwest & South regions.
  • Online gaming:  their goal is to create a first class experience in line with the Borgata name. Efforts are focused on free play offerings right.  They are testing tools - geolocation and know your customers tools. Objective to make it as safe and easy for customers to open up accounts.  Will launch as soon as possible. 
  • In NJ, their customers will now be able to gamble from their rooms
  • Planning further initiatives in LV locals operations
  • They are also going to be rolling out social gaming sites throughout the US
  • Company outlook remains "encouraging" despite 3Q challenges
  • They will continue to reduce debt
  • Will focus on growth opportunities - CA online gaming and S. Florida, and online gaming in NJ
  • In October, most of their operations are showing an improvement MoM
  • Locals LV:  Reduced overall marketing spend by over $1MM. Penny Lane initiative. Will roll out Penny Lane throughout Midwest & South - giving players more bonuses more often. Will launch a new advertising and marketing campaign in the coming months and weeks. 
  • Downtown: Hawaii market is improving and redevelopment remains a positive long term development for the market area.  Over time, this will lead to more visitation to the downtown market.
  • Midwest & South:  casual players pulled back sharply in their spend in September.  In the Midwest, Paradise & Blue Chip were materially negatively impacted by new competition. South: These markets are also impacted by government and military spending.  Some bright spots: Delta Downs. Iowa: Diamond Jo grew visitation and gained 2% share. Kansas Star grew but so did expenses as they opened the permanant facility and to accomodate revenue growth
  • Borgata:  Had a huge summer session. Higher property taxes reduced EBITDA by $2.1MM. But last week Borgata got a favorable ruling that Borgata had overpaid by $48MM in 2009-2010 plus $10MM in interest on that amount. They are also appealing 2011-2012 taxes as well.  This will benefit them through refunds and lower taxes going forward but timing is uncertain as NJ will appeal the ruling.
  • Borgata is posting solid gains in 4Q. Believe there is further upside to the property.
  • Debt Balance:  $3.6BN ($1.2BN at Peninsula). 
  • Cash:  $102MM at BYD and $28MM at Peninsula
  • Secured Leverage:  2.2x  (5x max) / Total 6.6x (8.0x max)
  • D&A:  Peninsula's $22MM/ Borgata $14MM
  • Capex:  $8MM at Peninsula/ $6MM at Borgata
  • 4Q13 guidance:
    • Interest expenses: $79MM; $20MM in Borgata and $20MM at peninsula
    • Share oustanding: 109MM
    • Wholly owned EBITDA: 105-110MM
    • Borgata: $22-24MM (ex tax benefit or online gaming revenues)
    • Non-tax expense of $3MM 
    • Adjusted EPS: 15-20 cent loss


  • Delta Down impact of Golden Nugget coming online in 2014?  They are about 30-40 minutes closer to Texas than Lake Charles - where the Golden Nugget will be.  Delta Downs is a slot only operation so they can treat their slot customers better.
  • Expect very modest revenue growth in the LV locals market in 2014
  • Borgata's online strategy: will be aggressive in attacking the market - have a significant budget allocated to market / attract players
  • Borgata property tax impact of $2.1MM was a YoY # and known when they put out their guidance
  • Government shutdown impact were complete unknowns in September.  Most of the impact that they have seen is in the lower end segment which is most economically sensitive.
  • Guidance of what they are providing is based on what they saw in 3Q and October.
  • Given the fast and dramatic change they saw in September they didn't really have an opportunity to adjust costs in reaction to it- hence the impact on margins. They are still looking for opportunities to take cost out of the business. 
  • In September, they saw a similar number of trips from the lower end of their database but they spent less. That group will recover but they need to feel better about the world.  MoM, they have seen a recovery (not necessarily YoY) across most of their properties. 
  • All they are saying about October is that it's not down as much as September
  • Their business didn't get negatively impacted from new competition in Downtown - their share increased. Dilution from new properties is usually offset by more visitation to the area. 
  • Impact from Sandy last year at Borgata: $11-12MM of EBITDA
  • Property tax discussion at Borgata:  Does affect going forward payments/ rate.  So they will get a refund of past payments and will have lower payments going forward. If you took the government's reassessment from the ruling they would see a $30MM reduction in annual taxes at the property which would boost EBITDA by that amount.
  • Online gaming: Expect that they will launch multiple brands at the same time - Borgata and Bwin as well as others. You can launch up to 5 sites under each license.
  • Penny Lane rollout to the Midwest & South: Launched around Dec 2012 for penny denominated machines and feel like the campaign contributed to the lift that they saw in the first few Q's. They are layering BYI's electronic bonusing suite which will help them create an innovative marketing campaign starting next week and get to the new Peninsula properties early next year.
  • 2014 - Do they expect a pick up from easier comps? Who knows ... 
  • They can't really say what growth in LV Locals would have been without Penny Lane. That wasn't the only change that was implemented to attract more people into their building.
  • NJ online gaming:  You will be able to sign up to gamble if you are within the bounds of the state - you do not need to be a NJ resident
  • View that online gaming opportunities will more than offset any impact to their bricks and mortor operations. They are not modeling any impact in their guidance.
  • What is the promotional environment like in reaction to the softness in the market?  It's really market specific. Overall, the lower end of the database is spending less. They are redeeming past offers based on higher play in the past. 



