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IGT: CEO COMP CONDUCIVE FOR SALE

Patti Hart’s employment contract rewards for change of control

 

 

CALL TO ACTION

As follow-up to our IGT recent analysis regarding IGT: A BETTER PRIVATE COMPANY, we now call subscribers attention to CEO Patti Hart’s recently revised employment contract filed via 8-K on November 15, 2013.  Hart is clearly incentivized to sell the company and may be leading the discussions with bankers and potential buyers. 

 

Fearing for the longevity of her employment while also wanting to catch a Golden Parachute and exit gracefully, Hart may pursue a change in control that earns an accelerated compensation payment. 

 

We continue to believe the Reuters story from Monday has teeth and we’re bullish on the prospects for some sort of value creating event:  a private equity or strategic buyout, some form of separation between Gaming and Interactive, or even a management change.

 

BACKGROUND

Patti Hart’s new employment provides for increased pay-outs “if termination of employment occurs upon or within eighteen months following certain changes in control of the Company.”  The increased payout apply to severance compensation, continued medical coverage, accelerated vesting of any time-based awards, unvested equity awards, and stock options. 

 

Furthermore, the following new compensation disclosures were made in the 2014 Shareholder Proxy:

  • For the “Change in Control (no termination)” the equity acceleration is $20.8 million
  • For the “Termination of Employment” section, note the $25.3 million in equity acceleration value in the new disclosure which follows a change in control

Exhibit A: Why There Seems to Be No Recovery In the First Time Homebuyer Market

Takeaway: This is an excerpt from a research note published by Hedgeye's financials team earlier this week.

We wanted to take a moment to flag the unstoppable force that is student loan growth in this country. 

Exhibit A: Why There Seems to Be No Recovery In the First Time Homebuyer Market  - STUDENT DEBT 

The chart below (taken from the G.19 data) shows the amount of federally-backed student loans sitting on the books of the United States. Currently the figure stands at $775 billion, up $112 billion (+16.9%) in the last 12 months.

 

For those wondering why there seems to be no recovery in the first time homebuyer market we offer the chart below as "Exhibit A".

 

Exhibit A: Why There Seems to Be No Recovery In the First Time Homebuyer Market  - student loans large



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Retail Callouts (6/11): ULTA, LULU, TGT, SKX, H&M, ANF

Takeaway: ULTA beats on the 2 lines that matter - Comp & EPS. Chip single biggest liability for LULU. TGT taps GM exec to protect customer security.

EVENTS TO WATCH

 

WEDNESDAY (6/11)

  • RH - Earnings Call: 5:00pm

 

THURSDAY (6/12)

  • LULU - Earnings Call: 9:00am

 

COMPANY NEWS

 

ULTA - 1Q14 Earnings

 

Takeaway: Definitely the quarter that ULTA needed to print. Not a blowout by any means, but the company beat on the two lines that matter most to ULTA -- comp and EPS.  Comps were up 8.7% vs expectations of 6.2%. Gross margins were below expectations, but inventory grew well below sales, putting the SIGMA in a positive position (see below). The company maintained full year guidance, but gave every indication that assumptions were very conservative. e-commerce, which was +72% added 190bp to comp,  which is important given that the average ticket for dot.com is $50 vs $35 in brick and mortar. We're not a big fan of this story. But even after today's price action, we'd be very weary about shorting it.

 

Retail Callouts (6/11): ULTA, LULU, TGT, SKX, H&M, ANF - chart1 6 11

 

LULU - lululemon Founder Chip Wilson Votes Against Re-Election of Outside Directors

(http://www.prnewswire.com/news-releases/lululemon-founder-chip-wilson-votes-against-re-election-of-outside-directors-262674301.html)

 

  • "Today, lululemon athletica inc. Founder Chip Wilson announced that he voted against the re-election of Michael Casey and RoAnn Costin to the Board of lululemon athletica inc...At lululemon Mr. Wilson has created a corporate culture that empowers employees and has pushed technical apparel beyond workout clothes to an everyday staple." 
  • "Mr. Wilson stated, 'After being asked by the Board to come back from Australia to help the company recover from the product recall last year, I have decided to vote against the re-election of the company's outside Board members. While I am excited about the new management team that I helped put in place, I am concerned that the Board is not aligned with the core values of product and innovation on which lululemon was founded and on which the company thrived. As a 27% shareholder in the company, I believe change is now needed at the Board level to increase shareholder value.'"
  • "Mr. Wilson continued, 'I was hopeful that we would be able to create a balance at lululemon between product and growth that would complement each other. Instead, I have found a palpable imbalance in Board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals. I believe this is impacting the company's prospects. My vote today sends a signal to the financial community that the company must address this imbalance if lululemon is to fully recover.'"

