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Data thru February 6, 2014






Genting Singapore said it has entered into a joint venture agreement with Landing International Development Ltd (LIDL) , a Chinese property developer, to own, manage and operate a US$ 2.2 bn integrated resort when it opens in 2017 in South Korea.  Construction will begin in June this year, the chairman said. The resort will have a total of 800 gaming tables and a casino floor of 27,000 square meters, he said.  The integrated resort will include luxury hotels, a shopping mall, a theme park as well as gaming and entertainment facilities.



SJM says it will break ground for its first casino-resort in Cotai next Thursday.  SJM CEO Ambrose So said last week his company intended to open the casino-resort within three years.



SJM plans to spend US$50 million (HK$390 million) to buy lottery operations in five countries through a joint venture.  The firm said yesterday it will set up a joint venture with eGame Solutions Operation Ltd, a global lottery provider.  Together, they will control a number of country-specific firms that run lottery operations.  SJM will own 75% of the joint venture, with eGame Solutions taking the rest.

Life Inside the Box

This note was originally published at 8am on January 24, 2014 for Hedgeye subscribers.

“If we lack emotional intelligence, whenever stress rises the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.  This, more often than not, is precisely the wrong approach in today’s world.” 

- Robert K. Cooper PhD


Robert Cooper is a neuroscientist and strategic advisor to CEOs and many Fortune 500 companies.  Taking on the work that Dr. Cooper requires is certainly not easy.  According to Cooper, your brain is organized to reflect everything you know in your life.  Or, in other words, your brain is a record and an artifact of your past. 


Consistent with this line of thought, Cooper poses the following question: Does your environment control your thinking or does your thinking control your environment?


To help you ponder, we ask the following questions:

  • What does your daily routine look like? 
  • Did you wake up today and hop out of bed on the same side? 
  • Did you shut your alarm off with the same hand? 
  • Did you go to the bathroom like you always do? 
  • Did you shower and follow the same grooming routine? 
  • Did you dress the way your coworkers expect you to dress? 
  • Did you follow the same breakfast routine and do you get angry when the morning commute to work is just slightly off the normal pace?

I’m sure many of you will find that you often revert back to a routine in life you are comfortable with or, in Layman’s terms, the same-old, same-old life.  This is considered living life inside your box and it is much more prevalent among us and our colleagues than we’d like to acknowledge.


Admittedly, this may be too much philosophical thinking for a Friday morning.  But, the metaphor of switching to autopilot during rising levels of stress could be the norm for a CEO whose company you have invested hundreds of millions of dollars in and whose stock is underperforming.  Isn’t this a scary thought?  What if this routine keeps him/her in survival mode and prevents him/her from making the right decisions for the company he/she is running?


Back to the Global Macro Grind


I often refer to this decision making process in the restaurant space as the “6 Stages of Grief.”  This is a cycle that some companies tend to go through before they can see life outside the box.  As I see it, today’s activist investors provide a version of neurological therapy for this grief.


Unfortunately, the news of an activist investor can actually provoke a series of decisions based on past experiences that might be inconsistent with what is appropriate for today’s environment.  When an activist investor arrives on the scene, it’s only natural that “as stress rises, the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.”


Whether it’s a letter from Dan Loeb saying you’re an idiot or a letter that says “we look forward to maintaining an open dialogue and working with you to ensure that value is created for all shareholders,” either one could put management on the defensive and get them to react in ways that could potentially destroy shareholder value.


Sadly, this is precisely the path of destruction that the CEO of Darden Restaurants is headed down.  


As I said earlier this week, the challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up, break out of their box, and implement meaningful change.  It is their challenge, their job, and their responsibility not to be more of the same. 


When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become fuzzy.  As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis.  The operational performance of DRI has stagnated and it is, without question, time for a significant change.


As Keith said in yesterday’s Early Look, we are short a significant number of restaurant names.  On yesterday’s earnings call, the CEO of Starbucks, Howard Schultz, went out of his way to emphasize the decline in bricks and mortar retailing.  Starbucks was wisely in a position to win in this environment.  Mr. Schultz is a great example of a CEO, at least in my space, that is willing to take on the difficult task of recognizing when and where he can strengthen his company.


To be honest, I welcome the commentary about bricks and mortar retailing as it relates to my short call on CAKE.  My original thesis was shorter term, but his comments could make our bearish call on CAKE more secular in nature.  In the short run, however, we believe the price spikes in the dairy complex are unaccounted for and suggest that EPS estimates are too aggressive for the company in 2014.


