Trending along the bottom, not worse but not significantly better...but that's a directional improvement.  





Prepared Comments

  • Balancing act - operating efficiency while improving guest experience.
  • Top line remains challenged
  • Focused on operational efficiencies
  • Change in culture - challenges of regional gaming...
  • Creating value for customers and stakeholders
  • Margins: 4Q margins up 90 bps


Balance Sheet:

Corporate Line of Credit $64m outstanding

Leverage 6.2x for covenant purposes

Retired $90m of debt, leverage down 0.25x

Capacity $184 million


2015 Guidance

D&A:  $80-$82 million

Int Exp: $83-$85 million

Maintenance capex $47-50 million



Q & A

  • New Golden Nugget in Lake Charles - Formulated battle plan for marketing, staffing, etc.
  • Blackhawk and Monarch expansion - expect Monarch to create more foot traffic for pod 1.  Ameristar promoting/marketing new car give away, challenge to market share battle. 
  • ISLE formal plan to go land based in Bettendorf - what is incremental capex and how to fund it? Going through application process with City, still finalizing scope of project. Could fund with capacity on revolver. 
  • Additional development plans at Pompano?  Looking at Pompano, a lot of options, but until better understanding of how Florida may develop for gaming simply wait.
  • Pompano results driven by higher slot play and higher F&B. Changes to slot reconfiguration to slot floor, especially high limit.  Big focus on customer service
  • What is meant by new reality in regional gaming?  Continuous top line pressure because traditional customer is under pressure and consumer spending is not rebounding.
  • Pennsylvania Control Board having trouble reaching consensus regarding 2nd Philadelphia gaming license. 
  • Leverage target:  5x or less within a couple of years...
  • Fan Club - revenue benefits, especially for Tier 1 customers?  Fan Club 2.0 launched end of January, still have 11 properties where yet to be rolled out. 
  • Cost savings now $3 million in the quarter, so $12 million annualized vs. $10 million annual goal.  Hit the big opportunities, now in the weeds looking for next phase.  Next round will be smaller saves.
  • Web-site:  new Pompano site live today, rest of portfolio next month. 
  • May improvement - weather, pent up demand?  Delta between where were in January, February, March was different than recent.  But May did not see a huge swing in trends to the upside (but not eroding further). 
  • June any changes?  Things haven't change for quite a while for the industry.
  • Lake Charles - Sasol plans - where will property be located?  Core market should increase visitation and local employment.
  • Gaming mix - slot/table ratio, any opportunity to change/improve?  Slots still 90%+ on GGR basis.  Still seeing weakness on slot play because the <$100 theoretical customer just not playing as much. 
  • CO December ballot initiative - still polling, testing. Location needs to be determined first, then quantify negative impact/cannibalization to Blackhawk. 
  • Pennsylvania: spent $60 million but earning $4 million vs. prior expectation of closer to $8-9 million.  Operating under restrictive daily/annual access plan, customers have other options without access fee as well as new competition.  Seeking legislative/financial relief.  Surprised how resistant customers were/are to paying daily/annual access fee despite knowing ISLE would have to charge customers to visit.
  • Asset sales - interest in selling one-off or portfolio to deliver?  Always a market...when it make sense ISLE will divest of assets near end of life or mature/declining markets.  
  • Interact with Goldstein family?  Fully involved and 3 members sit on the Board of Directors.


Takeaway: May's headline starts/permits print looks soft, and upon closer soft.

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.




Today's Focus: May Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for May this morning. The big takeaway is this: No Growth.


Summarily, activity was weak across the board as both SF and MF starts declined, permits went sub-1MM, and single family starts and permits re-coupled at the low 600K level.  


The lone source of relative strength was the sequential rise (+3.7% MoM) in SF permits, however, the YTD trend in permits continues to suggest softish forward starts figures.  


  • TOTAL STARTS = -6.5% MoM & decelerating to +9% YoY from +26% prior
    • Single Family:  Down -5.9% MoM (-39K absolute)
    • Multi-family:  Down -7.6% MoM (-31K absolute)  
  • TOTAL PERMITS:  -6.4% MOM…with April revised lower to 1059K from 1080K
    • Single Family: Up +22K sequentially to +619K (still negative -1% on a YoY)
    • Multi-family: Down a big -90K MoM to 372K from 462K prior (-19.4% MoM)


While total starts and permits bounced sharply in April they were down in May. More importantly, however, the Single family component showed little-to-no signs of life in April and was down again m/m in May (SF starts down -5.9% m/m). Yesterday’s sequentially improved NAHB HMI print of 49 seems at odds with today's continuation of the soft single family data. 