 

Takeaway: Maybe the two Directors in question are not appropriate for LULU. But that's irrelevant. The simple fact is that Wilson's influence far outweighs the economic and voting interest of his shares. The guy 'left' last year, but the fact is that this was only in title.  He remains the single biggest liability for Lululemon. If Wilson really wants the company he founded to succeed, he'll put his stock in a trust, walk away, and leave the company in the hands of a management that is empowered to change LULU without getting Chip's sign-off on every decision.

 

TGT - Target Names Brad Maiorino Senior Vice President, Chief Information Security Officer

(http://pressroom.target.com/news/target-names-brad-maiorino-senior-vice-president-chief-information-security-officer)

 

  • "Today, Target Corp. announced it has hired Brad Maiorino as senior vice president, chief information security officer." 
  • "Maiorino joins Target effective June 16 and will be responsible for Target’s information security and technology risk strategy helping to ensure that the company, its guests and team members are protected from internal and external information security threats. He will report to Bob DeRodes, executive vice president and chief information officer."
  • "Maiorino comes to Target from General Motors where he was the company’s chief information security and information technology risk officer. There he was responsible for leading the transformation of the company’s global information security and IT risk organization. Prior to General Motors, he was the chief information security officer at General Electric."

 

Takeaway: It's quite possible that Maiorino is the best person for the job. But given all Target's issues with consumer trust and confidence, do you think that just MAYBE it could have tapped someone from a company with a little more credibility than GM? The company does not have the kind of direct front-facing customer business that Target has.  And let's face it, its reputation with consumer honesty and transparency leaves much to be desired these days.

 

OTHER NEWS

 

H&M - Sales development in May and second quarter 2014

(http://about.hm.com/content/dam/hm/about/documents/en/cision/2014/06/1349780_en.pdf)

 

  • "In May 2014, the H&M Group total sales including VAT increased by 19 percent in local currencies compared to the same month last year."
  • "Sales in May were positively affected by calendar effects of approximately 3 – 4 percentage points. In June, this will be reversed, i.e. sales will be affected by negative calendar effects of 3 – 4 percentage points. "
  • "In the second quarter of 2014, i.e. during period 1 March to 31 May, sales including VAT increased by 16 percent in local currencies."
  • Store count increased from 2908 to 3285 year over year, an increase of 13%.

 

SKX - Skechers' Triple Crown 'Win'

(http://www.wwd.com/accessories-news/footwear/skechers-triple-crown-win-7721747)

 

  • Skechers’ sponsorship of the thoroughbred led to a major media windfall. Chief executive officer Robert Greenberg said, 'We were on 400 TV shows in one day. What’s the value of that — my God.'”
  • "...it took seven days of negotiations with California Chrome’s owners before the pre-Belmont deal was struck, Greenberg said. Noting that the horse’s owners adopted the nickname 'Dumb Ass Partners' skeptics once gave them, Greenberg said, 'I’m not saying they’re dumb but that was a tough one.'”
  • "Skechers spent $300,000...The idea of imprinting 'Skechers' on the nasal strip California Chrome wore at Belmont had been discussed but there was concern that visual distraction 'would screw him up,' Greenberg said." 

 

ANF - ABERCROMBIE & FITCH NAMES CHRISTOS ANGELIDES BRAND PRESIDENT OF ABERCROMBIE & FITCH AND ABERCROMBIE KIDS

(http://phx.corporate-ir.net/phoenix.zhtml?c=61701&p=irol-newsArticle&ID=1938619&highlight=)

 

  • "Abercrombie & Fitch Co. today announced that Christos Angelides has been named President of its Abercrombie & Fitch and abercrombie kids brands, a position he is expected to take up in October 2014."
  • "Mr. Angelides, 51, will report to A&F Chief Executive Officer Mike Jeffries and will have overall responsibility for all product and customer-facing activities for the Abercrombie & Fitch and abercrombie kids brands.  He will also be accountable for the financial performance of the brands."
  • "Mr. Angelides has spent his entire career with Next plc, a highly successful six billion dollar fashion retail and internet chain based in the United Kingdom, where he has most recently served as Group Product Director since August 2000."

