Conference Call Takeaways - TAST and TXRH

Summary Thoughts….

Both companies’ earnings benefited from cost cutting and commodity deflation.


Both companies are more cautious regarding top line expectations for the balance of the year, given current economic conditions, the increasingly competitive environment, as well as recent sales trends. 


Reduced capital spending is helping to reduce debt and increase cash on the balance sheet



COMMENTS ON TEXAS - Although the Texas economy has held up better than most of the country for some time, TAST said it is seeing some softening and mounting consumer pressures.  Recent unemployment reports indicated that conditions have worsened, and although the June unemployment rate at 7.5% is below the national average, Texas lost the most jobs, second only to California in June.


THE $1 MENU - In response to a question about whether advertising supporting the $1 Whopper Junior has begun to at least shift the trajectory of sales in July, or will the upcoming coupon help, management stated, “Yes, the Whopper Junior advertising is maybe two weeks old, so -- the early returns for the last couple of weeks, the sales have continued to struggle.”  The dollar menu is no longer a unique message to consumers.

CURRENT SALES TRENDS - MAY/JUNE/JULY BKC comps were down 5%+.  The Breakfast day part is getting hurt the most.  Thank you MCD.



SALES TRENDS SLOWED DURING THE QUARTER - For the quarter, the entire sales decrease was driven by lower traffic, as average check was flat.  By month, comparable restaurant sales were down 3.2% in April, down 3.7% in May and 4.4% in June.  In addition, as reported in the company’s press release, comparable restaurant sales for the first four weeks of the third quarter were down 5.5% to 6%.


NEGATIVE FORWARD-LOOKING INDICATOR - Average unit volume decreased 5.1% for the quarter, compared to the same-store sales decrease of 3.7%.


RETURN TO GROWTH – In the short run, there is no change to current development plans.  But, the company will accelerate to faster growth when it sees lower development costs and a better economic climate.


COMMENTS ON TEXAS – “We saw things in Texas specifically get a little bit softer during the June period, but then come back. Historically, Texas has been -- or recently, Texas has been a pretty strong state for us, as well as you mentioned for others, I believe. We did see things get a little bit softer in the latter part of the quarter in Texas.”


This could be a potential negative for EAT in the upcoming quarter.      



04 AUGUST 2009



I highlighted yesterday about how the 1.5x outperformance of retail in July makes perfect sense to me given the fact that the consensus earnings outlook rose steadily from 6% to 11% (NTM), and how we’re likely looking at 20% within a 3-4 month time frame. But let’s not lose sight of duration. As our clients know, we think of things as it relates to TRADE, TREND, and TAIL. Simply put, this is in terms of 3 weeks, 3 months and 3 years.  The analyst owns the fundamental debate, and we mesh with Keith on the duration. The bottom line is that it would be irresponsible of us to ignore ANY of those durations from a risk management perspective. That’s our process.


Retail is interesting. Still looking good from a TRADE perspective, but like Consumer Discretionary overall (below), momentum is running out of steam. I maintain my view that it’s going to be tough to keep the retail balloon underwater with 14% of the group held short while both revision factor and growth rates are headed higher. But this is an opportunity to either trim into strength or prep to buy more quality names on a pullback. My all-around favorite continues to be PSS. I also like BBBY, RL (they’ll smoke the qtr, though reaction to guidance w the stock at $64 worries me), and LIZ. Names to sell into strength include ROST, GIL, ICON and WRC.




Some Notable Call Outs


  •  Add Lane Bryant to the list of retailers embracing social networking. The company launched a social community, called Inside Curve, in an attempt to connect consumers with each other as well as with new products, styles, and reviews. A quick glance on the site reveals 4,000+ members in addition to 8,000 followers of the brand on Facebook. While social networking isn’t a replacement for focus groups (yet), it’s likely that real time communication with consumers will ultimately change the manner in which the consumer “votes” for a particular brand.


