We've got some more color on the sequential decline in participation units, the Haddrill contract amendment, and other tidbits.



- Hadrill’s new contract:

  • He was originally brought in to “turn around” the Company. Now the board wants him to focus on strategic initiatives and growing BYI
  • Compensation structure was changed to align his incentives to focus on creating “longer term value” and getting him paid in case the company gets bought out before he sees the fruits of his labor. Hmmmm....
  • You know our thoughts here (see the Footnoted post, "BYI: WHY THE NEW HADDRILL CONTRACT?" from 8/13/09)


- WAP/LAP installed base decreased in the quarter and over the last few quarters because the company hasn’t released new content in quite a while.  Over the last few months they’ve issued several new titles to go on their Millionaire 7’s and Quarter Millionaire platforms.  Management believes that over time the base of WAP/ LAP games should increase. 


- Daily & Rental Fee games decrease

  • Mostly in low fee rental & daily fee games, many of which got converted to for sale or weren’t earning enough to make it worthwhile to keep out there.  Based on our estimate these types of games contribute an immaterial amount to the gaming operations business
  • We estimate that there are roughly 6,500 “premium” rental & daily fee games earning on average $50/day, 2000 Seminole games (in a sale leaseback type arrangement) earning around $20-25/ day, and the balance earn around $10/ day


- Increase in Centrally Determined games was driven by Mexico & Washington


- Decrease in deferred revenue:

  • Management is trying to be more cognizant not to “bundle” systems and slot sales to avoid unnecessary deferral of revenues
  • A large portion of system sales are “add on” products to existing system which aren’t subject to deferral accounting since deferral revenues are more often associated with new system sales


- Apparently, management’s ommission of quarterly detail was accidental

The Tail Charts for Energy

This week we held our monthly strategy call with a detailed discussion on energy.  Setting aside the price fluctuations that might occur in the short term, I wanted to highlight two charts from that call that are very critical for any supply analysis of oil.


The first is the long term production chart (which is posted below), which highlights the flat lining of production globally over the past five years.  From 2001 – 2004, global oil production CAGRed at 1.8%, while from 2004 – 2008 it CAGRed at only 0.4%.  The long term average, over 30 years, is for 0.9% annual growth in oil production.  We are clearly seeing a slowdown in the rate of production growth globally.


The second chart that is critical is that of global rig count, which has been ramping dramatically for the last 10-years.  Global rig count CAGRed at 5.8% from 2001 – 2004 and then 8.6% from 2004 – 2008.  So investment in finding and producing oil ramped in a period in which production flat lined.


Combined, while these two charts and data sets don’t necessarily validate peak oil, but they most certainly validate the fact that oil has become much more difficult to find and will require much more substantial investment than we have seen historically to grow production rates.  These are two facts, and charts, to keep front and center as you position your portfolios for the tail duration on oil (three years or less).


Daryl G. Jones

Managing Director


The Tail Charts for Energy - oildj



Today’s Q2 GDP release for Hong Kong registered at a 3.3% improvement over the first quarter or a 3.83% decline over Q2 2008. This recovery was driven almost entirely by increased demand on the mainland which brought total exports to over HKD 600 billion for the quarter, although local political intervention did contribute with stimulus measures bringing government consumption up by 1.6% Y/Y.

(continued after chart)



As a trading economy, Hong Kong’s exports provide one of the clearer rear view mirror maps of global recovery to date separating the strong from the weak. On a re-export basis (meaning the goods in question originated elsewhere and only passed through HK) shipments to China and Taiwan showed positive year-over-year growth in June by 10.2% and 2% respectively, while shipments to Germany & South Korea  improved sequentially by wide margins (though remaining negative on a Y/Y basis). Meanwhile Chinese made exports passing through Victoria Harbor bound for the UK and US declined in June. 


Whether you believe that China’s recovery to date has been wholly artificially manufactured, or believe that it contains the seeds of expanding organic consumer demand, the fact remains that it is real. With today’s confirmation from Europe’s stronger economies that growth is returning there as well, Hong Kong’s ports should now start to see traffic improve in both directions. 


Andrew Barber



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RRGB’s 2Q09 same-store sales came in down 11.5%, representing a dramatic sequential fall off in sales on a both a 1-year and 2-year basis.  Comparable sales growth trends deteriorated further during the first four weeks of Q3, -15.3% versus the +4.4% from the same 4-week period last year.  Management stated that the most difficult comparisons of the year are now behind them, but as we have seen in this environment, easy comparisons no longer seem to matter. 