 

Alibaba, EBAY, AMZN - Alibaba Takes on U.S. E-commerce Market With 11 Main

(http://www.wwd.com/retail-news/direct-internet-catalogue/alibaba-takes-on-us-e-commerce-market-with-11-main-7724257)

 

  • "The Chinese Web giant is making its first go at the U.S. consumer with 11 Main, a multicategory e-commerce destination that is launching in consumer beta mode today."
  • "11 Main is focused on small businesses and emerging brands…Consumers can shop via boutique or curated collections that are based on seasonal events or trends picked by 11 Main’smerchandising team, based in San Mateo, Calif. 
  • "Selling goods on 11 Main requires no up-front costs; the site takes 3.5 percent of sales."

 

9983 - Comptoir des Cotonniers Names Creative Director

(http://www.wwd.com/retail-news/people/comptoir-des-cotonniers-names-creative-director-7722082)

 

  • "Comptoir des Cotonniers on Tuesday named Anne Valérie Hash its new creative director."
  • "A spokesman for the brand, controlled by...Fast Retailing Co. Ltd., said the first complete collection under her purview would likely be for the fall 2015 fashion season."
  • "Hash succeeds Amélie Gillier, who left the company in November."

 

AMZN, EBAY - eBay’s local delivery plans unravel: eBay Now may shut down

(http://venturebeat.com/2014/06/10/ebays-local-delivery-plans-unravel-ebay-now-may-shut-down/)

 

  • "Two years after launching its local delivery service eBay Now, eBay plans to shut it down, a VentureBeat source claims."
  • "The service is blowing a ton of resources, one source claims, and may not last, prompting eBay to walk away from pricing deals with retailers. An eBay spokesperson refused to deny claims that its eBay Now pricing deal with Best Buy has ended."
  • "Back in September 2013, eBay announced plans to launch in London “early next year.” And in October, Deb Sharkey, VP of Local at eBay, laid out an aggressive plan to operate in 25 U.S. cities — including internationally — by the end of 2014. Such plans no longer exist, according to an eBay spokesperson: “We are focused on supporting eBay Now in its current markets (San Francisco, San Jose, New York, Chicago, and Dallas), and we are not announcing any new market expansions at this time.”

LEISURE LETTER (06/11/2014)

Tickers: MGM, WYNN, MNTG, SMGM, HOT, HLT, AWAY, RCL

EVENTS

  • Wed June 11 - Thurs June 12: Bally Systems User Conference Mohegan Sun
  • Thurs June 12: Blackstone Investor Day 8:00 am
  • Wed-Thurs June 18-19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released

COMPANY NEWS

Genting Bhd (RWLV) – Gerald Gardner, Chief of Staff for Nevada Governor Brian Sandoval, is leaving his position to join Genting/Resorts World Las Vegas beginning July 7

Takeaway: A quick jump start to the Genting RWLV public relations effort as well as a good leader to facilitate dialogue between RWLV and local officials as needed.

 

Marina District Development Company "Borgata" (BYD & MGM) – entered into a settlement agreement between Borgata and the City of Atlantic City whereby both sides resolve the property tax dispute for tax years 2011 through 2014.  As a result of the agreement, Borgata will receive a tax refund of $88.25 million for tax years 2011 through 2013 and an estimated tax credit of $17.85 million for tax year 2014. MDDC believes the 2015 property tax expense will be significantly lower than 2013.  The agreement is independent and unrelated to the current appeal for property tax assessments for 2009 and 2010.

Takeaway:  One of several catalysts we've outlined for positive EPS revisions at BYD.  Could be worth a $1 per share in value to BYD.

 

MNTG – MTG Gaming Group and Eldorado Resorts LLC have extended the termination date of their planned merger because all the required approvals from applicable gaming authorities had not been obtained and the Company's stockholders had not approved the merger agreement at a special meeting to be called for such purpose.  The parties now expect to close the transaction during the their quarter of 2014. The combined company will operate six properties and have a total of 9,968 slot machines and video lottery terminals, 283 table games and 3,282 hotel rooms.

Takeaway:  A slight timing delay and not unusual.

 

PENN – Relating to Argosy Sioux City casino, at a hearing in Reading, Pa., Iowa assistant attorney general John Lundquist asked U.S. Bankruptcy Court Judge Richard E. Fehling to dismiss Argosy's Chapter 11 petition, arguing a lingering dispute over the floating casino's license should be settled in Iowa court. Ironically for PENN, PENN's chief legal expert testified under cross-examination by the Iowa Racing & Gaming Commission (IRGC) attorney,"conducting a gaming operation without a license would be a criminal offense." Previously both the Iowa Superior Court as well as the IRGC ruled PENN's Argosy Sioux City does not currently have a valid gaming license.