Three factors are principally responsible for the ongoing weak 1H14 performance for housing. First, QM rules that took effect on January 10 of this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.














About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 



Joshua Steiner, CFA


Christian B. Drake

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RETAIL CALLOUTS (6/17): ICSC, JCP, M, WMT, TGT, WWW, KSS ***Update w/ Chart

Takeaway: ICSC - QTD growth rate flat to last year. JCP gets a slap on the wrist over MSO agreement. WMT investing in e-comm talent.



Wednesday (6/18)

  • H&M - Earnings Call: 2:00pm



ICSC - Chain Store Sales Index


Takeaway: Two solid weeks of data. Plus 3% and 3.1% YY over the past two weeks respectively. QTD growth rate is flat to last year.


RETAIL CALLOUTS (6/17): ICSC, JCP, M, WMT, TGT, WWW, KSS ***Update w/ Chart - chart2 6 17




JCP, M - Macy's Wins Case Against J.C. Penney



  • "New York State Court Judge Jeffrey Oing ruled that Penney’s 'tortiously' interfered with Macy’s agreement with MSLO and ordered that a hearing be scheduled to determine how much Penney’s owes Macy’s in damages and attorneys’ fees. The judge did not award Macy’s punitive damages…"
  • "The judge continued that Johnson’s 'only motivation' was to 'gain an edge' on the competition. He denied Macy’s its request for punitive damages, which are normally granted to punish a defendant for misconduct and to deter others from similar behavior in the future. Oing said Penney’s firing of Johnson in April, combined with the fact it was 'on the verge of financial collapse,' amounted to 'abject retail failure,' which proved to be a sufficient deterrent to the company and its rivals. Still, Oing noted that a judicial hearing officer or special referee would determine damages and attorneys’ fees at a later date."


Takeaway: Looks like Penney's will walk away from this with a slap on the wrist. M prolonged the case in an attempt to inflict maximum pain on JCP. The irony is that this is behavior that is typical of wanting to hurt a financially-strained competitor. We're not beating Macy's up over this -- it's what companies do. But, Macy's management will swear all day that it does not compete with JCP. The big loser in this whole mess is MSO.


WMT - @WalmartLabs Grabs Its First “Silicon Alley” Startup With Acquisition Of Fashion App Stylr



  • "@WalmartLabs, the retailer’s Silicon Valley-based R&D and innovation center, is today announcing its 13th acquisition – and its first from New York’s 'Silicon Alley' – with the acquisition of fashion app Stylr. The app, which helps consumers find clothes they love in nearby stores, will be shut down. It will be pulled from the iTunes App Store by the end of this month."
  • "Terms of the deal were not disclosed, but we understand it was more of an 'acqui-hire' related to bringing the talent of the founders, Eytan Daniyalzade and Berk Atikoglu, to Walmart."


Takeaway: WMT continues to invest in talent. The company has recognized the importance of this channel for its long term growth algorithm and is investing accordingly. Compare that to the guys in Minneapolis who formed a Digital Advisory Council to solve TGT's e-commerce problem.




TGT - Target: Device glitch caused check-out delays



  • "Target Corp. said Monday that the 'glitch' that slowed many of its check-out registers to a crawl Sunday night was related to a defect with a network device."
  • "The Minneapolis-based retailer didn’t provide more details about the problem, noting that the issue was resolved by about 11 p.m. Sunday. The company also reiterated there was no evidence that it had anything to do with a cyberattack. The malfunction lasted a few hours but affected stores nationwide…"


KSS, SHOO - Juicy Couture, Steve Madden Partner for Footwear



  • "Juicy Couture is stepping into the footwear category through a partnership with Steven Madden Ltd. The line will be available internationally in spring 2015 in Juicy Couture stores, shops-in-shop, select department stores and online at the brand’s Web site."
  • "The higher-priced line, starting at $80 and going up to $200, will be available internationally, while a lower-priced collection referred to as the midtier line will come later and is expected to be sold primarily at department store doors in the U.S."


