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In preparation for BYI FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • International units and revenue were down, largely as a result of continued importation restrictions in Argentina, which were partially offset by increased sales into Mexico. While international game sales improved by 5% to 782 units versus last year, they did not meet our internal expectations.


  • Our domestic ASP has been more or less holding up the way it was before. And we have been very disciplined with our pricing.
  • And international ASP is down because we shipped a lot more to Mexico this quarter. So, if you remove all those particular regional and product effects, our ASP has held really steady across the quarters.
  • This Pro Wave will help keep the ASP at current levels and probably slightly higher, but I wouldn't think of that as a big contributing factor to ASP of game sales.
    • If you remember when we introduced the Pro Curve a while back, it initially took a slight hit on our margins. We don't actually expect that with the Pro Wave, but I don't think it's going to be accretive probably for at least the first 12 months.


  • With more new products coming to market, based on brands which are terrific, fits for our target demographics, and utilizing proven math models, we are confident that our Gaming Operations business is well positioned to see meaningful growth resume before the end of FY 2014.
  • The margin on Gaming Operations was 70%, up from 69% in the comparable period last year, and within our expected range at 68% to 73%.


  • Given the continued growth of maintenance revenues, we now expect annual Systems' gross margin will approximate 75% for the full year.


  • Yield will continue to improve. The last two WAP releases, we have out there, the latest Michael Jackson and Jackpot Empire, are definitely doing very well. So we are positive as far as the yield improvements in the future go.
  • Based on our current release schedule, we do not anticipate our WAP footprint to grow (i.e. flat-to-slow growth) during the second quarter. However, we do expect the growth in our WAP install base to pick up again during the second half of this fiscal year.
    • I would expect it to be a bit flat, but not go down, and then pick up again in the subsequent quarters.


  • We continue to expect to establish a new annual revenue record for Systems in fiscal 2014, with revenue expected to grow by at least 10% over fiscal 2013, which was itself a record year.


  • At least $30 million


  • Most of our unit shipments just kind of follow the approvals by the gaming board there. In Q4 there were a lot of approvals. In fact, recently, there were a lot of approvals. So I would expect Q2 to be equal to or greater than Q1, but no competitive pressure there. We're still getting our more than fair share of the market.


  • With respect to our premium footprint, it still remains healthy. We've actually got a number of releases slated up over the next couple months.
  • Pawn Stars is reaching about a year old. You have Cash Wheel, a quick hits-style game going out on that, which customers have really been asking for. So, there's a lot to come in our premium footprint.

European Research Bullish; Quant Bearish

Below we update the chart of PMIs (Manufacturing and Services) for the month of January -- the Eurozone aggregate continues its bullish outlook in expansionary territory above the 50 line.


From a research perspective, we continue to see strong European PMIs, a reduction in sovereign debt levels, and outperformance from the periphery (of note is Spain) as continuing signals that support our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish growth recovery in Europe, specifically with a bullish outlook for UK and German equities and the British Pound vs the USD.


While our research view remains intact, we want to make note that our fundamental view has currently diverged from our quantitative view with key signals coming from the TREND lines in the DAX and Russian equities breaking down.  While we’ve favored European equities over U.S. equities on the margin in 2014, the signal here trumps the research and so we are not invested in European equities in our Real-Time Alerts Portfolio.

As the signals change, we change. It’s after all not always the case that our fundamental view matches our quantitative view… and we’re fine with that. Managing risk is dynamic.  


European Research Bullish; Quant Bearish - aa. pmis


Matthew Hedrick


This Person Is the Single Biggest Risk to the Bears

Takeaway: Keep your head up out there. You don't want the Fed to smash your face in.

By Keith McCullough


Earlier this morning, a listener on my firm's morning macro call asked me an important question.


What is the biggest threat to the bear case right now?

Economic growth slowing?


Emerging market contagion?