  • With the political situation in Honduras still unresolved, late last week Adidas, Nike, and Gap sent a letter to Hilary Clinton asking her to restore democracy to the politically unstable nation. The letter was drafted with support of a local labor rights organization. Noticeably absent from any commentary on the situation are Hanes, Gildan, and Russell Athletic. While it is not common for a corporation to take sides in political conflict, it appears that Adi, Nike, and Gap are attempting to build goodwill with the local workforce and the U.S government at time when a resolution in Honduras still appears elusive.


  • By now you’ve probably seen that Radioshack is going to re-brand itself as The Shack. A quick troll of the blogosphere suggests that even the average consumer realizes that the company’s competitive challenges go far beyond the name above the door. I have to say I agree. The one winner here is the company that was awarded the contract to make 4,000 new signs!



-Retailers in Thailand face tough road ahead with swine flu impact - Retailers in Thailand are confronting the spread of swine flu, which could jeopardize their recovery from weak economic conditions that have curbed consumer spending and cut into tourism. About four dozen people have died from swine flu in Thailand and another 6,700 cases have been confirmed, making it one of the hardest-hit Asian nations. A major Bangkok paper, The Nation, urged in a recent front-page editorial that public venues, including “schools, theaters, concerts, department stores, supermarkets and offices,” be shut for two weeks to stem the spread of the virus. Lower hotel occupancy rates and a steady drop in international tourists is proof that fears of the flu, along with economic conditions, are affecting Thai businesses. Retailers have promised to keep malls cleaner, including more frequent cleansing of restrooms, handrails and elevator buttons, to ease health fears. At Gaysorn, an upscale designer mall on Bangkok’s main retail strip, swine flu is being blamed for slower international traffic, which has fallen 10% to 15% this year. About half of Gaysorn’s shoppers are tourists, most of whom come from Hong Kong, Singapore, China, Russia and India. Public health fears have yet to dramatically affect department stores or discounters that cater to the local market. Upscale malls that depend on big-spending international tourists, such as Siam Paragon, The Emporium and Gaysorn, on the other hand, have seen their bottom lines slip because of fewer tourist visits. Department stores have seen no growth in the first three quarters of 2009 and are counting on a rebound in the last quarter. Sales at hypermarkets have dropped 1% this year, but convenience store sales increased 5%, primarily because locals are doing more shopping closer to home. An estimated 6% to 7% of Thailand’s gross domestic product is based on tourism. <>


-One-Third of Russia's Clothing Retailers Are Going Bust, Exporters Say - A third of Russia’s 42,000 clothing retailers will close by the end of this year after the economic crisis hurt local spending, according to the head of the European Fashion and Textile Export Council.  <>


-Australian Retail Sales Unexpectedly Decline as Stimulus Effect Wanes - Australian retail sales unexpectedly fell in June for the first time in four months as households spent less on clothing and at department stores. <>


-JD Sports Fashion has bought the global rights to the Canterbury and Canterbury of New Zealand brands and taken the key assets of its European licensee out of administration - JD Sports acquired the brand, goodwill and the global rights to the rugby brand for £6.5 million. JD bought Greater Manchester-based rugby kit wholesaler Kooga Rugby in July and hopes that both acquisitions can be developed profitably and that they will generate royalty income for the business. Canterbury was founded over a century ago in New Zealand and is a specialist in rugby apparel including technical and lifestyle products.  It fell into administration last month after being hit by the weak pound and expanding unsuccessfully into new sports categories.  <>


-Nepal Trade Union seeks to increase each workers salary by 40% - In view of Nepal's government increasing salaries of civil servants, the affiliated All Nepal Trade Union Federation (ANTUF) has sought a 100% increase in the worker allowance and 40% hike in basic salary . President of the Garment Association of Nepal (GAN), Prasanta Pokharel also confirmed that the association has received demands  for increased salary on a part with civil servants who have recently enjoyed a 4-6% raise. ANTUF official said that if their demands were not met, their union will announce a struggle program within 10 days. But the industrialists are responding to the situation by saying that they are not compelled to increase the pay and allowances, since they had increased the salaries just before nine months. Acting president of the Federation of Nepalese Chambers of Commerce and Industry Suraj Vaidya said the additional increments in salary will force industries to close down as they are already operating below capacity at present. Number of employees in the garment sector has shrunk to 30,000 from 50,000. <>