 

Separately, PENN is suing the IRGC in Polk County District Court (Iowa) in a bid to vacate or overturn the actions that led to the Hard Rock winning the license and final arguments in the judicial review case are scheduled for September. Penn National believes the Chapter 11 filing would nullify the IRGC order to close until all the legal issues are sorted out.  According to legal filings, Penn National does not want to lose its $110 million investment in Sioux City.

Takeaway:  As we've written previously, the end result of a closing of the property seems an inevitable outcome...why needlessly spend shareholder capital fighting against the outcome?


SGMS – announced the appointment of Gavin Isaacs as President and CEO.  Former CEO, David Kennedy will continue to serve as Executive Vice Chairman of the board.

Takeaway:  We expected a change and welcome Gavin back to the C-suite. We have a lot of respect for him and his abilities.

 

HOT – will stop managing what is now the Westin Resort Macau starting June 21. The hotel management company and the owner of the Coloane property have announced that the licence agreement “will cease on June 21, 2014 when it expires”. The 208-room hotel has been operating under the Westin brand since 1993. It is one of the few five-star properties in Macau with no casino in its facilities or surrounding area. 

Takeaway: Slight near term loss for long-term gain.

 

HLT – announced, via S-1 filing, the registration of 90 million shares (103.5 million with the green shoe) on behalf of selling shareholder Blackstone Group.  Assuming the exercise of the green shoe, Blackstone will own 648.99 million shares or 65.9% of the outstanding shares.  As of Tuesday's closing price of $23.43/share, HLT stock was up 17.15% since its IPO on December 12, 2013 at $20/share versus the S&P 500 up 8.2% (as of the close on Dec 11, 2013). 

Takeaway: By comparison HOT was up 9.7% and MAR was up 34.6% since December 11, 2013 through yesterday's close.  As the old Wall Street adage goes "nobody ever got fired for taking profit...."

 

STAY - filed a 21 million secondary offering for selling shareholders including 7 million shares each to Centerbridge Partners, Paulson, and The Blackstone Group.

Takeaway: More insider selling...

 

RCL -  pays bonus on high-end Oasis-class bookings (Travel Weekly)

RCL has set a $250 bonus commission on bookings of Crown Loft suites or higher accommodations on Oasis and Allure of the Seas cruises departing from June through August.  In addition, clients get a $1,000 onboard credit per stateroom with the booking, and third and fourth guests sail free. Agents will earn an additional 2% points in commission for all new bookings on any 2014 Caribbean or Bahamas sailings, and 1 point extra for all new bookings on any other 2014 sailing. 

Takeaway:  Best way to build a relationship with the agent community is to pay them more.

 

TUI Cruises -   Richard J. Vogel is giving up his position as CEO of TUI Cruises.  His successor has been chosen and will be disclosed during the next few weeks. TUI AG yesterday only confirmed that he ‘will take up a top management task outside the TUI Group’.

Takeaway:  Surprising departure only days before Mein Schiff 3 christening.

 

RCL -  Says Bon Voyage to New Orleans (WGNO)

New Orleans is losing one of its cruise ship lines.  Royal Caribbean announced it will leave the market effective in April 2015.  RCL says it has no ships planned once the Serenade of the Seas departs.  The move leaves New Orleans with two other cruise companies remaining, Carnival and Norwegian.

 

INDUSTRY NEWS

Union Pay & Macau Gaming – SJM Holdings Ltd says the Monetary Authority of Macau intends to restrict further the use of China UnionPay Co cards in casinos and has ordered jewellers and pawnshops on casino floors to remove their UnionPay card terminals by July 1.

Takeaway: As expected given our conversation with gaming operators.

 

Gaming Headwinds (Macau Business Daily) "Unlucky 13" reports casino profits in Macau could fall in the Q2 2014 - the first time in four years and further cited 13 reasons for negative sentiment overhang including: 1) stocks aren’t going to work due to continued ‘softness’ in consensus expectations for the second quarter of this year, 2) a slow down of the VIP segment, 3) continued negative macro-economic data in sectors such as real estate and banking from mainland China that impacts investor sentiment, 4) a potential decline in mainland Chinese visitor numbers once measures are implemented to target abuses in the transit visa scheme, 5) the ban on hand-held swipe card devices from casino floors, 6) possible bad press ahead of the full smoking ban and also links between a slower gross gaming revenue and the World Cup, 7) more bad press related to junket operations and delays in infrastructure projects such as the light rail, 8) and fluctuations in gross gaming revenue.

Takeaway: The tide is going out...don't fight the tape. 