  • LV Locals: Ongoing refinements to our business continued to drive revenue growth at our four Locals properties during the quarter.  We also benefited from efficiencies throughout our operations
  • Downtown: Weakness at the Fremont during September was primarily responsible for the EBITDA shortfall.  Business at the property was impacted by construction disruption in the Downtown area, which resulted in reduced visitation.
  • Midwest & South; Peninsula: Peninsula segment contributed net revenues of $130.7 million, and Adjusted EBITDA of $45.3 million. Solid performances at Diamond Jo Dubuque and Delta Downs were offset by declines at other properties in the region, particularly in September.  Our operations were impacted by soft economic conditions late in the quarter, as well as increased supply in certain markets.
  • Borgata: Borgata's market share rose 3% and EBITDA margins improved by 550bps, due largely to more normalized table hold as compared to the year-ago quarter.  Despite increased regional supply, Borgata's first-in-class amenities, service and effective marketing programs are providing a significant competitive advantage.  On October 9, Borgata received the first Internet Gaming Permit granted by the New Jersey Division of Gaming Enforcement.  Preparations are ongoing for the launch of our Borgata-branded online gaming site, and we remain on track to be among the first operators to offer real-money online gaming in New Jersey

HBI: Headed Even Higher

Takeaway: HBI is working for the wrong reasons, but it’s impossible to fight the tape on this one. The stock is headed higher. Get used to it.

First let’s look at the reality of this company. We think that the base business is in the bottom quartile of businesses we’d like to invest in. Consider trends in the third quarter. Innerwear sales are down for the second time this year. Ditto for Activewear. And yes, those two businesses combined account for 83% of sales and 95% of cash flow. Direct to Consumer was finally up for the first time in five quarters, but barely so – sales were up 0.9%. This is an area we feel strongly about.  No company – and I don’t care who it is – should be putting up sales growth in DTC anything less than 10%. The good companies are looking at 20%. The great companies are better than 30%.  Does the underwear business naturally lend itself to a wholesale business? Yes, perhaps. But growth in the DTC channel is synonymous to the health of the brand in question.


Lastly, the trajectory of the balance sheet relative to the P&L is not looking good at all.  Check out HBI’s SIGMA chart below. The clockwise motion is a classic pattern of a company that follows the patterns of either the economic cycle or an industry-specific cycle.   But the interpretation is plain as day: Margins were in trouble for four quarters, but the company fixed its inventory levels along the way (which made the line gravitate upward throughout 2012). But then inventory/sales got consistently less good, but people were ok with that because margins were improving. That’s what happened over the past nine months. But the latest data point here denotes considerable erosion in both inventory/sales AND margins. For the record, you don’t want to see those two things coincide if you’re long the stock.


HBI: Headed Even Higher - HBI sigma


Then why, HedgeyeRetail, do you think that the stock will continue to head higher?


That belief lies entirely with Maidenform, and the sheer fact that management continues to sandbag the accretion math.  Consider the following. 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’s 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 in 2014. Seriously? If we simply add on MFB’s net income from last year – which was abysmal, by the way (worst in 8-years) and then tack on borrowing costs, 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.


That’s why we get to the RNOA trajectory in the chart below. It is one of the best in retail, and it’s all due to MFB.  Margins getting better while asset turns are improving.


HBI: Headed Even Higher - hbi rnoa


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.

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