-Smaller retail chains and specialty stores are finally getting some respect - They are being pursued to fill the real estate void created by scuttled expansion plans, liquidations of midsize mall players such as Gottschalks and Mervyns, the closing of specialty concepts like Ruehl and the decision of major chains, including Ann Taylor, to eliminate stores. Malls are now looking to the regionals and locals to build more of their tenant base than they ever have before. The overall retail vacancy rate increased to 7.5% in the second quarter from 6.3% in the second quarter of 2008, according to CoStar Group, a real estate research firm. At the nation’s 1,152 malls and lifestyle centers 5.1% was vacant, compared with 3.6% a year ago. Although a few retailers, including Kohl’s and Buckle, are opening stores, total retail square footage is forecast to keep shrinking as about 4,600 doors shut this year, according to the International Council of Shopping Centers. <>


-Sportsman’s Warehouse to Emerge from Bankruptcy - Sportsman’s Warehouse, Inc. announced that the U.S. Bankruptcy Court for the District of Delaware has confirmed its Plan of Reorganization sponsored by an affiliate of Seidler Equity Partners, a private equity firm based in Southern California. The company expects to formally emerge from bankruptcy by August 15, 2009 and will continue to operate 26 stores across 14 states. <>


-Quiksilver, Inc. entered into an agreement with its European banking partners - Quiksilver is going to consolidate its European debt obligations, including previously uncommitted lines of credit, into a new committed 4-year facility consisting of €170 million ($243.9mm) in term loans, a letter of credit facility with a capacity of €40 million ($57.4mm) and a €58 million ($83.2mm) revolving line of credit. <>


-Timberland names a new senior e-commerce executive - In addition to e-commerce, Mark Bryden will oversee all marketing, retail and wholesale operations as the vice president and general manager of North America. Bryden worked at SmartWool Corp., an outdoor performance brand Timberland acquired in 2005. <>


-Former CEO of The Children’s Place resigns from board, sells back shares - Ezra Dabah, former chairman and CEO of The Children’s Place, has agreed to resign from the retailer’s board and sell back half of the 4.9 million shares he and members of his family own as holders of a 16.6% share of the company’s common stock. <>


-Japan's Uniqlo has tough month from rainy season - Fast Retailing Co. Ltd., the company that owns the fast-fashion chain, said Tuesday that an unusually long rainy season has bit into business and caused the brand’s same-store sales in July to fall 4.2%.  That’s an abrupt change from the eight consecutive months of comps growth the company registered from November through June. The number of consumers in July was almost flat, down just 0.3% from the previous year but average spending per consumer dropped by 3.9% from the same month a year ago. Rainy season in Japan, which normally ends in mid July in most parts of the country, has persisted for a couple extra weeks. Comps were tough since same-store sales in July of last year, a warmer and drier month, rose 11.9%. <>


-Prada lenders agree to postpone term payment to 2012 - While some of their luxury peers sweat on negotiations with bankers that could determine the survival of their businesses, the lenders to Bertelli and his wife’s investment vehicle Prada Holding BV have agreed to postpone until 2012 the term payment of 450 million euros, or $641.8 million, of the group’s debt. <>


