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PENN 4Q 2013 CONF CALL NOTES

Consistent with our "Regional Reversal" call, better than awful was good enough.

 

 

CONF CALL NOTES

 

  • 4Q:  Hollywood St. Louis refurb was completed right before Christmas holiday.  Property will be wellreceived in 2014.
  • 2 OH VLT slots only Racetracks:  On target for Fall 2014 opening
  • Jamul property: early 2016 opening
  • MA decision will come at end of February
  • PA Philly license decision: 2nd quarter of 2014
  • Relatively soft consumer environment, particularly at low end segment
  • Cannibalization impact:  Lawrenceburg, Charles Town
  • Weather hasn't helped
  • Rewards program:  75% properties live; majority of remaining property will be implemented in 2014 including M Resorts later in Feb 2014 
  • Focused on cost structure; additional efficiencies ahead
  • Currently, promotional environment mostly rational and stable
  • 4Q 2013 
    • Spin off MD/Baton Rouge:  less $25MM revenue and less $5 EBITDA 
    • Impairment charge also the result of spin-off
  • 3 annual dividend payments to PENN employees who hold stock options as a result of spin off

 

Q & A

  • 4Q Rent coverage: 1.8x
    • Guidance reflects lower rents
    • 80% master lease fixed, 20% variable (1/2 resets every 5 years, 1/2 predicated on OH)
  • Assume a 'conservative customer' in 2014; assume current trends in 2013 will continue into 2014
  • Dayton/Austintown:  may not be 20% ROI (Toledo/Columbus) but will be good returns
    • Margins in the high 20s or better
  • Jamul project:  $81MM (capex in 2014)- $360MM total budget; June/July will get going; spread on financing is excess of 10% of revolver financing 
  • <$100 per visit: segment accounts for 20-25% of database 
  • >$100 per visit segment also declined
  • Horseshoe Baltimore:  impact on Charles Town will be smaller than Maryland Live! opening
  • Columbus:  new signups 10,000 per month (over 300,000 in the database)
  • 75% full-time employees, down from 80% historically
  • Jamul mgmt agreement:  7 years 
  • 1Q 2014 lower costs:  payroll and marketing costs; better operational costs in Toledo and Columbus
  • Cash balance:  looking for further reduction in cash which will be used to pay down debt
  • 2014 capex:  $88MM maintenance capex (60% spend on gaming floor refurb); $176MM new project capex (does not include $81MM for Jamul)
  • 4Q: corporate expense $26.5MM; going forward, $80-85MM corp expense (inclusive of $12MM dividend payments)
  • Other forms of gambling entertainment playing no role on gaming (e.g. i-gaming)
  • Middle income customers being squeezed
  • On non-weather-related days, revenue levels are comparable with what has occurred in the past
  • St. Louis property:  appealed on property tax calculation
  • 2014 guidance is conservative
  • 4Q Toledo: net slot win was up 5%, encouraging sign; expect that property to grow since there will not be additional supply in that market
  • Columbus:  Dayton customer shared with Miami Valley; Dayton racetrack opening may slightly impact Columbus 
    • Over 90% customers are local
  • Promotional expenses ticked up in 4Q
    • Largely been in new competition markets. 
    • Will continue to bring that number down 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING

Takeaway: Tomorrow's NFP print will be the main event on the labor front, but we think we already have a pretty clear picture of what's happening.

Labor is Slowing, but Only Modestly

The strength of the labor market has cooled off modestly. We key off the year-over-year rate of change in rolling NSA (non-seasonally adjusted) initial jobless claims. This week the data was better by 5.5% vs the same period last year. However, if you compare that with the preceding three weeks of data, it reflects a modest deceleration. The last four prints have been: -8.5%, -7.9%, -7.2% and -5.5%. It's important to remind investors that initial claims tend to hit a frictional resistance around 300k. As such, the closer we get to 300k the more we'd expect the rate of improvement to converge toward zero. As such, it's not surprising that the rate of improvement is slowing, but we're more interested in the short-term acceleration/deceleration relative to the trendline rate of change. On that basis, the last four weeks represent a bit more of a slowdown than what the trendline would suggest. To be clear, we're not overly concerned here, but in light of the weak ISM print and the elevated overseas concerns it's important to keep tabs on whether we're in the early days of a real slow down or just a short, counter-trend speedbump.

 

The Numbers

Prior to revision, initial jobless claims fell 17k to 331k from 348k WoW, as the prior week's number was revised up by 3k to 351k.

 

The headline (unrevised) number shows claims were lower by 20k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.75k WoW to 333.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.2%

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 1

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 2

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 3

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 4

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 5

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 6

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 7

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 8

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 9

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 10

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 11

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 12

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 13

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 19

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 14

 

Yield Spreads

The 2-10 spread rose 3 basis points WoW to 235 bps. 1Q14TD, the 2-10 spread is averaging 244 bps, which is higher by 4 bps relative to 4Q13.