 

Miami Beach Convention Center Hotel Sites Proposed – Miami Beach hopes to begin a $500 million renovation of its convention center by 2016 and city officials want to add an 800 room hotel to make the event space more attractive to groups. Early locations for the proposed hotel include current City Hall or the 17th Street parking garage near Lincoln Road.

Takeaway: Miami is one of the top performing hotel markets, so new development makes sense given the desirability of the Miami market to North Americans as well as South American tourists.

 

Odessa Issues Statement "Operations are Normal and Safe" (Cruise Industry News) 

Elvira Leschinskaya, head of Odessa development and external relations, said that most of the big cruise lines had cancelled their calls to Ukranian and Russian Black Sea ports for the season.  She said they have left altogether or come up with alternative Black Sea itineraries.  Leschinskaya said she hoped that some of the season could still be salvaged and that so far 79 calls for 2015 were still scheduled.

 

Chris Allen, Royal Caribbean director of deployment and itinerary planning, said that Royal Caribbean International had no cruises scheduled for this year, and Marc Miller, manager of deployment and itinerary planning, said that Celebrity Cruises has three sailings scheduled in the fall, but has removed the Ukrainian ports from the itineraries.  “For 2015, we have not made any changes in our plans,” Miller said. “What is new is that we are offering summer cruises in June and July in the Black Sea, where we used to only sail in the fall. These are open-jaw 14-day sailings on the Constellation between Venice and Istanbul.”

Takeaway:  Cruise lines shifting away from the volatile regions in the Black Sea.  They may have had a disruption for Europe summer cruising but we're still seeing strong overall pricing in that region.

 

Norwegian Cruise Line launches Bonus Days on Sailings to Bermuda, the Bahamas and Florida (Travel Agent Central)

NCLH is launching its Bermuda and Bahamas & Florida Bonus Days, offering savings on the line’s Bermuda and Bahamas & Florida cruises.  Guests who book a Bermuda or Bahamas & Florida cruise vacation from Sunday, June 8, 2014 through Saturday, June 14, 2014, can receive up to $100 per stateroom to spend on board.

Takeaway:  Promotions continue for the Caribbean

MACRO

Chinese Consumer Confidence – According to Nielsen, Chinese consumer confidence remained high in the first quarter of 2014 as in the previous quarter, higher than the same time period in the previous year and above the global average.  Nielsen also found that "fast moving consumer goods" in the Chinese market rebounded back to 8% growth in Q1, a 2% increase year-over-year. Nielsen noted that across China, consumer's greatest desire is for personal digital appliances. Lower tier cities and West China (in particular, mid-west China which includes Sichuan, Guizhou, Yunnan, Shaanxi, Chongqing and Guangxi) consumer confidence is rising. Health has become the top concern for all-tier city consumers in Q1, which is closely followed by their concern for income, according to Nielsen.

 

LEISURE LETTER (06/11/2014) - chinese consumer pref

  

Las Vegas Residential Real Estate – According to the Greater Las Vegas Association of Realtors, the median sales price of previously owned single-family homes last month in Southern Nevada was $195,000, up 1.6% from April and 14.7% from a year ago.  A mere 7.9% of pre-owned home sales during May were short sales, down from 12.4% in April and 9.1% of May’s sales were foreclosed properties, down from 11.4% in April.

Takeaway:  Still green arrows in LV housing market

 


HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS

Takeaway: Mortgage volume finally catches a bounce, but post-holiday week data isn't terribly reliable. We'll see what next week brings.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Compendium 061114

 

Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended June 6. Mortgage purchase application volume rose +9.3% week-over-week, which improved the series to -13.6% YoY vs -17.2% YoY in the week prior. The QoQ is currently running at +3.4%.

 

Prior to last week, the purchase index had declined for four consecutive weeks. The Memorial Day holiday week was the week that preceded last week so it's possible/likely that there was demand that was time shifted.

 

As a general rule of thumb, anytime there is a holiday involved we tend not to get overly excited by sharp turns in the data in either direction. Next week should be a better indicator of the underlying trend in demand. 

 

Activity heated up on the refi side as well. Consistent with lower rates  - current 30Y FRM contract = 4.34%, up from 4.26% prior but still at best levels in a year - refi application volume rose +11.0% W/W, reversing the trend of the prior two weeks. 

 

We're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.

 

Our expectation remains that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Purchase and Refi YoY

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Purchase Index Qtrly

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Purchase Apps LT w Summary Stats

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Composite Index Qtrly

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - Composite Index LT w Summary Stats

 

HOUSING DEMAND BOUNCES AMID HOLIDAY DISTORTIONS - 30Y Mortgage Rates Mo Ave

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

Joshua Steiner, CFA

 

Christian B. Drake

 



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