-Saks Fifth Avenue hosted its men’s wear summit - Some 65 department managers from around the country flew to New York for a three-day seminar to be introduced to the Saks Fifth Avenue Men’s Collection. On Monday morning, the retailer staged a fashion show for around 130 executives on the sixth floor of its flagship, steps away from the 800-square-foot shop for the new collection in the store’s atrium. The private brand, which is trickling into stores now, is arguably the most important launch at the store for the fall season. In the works for nearly two years, SFAMC encompasses all categories of men’s product — everything from ties, shoes and socks to suits, cashmere sweaters and outerwear. It’s also the first sign of a new company initiative to bolster private label and proprietary brands. Saks has set up a new private label-brand office and hired two people, with two additional openings that are expected to be filled shortly. “There will be more private labels to come down the road,” said Tom Ott, senior vice president and general merchandise manager of men’s, declining to provide further details for now. <>


-While shopping for beach wear and back-to-school supplies this summer, don't be surprised to find Christmas deals in the next aisle - Several retailers are starting the holiday push earlier this year—a move that industry experts say won't guarantee improved sales. Sears Holding Corp. has launched a “Christmas Lane” shopping portal for its Sears and K-Mart brands. The website invites consumers to "beat the holiday rush" and offers stocking stuffers, as well as other (typically seasonal) deals. Toys “R” Us, likewise, kicked off an in-store and online "Christmas in July" sale touting “scorching savings.” The promotion, which ran July 19 through 25, offered discounts on popular toys and gaming systems, including the Wii and Xbox 360. <>


-Iconix Brand Group is playing musical chairs with its supermodel spokeswomen - After featuring Gisele Bündchen in its spring ’09 campaign for Rampage, Iconix opted to go with the new hotness, Sports Illustrated cover model Bar Refaeli, for the fall marketing plan. But the newly pregnant Bündchen is definitely not out in the cold. Instead she’s seductively wrapped in Iconix’s London Fog products this fall as part of its continuing effort to spice up the classic label. Refaeli’s campaign, shot by Gilles Bensimon, will debut in the September issues of Elle, Lucky, Cosmopolitan and others, as well in outdoor advertising and online. Meanwhile, Bündchen’s images will begin appearing in October fashion mags and on billboards and online. <>



-Havaianas has a new leader - Alpargatas USA Inc., parent company in the U.S. of the Brazilian sandal brand, has named Afonso Sugiyama president of the company. Sugiyama previously oversaw strategic and financial planning for Havaianas in Brazil and managed the openings of the U.S. and European Alpargatas offices. Sugiyama will report to Carla Schmitzberger, the Brazil-based global director of sandals. Glen Lagerstrom, EVP of sales and marketing, and Marcio Moura, VP of finance and operations, will report to Sugiyama. <>


-DKNY Men’s spring collection reaches out to male customers from every sphere - Styles cover dress and casual, including cap-toe laceups, urban-inspired high-tops, leather slip-ons and a broad range of flip-flops. David Stamberg, SVP of sales and merchandising, told Footwear News he predicted sport casuals would pick up for spring. “We are excited about our expanded sport casual shoes,” he said. “These styles feature a lot of whites with various color hits from black to gray, from red to yellow.” DKNY Men’s dress shoes retail for $98 to $160, with sandals costing $69 to $115, while active footwear is priced at $85 to $130, and $49 to 89 for sandals. Delivery is between Jan. 25 and Feb. 10 for the first shipments. <>


-i.e. distribution reached a license agreement to produce DADA Footwear - i.e. distribution announced they have reached a license agreement to produce and distribute DADA Footwear and DADA Supreme Footwear for North America. i.e. distribution, the world wide distributor and owner of World Industries a 21 year old skateboard, footwear and accessories brand, has many years of footwear production and distribution experience in multiple trade channels. DADA brand launched in 1995, rapidly becoming a leader in the urban and the athletic markets with record sell-through numbers worldwide at Footlocker, Finish Line and Foot Action. The brand has been most recognized by it’s many athlete and musician endorsement deals. A few to note, the “Spree’s”, designed with a scale model of Latrell Sprewell’s custom Lexani “Spinner” rims from his car built into the side of the shoe. Chris Webber’s all chrome shoe is one of the top 10 shoes worn in an All Star game to date. And Xzibit the Rapper from MTV’s “Pimp My Ride” pimped himself a pair of signature DADA shoes, too. <>


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): XLY

08/03/2009 10:29 AM


What this Burning Buck will lead to is a REFLATION Rotation (reflation will morph into reported Q4 inflation). I'll be short Consumer spending into that. KM



DBRN: David Jaffee, President & CEO, purchased 300,000shs ($1.1mm) granted under the company’s stock option plan increasing total common holdings by ~6%.