Moving on to a broader concept, the biggest risk to the consumer and restaurant space in 2014 is our MACRO theme of #InflationAccelerating.  The CRB Index, milk, cheese, natural gas, cattle, hogs and coffee are all up more than the S&P 500, as gold continues to signal higher lows.  With the Bloomberg Consumer Confidence Index flat week over week at -31, sluggish Per Capita Disposable Income, and a stagnant job market, it could be challenging for most companies to take price in order to offset inflation.


The irony of all this is that one of the few names I like on the long side is Darden Restaurants.  The CEO’s tendency is to do more of the same, only harder.  While I’m typically not a proponent of this line of action, it has indeed created a significant opportunity for a lot of money to be made.


It has also provided me with the material for a scathing attack on what has arguably been the largest case of value destruction in Casual Dining history.  For the record, if you’re reading this Mr. Loeb, I have everything you could possibly need to write your best letter yet.


Function in disaster, finish in style.


Howard Penney

Managing Director


Life Inside the Box - chartofday


Life Inside the Box - rta1


Solid quarter boosted by unusually high systems hardware sales




  • $29.4 MM revenues from SHFL for 37 days
  • 51% - recurring revenues
  • FX adverse effect:  2 cent loss in Q, particularly Argentina.  Expect losses to continue.
  • NA units sold: 3,652 (2,000 replacements)
  • International units sold: 1,500
    • New market:  Australia/Asia 
    • Higher sales in Mexico/Central America offset by South America weakness esp Argentina
  • ASP:  lower primarily as a result of mix and lower ASPs in certain international jurisdictions (Mexico). Expect back half 2014 to be better.
  • EGM:  Excluding $3MM one-time inventory charges related to acquisition, margins were 51% 
  • Gaming operations benefited from NY lottery and 2,985 leased Equinox EGMs 
  • Centrally determined units declined primarly because of removal of Mexico units
  • Systems gross margin decreased primarly due to higher mix of hardware revs 
  • Table revs: $14.3MM ($8.8MM utility revenue, $5.5MM prop table gain rev)
  • Table product margin 71% after excluding $1MM of inventory charges related to acquisition
  • Expect effective tax rate to be 35-36% for remainder of FY 2014
  • Interest expense for Q was $11.8MM ($6.9MM incremental with term loan B, higher RC).  Going forward, $21MM/Q ($17MM or $0.27 per share related to SHFL).
  • $507MM SHFL intangible assets amortizing over 9 years. $5.5MM amortization attributed to SHFL.  Going forward, $13.5MM per quarter.
  • Pro forma leverage: ~4x; target goal: 3x in the next 2 years
  • Avoided $22MM in ticking fees due to closing the merger sooner than expected
  • FY 2014 EPS guidance:  $4.30-$4.50 
  • Adjusted EPS more appropriate measure
  • Annualized synergies +$40MM, up from $30MM; a run rate by end of 2014;  half of $40MM will be realized in 2H 2014 (mostly in SG&A)
  • Expect SG&A to decrease as a % of revs
  • Integration process has been better than expected
  • Table baccarat/pai gow poker off to good starts
  • Sold 250 games in Asia
  • Sold over 1,000 VGTs units in Illinois; will continue to make inroads well into FY2015
  • Normal seasonal decline of variable games was impacted by softness in GGR
  • Gaming ops revenue:  45% variable (meaningful portion generated by NY Lottery)
  • WAP install base:  expect to see higher growth starting in June quarter
  • Will see further WAP and premium games
  • Invests in gaming ops will continue
  • FQ2 systems gross margin:  lower end of internal guidance but had record revenues
  • Systems expect gross margins to be around 72% for remainder of  FY 2014
  • Systems revenues 2014:  +20% growth
  • Casino environment more competitive than ever before
  • Interactive:  expect NJ customer to take advantage of marketing promotions
  • Gaming ops business will grow at the end of 2014 and into 2015
  • Will show more WAP products at G2E 2014
  • Operating margins ex items was a record 27% 


