Aristocrat vs IGT


  • IGT’s problems are well documented and discounted in the stock
  • Some were out of the company’s control:  soft North American demand (replacements and new casino) and weak US gaming revenues
  • Meanwhile, Asian focused ALL’s business is much stronger combined with a little bit of a North American resurgence



Source: Yahoo Finance!

European Banking Monitor: Greek Credit Risk Tightens | $NBG

Editor's Note: This is a complimentary research note from Hedgeye Analyst Matt Hedrick originally provided to subscribers on April 14, 2014 at 11:20 a.m. 

Below are key European banking risk monitors, which are included as part of Hedgeye Financials team's Monday Morning Risk Monitor.  If you'd like to receive the work of the Financials team or request a trial please email And, for more information on our services, click here.


European Banking Monitor: Greek Credit Risk Tightens | $NBG - greece


European Financial CDS –  Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. The news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.


European Banking Monitor: Greek Credit Risk Tightens | $NBG - European Financials CDS  1 large


Sovereign CDS – Sovereign swaps mostly widened over last week. Irish sovereign swaps tightened by -2.7% (-2 bps to 71 ) and Spanish sovereign swaps widened by 7.1% (6 bps to 93).


European Banking Monitor: Greek Credit Risk Tightens | $NBG - Sovereign CDS  2


European Banking Monitor: Greek Credit Risk Tightens | $NBG - sovereign cds chart  3


European Banking Monitor: Greek Credit Risk Tightens | $NBG - sovereign cds chart  4


Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Greek Credit Risk Tightens | $NBG - euribor ois spread  5

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Retail Callouts (4/16): KORS, NKE & ADDY, BBY, GPS

Takeaway: KORS inks new eyewear deal with LUX. NKE & ADDY factory shutdown. BBY retail chief retires after 1yr on the job.




  • GPS - Investor Meeting: Wednesday 4/16, 1:00 pm



  • LULU - Analyst Day: Thursday 4/17, 12:00 pm







  • "Michael Kors Holdings Limited and Luxottica Group  announced today that they have signed a new and exclusive eyewear license agreement for the Michael Kors Collection and MICHAEL Michael Kors eyewear. The first collection produced with Luxottica will launch in January 2015."
  • "The partnership with Luxottica...will last 10 years. It will allow Michael continue the global expansion of the brand’s eyewear business. Luxottica will produce eyewear for both the Michael Kors Collection and MICHAEL Michael Kors lines, beginning with Spring 2015. The brand’s two luxury eyewear collections will be carried around the world in Michael Kors stores, department stores, select travel retail locations, independent optical locations and Luxottica’s retail stores."


Takeaway: The deal with LUX partners KORS with the dominant player in the eyewear segment and will give the company a much more prominent place inside Luxottica's retail network. Nice upgrade here for KORS with the Marchon deal set to expire.


NKE, ADDYY - China Shoe Plant Strike Disrupts Output at Nike, Adidas Supplier



  • "Workers at Nike Inc. and Adidas AG shoe supplier Yue Yuen Industrial Holdings Ltd. in Dongguan, China struck for a third day seeking a 30 percent pay increase and better benefits, disrupting output."
  • "The number of striking workers increased today, a spokesman for Hong Kong-based Yue Yuen said, without estimating the number of strikers or affect on production. He asked not to be identified because of company policy. New York-based China Labor Watch estimated strikers at 30,000."
  • "Adidas is 'closely monitoring the situation' at the factory, Katja Schreiber, spokeswoman for the company, said by e-mail today."
  • "Nike 'is concerned by the events' and is monitoring production and the dialog between factory management and workers, Greg Rossiter, a spokesman for the Beaverton, Oregon-based sporting goods company, said in an e-mail."


Takeaway: Regardless of the outcome here, its clear that input costs, both material and labor, are headed higher. With Gross Margin turning from a tailwind to a headwind and an incremental $400mm in SG&A we're looking at 9% decline in EPS with the top line growing at 10%. If NKE can't grow EPS at a Nike-esque 20% rate when futures are six months into a DD growth rate, then when will it happen?




BBY - Best Buy's top U.S. store executive departs



  • "Seven months after getting a new title, Best Buy Inc.’s president of U.S. retail stores retired and is being succeeded by the retailer’s chief human resources officer."
  • "Shawn Score, a 29-year veteran of the Richfield-based company, was put in charge of its 1,400 U.S. stores in January 2013. He was named president of the unit, the biggest in the company, last October. Best Buy on Monday confirmed the departure of Score, 48, but declined further comment."
  • "Shari Ballard, the human resources chief, will take on Score’s duties. ­Ballard, a 21-year employee, will retain the human resources job, which she got last August after leading Best Buy’s approximately 450-store international unit. She previously was executive vice president of retail channel management. Best Buy said Ballard is a permanent replacement for Score, rather than an interim choice."