GCO: Robert Dennis, President & CEO, sold 3,353shs (~$70k) that were withheld to satisfy minimum tax liability upon the vesting of restricted stock granted under the equity incentive plan, less than 2% of total common holdings.

FINL: Alan Cohen, Co-Founder & Chairman of the Board, sold 3,300shs (~$30k) a token amount relative to 1.8mm Class B shares owned.






Green Bananas

“Offer them what they secretly want and they of course immediately become panic-stricken.”
-Jack Kerouac
It’s no secret – monkeys want bananas. Get one of those qualitative “channel checking” Wall Street “consultants” to test that primitive theory. Green or yellow, when the monkeys are heated up in a panic, they’ll clamor for them.
Yesterday’s market meltup to new year-to-date highs (+11% SP500) was a real-time example of a Monday where humans were perfectly willing to inhale green bananas. With the advance/decline line as lopsided as 90%/10% at one point, there weren’t many green prices in that group-think cage that people weren’t willing to chase. The same 200-day Moving Monkeys who sold the red 879 close of July 10th (-14% lower!), couldn’t scarf down enough green. Hopefully you sold into them. I did.
While yesterday’s pre-open global macro setup looked great, this morning’s is a little less great. I know, that’s that hockey player turned zookeeper talking about changes on the margin again, but what happens on the margin matters most in markets. Everything has a time and price.
What’s changed in the last 24 hours? That’s easy - prices. If one of those super duper channel checker mall people were to start hiking prices while you were shopping, would you pant and pray for more of their wares? Of course not – only an ape would. So let’s all calm down and bring some semblance of sophistication to this profession.
The biggest global macro news in Asia overnight was that the Reserve Bank of Australia is done cutting interest rates. Aussi Central Bank Chief, Glenn Stevens, is in the midst of schooling Ben Bernanke on how the un-conflicted are allowed to think about monetary policy. Stevens marked a 55 year low in the RAB base rate at 3%, and his next move is going to be raising them.
Raising rates? Yes, you’re allowed to do that and pay your citizenry some level of return on their savings accounts. On this day in 1789, France abolished Feudalism. President Obama, your approval rating is hitting new lows as the markets hit new highs for a reason – the American people aren’t stupid. They get who is getting paid with a “Great Depression emergency” interest rate policy of zero - and it’s not them!
On the “news” that the Aussi’s are going to raise rates, what would Hank Paulson guess the stock market would do? Nope, sorry Mr. Squid Wrap, the market didn’t collapse into a calamity – it went straight up. In fact, Australia was one of the best performing stock markets in Asia overnight, closing up over +1%. Inclusive of that move, the Australian stock market up +18% for the YTD. Yes, this proves that you can have an interest rate that’s higher than zero and not be depressed.
At 3,471 on the Shanghai Stock Exchange Index, Chinese stocks hit another new YTD high as well. While everyone and their American monkey yelps about Chinese “loan growth” bubbles, those who are long China are now up +90.7% in 2009. Even a monkey like me can make money long China. Throw me a yellow one, eh!
Never mind China, I said this last week and I will say it again – on days that the US Dollar is down, simian primates can make money being “long of” pretty much anything priced in those once almighty US Dollars. At $77.57, the US Dollar Index hit another YTD low yesterday.
With the Buck Burning, the CRB Commodities Index (19 commodities) had a bright green day, closing +3.5%.  For any asset class, that’s a massive one-day move. In the US Equity market, the best performing SP500 sub sector was Basic Materials (XLB). Ironically enough, it’s green day also equated to +3.5%.
So as I was contemplating sending Mr. Commodity Bull Roubini a Tarzan loin cloth, what did I do yesterday? For those of you who get my real-time virtual portfolio moves at  you already know the answers to that, but here were the most important macro moves:
1.      Covered my short position in the US Dollar (UUP)