Q & A

  • Sales force busy with Pro Wave
  • Synergies: 50% payroll and 50% legal/marketing (mostly SG&A)
  • Equinox:  Asia/Australia - no change in cabinet strategy
    • Cabinets being placed on a fixed fee basis-- helping game ops business rather than EGM sales
    • Will be coming into US, timing uncertain due to regulation standpoint
    • Additional tool to increase ship share
  • 2014 guidance range:  systems (good visibility); expect economy to be status quo; great backlog; table games will penetrate international markets; about half of cost synergies of +$40MM have been already achieved
  • Revenue synergies?
    • Difficult to forecast
    • SHFL slot content never been launched in South Africa where BYI has relationships
  • Pro Wave  
    • 10% ASP Premium
    • Backlog stronger than Pro Curve
  • Maintenance fees not increasing bc they're increasing prices.  They're increasing bc customer base expanding. 
  • New game releases later in FY 2014 gives them optimism in the back end of year for game ops
  • Illinois VGT
    • Avg 600-700 per quarter
    • 1,000 per quarter is a high goal.  Next quarter may be a touch lower.
  • Mix issues:  did not release much WAP/premium releases and performance has declined e.g. NASCAR which needs refresh

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

RH: Bullish Thesis Intact

Takeaway: Please join us Monday, February 10th at 1:00pm EST for a Flash Call on RH. ***Call details will be posted morning of 2/10

Please join us on Monday, February 10th at 1:00pm EST for a Flash Call on Restoration Hardware (RH). On the call we will revisit our bullish thesis on RH and address current challenges in the market - real and perceived. 


RH: Bullish Thesis Intact - Call details


Given all the noise out there in the market, we want to be clear about delineating risk/reward around each of the following three durations:

  • TRADE (3 weeks or less)
    • Sentiment - and the key issues we hear from investors
    • Risk scenarios based on how RH likely fared operationally and financially in 4Q while retailers were dropping like flies
    • Is the Company's guidance at risk, and if so, how much?
    • 'Deferred Revenue' has gotten a lot of attention year-to-date. Is the concern justified, or overblown?
    • How is e-commerce trending?


  • TREND (3 months or more)
    • Catalyst calendar throughout CY2014
      • Store opening cadence
      • Category launch
      • Catalog drops, or lack thereof
    • Management transition - life after Carlos


  • TAIL (3 years or less)
    • Inflection point(s) in square footage model
    • Impact of larger format stores on the comp
    • Trade-off between in-store vs. direct revenue
    • Gross Margin Opportunity, real or perceived
    • SG&A leverage - or lack thereof?
    • Capital intensity (something no one asks about)



The dial-in details and the presentation will be circulated on Monday prior to the call. Please email  for more information.


McCullough: No Need to Be a Cowboy on Friday's Jobs Report

Takeaway: Hey Jesse James. Put your gun back in its holster.

I am getting a ton of questions from institutional investors on what I think tomorrow’s January jobs number is going to be.

  1. I have no idea.
  2. The question is being asked because consensus still doesn’t want to miss a big up move.

I'm probably going to go into the print with relatively flat net exposure and low gross. I've covered a lot of shorts on red, so I have a lot to do putting shorts back on.


But no need to be a cowboy.


Betting on an unpredictable jobs number? That’s cowboy. I’ve been there and done that. And I failed. Unless you've got some inside information, no one has any edge. No one. (Apologies to Mark Zandi, Steve Liesman, etc).


McCullough: No Need to Be a Cowboy on Friday's Jobs Report - z 45


Moreover, the risk range on the S&P 500 right now is wide at 1735-1803. And the VIX is sitting right in the middle of its risk range of 14.91-20.41 too. So it’s not the spot to play cowboy.


Unlike a lot of pundits, we don’t pretend to have any edge on the monthly non-farm payrolls figure. While many market pretenders toss out pie-in-the-sky predictions, we don't. No real pro or analyst will.


In other words, unless you’ve got some inside information leaning either way is just a guess.



Join the Hedgeye Revolution.


Takeaway: We are removing JPMorgan (JPM) from Investing Ideas.

Hedgeye Financials Sector Head Josh Steiner is pulling JPM from Investing Ideas. For now.




We still like this name from an intermediate/longer term standpoint for the same reasons we cited when it was added to Investing Ideas. But in the short-term, the growing risks abroad augur poorly for a globally-interconnected bank like JPMorgan.


Moreover, the recent trend of softening economic data in the US is also unsupportive.


JPM is a name that we can revisit on the long side when the Emerging Market risk profile is in retreat, rather than rising, and when we have better visibility into whether the recent US data is hitting a speed bump or something larger.


The S&P 500 is down approximately -3% since JPM was added to Investing Ideas. JPM is essentially flat.