GPS - Gap Inc. Announces Marissa Webb as Creative Director and Executive Vice President of Design for Banana Republic



  • "Gap Inc. today announced that Banana Republic has named Marissa Webb as Creative Director and Executive Vice President of Design, effective April 28. She will be responsible for guiding the brand’s overall creative direction, as well as leading global product design for Banana Republic Women’s, Men’s, and Accessories.  Marissa will report to Global President of Banana Republic, Jack Calhoun."
  • "...Marissa Webb is most recently known for her eponymous upper contemporary label. Prior to branching out on her own during 2011, she spent time at Polo, Club Monaco and over a decade at J. Crew Group Inc., where she served in various design roles, including Head of Womenswear and Accessories Design.  Webb will retain her role as President and Creative Director at Marissa Webb, in addition to her newly appointed role at Banana Republic. Webb’s first collection for Banana Republic is expected in the summer of 2015."


ANN, DXL, DEST - Private equity and retailers court each other



  • "One of the easier deals, at least on paper, likely to get done this year is a leveraged buyout of Ann Taylor parent Ann Inc., according to industry sources. Leading the line of potential buyers would be San Francisco's Golden Gate Capital, which already took a 9.5% stake in the women's apparel retailer in March. Ann is already working with a financial adviser, a source said."
  • "Two other retailers available for tie-ups with private equity are Destination Maternity Corp. and Destination XL Group Inc., according to industry sources. Those sources said the retailers are often on bankers' lists and have been circulated as potential acquisition targets over the past few years. Either could be targeted…"


ADDYY - Adidas Links With Mary Katrantzou



  • "Come November, London-based designer Mary Katrantzou will collaborate with Adidas Originals on a long-term partnership that will consist of a women’s-focused apparel and footwear line."
  • "The designer follows in the footsteps of names like Yohji Yamamoto, Raf Simons and Rick Owens, among others, and will be the first women’s-focused collaboration line since Stella McCartney’s."


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April and Q2 gaming revenues should be better than bad following an awful Q1.  BYD and PENN probably guided low enough for Q1.



Call to Action:

Catalysts are lining up positive for PENN and BYD with potential in-line to slightly better Q1 earnings and sequentially better Q2 gaming revenues.  PNK Q1 looks at risk.



Investors have been waiting a long time for regional gaming revenues to improve.  On the heels of a disastrous December performance, we had many winter storms and brutally cold weather plus a March that surprised many folks (not us) to the downside.  With Louisiana and Mississippi still to report, SS revenues are tracking right in-line with our projection of -7% for March (see our note: ANOTHER REGIONAL REVERSAL?, 4/2/2014).  We expect Louisiana and Mississippi to report mid single digit declines in revenues for March.


The good news is that analysts have already lowered Q1 estimates for PENN and BYD.  While there should be a few more stragglers, we think current estimates reflect reality – BYD provided its last guidance update on March 1st and PENN was necessarily conservative when it reported Q4.  PNK seems to be the company most at risk for Q1.  We’ll see when Louisiana releases estimates but consensus Q1 estimates of $0.42 looks $0.05-0.10 too high.  For PENN and BYD, we wouldn’t be surprised with an in-line to slight beat.


This may not be the most compelling investment thesis ever, but going forward, regional gaming revenues look better than bad – still negative but decidedly less so as seen in the following chart.



LEISURE LETTER (04/16/2014)



Wednesday, April 16

  • HTZ at BAML Auto Summit

 Thursday, April 17

  • Iowa Racing & Gaming Commission Meeting - scheduled to decide whether it will grant Cedar Crossing Casino a state gaming license, which would make the facility the 19th casino in Iowa.
  • GE 1Q14 Earnings – 8:30 am Conf Call – real estate comments?
  • BX 1Q14 Earnings – 11 am Conf Call PIN 149 943 55 – lodging comments & color?
  • TZOO  Earnings – 11 am Con Call
  • DIS – Investor Day – cruise & parks commentary?