2.      Sold short the Dow (DIA)

3.      Sold short US Consumer Discretionary (XLY)

4.      Sold out of my long position in Germany (EWG)

5.      Shorted Italy (EWI)

6.      Shorted Apple (AAPL)

Yeah, I invited the Yale guys with the white coats over for lunch and we fired up our quant machines in a search of replicating the shorting of green bananas (these guys love concocting financial products). The best idea we came up with was shorting one of our favorite companies bearing the name of another fruit. If that AAPL is red today, I’ll probably cover it and book the gain. Never fall in love with a stock, her market, or a short position.
The risk in today’s market outruns the reward. I have immediate term resistance for the SP500 at 1,004 and downside support at 980. The US stock market’s overall setup remains bullish, but at a price. Don’t be panic-stricken. Don’t be a monkey.
Best of luck out there today,


CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

QQQQ – PowerShares NASDAQ 100 With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP– iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

XLI – SPDR Industrials
We don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares ItalyItalian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don’t want to be long of.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3, which is finally overbought.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY – SPDR Consumer DiscretionaryAs Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9, 7/22, and 8/3.

SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.





Casino magnate Stanley Ho has been hospitalized in Hong Kong, according to reports released on Tuesday.  The Chinese-language newspaper Apple Daily cited unnamed sources as saying that Mr. Ho had tripped and hit his head last week, resulting in him being rushed to hospital for surgery.  Apple Daily said that his condition had stabilized following the removal of a blood clot in his brain.  The long-term effects of the injury are not certain, according to the report.



Gross gaming revenues in July came to MOP9.5 billion, a year-over-year increase of 3.1%, according to the LUSA news agency.  SJM continues to lead the way in terms of gross revenues, with 23.36% market share, followed by LVS with 21.63%, MPEL with 17.77%, WYNN with 14.85%, and MGM and Galaxy with approximately 12% and 10%, respectively. 

Of the MOP9.5 billion, MOP599 million originated from slot machines.



Sheldon Adelson and Steve Wynn are both optimistic about the future political leadership of Macau.  The Chairmen of the Venetian and Wynn expressed confidence in newly elected Chief Executive Fernando Chui Sai On by touting his US-based education as a positive attribute. 

During a quarterly conference call last week, Wynn said, “in America, the creators of employment have a target on their back, that's not the case of Macau and the Peoples Republic of China. Maybe we could learn a lesson from what is going on there.”  Sheldon Adelson expressed hope that the gaming tax could be subject to “innovation” – specifically he seeks the removal of a 4% tax (on top of the 35% basic gaming tax) that goes to the Macau Foundation as well as an overall reduction to compete with emerging gaming markets like Singapore, Taiwan and the Philippines.



CIMB Investment Bank has said that Genting may open its S$6.6 billion resort in Singapore before the end of 2009 and earn more than previously estimated in its first year of operation.  Construction has been progressing at a “quick pace” and Genting may announce the resort’s opening date next month.  The resort is now expected to generate S$690 million in EBITDA in its first year, more than double CIMB’s previous estimate. 

Genting’s Singapore project is one of two casino resorts the government has allowed to be built in the city-state in order to triple annual tourism revenue to S$30 billion by 2015.  LVS announced on July 8th that its Singapore casino resort would open on schedule in January or February of next year.


We are bullish on the slot supplier segment, not so much based on 2010 but more so because there is a visible and developing domino effect with new markets, leading to neighboring jurisdictions needing to “keep up with the Joneses”.  It is fair to argue that WMS deserves a premium valuation given its stellar performance.  However, we believe that there are cheaper ways to play this trade, with stocks that have lower embedded expectations.