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 15

 

INITIAL CLAIMS: SLOWING MODESTLY, BUT STILL IMPROVING - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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FLASHBACK: Penney Shorts Casual Dining (He Nailed It)

Takeaway: It pays to listen to Hedgeye's Howard Penney.

Does Howard Penney have a crystal ball? No. He’s just one of the best (if not the best) restaurant analysts on Wall Street.

 

Earlier this week, 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.

 

In other words, bad news for restaurants.

 

As you can see in the HedgeyeTV video below from a month ago, Penney was all over this bearish trend and well ahead of Old Wall consensus in making his call.

 

 

Join the Hedgeye Revolution.


Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok,

Takeaway: Gotta respect the CVS tobacco move – even if you smoke. AdiBok does something positive? COST leaves the field in the dust. LB M ANF JWN

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

BEBE - Earnings Call: Thursday 2/6, 4:30 pm

 

COMPANY NEWS

 

ADDYY - Topshop and Adidas Originals Team Up

(http://www.wwd.com/fashion-news/fashion-scoops/teaming-up-7412358?module=Fashion-Fashion%20Scoops-bullet)

 

  • "Topshop is launching a collection in collaboration with Adidas Originals. Topshop’s design team and Adidas Originals have created a 20-piece collection — called Topshop X Adidas Originals…" 
  • "Among the styles in the collection are three-stripe track pants...along with cotton tank tops..and sweatshirts adorned with a print inspired by London landmarks, created by Topshop’s designers. Footwear is also part of the mix, with Adidas Originals’ Superstar, Tech Super and Attitude sneaker styles reworked in new leather and print combinations."
  • "The collection will be launched March 6 in select U.K. Topshop stores and all the retailer’s U.S. stores, alongside its Hong Kong store and 64 other international locations. It will also be carried at topshop.com and nordstrom.com and at 80 Adidas stores internationally. Prices for the collection start at $35 for a cotton tank top and run through to $135 for the Tech Super sneakers."

 

Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok, - chart1 2 6

 

Takeaway: Adidas is no stranger to collaborations with brands and designers. They've largely been hit or miss. This one, however, is pretty smart, as it's attaching itself to one of the fastest growing fashion apparel retailers. Better yet, Topshop will be responsible for the design of the merchandise -- and therefore has greater accountability to getting the goods sold.

 

CVS - CVS to Stop Selling Cigarettes, Tobacco Products by October

(http://www.bloomberg.com/news/2014-02-05/cvs-caremark-to-stop-selling-cigarettes-tobacco-by-october.html)

 

  • "CVS Caremark...plans to stop selling cigarettes and tobacco-related products across the nation by Oct. 1 in an effort to support the health of its patients and customers."
  • "CVS...would be the first national pharmacy chain to take this step, the Woonsocket, Rhode Island-based company said in a statement today. The decision will cut annual revenue by about $2 billion, equating to 17 cents a share, CVS said."

 

Takeaway: Kudos to CVS for one of the boldest moves we recall seeing from a retailer in years. Giving away $2bn is a big big deal, particularly when you consider that cigs are a traffic driver. We're not suggesting that people come in to buy smokes and also walk away with loofahs and baby wipes and hair gel, but there's a strong attachment rate with other items at the front of the store like gum, breath mints, soft drinks and candy. CVS can do the analysis far better than we can, and its data still suggested that the right thing to do is walk away. Just in time for the dollar stores (DG and FDO), who are embracing tobacco as a business driver. The key strategy for CVS now is to parlay its move into a better public image to improve loyalty with the 82% of adults that don't smoke. 

 

COST - Costco Wholesale Corporation Reports January Sales Results

(http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-newsArticle&ID=1897484&highlight=)

 

  • "Costco Wholesale Corporation today reported net sales of $7.99 billion for the month of January, the four weeks ended February 2, 2014, an increase of six percent from $7.51 billion during the similar four-week period last year."

 

Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok, - chart2 2 6

 

Takeaway: Not all retailers whiffed the month. COST comes out ahead.  Some highlights…. a) Traffic up around 4.5%. b) Avg transaction -1.5% but FX hurt transaction value by 2.25%. c) Cannibalization hurt comps by about 50bps. d) Geographies: US saw strongest results in Southeast and Midwest. International saw strongest results in Mexico, Taiwan, Korea and Canada. e) food up msd, f) hardlines up lsd, g) Softlines +mid-high single digits. h) fresh food up ldd.

 

LB - L Brands Reports January 2014, Fourth Quarter 2013 And Fiscal Year 2013 Sales; Updates Fourth Quarter Earnings Guidance

(http://phoenix.corporate-ir.net/phoenix.zhtml?c=94854&p=irol-newsarticle&ID=1897536)

 

  • "L Brands, Inc. reported comparable store sales for the four weeks ended Feb. 1, 2014 increased 9% compared to the four weeks ended Feb. 2, 2013."

 

Takeaway: LB essentially bought the comp in the last month of the Quarter. 10% comp at VS but margins down significantly. The one thing we can't get over is that direct was down 12%.

