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When Bad News Is Good...

On a week over week basis, this morning’s jobless claims number was worse (see chart below -558,000 vs -554,000 in the week prior). Although its on a very tight duration, on the margin, this number is what it is – worse…


But, there’s this thing we have been following called the US Dollar. Yes, that thing that Bernanke is Burning…


The buck broke down on the “news”, supporting further strength in everything that’s priced in those Burning Bucks.


Chaos theory is a beautiful mathematical reality – it boils things down to a very deep simplicity.


Dollar down = everything else up.



Keith R. McCullough
Chief Executive Officer

When Bad News Is Good... - a1

Back to School, Back to Footwear?

We are beginning to see positive back to school trends develop within the sports apparel and athletic footwear data.  Footwear sales picked up measurably, breaking into positive growth territory for the first time in 17 weeks with a 4.9% increase.  Along with total sales, ASP’s improved sequentially from -4% to -3%. 


Total sports apparel sales fell 2.4% for the week as the Family Retail channel ended a 3 week run of positive trends.   This decline more than offset the improvement in the Sport Retail channel.  While the total industry experienced a slight decrease is sales for the week, ASPs grew 10% driven by dramatically higher prices in the Discount/Mass channel.  The West Coast continued to outperform the national trend for sports apparel with a positive high single digit increase. The East Coast declined in the mid to high single digits.   


Two interesting points pertaining to early Back to School can be pulled out of this week’s data: 1) price stabilization and 2) a notable sequential pick up in footwear (with a delta far greater than the build we saw last year at this time).


If you follow the table below, the last 3 week’s ASP trend has been very consistent for both footwear and apparel.  The overall trend while still slightly negative for footwear appears to be stable as we are now over one week into the key selling season.  While it is still early, this supports anecdotal evidence that the promotional environment remains unchanged at this time.  The current trend is in stark contrast to last year, where ASP’s were showing substantial increases and then decelerated sharply as back to school progressed. 


Footwear dollar sales had a very dramatic sequential delta from down high single to low double digits (which was a trend over the last 5 weeks) to +5% this week.  This uptick clearly marks the presence of BTS.  Interestingly, when we look at the back to school ramp last year we do not see anything as dramatic.  Over a similar period in 2008,  sales jumped from down -2% to +4%.  Again, it is still too early to declare a victory for the season, but the delta in sales cadence is notable as tax holidays and back to school marketing campaigns have kicked in.


Back to School, Back to Footwear? - BTS table


Back to School, Back to Footwear? - footwear and apparel dollar chart


Back to School, Back to Footwear? - ASP chart sports apparel


Back to School, Back to Footwear? - Sports Apparel channel table



PFCB seems intent on developing a new concept.  Yesterday, PFCB announced that it would provide a $10 million loan to Fox Restaurant Concepts to develop True Food Kitchen restaurants, a new Phoenix, Arizona based eatery that offers a globally inspired, seasonal menu appealing to anyone seeking a more balanced lifestyle.  Under the agreement, PFCB’s loan can be converted into a majority equity position in True Food Kitchen.


It was only about a year ago that PFCB closed on its transaction to completely exit from its Taneko Japanese Tavern concept, which it had opened only about 2 years earlier.  PFCB had only operated one Taneko restaurant, which failed to ever make money.  Additionally, until very recently, PFCB’s second concept, Pei Wei was delivering negative returns.  The company significantly slowed its Pei Wei development in FY09 and margins have grown rather significantly in each of the last three quarters.  To that end, I think PFCB would be better served to continue to focus on improving returns at its current concepts rather than invoking on new restaurant concept development. 


This True Food Kitchen agreement is much less risky in that it does not appear that PFCB will currently be involved in the day to day development and operations as it was with Taneko, which the company developed internally.  In the near term, this investment will not have a material impact on PFCB, but given that PFCB’s loan can eventually be converted into a major equity investment, the company may become more tied to the concept going forward from both an operations and financial perspective.