  • 13th consecutive quarter of meeting or beating guidance
  • Over the last 3 years WMS’s net income tripled, despite the decline in industry shipments
  • Results were achieved in the midst of the worst replacement market and weak new openings
  • Capital investment is targeted towards high ROI initiatives
  • Activity in multiple new jurisdictions and eventual replacement cycle makes them optimistic
  • Increased share repurchase program
  • High performing games is helping their gaming operations through more units and higher win per days
    • WAP footprint grew 38%
    • 171MM of gross profit
  • Estimate ship share will be higher than 21% achieved last year
  • International new unit revenue grew 5% for the year
  • CFFO was 179MM
  • Bluebird 2 platform saw some success  - 62% of new shipments, with 25% being mechanical reels (22% for the year), 20% higher price
    • Same gross profit margin % achieved in BB2 as BB1
    • They expect to further increase margins with cost decreases and price increases
    • Can deliver units faster, saving money
    • Aria – 23% of floor will be blue bird 2 – highest flow share for Vegas strip opening
    • 23% in Rivers Pittsburg, and 24% in River City – PNK (shares)

Outlook/ new products:

  • Growth from new international jurisdictions
    • Already shipped first units into Mexico and expect to recognize revenue in New Wales by 1H2010
  • Growth from new platforms like Helios (value oriented cabinets for international markets)
  • Growth from networked gaming contribution
    • Log on feature- player recognition
    • Time machine game/ monopoly games – first participation game on BB cabinet
  • Higher selling prices, despite depressed unit shipments domestically
  • Higher install base and higher average daily win per day in 2010
  • Entry into centrally determined markets – WMS games are already in those markets (like Oklahoma) through 3rd party distributors. Already shipped first units to Washington
  • They have a monopoly license through 2016 (and extension available through 2019)
  • Opened new lab in Seattle – to demonstrate new network gaming products
    • Launch wage-net enable products over the next 6 months (Aria & other casinos)
      • Received approval in Mississippi to conduct trials for downloadable
  • WMS assumes lower Native American expansion opportunities in 2010
  • They aren’t including any new markets that still have a lot of uncertainty around them
  • Lower margin on game ops from higher mix of WAP units
  • Benefit from higher mix of BB2, hurt by higher mix of lower margin product sales like used games and lower # of conversion kits –resulting in lower gross product margins
  • R&D: will continue to grow – ~14% of revenues
  • SG&A:  (June reflected higher headcount from global growth)
  • D&A:  increase modestly and decline as a % of revenues
  • Effective tax rate will be 36-38% (after R&D tax credit expires this year)
  • Remain optimistic given:
    • 18 consecutive quarters of double digit EPS growth
    • 2 week customer order turn around
    • Innovative culture and pipeline = special sauce for boosting demand for products in challenging times
    • “Future ready” for networked gaming

Quarterly highlights:

  • Other product sales (used) created a small drag on margins
  • Operating cash flow in 2009 was same as 2008   
    • Provided financing for more customers in the quarter
  • Inventory turns improved 35% to 4.2x from 3.1x turns
  • Cash grew despite $27MM used in investing activities


