In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance



OVERALL:  BETTER - Certainly not better than consensus back in October when PNK reported Q3, Q4 margins were strong in the face of a difficult GGR environment.  EBITDA actually beat reduced Street margins and in-line with our recent Regional Reversal thesis, the bad was more than reflected in the stock.


PNK 4Q 2013 REPORT CARD - nk



  • MIXED:  January was a very tough month.  Negative impact on EBITDA could exceed more than the $2MM in December.  However, February is off to a better start.  Trip frequency continues to decline with spend patterns stable.  <$100 segment hit particularly hard.
  • PREVIOUSLY:  There is undoubtedly some headwinds regionally.



  • BETTER:  This property continues to set new EBITDA records due primarily to strong margins. Top line was also strong.
  • PREVIOUSLY:  "We experienced a very strong quarter at our L'Auberge Lake Charles property where all time records were set in cable drop, cable revenue and retail revenue. We completed the renovation of our standard hotel rooms and have received very favorable guest feedback."


  • BETTER:  230bps improvement in market share.  Cash revenue was up 15% and F&B was up 32% in Q4.
  • PREVIOUSLY:  "River City is significantly outperforming the market. Our new hotel opened on August 28, completing an $82 million project that included an event center and 1,600-space parking garage. Early results have been encouraging with guests who have stayed in the hotel showing a 37% increase when compared to prior to the hotel opening."


  • SAME:   Belterra Park's construction budget remains $209 million, and is scheduled to open on May 1, 2014 pending required regulatory approvals.
  • PREVIOUSLY:  "We are looking forward to the opening of our newest property, Belterra Park, in May of next year."


  • BETTER:  Market share increased 420bps from prior year and set a new EBITDA record.  There was strong local and regional play. PNK reduced marketing spend at the property and achieved 2nd highest REVPAR.
  • PREVIOUSLY:  "L'Auberge Baton Rouge continues to be a very good story, growing the market while achieving the highest market share since opening at 53.4% in the third quarter. We are seeing the momentum of strong trial continue with over 17,000 new mychoice members visiting the property for the first time in the third quarter. Hotel demand remains high with the property now producing the second highest RevPAR in the combined company. EBITDA margins also are improving as we cycled our first year anniversary in September."


  • SAME:  $26MM of synergies realized at the end of 2014.  Revenue synergies are expected in 1H 2014.  PNK expects to reach $40MM in total synergies by 1Q.
  • PREVIOUSLY:  "Over the course of the first 49 days of the integration, we have implemented synergies that will provide savings throughout our company in excess of $20 million per year. These implemented synergies fall into three categories: public company cost, labor and scale efficiencies.
  • Every day, we continue to make progress and feel very confident on our ability to execute to meaningfully exceed our public target of $40 million in synergies to be implemented by the end of next year.
  • We will be able to achieve that (rest of $20MM) without any revenue. And we will exceed it without any revenue.
  • There is revenue opportunity for the combined company. I mentioned a few, but I'll just elaborate on them, one being the hotel yield automated system. Currently, Ameristar does not have a sophisticated hotel yield system. A second opportunity will be the combining and the unveiling of a new loyalty program in the spring of next year. One other item that I would add to the revenue mix is legacy Pinnacle has an established national casino marketing infrastructure that includes branch offices in key cities like Chicago, Dallas, Houston and others as well as a pretty expansive network of independent reps. We're now going to take that same infrastructure and leverage it across the Ameristar portfolio."

Short: SP500 Levels, Refreshed

Takeaway: Given US #InflationAccelerating and consumption #GrowthSlowing, I am not convinced my @Hedgeye TREND support of 1785 holds.



While being short into the tail-end of a market v-bottoming off the YTD lows was painful yesterday, that doesn’t mean our bearish call on consumption growth ends. If you want to be long, buy commodity inflation and/or slow-growth (bonds) assets. That’s what’s working.


Across our core risk management durations here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1837
  2. Intermediate-term TREND = 1785
  3. Immediate-term TRADE support = 1729


In other words, SPX is making lower-highs on lower-volume signals than we are seeing on the down days (Top 5 Volume Days of 2014 were all down days).


Given US #InflationAccelerating and consumption #GrowthSlowing, I am not convinced my @Hedgeye TREND support of 1785 holds. This is materializing into a very different setup vs. what our process signaled in 2013.


If they snap 1785 again, there’s no support to 1729. On a move like that, risk will most likely happen fast.