From a balance sheet perspective, PFCB has already cut its debt balance in half since the start of the year and still expects to generate $70-$80 million in free cash flow so this $10 million loan should not pose any problems for the company.  PFCB had said it would use its free cash flow to pay down debt and repurchase shares in FY09 so this announcement does come as somewhat of a surprise.  On its most recent 2Q09 earnings call, an investor asked whether PFCB would consider going to more of a franchise model in the U.S. with its Pei Wei concept and management responded by saying:


“I don't know that we've ever said that as much as we would evaluate any opportunities that might help us develop that brand.  You know, we are not constrained by capital, and we're not necessarily constrained by management resources.  You know, if there was a unique opportunity that presented itself, and it required a level of partnership or franchising we would consider it. You know, we probably would, but it's not high on the list of priorities right now.”


Based on this response, maybe I should not be surprised because management did say (though in reference to Pei Wei) that PFCB was open to opportunities that required some “level of partnership.”   At the same time, this comment was made less than a month ago and at that time a partnership was not a high priority.  And, given co-CEO Bert Vivian’s gloomy and overly cautious near-term outlook for the restaurant environment, it is an interesting time to get involved with a restaurant concept that is in its early-stage development phase. 

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AUGUST 13, 2009




Here are some key call outs from this morning’s flurry of EPS releases.


Wal*Mart:  Key surprise here is same store sales which came in at -1.2% for the US without fuel and -1.9% with fuel while the street was generally expecting a +1% - 1.5% comp.  One of the few details in the press release alludes to deflation (a trend that has been consistently negative for all consumables retailers in the qtr).  Offsetting a slightly weaker sales number was a slightly better operating margin performance.  Inventories were also very well controlled, declining by 4.3% vs. a sales decline of 1.4%.  Check out the visual in the SIGMA chart below. Overall, results were very much inline with the high end of the guidance.  This is the consistency that people pay for.  After beating the street's EPS estimate by $0.03 and earning at the high end of it's guidance, WMT guided Q3 to $0.78-0.82 vs. Reuters $0.80 and full year $3.50-3.60 vs Reuters $3.53, tightened from previous $3.45-3.60.

One of the financials that bugged me initially is capex, which is showing a pick up from the bottom. Almost all the growth is coming outside of the US which is the only place left to expand. Also some step up in a worldwide systems initiative to create common platforms. In the end, it’s probably not worth getting bent out of shape about – as the best companies should be increasing investment levels during recessionary periods.  In the end, a net positive report from WMT.



Kohl's: Q2 release and Q3 guidance may be perceived as a mess, but only if you want to really believe their guidance. This is basically what Macy's did yesterday. Lowball, raise, raise again, beat, and then guide below the Street. If we use M as a proxy then the Street will look right through the guidance. Kohl's comp guidance at -3 to -5% is a bit laughable if you consider they just reported a positive comp in July (which is the month with the negative hit from BTS). Sales up 2%, inventories flat. The SIGMA trajectory here is one of the best out of the major retailers. This path is usually tough to reverse.


GIL: While the clean EPS of $0.32 is a bit lighter than the headline of $0.37, the company still beat consensus  by $0.03. Sales missed by 10% but gross margins beat meaningfully, which was due to Cotton cost benefits being realized a quarter earlier than we thought and GIL pumping its volume through tighter capacity. We expected this in 2H09 – though it is showing up a quarter early. I still question why this company needs to exist beyond its core US screenprinting business. But consistent with our quality vs. junk theme for 2010, this is one you can’t bet against until the stats start to visibly align in another 2 quarters.







Some Notable Call Outs


  • Bloomingdales’ sales are still lagging the overall Macy’s corporate average, but management indicated trends did improve during the second quarter. Additionally, Bloomingdales is said to be outperforming its peer group of higher-end department stores. Most interestingly, markets with tourist exposure (i.e NYC) performed a little better in the 2nd quarter. Macy’s flagship store in Herald Square was called out as having a “great trend” over the past couple of weeks.


  • Based on comments from the CEO, it does not look like LIZ is looking to shed any additional assets at this time. When asked point blank on the company’s 2Q conference call if there were any brands that could be potentially shelved or sold, the answer was a definite “no”. CEO McComb reminded everyone that the company’s strategic reviews have been completed and there will be no further changes to the brand portfolio at this time.