  • What are they seeing with their install base, is there more price resistance?
    • No – they continue to see pricing leverage
    • Units – tremendous success with Wizard of Oz not sure that they can replicate that growth
    • “There could be some upside if games are success”
    • Expecting a decline the rate of growth for participation business to slow
  • Assumptions for domestic / international
    • International mix to remain constant next year
    • See first 6 months of 2010 to continue current trends and pick up in back half
  • Why are they comfortable that back half replacements will help them in 2H2010?
    • Had a number of dialogues pre G2E and see a resurgence in demand from some clients that haven’t bought in a while (big players)
    • “loosening of purse strings”
    • Some of it is because there was pent up demand
      • I’m sure that the refinancings are driving this
  • Used games?
    • Great demand for BB1 product – not a lot of inventory so great demand for them… may start to see the BB1 come back to them and go to 2nd tier markets (internationally) so when their customers upgrade to BB2 they get more BB1’s back
    • No used games in their inventory today
    • Used games vs conversions kits moving in the opposite direction
      • NO
      • They are to venues outside the US vs. conversions are to US
  • Is IGT’s increased WAP footprint (BYD/MGM) impacting their guidance –NO
  • Growing excess FCF – above R&D needs – where are the opportunities to deploy that
    • Scour the globe for new technologies/ IT
    • Acquiring a company…
    • Board increased the buyback program by $75MM have $150MM under the program
    • Reinvest in the same range as 09 into gaming operations
  • Backlog?
    •  “healthy”
    • Very comfortable with their guidance
  • Class 2 & Australia cheaper… than BB2 – hence lower ASP growth given higher BB mix
  • Think they had a mid-high 20’s share – mid 30s replacement share
  • Majority of replacement units are competitor units- particularly in mechanical product – fresh market share for them
  • Taking “Price is Right” brand from a competitor
    • Thought they could leverage the brand – not about stealing competitor brands – it came to them  - given server based capabilities
  • Outperformance in operating margins driven by the gaming operations business- that’s where the beat can come from in 2010. On the product sales side, could have upside from new markets.  Replacement cycle improvement would be huge too.
  • Expanding video poker platform
    • Exciting opportunity in IL – but it’s not going to be just video poker. Expect to participate and have a commensurate share of that market
  • Idea behind internal casino Seattle to help sell their server based games – hard to sell on paper –easier to demonstrate
  • Are they sandbagging win per day for 2010?
    • July was the best month ever (June & Sept are seasonally the strongest quarter) but hard to forecast super strong trends continuing
    • Wizard of Oz – new placements – unclear if win per days will hold
      •  typically participation games have falling off win per days as games on the floor age
  • Any chance they get same share of games for new openings as replacements?
    • People forget that existing floor share is in the teens so 30% is getting them closer to new opening share in the low to mid 20s
  • Regional operations have been aggressively  replacing their  machines, and Native American casinos are on a normal 5/6 year cycle… it’s really the multi-property/ strip players  that haven’t been holding up orders
  • Comparing Wizard of Oz to Wheel of Fortune is a stretch …
    • I don’t think people realize how many WoF games are out there… probably about 25,000… whole other league – not to take anything away from WMS
  • Long term – where can margins go:
    • 60% product margins (will depend on conversion kits and software success of “networked gaming”)
    • 25% operating margins

Reflation's Rotation: ISM Prices Paid

If there is one question I have been getting most consistently from investors as of late, its ‘why do you think we see inflation in Q4?’…


Generally speaking, until macro numbers are on the tape, “private forecasters” won’t believe they are possible. Maybe that’s because groupthink is so dominant right now. Maybe it’s because you can’t get these forecasts with in a “one on one” with your favorite economist. Otherwise, I have no idea. This call isn’t that complicated.


When I measure risk, I measure ranges, deltas, and spreads. One way to measure the risk of reflation rotating into inflation in Q4 is through the delta of the Prices Paid component of the ISM Manufacturing survey. Last month I called this out as an eye opener. This month’s number is a flat out moon-shot (see chart).


A lot of economists are calling for perpetual deflation because that’s what the lagging indicators (reported CPI and PPI) are telling them. Looking at the smack-down of this chart from July of 2008 until the end of Q408’ will give you a great summary of what’s in that rear-view mirror.


At a reading of 55 for July of 2009, this horse has already left the barn. If these price levels hold, year-over-year inflation accelerating in Q4 is as close to a mathematical certainty as I can find. People have to pay for things in US Dollars – the Buck is Burning.


And Reflation’s Rotation is finally underway…



Keith R. McCullough
Chief Executive Officer


Reflation's Rotation: ISM Prices Paid - ISMCHART


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