WWW - Wolverine Worldwide Announces Key Leadership Changes And Additions To Accelerate Global Growth



  • "Wolverine Worldwide today announced important organizational changes to strengthen its senior leadership team and help accelerate global growth."
  • "...James D. Zwiers has been appointed President of the International Group.  Mr. Zwiers has held numerous and increasingly significant leadership roles during his 16 years with the Company, including President,Performance Group; President, Outdoor Group; President, Hush Puppies USA; and Senior Vice President with responsibilities for strategy, business development, consumer direct and legal."
  • "...James A. Gabel will succeed Mr. Zwiers as President of the Performance Group...having most recently served as President of adidas Group Canada
  • "...Andrew Simister as President of the Company's Lifestyle Group...Most recently, Mr. Simister was President of the Lacoste Footwear brand…"


WMT - Wal-Mart to Triple Spending on Food-Safety in China



  • "Wal-Mart Stores Inc. said it will triple its spending on food-safety in China to 300 million yuan ($48.2 million) between 2013 and 2015 amid scrutiny of its operations by officials there."
  • "The Bentonville, Ark., retailer is increasing its food safety investment from the 100 million yuan it previously pledged to spend over the three-year period, said Wal-Mart's China Chief Compliance Officer Paul Gallemore in a press briefing Tuesday. The funding will go to additional food testing and supplier audits, Mr. Gallemore said, adding that Wal-Mart will double its DNA testing on meat products."


GIII - G-III Apparel Group, Ltd. Announces European License for G.H. Bass Footwear



  • "G-III Apparel Group, Ltd. announced today that it has entered into a multi-year wholesale license agreement with UK based Overland Ltd. for the sale of men's, women's and children's footwear under the G.H. Bass and related brands in Europe. Overland plans to sell G.H. Bass footwear primarily to department and specialty stores beginning in the fall of 2014. A companion agreement also enables Overland to operate retail locations throughout Europe."
  • "This latest agreement marks the second license that G-III has entered into since acquiring G.H. Bass from PVH Corp. in November 2013. Earlier this year, G-III announced a multi-year license with PVH Corp. for G.H. Bass better men's sportswear for department store distribution throughout North America."


UHR - Swatch Waiting With Apple for Smartwatch Market to Grow



  • “'You won’t see us participating in a race of who’s going to introduce what first,' Hayek said over coffee in his cluttered office in Biel,Switzerland. 'There’s still big resistance from the consumer, so we’re going to wait.'"
  • "Hayek says his company has all the technology it needs to make a smartwatch. His plan is to sell components to others, a quiet way to benefit from a potential revolution in the $62 billion watch industry. If demand crystallizes, the company is ready to jump in and push a smartwatch through its extensive distribution network."


NKE, JD Sports - JD Sports Fashion jumps 3% after World Cup boost



  • "JD Sports Fashion ... has issued a positive trading update, saying it expected a satisfactory increase in first half profitability in line with expectations."
  • "The build up to the World Cup has enhanced the trading performance of our most significant segment of the business, the sports fascias. As a consequence, precise like for like sales figures, at this stage, would be potentially misleading. However we are certainly pleased with the underlying performance of this segment in the period to date."

RH – De-Risks The Growth Plan

Takeaway: The punchline on this financing deal is that it de-risked the growth strategy, and took out one of the key bear arguments on this stock.

We were initially caught off guard in seeing the announcement from RH hit the tape last night about its convertible offering. But after going through the numbers and the logic, we think it makes all the sense in the world. Here’s what we’re thinking…

  1. The company is, in effect, creating $350mm of low-cost liquidity through a convertible note offering.  It currently has only $149mm outstanding on a $417.5mm credit facility. So why would it need to do this deal?
  2. First off, because it can. We’d like to see the company tap the capital markets for lower cost financing from a position of strength rather than from a defensive position if the long-term growth plan is thrown a curve ball.
  3. The cost of the debt is not the issue at hand. Yes, it’s nice that the structure of this deal suggests that there is no dilution until the stock is $170 – about 105% above current levels. And even then, we’re only talking about 3-4% dilution.
  4. No, the KEY ISSUE here is duration matching. The company just started what will be a 5+ year store growth plan where it will take square footage from 825k to about 2.3mm. It is signing leases today for 2H16. Its current credit facility expires in August 2016. One of the bear cases we hear is that the company would be locked into expensive leases in 2017/18 without having liquidity protection. Then we go into a recession, which would hurt cash flow and close the window for the company to find liquidity to finance its growth. That argument is officially shot in the foot.