RRGB continues to blame its sales weakness on both the macro environment and the company’s decreased level of YOY spending on national cable advertising.  RRGB should never have invested in national cable advertising because its less than 500 unit store base does not warrant such a high level of spending.  Since its inception, management was never able to quantify the advertising campaign’s returns, but based on management comments, guest count growth was directly related to the level of advertising spending in each quarter.  More importantly, it was directly related to the incremental spending on a YOY basis, which means that the company had to spend increasingly more money to continue to drive traffic higher.  This is an addictive type of spending, which does not yield the necessary returns because the incrementally higher level of spending does not typically generate incrementally higher growth.  Instead, the increased spending is needed to maintain the same level of growth.


RRGB launched its national advertising campaign in April of 2007 and ran advertisements for 11 weeks in FY07.  In 2008, the company increased this ad time to 23 weeks and its total spending to $18-$18.5 million from $11.5 million in 2007.  In 2009, RRGB does not plan to do any national cable advertising and reduced its contribution to the national advertising fund to 0.25% of restaurant sales from 1.5% in 2008.  The chart below shows the quarters when there was no advertising, increased, decreased or even advertising weeks versus the prior year (as shown by +, -,=) relative to reported traffic results.


Early on, RRGB's traffic growth benefited from this incremental spending (turning positive in 2Q07 and 3Q07) but went negative again in 4Q07 when the ads went off the air. There was some sequential improvement in 1Q08 traffic (still slightly negative) when there were incremental weeks of advertising relative to no advertising in 1Q07.  In 2Q08, advertising levels were flat with the prior year and traffic continued to decline.  Even with higher levels of advertising spending in the back half of 2008, traffic declines deteriorated further.  Of course, the macro environment had a lot to do with the top-line weakness at RRGB and outweighed the benefit of having incrementally more television ad support in 2H08.  Due to the decline in sales in 2H08, the company could not justify maintaining the same level of investment in national cable advertising in 2009.


Last year, we heard about top-line weakness despite increased spending in 2H08 so margins felt the impact of both declining sales and the incrementally higher costs.  This year, RRGB continues to point to the decreased level of advertising as the reason why sales have continued to fall off so significantly.  Most of the questions on the earnings call were focused on a national advertising campaign that does not even exist this year, which highlights the distraction it has become for the company even after the case. 





Resolution of credit issues should lead to more open disclosure of Singapore timeline.


As we wrote earlier this week, we have been hearing that LVS’s Singapore opening will be pushed back to June/July from the January/February period that Sheldon Adelson has been mentioning.   We think that, liquidity issues being resolved, a more reasonable timeframe will be outlined and investors will be notified that the property will open once it’s “ready”.  The pressure of needing extra EBITDA to comply with tight covenant hurdles will be relieved and the company will guide to a 2Q10 opening.  For a late February opening, LVS would need to open 50% of the non-gaming gross square area.  According to construction crews on the site, a February opening would require everything to go exactly right (no weather delays, no construction issues, no issues with subcontractors, etc.).



14 AUGUST 2009




Over the past few weeks we have been suggesting that the current setup for retail and apparel companies has become stale and boring. The fact is with inventories well managed, expense cuts across the board, and lower but stable levels of demand, most companies are in a good position to generate solid earnings results. This is clearly consensus thinking as we head into the back half of the year. As this backdrop has evolved over the past several months, one may have thought Street expectations would rise along the way leaving less room for upside surprise. However, in looking at the data for 30 apparel/footwear manufacturers and retailers which recently reported 2Q09 results, we are surprised to find the level of earnings upside is expanding both in magnitude and breadth.


We realize it is still early in the earnings season for retailers, but the data is compelling and suggests there is likely more upside (even if we all see it coming). Of the 30 companies we tracked, 27 have exceeded consensus estimates in 2Q. This compares with only 21 out of 30 exceeding expectations in 1Q. Most surprising is the average magnitude of the upside. Currently, operating earnings are exceeding the consensus by an average of 41%! This is a sharp acceleration following 1Q results where the same group of companies exceeded estimates by 12%. In 4Q08, the same group missed expectations by 5%.


Now, clearly the environment has changed over the past six months, allowing earnings revisions to move higher. However, perception may not be the reality of what is really occurring. The Street is still underestimating the impact of the “boring” dynamics. If we all knew inventories were low, expenses were controlled, and gross margins were likely to be up year over, then how can the Street be so far off from the actual results? The bottom line is, a high degree of skepticism still remains on the consumer and the sector. It might be stale and boring, but this is just another confirmation why we don’t want to be short these names just because “everyone knows” easy comparisons are on the horizon.  The Quality Trade will ultimately separate those that have been prudently investing in profitable growth (RL, BBBY, UA, and NKE) but for now the tailwind is still blowing across the majority of the industry.