  • Perhaps this is the beginning of a trend. On August 18th, Seattle residents will vote on a 20 cent plastic bag tax, which would impact grocery, drug, and convenience stores. The tax, which is generally driven by environmental motives, was originally passed last year but was put on hold after an opposition group (backed by Dow, ExxonMobil, and bag manufacturers) collected enough signatures to put the measure to a ballot. Interestingly, IKEA began phasing out plastic bags in the U.S. by instituting a 5 cent charge per bag and immediately saw a drop in usage by 92%. Eventually, the furniture/home retailer phased out plastic bags completely by the end of 2008.




-Apparel and Textile Imports fall 10.3% in June - Imports of apparel and textiles to the U.S. declined 10.3% in June, but still represented the highest monthly volume gain for the combined import categories so far this year.  Vietnam, Pakistan and Bangladesh were the only countries that showed overall growth in apparel and textile imports in June. Vietnam increased shipments 29%  driven by a sizable growth in textiles. Shipments from Pakistan increased 8.5% and imports from Bangladesh were up 2.2%. Shipments of textiles and apparel from China fell 4.2%. The figure was held down by declining textile import levels. Apparel shipments from China, however, increased 16.2%. Honduras had the largest textile and apparel import declines (affected by the military coup at the end of June that created political turmoil) posting a decrease of 29.3%. The top five apparel suppliers to the U.S. in June were China, Vietnam, Bangladesh, Honduras and Indonesia. China was also the top textile supplier, followed by Pakistan, India, South Korea and Mexico. The nation’s trade deficit widened to $27 billion in June from $26 billion in May, as oil import volume and prices increased. <wwd.com/retail-news>




-WTO finds China guilty of trade violations again - A World Trade Organization panel said Wednesday that China disobeyed trade rules by creating barriers to imports of U.S. books, music, videos and movies, a warning to Beijing over its handling of intellectual property and distribution requirements. It is the second recent ruling in which the WTO has sided largely with the U.S. and criticized China for inadequate intellectual property rights enforcement and protection. <wwd.com/retail-news>


-Charming Shoppes sells credit card operations - ADS and Charming Shoppes (CHRS) announced a long-term agreement where Alliance Data will assume operation of Charming Shoppes' private label credit card programs on an ongoing basis as well as acquire the credit card files and service center operations associated with Charming Shoppes' branded card programs. Alliance Data expects the transaction to close by the end of the year, subject to attaining certain customary regulatory approvals. Under terms of the agreements, Alliance Data will assume the operation of the Lane Bryant, Fashion Bug and Catherines credit card program, portfolio and securitization master trust, which combined represents 4.5M active accounts generating $680M in annual credit sales and $500M in account receivables. <streetaccount.com>


-Liz Claiborne Inc. has promoted Chris Kolbe to the position of president, chief merchant officer of Lucky Brand Jeans - Liz Munoz remains president, creative director of Lucky Brand Jeans. Kolbe will be responsible for all product design concepts, merchandising, manufacturing and planning. He begins in this new role on Sept. 1 and will be based at the brand’s Los Angeles headquarters. Most recently, Kolbe was based in Amsterdam as part of Mexx Europe’s transition management team. There since January, he worked to secure product and merchandising strategies while Claiborne sought a permanent Europe-based team for the Mexx brand.  <wwd.com/retail-news>


-The UK Government has unveiled a £3m fund to help regenerate high streets which have been hit by the recession - The fund will be shared between some of England’s hardest-hit areas to allow councils to replace boarded up shops with projects such as art galleries or community learning centres. 57 local authorities have been given grants worth more than £50,000 each to help prevent their high streets becoming ghost towns.  <drapersonline.com>


-The top 8 Green Companies according to consumers - 77% of consumers said it’s “somewhat or very important” for companies to be eco-friendly, according to a new study conducted in seven countries, including the U.S. and the U.K. Respondents said although sustainable items cost more than comparable nongreen products, they indicated they would spend more for merchandise that is environmentally friendly in the next 12 months. The “findings reinforce consumers’ desires to be green,” said Russ Meyer, chief strategy officer of Landor Associates, a firm involved in the study, which questioned more than 1,000 participants in each country to rate a predetermined set of brands. Top 8 US brands: Clorox Green Works, Burt's Bees, Tom's of Maine, S.C. Johnson & Son, Toyota, Proctor and Gamble, Wal-Mart, and IKEA. <wwd.com/retail-news>