Monday, April 21

  • Genting Singapore – Annual General Meeting

Tuesday, April 22

  • IGT FQ2 earnings:  5 p.m. Conf Call   , Passcode: IGT

Thursday, April 24

  • WYN Q1 earnings - 8:30 a.m. , Passcode: Wyndham
  • LHO Q1 earnings - 9:30 a.m.
  • PENN Q1 earnings - 10 a.m.
  • HOT Q1 earnings - 10:30 a.m. , Passcode: 12049644
  • LVS Q1 earnings - 4:30 p.m. ; PW: 18236529


PENN - Continental Real Estate Cos, based in Columbus Ohio, is negotiating with PENN to buy and redevelop the Beulah Park property, which will cease to be a racetrack in May. Beulah Park will hold its final thoroughbred horse races on Derby Day, May 3, and then will close. PENN will transfer the site's gaming license to Hollywood Gaming at Mahoning Valley (Youngstown).

TAKEAWAY: The monetization of a hidden asset on PENN's balance sheet.


DRH - sold the 386-room Oak Brook Hills Resort for $30.1 million, including $4.0 million of seller financing or approximately $78k/key.

TAKEAWAY: Seems to be a very low price per key, but deferred capex likely a hurdle to getting a better price.



Macau table/slot count Q1 2014 DICJ  Gaming tables sequentially declined from 5,750 in Q4 2013 to 5,700 in Q1 2014.  Slot machines sequentially rose from 13,106 in Q4 2013 to 13,232 in Q1 2014.

TAKEAWAY:  The slight table decline in Q4 is a little surprising given all the fuss over lack of tables.


LEISURE LETTER (04/16/2014) - mm


VIP Player Scrutiny - The Treasury Department is seeking to enforce Article 31 of the Bank Secrecy Act, which was enacted over 10 years ago. The Treasury Department claims Las Vegas Strip casinos are years behind other financial institutions in handing over their data and customer lists.  Fred Curry, a partner with Deloitte Financial Advisory Services, says it is only “a matter of time” before such information is going to be handed over.

TAKEAWAY:  Clearly not a positive for the casino industry, this could also lead to increased audits by the Internal Revenue Service based on suspicious activity.


Japan Gaming Congress -

TAKEAWAY:  The Yumeshima annoucement yesterday shows Japan interest is heating up. This conference is held before the May debate on a possible casino bill.


Macau Infrastructure - the China high speed train between Beijing and Guangzhou will be delayed from 2015 to 2016 and expected to open for passenger services in 2017.

TAKEAWAY:  A near term negative for the mass segment growth.


Vietnam Gaming - Casino operator Donaco International cleared the final regulatory hurdle in its bid to open a new hotel and casino in Northern Vietnam with a focus of attracting Chinese gamblers in the bordering Yunnan province.  The company is run by Joey and Ben Lim who are nephews of casino magnate K.T. Lim, the founder of Malaysian conglomerate Genting Berhad.  Genting Hong Kong, which is part of Mr Lim's empire, has a strategic stake in casino operator Echo Entertainment Group.  The five star 428-room hotel and casino is now slated to open in a "soft launch" on May 18th.

TAKEAWAY: This is a foreigners only casino.  Vietnam's upcoming pilot project ($7BN Van Don Casino), which would be open to locals, is the real prize.


Atlantic City Property Comp – based on company filings by Bally’s Atlantic City casino, TJM Properties, the buyer for the former Claridge Casino/Hotel in Atlantic City paid $12.5 million for the property.

TAKEAWAY: Another low transaction price in a fading market.



China - Q1 GDP growth: +7.4% YoY vs +7.3% consensus and +7.7% YoY in prior quarter

TAKEAWAY: A beat off of a lowered number


China 1Q14 Home Sales Decline - (Bloomberg) home sales fell and new property construction declined 25% in Q1, as credit remained tight, adding to signs of a slowdown.  The value of homes sold fell 7.7% year/year to 1.1 trillion yuan (US$177 billion) and the last time home value sales dropped in 1Q2012.

TAKEAWAY: A key metric that bodes poorly for China


China Shadow Banking (Business Times) - Chinese companies that have lent money to other companies are facing a potential wave of defaults, with several firms reporting missed loan repayments, including Sainty Marine and Qiaqia Food Co.  According to Chinese Central Bank data, the shadow banking industry granted a net 2.55 trillion yuan ($411 billion) in so-called entrusted loans last year, nearly double the total for 2012, making them the second-biggest source of domestic credit behind bank loans.

TAKEAWAY: No doubt Chinese government is keeping a close watch on shadow loan defaults. Could impact Macau VIP


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.



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