- Eric Levine




Some Notable Call Outs


  • Nordstrom is opportunistically taking advantage of the real estate environment and value conscious consumer with a slightly more aggressive store growth plan for its Rack concept. There are now plans to open 13 stores this year vs. a prior plan for 10. There is also a plan for 12 units in 2010, with a few additional locations to be added soon. Management noted that closures from Linens N’ Things and Circuit City have provided opportunities for new Rack locations.


  • URBN’s management team made it clear the company has not sacrificed any investment in the company’s growth initiatives over the past year. After pointing out there have been no layoffs at the company despite the challenging environment, the CEO highlighted ongoing investments which include: a joint venture with an Asian buying agent, enhanced functionality of the ecommerce platform, a new mobile site, investments in social media marketing, a 50% capacity increase in the East Coast distribution center, and development of European infrastructure to support aggressive growth in the near future. The company announced that it expects there could 100+ stores in Europe between the two main brands.


  • On the surface it appears that KSS’ store growth of 20-25 stores for next year seems very conservative given the company’s aggressive push to open 59 stores this year, including the strategic acquisition of former Mervyn’s location in CA and the Southwest. However, when pressed on the topic management explained that it sees many opportunities materializing over the next 12-18 months and the company will be aggressive in using its balance sheet to pursue market share opportunities through displaced real estate.


  • Further confirmation of sourcing benefits was provided by Kohl’s. The company expects a 5-6% improvement in product acquisition costs over the back half of this year and into early next year.


  • This is just a fact, but one that can’t be ignored. Wal-Mart now serves 200 million customers per week across the globe. On average, that’s 3.3% of the world’s population.




-After almost a year of doom and gloom, footwear firms are trying to accentuate the positive in their back-to-school marketing - In one of JCPenney’s latest “Schooled in Style” commercials, teens stage a riotous underground fashion show in the school cafeteria, set to the music of new wave band Hockey. The tone is light, positive and fun, which is not so much new for JCPenney, but is a welcome change after months of highly promotional TV ads touting dollar menus and BOGO sales. Famous Footwear, which in the past has been known for its buy-one-get-one specials, is also playing up a new message: “Make Today Famous.” The upbeat tagline, introduced to consumers this summer, is being supported by a multichannel campaign, including TV and radio ads, promotions on Facebook and Twitter, and a humorous digital short that went live last week on  The short, featuring a mob of women and kids chasing a shoe truck (think heels instead of ice cream), tries to transcend the everyday buying experience and remind customers about the joys of shopping. <>


-Reebok and Foot Locker team up with rapper Fabolous on Classic Remix -The Canton, Mass.-based Reebok (a division of Herzogenaurach, Germany-based Adidas) announced yesterday that rapper Fabolous would be the latest artist to participate in the Classic Remix concert series in conjunction with New York-based athletic chain Foot Locker. The Classic Remix footwear collection for Fabolous will consist of heritage styles including the SL 7010, Workout Hi, Tejara and Classic Leather in various colorways for men, which will retail between $60 and $75 and will be available in select doors in states that will host concerts. The first 100 fans who purchase one of the styles at the rapper’s personal appearances will win a pair of tickets to an intimate performance. The shows will be held in New York on Aug. 24; New Orleans on Aug. 26; Miami on Aug. 28; Houston on Sept. 1 and Atlanta on Sept. 3. Details on the location and times of the appearances can be found at <>


-As part of its plan to open as many as 1,000 stores in China before 2012, New Balance will unveil its first Experience Store in Beijing on Saturday - Designed to showcase the brand’s 103-year-old heritage, the 2,000-square-foot store’s first-floor decor features a worn-in leather couch, framed vintage logos, ads and other paraphernalia dating from the early 20th century. A ribbon extending from the main entrance upstairs to the decidedly more modern second-floor highlights the brand’s milestones. Audio, visual and olfactory touches such as the oak scent of a mid-20th century shoe store are used in different areas throughout. The store carries both New Balance footwear and the entire apparel collection. <>


-Li & Fung to Use $1 Billion `War Chest' for Growth As Opportunities Rise - Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., said it can spend about $1 billion on acquisitions to boost growth because the “murky” U.S. economy is prompting some company owners to sell.  <>