Keith R. McCullough
Chief Executive Officer


Short: SP500 Levels, Refreshed - SPX


Another big stock move following earnings suggests our Regional Reversal call still relevant. Feb regional gaming revs should bounce back




  • New combined loyalty program launch in April 2014
  • All properties will be connected to universal card by mid-2015
  • New hotel yield system:  Kansas City came online in Dec; all properties will come online by end of 3Q
  • Trip frequency continues to decline with spend patterns stable; hardest hit among the <$100 segment
  • Rational marketing spend 
  • Will not pursue nonprofitable revenues
  • L'Auberge Lake Charles:  55% market share.  Double-digit growth from higher-end segments.
  • L'Auberge Baton Rouge:  market share increased 420bps from prior year (strong local and regional play), reduced marketing spend; achieved 2nd highest REVPAR in the company
  • ASCA St. Charles saw +10% REVPAR improvement in December due to new hotel yield system
  • River City:  230bps improvement in market share; cash revenue up 15% and total food up 32%
  • South segments:  saw better demand trends than Midwest; record EBITDA for both L'Auberge properties
  • January remain challenged; February off to better start
  • ASCA synergies:  public company costs, labor, and scale efficiencies; have started to implement changes in marketing. Will exceed $40MM target by 1Q 2014.
  • Belterra Park:  on time and slightly underbudget
  • New Orleans hotel:  on budget and will open early summer 2014
  • Lumiere sale will close 1Q or early 2Q


Q & A

  • Weather adversely impacted in December by $2MM
    • January was tough; could have worse impact
  • <$100MM segment:  unprofitable programming and macro factors
  • Corporate expense run rate:  expect to trend down towards $20MM
  • D&A:  expansion of River City creeped up D&A in Q4.  Additional D&A in Q4 due to player list purchase accounting.  Real depreciation in Q4 was $55-60MM.
  • 2014 Cash Taxes:  $10MM
  • Most of revenue synergies will be in 1H 2014
  • $26MM synergies:  almost exclusively cost synergies
  • Careful about reinvestments
  • Marketing reduction in 4Q:  1) L'Auberge Baton Rouge out of launch mode 2) marketing reductions across portfolio due to softness in revenues 3) eliminated unprofitable programming
  • 10K - March 3
  • Tilman Fertitta property (Lake Charles): plan to open Fall 2014 
    • think market will grow
  • Will continue to de-lever the company
  • Will look at NY, FL opportunities

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$MCD: MCDONALD'S MANAGEMENT IN DENIAL, ackman to the rescue?

Takeaway: If management’s denials persist, we believe MCD will continue to underperform and may prompt Bill Ackman to dust off the old slide deck.

Editor's note: This research note by Hedgeye Managing Director and veteran Restaurants analyst Howard Penney was originally published January 30, 2014 at 10:42 in Restaurants. For more information on our subscriber services click here.

For the past year, we have been harping on our “Espresso-Based Conspiracy Theory” as one of the reasons why McDonald’s is struggling to grow its top line.  The evidence supporting this assertion continues to pile up.


$MCD: MCDONALD'S MANAGEMENT IN DENIAL, ackman to the rescue? - mcds

In short, we believe the McCafe strategy creates additional complexity in the back of the house and diverts resources away from the core food business.  We’ve always viewed McDonald’s as a food first destination and whenever management shifts their focus away from food and to beverages, the core business suffers.  To that extent, we contend that the early success of the beverage strategy (cold beverages) masked a decline in the core business (selling burgers and fries).


At the most recent analyst meeting and earnings call, management finally began to “come clean” with some of the issues that are impacting sales trends.  None of the issues the company addressed, however, included McCafe.  In fact, part of their 2014 strategy includes increased marketing resources to “go after the coffee consumer in 2014.”


On the 4Q13 earnings call, Chief Operating Officer Tim Fenton admitted that the never-ending LTOs and menu changes in 2013 overcomplicated operations.  The menu changes in 2013 included:

  1. Mighty Wings
  2. Premium McWraps
  3. Steak & Egg Burrito
  4. Fish McBites
  5. Steak Breakfast Sandwiches
  6. New Quarter Pounders
  7. Grilled Onion Cheddar Burger
  8. Hot’n Spicy McChicken
  9. The Dollar Menu & More (with five new burgers)

During the analyst meeting a couple of months ago, Don Thompson said: “We stumbled a bit last year with too many new products, too fast and we created a lot of complexity.”  This may be true, but we contend that the issues McDonald’s faces did not start in 2013.  These issues really date back to 2009/2010, when we saw the national launch of McCafe and an accelerating number of menu introductions.