The punchline on this financing deal is that it de-risked the growth strategy, and took out one of the key bear arguments on this stock. If there’s any bad news, it’s that that there will be dilution at some point over the next few years – because we think that RH trades through $170.

Forcing 0%

“The Fundamental Force for Divergence: r > g”

-Thomas Piketty


I’m about a third of the way through Piketty’s 685 page NYT “Best Seller,” Capital In The 21st Century, and I have to admit that I don’t think I’m going to make it to the end. Like most Keynesian and/or Marxist economic diatribes written from a loft in Europe, there’s a lot more text than teeth.


That said, if Piketty had any experience risk managing markets, he’d have been able to hammer home why one of his core arguments is accurate. The aforementioned quote points to a simple relationship between growth (g) and returns (r). It explains the widening divergence between rich and poor.


True or False? “When the rate of return on capital significantly exceeds the growth rate of the economy, then it logically follows that inherited wealth grows faster than output and income” (Piketty, pg 26). True; especially when real growth is 0%. That’s when only those long inflation and/or #YieldChasing get paid.

Forcing 0% - 567

Back to the Global Macro Grind


The main issue most mainstream “economists” educated in the West tend to have is taking the government’s word for it on inflation. If you don’t know what real world inflation is, there’s absolutely no way you can have a real forecast for real (inflation adjusted) consumption g (growth).


It took Piketty to page 102 to address “The Question of Inflation”, but using multi-century government data sets he was still able to discern a very basic trend in made-up government inflation data: “the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon.


“More precisely, if we look at average price increases over the periods 1 and 1, we find that inflation was insignificant in France, Britain, the United States, and Germany: at most 0.2-0.3% per year. We even find periods of slightly negative price movements.” (Piketty, pg 103)


Negative price movements?


Oh the horror. Commonly fear mongered in 3-card Keynesian Monte as the great threat of “deflation”, most humans have got along just fine when the prices of primitive things like food and shelter have fallen in price.


Forget getting lost in the weeds on why there’s no way the 0.2-0.3% inflation reading is precise. It’s the forest (i.e. long-term and secular slope of the line in general prices and/or cost of living) that has been straight up into the right since 1913.


What happened in 1913?


Oh, right. That was the Federal Reserve Act of 1913 – when the US allowed an un-elected body of central planners begin with their Policies to Inflate via destruction of the purchasing power of The People (i.e. the value of their hard earned currency and savings).


Back to the relationship between real growth (g) and returns (r):


  1. If real-growth is +3-4% (1, or 1), lots of people are getting paid (savers too!)
  2. If real growth is 1.7% (Bush and Obama decade), less people are getting paid (not the savers though)
  3. If real growth is -1% (US GDP growth in Q1 of 2014), people who are long inflation and/or #YieldChasing get paid


If you have nothing, you can’t make a return on nothing. That’s a simple concept. What’s less obvious is that if you have something, and save it  (during this Federal Reserve Regime) you still get nothing, minus inflation.


“So”, when growth slows, you’re forced to buy asset price inflation (commodities, REITS, etc.) so that you can earn what you need (something greater than 0%) just to keep up with the cost of living.


When growth accelerates and the central planning agency RAISES rates, you get paid to both save and invest. (hint: you can’t grow unless you have savings to invest, unless you start levering yourself up).


Two real-time examples of countries going opposite way on this right now are the USA and the UK:


  1. The British Pound is +4.2% in the last 6 months vs the US Dollar
  2. As the Pound strengthens, UK inflation has weakened to its lowest level since 2009 (+1.5%)
  3. As US inflation accelerates (vs. decelerating at this time last year when the USD was strengthening), real-growth is slowing


What the US and UK bond markets are expecting are two different policy paths:


  1. US rates are falling again as the world anticipates Yellen gets less hawkish (less tapering, more dovish)
  2. UK rates are rising as the world expects the Bank of England to get more hawkish and get off 0%


I could ground myself in an academic hole and write a doctoral thesis on how the divergence between rich and poor is being perpetuated by Fed Policies to Inflate. But I won’t. Too expensive. The inflation of a Western Economics Education is hitting all-time highs too.


Our immediate-term Global Macro Risk Ranges are now:



RUT 1136-1175

VIX 10.73-13.29

Pound 1.68-1.70
Brent Oil 110.13-113.78

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Forcing 0% - Chart of the Day

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