-Retailer Talbots Inc. said Thursday that it signed a deal making Li & Fung Ltd. its exclusive global apparel sourcing agent - Terms were not disclosed. Starting next month, Hong Kong-based Li & Fung will be the exclusive agent for almost all of Talbots' apparel and will serve as the non-exclusive agent for its swimwear, intimate apparel, footwear, jewelry, handbags and accessories. Talbots President and CEO Trudy Sullivan said in a statement that the agreement should help the company lower its costs of goods sold and internal operating expenses even more and make its time to market faster. <>


-LVMH expands spirits portfolio with stakes in two French private winemakers - LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury products group, has boosted its portfolio of premium wines with the acquisition of stakes in two French private winemakers. LVMH has acquired 50 percent of  Cheval Blanc, which produces and commercializes Chateau Cheval Blanc, and 50 percent of La Tour du Pin, owner of the Chateau Quinault l'Enclos estate. No financial details were disclosed for the two transactions, which were carried out with unit of Groupe Arnault, the holding company of LVMH's chief executive Bernard Arnault. <>


-Switzerland's Swatch Group reported a 28% slump in first-half net profit but forecast a pick-up in demand for the second half of 2009 - The company said Friday that current sales and order levels show signs of recovery. The world's largest watchmaker, best known for its colorful Swatch watches, said sales in the second half of 2009 should be in line with the same period in 2008, with some key brands expected to post higher sales.  Exports of Swiss timepieces have been tumbling over the past year, as consumers have drastically cut spending on luxury watches and retailers have sharply reduced inventories. However, Swatch has benefited from its diversification in all price and market brackets as low and mid-range price points have held better in the current economic downturn. The company said the sales development in the last two to three months as well as current order entries show signs of recovery. "This positive trend has been clearly confirmed in July 2009," Swatch said in a statement. <>


-High Tech Swim Suits Banned from High School Competition - The National Federation of State High School Associations (NFHS) has announced that high-tech swimsuits that have been linked to record performances at all levels of competition the past couple of years have been banned for high school competition, effective immediately. <>


-Consumers are continuing to purchase private label products at an increasing rate, per new research from Nielsen -  The “U.S. Store Brand Development” study found that both private label dollar and unit sales significantly increased for the 52-week period ending July 11, 2009 versus the prior year. Dollar sales grew by 7.4% to $85.9 billion within food, drug and mass-merchandisers (including Walmart), with shares recorded at 16.9%. This reflects an increase of 0.7 points from the previous year. Growth peaked in 2008 but then slowed slightly in 2009 with falling commodity prices and increased retail discounting. <>


-A student with a prosthetic arm has won her case for wrongful dismissal by clothing retailer Abercrombie & Fitch - An employment tribunal found she was wrongfully dismissed and a victim of disability discrimination. It said the US firm's flagship UK store, in Mayfair, Central London, which has been criticised for recruiting only young and beautiful assistants had violated her dignity. The student was born with her left forearm missing and was initially allowed to wear a cardigan to work on the shop floor to cover up her fake arm. The 22-year-old was then told she'd have to work in the back of the store away from customers because her cardigan went against Abercrombie & Fitch's dress code. The Student, Riam Dean, was awarded £7,800 for injury to her feelings, £1,077.37 for loss of earnings and £137.75 for wrongful dismissal. <>


-It has been a while since shoppers minded what Gap was selling - The Gap division of Gap Inc. was struggling even before the recession, which has persuaded consumers to cut back significantly on clothing purchases. Problems with the appeal of its merchandise, which was perceived as unfashionable, have vexed Gap at a time when its friendly prices and back-to-basics approach should be attracting customers. In a major effort to address that, Gap is reintroducing its core product, denim jeans, with an elaborate campaign notable for its many nontraditional elements, which include a Facebook page, video clips, a realistic online fashion show on a virtual catwalk and an application for the iPhone called the StyleMixer.  The campaign, which gets under way on Thursday, promotes the newly named 1969 Premium Jeans line with the theme “Born to fit.” The year in the name is a tip of the hat to the 40th anniversary of Gap, which opened in 1969 selling Levi’s jeans and records. The 1969 Premium line represents a reworking of the types of jeans Gap sells, to improve their fit and finish, along with the addition of popular styles like the boyfriend jean for women and the skinny jean for men. Prices start at $59.50, which Gap hopes will appeal to budget-conscious shoppers trading down from designer jeans costing $100 to $300 a pair. <>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):  PETM, KR


08/13/2009 10:11 AM


I think a lot more people are short this stock now than prior to JPM's super secret "one on one" meeting... I'll take the other side of that into the print. KM


08/13/2009 10:37 AM


A lot of people are still hiding in this "the grocers are cheap" safety trade. Low beta is really starting to have issues. KM

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