Later in the note, we use a chart from Burger Business, along with management’s comments from the 4Q13 earnings call, to put our thesis in perspective.


$MCD: MCDONALD'S MANAGEMENT IN DENIAL, ackman to the rescue? - mcd11


By way of background, part of the 2003/2004 “Plan to Win” strategy included a Time & Motion analysis of the restaurants’ back of house operations.  With this study, management had determined that employees’ movement in the kitchen had become inefficient.  Management’s desire to fix this was a key driver in simplifying the menu and streamlining operations.


In 2014, management is now once again talking about the Time & Motion of employees in the back of the house.  However, this time management does not appear to be a taking a holistic approach to fixing these issues.  Rather, these moves strike us as more geared to specific menu items.  To illustrate our point, we have reproduced a chart from Burger Business looking at the evolution (bloating) of the McDonald’s menu since 2004.


As you can see in the chart below, the total number of items on McDonald’s menu increased by 75% from 2004 to 2014.  This means an incremental 51 items have been added to the menu over that period, making the current day menu very difficult for crews to execute.


More importantly, there are two sections that account for the bulk of the menu proliferation.  Not only are the number of Burgers, Sandwiches, Wraps up by 60%, but McDonald’s also created a whole new beverage category called McCafe (espresso drinks added in 2009; smoothies and frappes added in 2010).


$MCD: MCDONALD'S MANAGEMENT IN DENIAL, ackman to the rescue? - pen


Knowing how important Time & Motion is to the performance of McDonald’s restaurants, we continue to believe that McCafe has played a critical role in the slowing sales trends at their restaurants.  This is an issue that management continues to ignore and could very well exacerbate!


To their credit, management has addressed part of the menu proliferation with the roll out of its high density kitchen tables.  As management said on the 4Q13 earnings call, “These new high density kitchen prep tables are designed to deliver enhance service capabilities and menu choice to our customers.”  We believe these high density tables should address Time & Motion issues associated with burgers, sandwiches, and wraps – to an extent.  Management also supported this thought: “On the capacity, any time during our peak hours, if I can keep place in place and not have their feet moving to restock or to get something else or have crossover,” they, theoretically, will be able to improve the performance of their stores.


While this may be a step in the right direction in an attempt to better execute the current menu, this will also allow for additional customization.  While they may need this additional customization to remain competitive in the market place, it could mitigate some of the benefits of the high density tables.


In addition, management has failed to address the proliferation of beverages and the impact of the McCafe strategy.  Is it possible to add two new pieces of equipment (needed to make McCafe beverages) and not create additional Time & Motion inefficiencies?  We don’t think so, but management appears unwilling—at least at this point—to acknowledge this.


So how does this end?


The high density kitchens will be rolled out to the entire system by the end of 2Q14.  Therefore, McDonald’s should begin to see better sales trends by July 2014.  If, however, this doesn’t happen and weakness persists into 2H14 (meaning high density kitchen tables are not the panacea for sluggish sales trends), the focus of analysts and investors will shift to other issues the company could be facing.  If and when this time comes, we’d expect management to be more upfront about the issues surrounding the McCafe strategy. 


Only time will tell.


If management’s denials persist, we believe the stock will continue to underperform and may prompt Bill Ackman to dust off the old McDonald’s slide deck and step in to push for more changes at the company.



Howard Penney

Managing Director

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Reading Between the Macro Lines

Client Talking Points


Janet Yellen opened the door for “un-tapering” yesterday. Great. No surprise... the slow-growth commodity inflation rip-trade? It loved that. Utilities and Gold are leading the V-bottom S&P 500 parade as the US Dollar remains bearish TREND versus both the Euro and Yen now. 


Got Pounds? The Bank of England's Mark Carney is definitely not Janet Yellen. The BOE doesn't have to do the whole lingo thing about “taper” or un-taper in the UK; they just need to talk about rates and currency higher, which perpetuates purchasing power, consumption growth, etc. At $1.65 versus the USD, this remains our favorite major currency.


continued yesterday w/ the CRB Index and Gold moving to +3.6% and +7.2% YTD (vs SPX and Russell2000 -1.6% and -4.4%); while I was dead wrong being net short the US stock market yesterday, that doesn’t mean I capitulate on what I think is our most outside of consensus theme

Asset Allocation


Three for the Road


The Fed's Bullard must be smoking something in CO w/ this 3% US GDP call for 2014 @KeithMcCullough


"It is the trouble that never comes that causes the loss of sleep."

-Charles Austin Bates


It's estimated that at any given time, 7% of the world's population is drunk.

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