Janet “Mother of All Doves” Yellen reverting the Fed back to full blown dove?


This Person Is the Single Biggest Risk to the Bears  - yell2


Stop right there. From my market perch, the greatest threat to the bear case right now is Janet Yellen. In other words, Janet Yellen being Janet Yellen.


Here’s how this risk might hypothetically play out: our new, all-knowing, omnipotent Fed Head recognizes a day late and a dollar short that growth is slowing. She says to herself, “We’ve got to stop this tapering!” She picks up her phone, calls the Fed’s mouthpiece Jon Hilsenrath over at the Wall Street Journal, and shows him her cards.


You know what happens next. Someone gets an early whiff of the leak. Voila! “Suddenly” the S&P 500 is up 5 percent. Just like our Founding Fathers envisioned in 1776.


That there is the key risk to being bearish right now.


The other risks? They are “known knowns.” I’m not worried.


Emerging market contagion? Are people seriously still debating that? We’ve been bearish on emerging markets for over a year now. That’s nothing new and certainly not something I’m losing any sleep over at night. Look, emerging markets have been a total disaster. Just to get anywhere near back to breakeven, emerging market bulls are probably going to have to fast forward to the year 2020.


Incidentally, the “Tail” line (a duration of 3 years or less in our model) of support on the S&P 500 is 1,683. That’s the key line to keep in mind. The “Tail” is really important because it’s binary. (I can get you a lot lower than that if I were to use fundamentals.)


What I mean by that is that when you break the “tail,” there’s basically no support whatsoever down 300-400 points below. It’s really not something you want to mess with. The corollary is like walking up to some dog you don’t know and pulling on its tail. Now, you can go ahead and roll the bones on that. Have at it. Maybe the dog will even lick you. But there’s also an outside chance it’ll turn around and bite your arm off.


As far as the “Trend” (a duration of 3 months or more) is concerned, it has the best back test in our model. The math works really well here. When trends reverse from bullish to bearish (or the other way around), that’s when we make our best calls, because it’s typically where consensus gets caught offside’s. I really like to lean when the trend breaks one way or another.


Right now, the trend is breaking the wrong way, and gold is breaking the right way. That’s why we’re doing literally the opposite of what we were doing a year ago. If you were on our morning macro call a year ago, you would have heard me saying short gold and buy U.S. stocks.


A lot of people are still scratching their heads over this pullback. Why?  The writing was on the wall. The Financials (XLF) -2.5% snapping our TREND last week was a huge signal. It was one reason why we were advising caution, getting short, and telling people to look out below. (For the record, if my S&P 500 line wasn't broken, I'd be buying the damn-bubble like I did numerous times recently. But it is. And bubbles pop.)

At any rate, the biggest bear risk right now is clearly “Mother Dove.” She’s the most important wild card that I would be worried about right now.


Central Planners remain the greatest market and economic risk out there.


This Person Is the Single Biggest Risk to the Bears  - boom1

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HAIN – Gross Margin Headwinds Sting?

HAIN reported its fiscal Q2 2014 earnings after the close yesterday. The report was mixed:  while the company achieved double digit sales growth in the quarter, the trend is slowing, and CEO Irwin Simon noted commodity headwinds in the remainder of the year. While we remain bullish on HAIN’s portfolio – which meets customer demand of organic and natural products – we think this richly valued stock is heading lower based on our quantitative setup and profitability concerns in an environment of #InflationAccelerating.


The stock took a leg down after the print and has traded down as much as -10% intraday today.


HAIN – Gross Margin Headwinds Sting? - a. hain ch


As you can see from the chart below, sales of $535M in the quarter (an increase of 17.5% Y/Y) took a leg down in the quarter. The Q&A was filled with the management team explaining away what was a weaker quarter based on price and inventory shifts, particularly in the U.S. and U.K. that negatively impacted results. 