-Wal-Mart Supplier Li & Fung Net Rises 13% on Cost Cuts, Beating Estimates - Li & Fung Ltd., which supplies retailers including Wal-Mart Stores Inc. and Target Corp., said first-half profit rose 13%, beating estimates, after cutting operating costs. Sales shed 2% as weak consumer demand and some customer insolvencies bit into business. The company said cost cutting helped lift core operating profit 11%. The company also said it has entered into a buying agency agreement with Talbots Inc. Li & Fung said the deal is expected to be completed in September. The companies acknowledged earlier this year that they were in negotiations.  <wwd.com/retail-news>


-Maidenform Brands Inc. reported a less-than-expected decline in second-quarter profits and raised full-year guidance Wednesday -  Net sales rose 5.9% aided by a 9.2% increase in shapewear sales. Sales at department stores decreased 1.7%, while mass market revenues declined 7.4%.  Retail sales remained unchanged although same-store sales slid 6.4%. The company said increased promotional activity and strong sales from its lower-margin mass merchant and other channels pulled gross margins down to 270 bps. Quarterly expenses rose 2.5 % as Maidenform launched licensed programs under the Donna Karan and DKNY brands. <wwd.com/retail-news>


-Coty Inc. and Guess? Inc. Announce Collaboration to Develop and Market New Fragrance Lines - Coty, Inc. announced that it has entered into a license agreement with Guess? Inc, to develop and market new GUESS fragrance lines. As part of the new partnership, Coty will also distribute existing GUESS fragrances, effective January 2010. GUESS is on the pulse of edgy style and flirtatious fashion, and GUESS' ground breaking approach and reputation lends itself perfectly to the passionate and innovative spirit of Coty. With this partnership, Coty is inheriting a notable fragrance house. This collaboration with Coty will provide the perfect platform for GUESS to create innovative, highly desirable and luxurious fragrances that reflect company's image and legacy. <capitaliq.com/news>


-Bakers Shoes steps up efforts to attract global shoppers with new service - Bakers Shoes is taking steps abroad—at least when it comes to its e-commerce site. The online retailer can now sell to consumers in more than 200 countries through a new program from a vendor specializing in international e-commerce for U.S. retailers.  <internetretailer.com>


-Designer Robert Geller has created a cobranded denim collection with Levi’s that will hit stores next month - The 11-piece capsule range will be sold in 12 Bloomingdale’s units, on bloomingdales.com and in seven Levi’s stores in New York, San Francisco, Miami Beach, Beverly Hills and Bucktown, Ill., beginning Sept. 10. The collection will be celebrated with a party at Bloomingdale’s Manhattan flagship on Sept. 9, and is featured in the September issue of GQ. The project comes after Geller’s win in GQ’s Best New Menswear Designer in America competition in February. <wwd.com/retail-news>

FOOTNOTED: BYI: Why the new contract for CEO Haddrill?

Whenever we see a company changing an employment agreement with its CEO more frequently than once a year, it begs the question why. And that’s exactly the question we’re asking after taking a careful look at the 8-K that Bally filed late Tuesday.

The filing, which was the sixth amendment to CEO Richard Haddrill’s employment contract, was significantly different than the fifth amendment that was just signed last October. How so? There was a lot of new language about what happens to Haddrill in the event of a change in control. For example, the new contract adds a “strategic initiatives bonus” that pays Haddrill $2.5 million if the company meets certain unstated goals by December 2010 or if there’s a change in control by that date. That’s just one of the changes. There’s several others too, including an additional payment of $1.9 million if a deal takes place before the end of next year, the extension of health benefits through 2012 following a deal and a new anti-compete clause that prohibits Haddrill from working for any other company engaged in electronic gaming or owning more than 5% for a four year period.

Add to the fact that the fifth amendment was not set to expire until Dec. 2010 and you have to wonder why all of this new language was added. The lawyers that draft these sorts of contracts may not charge by the word, but they do charge by the hour, which makes it hard to believe that all of this new language is merely coincidental.


EPS was better but revs fell far short of expectations. The latter will likely impact the stock action. We see little in FQ2 to change our positive long-term thesis.