 

M - Shaq Attacking Tailored Clothing

(http://www.wwd.com/menswear-news/sportswear/shaq-attacking-tailored-clothing-7411076)

 

  • "Peerless Clothing...has signed National Basketball Association legend Shaquille O’Neal to headline a new collection of suits that will be sold exclusively at Macy’s. The line, which is being introduced for spring, quietly made its appearance on the Macy’s Web site this week and will begin rolling out to stores between now and March 1."
  • "The collection of suit separates and sport coats is available in both regular and big and tall sizes and retails at $400 for the jacket and $150 for the pants."

 

Retail Callouts (2/6): CVS, COST, LB, M, ANF, JWN, AdiBok, - chart3 2 6

 

Takeaway: There's a few cardinal rules in retail. But one is that huge spokespeople don't sell product. When Shaq was endorsed by Nike, he couldn't sell a thing. Same goes for Kevin Garnett, Tim Duncan, and Yao Ming. Now…we acknowledge that the tailored clothing business is different from selling shoes. But we'd argue that even the average 'really big guy' still can't really associate with Shaq (we have to take their word on it -- big and tall stores won't let McGough in). Shaq should stick to promoting Gold Bond Hand Lotion (though we have no idea how that deal exists and subsequently adds value).

 

ANF - Tech Firm Hire Latest Move in A&F Reboot

(http://www.wwd.com/retail-news/marketing-consumer-behavior/af-hires-first-insight-7410287)

 

  • "...A&F has hired First Insight Inc., a Pittsburgh-based technology firm that guides stores on product, design and pricing decisions."
  • "First Insight taps consumer perceptions through online social engagement tools, including gaming. The company said it will provide its consumer-driven predictive analytics to help A&F make faster and more accurate design, buying and pricing decisions and reduce markdowns and risks associated with product introductions. It added that thousands of products and designs will be analyzed months before they are brought to market. 'We look forward to driving measurable results' for A&F, said Greg Petro, First Insight’s president and chief executive officer."

 

Takeaway: We're massive ANF critics, but we'll always give credit to a company that looks elsewhere for help getting more productive. But sadly, the best move the company can make remains to get a new CEO. At this point, we'd say that we like Ullman better than Jeffries.

 

JWN - Nordstrom to Shutter Two Department Stores

(http://www.wwd.com/retail-news/department-stores/nordstrom-to-shutter-two-department-stores-7411272)

 

  • "Nordstrom Inc. will close two full-line department stores, one in Portland, Ore., and the other in Vancouver, Wash., within a year…"
  • “'These two locations just haven’t performed to the level we need them to, and investing in remodels to possibly make them more successful didn’t pencil out,' said Erik Nordstrom, president of stores at the Seattle-based retail firm. 'We never like to close a store, but we came to the difficult conclusion that it doesn’t make good business sense to continue operating them after our agreements end.'

 

 

INDUSTRY NEWS

 

U.S. E-Tailers' Cross-Border Sales to Hit $45B: Study

(http://www.wwd.com/business-news/financial/us-e-tailers-cross-border-sales-to-hit-45b-study-7411762)

 

  • "The Web is bringing the world’s customers to U.S.-based e-tailers — which are expected to grow their international business fourfold to $45 billion by 2020, according to a new study."
  • "That’s just the fastest growing part of an already expanding business. U.S. e-tailers are expected to see their domestic sales shoot up 56 percent to $234 billion by 2020, according to research from OC&C Strategy Consultants and Google. The study, titled 'Retail e-mpires,' estimated the value of the online retail export market by analyzing 2011-13 Google search volumes from across the world."
  • U.S. e-tailers are projected to get 16 percent of their business from abroad by the end of the decade, up from 7 percent last year.
  • "Interest in American e-tailers is rising most sharply in Russia, where searches for U.S. retailers grew at a compounded annual growth rate of 51 percent from 2011 to 2013. Also growing keener were Web searchers in Brazil, up 40 percent, and Mexico, 39 percent."
  • "All told, U.S. consumers bought $470 million more in fashion from sites overseas than American companies sold abroad. (The U.K. was the largest net exporter of fashion, selling $1.22 billion more than consumers in that country bought from abroad.)"

 

Shoppers battle weather to take advantage of deals

(http://www.fibre2fashion.com/news/technology-result-news/newsdetails.aspx?news_id=159410)

 

  • "Euclid, the leader of in-store retail analytics, measured data on nearly 25 million domestic shopping sessions during January, revealing that shoppers remained quite active in January despite the effects of bad winter weather across much of the country. "
  • "Shopper traffic and window conversion showed improvement over last year for another month in a row as shoppers looked to capitalize on a very promotional January."
  • "Traffic in January decreased 17.6% compared to the previous month, but increased 1.4% compared to the same month last year. Shopping visits grew despite harsh winter storms across much of the country this year."
  • "Window conversion in January, defined as the number of shoppers who enter a store as a percentage of the total foot traffic, rose to 8.4% from 7.3% last year. This was a slight decline from the 8.9% seen in December 2013."

 


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