Gross margins fell in the quarter (26.8% vs 28.7% in the year-ago quarter) and we think investors are concerned with rising commodity prices in 2014, in line with our macro team’s Q1 theme of #InflationAccelerating.  Starting with a base of higher costs to produce organic and natural products, its two largest commodities in almond and dairy have already seen significant price gains.  The company expects its basket of commodities to inflate by +3.2% this year – we think a big threat to the company is its inability to expediently take pricing, especially in a macro environment that see the consumer still challenged in the U.S. and Europe.   


We’re bullish on the company’s recently completed acquisition of Tilda (a rice company) and its integration in the Middle East and Asia, in particular. The company boosted its full-year earnings and revenue outlook, now expecting per-share profit of $3.07 to $3.15 and a top line of $2.12 billion to $2.15 billion. In November, the company said it expected $2.95 to $3.05 and $2.03 billion to $2.05 billion, respectively.


HAIN – Gross Margin Headwinds Sting? - z.price diverg


Call with questions,


Matt Hedrick


Takeaway: We reiterate our Best Idea shorts: BLMN, CAKE, MCD, PBPB, PNRA.

Last night, Malcolm Knapp released sales results for January, estimating that same-restaurant sales and guest counts declined -2.6% and -4.4%, respectively, versus January 2013.  On a two-year average basis, same-restaurant sales and guest counts declined -1.6% and -3.3%, respectively.

January did, however, mark a period of sequential improvement.  The results imply a sequential acceleration of 350 bps and 340 bps for same-restaurant sales and guest counts, respectively. On a two-year average basis, the results imply a sequential acceleration of 225 bps and 235 bps for same-restaurant sales and guest counts, respectively.


Knapp noted that all four weeks in January had both negative same-restaurant sales and guest count results.  While January benefitted from gift card redemption, weather was a widespread and fluctuating issue.  Parts of the East Coast and Midwest were hit particularly hard during the month.


We will release more data when Black Box Intelligence reports, including any revisions to company specific 1Q14 same-restaurant sales estimates in January.



Howard Penney

Managing Director



We haven’t officially revisited our BWLD short thesis in over a year.  During that time, we stayed away from the long side because we don’t think the company has the unit economics to survive in the long run.  After last night’s earnings release, we have a few incremental data points to support an emerging secular bear case for BWLD.

We will spend more time pressing our short case over the upcoming weeks, but we wanted to post four critical charts to get the discussion going.

  1. New Unit Sales Performance
  2. ROIIC
  3. CFFO/Net Income
  4. Valuation



While same-store sales trends (+5.2%) were better than expected, the company missed overall revenues by 2% due to lower-than-expected new unit productivity.  This is the first time since 1Q10 that the growth in average weekly sales was below the growth in same-store sales.  This is a critical leading indicator for future trends.  While we see some underlying issues, we do acknowledge the company is currently benefitting from a few tailwinds.  These include mid-single digit comp growth, lower labor costs, and lower wing costs.  The bottom line is that there is limited visibility toward the future growth of the core BWLD concept.  This factor is reaffirmed by management’s desire to aggressively expand into the fast casual space.






BWLD has always been a very low return business and now that new unit performance is slowing, the blue line will likely head lower from here.  We expect the red line to begin to mirror this trend.






CFFO/Net Income is a key metric for any growth company, as it is another measure of the efficiency of capital being deployed.  Simply, it indicates the proportion of earnings that are yielding cash.  A higher ratio relative to the industry can indicate more conservative accounting, signaling a sustainable level of income.  Any ratio that is close to flat or negative is generally a red flag for us.  BWLD is heading in the wrong direction.






BWLD is still a great example of the current bubble in casual dining.  On a good day, BWLD should trade at 8x EV/EBITDA – but the market suggests the company is worth 11.2x EV/EBITDA.  Assuming the multiple corrects three turns over the coming months, there could be as much as 30% downside from current levels.




Feel free to call with questions.


Howard Penney

Managing Director

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