We like the set up.  The positive long-term thesis was teed up in our 8/9/09 note, “BYI: THE LONG (TERM) AND SHORT OF IT”.  We explicitly avoided making a call on the quarter even though we were two cents above the Street (they actually did 3c above).  The stock will likely be down today due to a big revenue shortfall.  We hope so.  There is little in the quarter’s numbers that dent our very favorable long-term view.  The only real negative takeaway was the decline in participation units which we need to get more color on.


After the close yesterday, Bally’s reported revenues of $205MM and EPS of $0.58.  They missed the Street revenue estimate by 8%, but beat Street EPS and ours by 3 cents and 1 cent, respectively.  Guidance of $2.25 - $2.50 was wide (as predicted) and in line with expectations.  We’re not sure the EPS beat will be enough to offset weak revenues in investors’ minds.




The revenue miss came primarily from gaming equipment and systems revenues, somewhat offset by better margins on gaming equipment sales and operations.  The lower revenues do not concern us as system sales and international slots are notoriously lumpy.  Lower SG&A bridged the gap of lower revenues.  Other income, lower tax rate, and lower R&D helped beat consensus.  Below is a detailed review of the quarter and some further thoughts.


Gaming Equipment Sales

  • BYI missed our revenue number by $11MM.  $5.6MM of the miss was due to new unit sales and the balance was due to lower used, parts, & other sales.
    • North American units were spot in line with our estimate, however, international units which were down 22% y-o-y, 306 units light of our estimate
    • Pricing was only a touch (60bps) below our estimate
  • Other revenues came in $5.3MM below our estimate, but the mix was heavily skewed to conversion kits.  Our best guess is that the margin on “other”  improved to 65% from a 20’s-40% margin over the last four to five quarters


  • Systems sales came in $8MM below our estimate.  However, to be fair, this is really the most difficult segment to model due to the timing of revenue recognition.  We feel good about management’s comments on the call regarding systems in FY2010. There is a six to nine month lag between when BYI wins a contract to when the system is installed, and it can take even longer to recognize revenues.
  • Maintenance revenues increased to $13.5MM and with the launch and ramp of new applications installed on its 130,000 iviews in the field, management expected a strong ramp of maintenance revenues to $58-62MM in FY2010
  • Management also expects a strong December 2009 quarter.  BYI will be doing LVS’s Marina Bay Singapore and PNK’s River City installation
  • We expect the September quarter to be better than the June quarter, but still below the mid 50’s recent run-rate

Gaming Operations

  • Gaming operations revenues where $3MM below our estimate but gross margin was only $0.4MM below our estimate due to higher margins
    • WAP/LAP units decreased by 211 units sequentially
    • Rental and daily fee games decreased by  616 units sequentially
    • Centrally determined games increased by 1,287
  • Decline in participation units is probably the only aspect from the quarter that could have negative longer term implication
    • Management seems committed to produce more Millionaire games which will help the WAP/LAP segment
    • Management must explain the rental and daily fee decline – we will have a follow up


  • SG&A was 54.3MM, below our estimate.
    • As a reminder, last year BYI had some “unusual” expenses including at least $10MM of legal expenses (mostly regarding the IGT litigation) as well as auditing expenses relating to their restatements
  • Other income was $2.7MM, mostly from FX – which we did not model
  • We thought it was odd that BYI didn’t break out 4Q09 financials and instead they only broke out 4Q09 financials for the slot business
  • Share count looks like it ticked up a bit, despite the buyback
  • Total debt decreased by $60MM sequentially, cash flow generation was strong with total operating cash flow net of investment spending equalling approximately $136MM for FY2009


  • BYI guided to $2.25-$2.50 per share, growth that will be driven by
    • Higher international units
    • Higher ASPs
    • Higher conversion kit sales, which mean higher margins for gaming equipment sales
    • Higher base of gaming operations units
  • EPS will be slightly more back-end loaded than expected, the street was projecting 46% of EPS in the 1H FY2010.
  • BYI does have some large systems installations coming with LVS’s Marina Bay Sands and PNK’s River City opening in calendar 4Q09/1Q2010
  • Deferred revenues were down sequentially again, even though the company says that deferred revenue isn’t a good proxy for forward revenues, we do find comfort in the a large backlog

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%