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Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK

Takeaway: SIGMA review for companies reporting earnings this week. Carter’s looks the most troublesome – esp rel to sentiment/valuation.



SIGMA REVIEW: Here are the SIGMAs for the eight retail-related companies that reported earnings this week. There are no clear trends within the group in aggregate, but there are some interesting callouts.


  • SKX, HBI and DECK all moved into Quadrant 1 -- sales growing faster than inventories and margins improving. They have the best setup headed into 3Q. But for the most part, the market knows it.
  • UA and AMZN are still putting up weak margins, but inventories are getting better on the margin, which bodes well for a GM recovery in 2H.
  • CRI is probably the most notable callout.  The company has been growing inventory faster than sales for six quarters in a row.  In fact, CRI is sitting next to CAB (which missed big) as the only companies that are in Quadrant 2, which we think is the most dangerous place of all. It is a spot where margins are positive, allowing management teams to be complacent about elevated inventory levels. This almost never works out well for the company in question -- especially when it's trading at 18x earnings. We don't like CRI -- to be clear (it's on our short bench). We'll be back with an analysis as to whether this is the appropriate timing for us to be vocal on the name.


AMZN - 2Q14 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - Chart1 7 25 14


DECK - 1Q15 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - chart2 7 25 2014


COLM - 2Q14 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - chart3 7 25 2014


UA - 2Q14 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - UA sigma


CRI - 2Q14 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - CRI SIGMA


HBI - 2Q14 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - hbi sigma


SKX - 2Q14 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - skx sigma


CAB - 2Q14 Earnings


Retail Callouts (7/25): CRI, AMZN, DECK, UA, SKX, CAB, HBI, DECK - Chart8 7 25 2014


DECK 1Q15 Earnings


Takeaway: Weak guide - taking top line expectations up by $15.5mil ($20mil beat in the Q) and EPS up a nickel after blowing away numbers by $0.22. Coming out of the quarter inventories look healthy and that almost always sets up favorably for a positive Gross Margin event, but that will be offset by SG&A deleverage as the company adds another 30-35 units on to its existing base of 117. The question we have for DECK is - why continue the square footage growth when retail concepts have been unable to comp at the store level (-2.8% CY on top of a -5.3% LY)? We don't buy the store and e-commerce symbiosis argument. This is a company that does over a $1bil wholesale…it's not like it has an awareness problem. Instead of opening singularly focused retail concepts, why not roll half that cash into a killer e-commerce site to leverage the awareness offered by wholesale partners.


WMT - Walmart Names Greg Foran President and CEO of Walmart U.S.



  • "...Walmart announced that Greg Foran, 53, has been promoted to President and CEO of Walmart U.S. Foran succeeds Bill Simon who has been in the role since June 2010 and will be transitioning out of the company."


Takeaway: For a more detailed recap on our thoughts on Simon's departure and how it relates to TGT see our note from last night titled TGT: 1.0 vs. 2.0. Link - CLICK HERE


TGT - First TargetExpress opens its doors in Dinkytown near U



  • "The Minneapolis-based retailer will open a 20,000-square-foot TargetExpress store in Dinkytown Wednesday, the first of its kind for Target at about a sixth of the size of traditional locations."
  • "The prototype feels like a drugstore along the lines of a CVS or Walgreens, but has its own Target flair with merchandise that includes groceries, bedding, smartphones…"
  • "...Target already is planning four more locations for 2015 — one in St. Paul’s Highland Park and three in the San Francisco Bay Area."


Takeaway: TGT's answer to WMT's Neighborhood Markets and Express Stores. TGT Express stores = 1, WMT small format stores = 370. We give the company credit for testing this new prototype. Something it's been slow to do in the past. But, in order for TGT to succeed it needs to redefine its place in the marketplace not chase the 800lb gorilla that is WMT.




JWN - Nordstrom Hiring 400 Staff, Including 30 Managers, for 2nd Canadian Store



  • "Nordstrom is hiring management and staff for its new Ottawa store, the second to open in Canada. In total, about 30 managers and over 350 additional staff will be hired for the Rideau Centre location, scheduled to open March 6th, 2015."


Vineyard Vines Unveiling NYC Unit



  • "This fall, the Stamford, Conn.-based sportswear brand will open its first unit in New York City, a 2,500-square-foot store at 1151 Third Avenue, at 67th Street. The store is expected to be opened in early November."


Keith's Macro Notebook 7/25: CHINA EUROPE RUSSIA

LEISURE LETTER (07/25/2014)

Tickers: BYI, BYD, ISLE, PNK


  • July 25: PEB 2Q call 9am
  • July 29: 
    • WYNN 2Q 8:30am ; pw: 67663320
    • NCLH 2Q 11am ; pw: 63063248
    • IGT 2Q release
    • GLPI 2Q call 10am
  • July 30: 
    • MGAM 2Q earnings
    • MAR 2Q call 10 am : , pw: 59383825
  • July 31:
    • HST 2Q call 10 am:
    • BEL (OEH) 2Q call 10 am: , pw: 68627603
    • H 2Q call 11:30 am:  , pw: 21721745.
    • BYD 2Q call 5pm:  , Passcode: 2654057
  • Aug 1:
    • HLT 2Q 10 am: , pw: 67361605


BYD – announced it appointed Chris Gibase to the newly created position of Senior Vice President and Chief Marketing Officer.  Gibase will direct all of Boyd Gaming's marketing functions, including digital and print media, advertising, B Connected, E-Commerce and event marketing.  Boyd Gaming also announced that it has named two executives – Steve Schutte and Vince Schwartz – to the position of Senior Vice President, Operations. Schutte will have day-to-day oversight of four properties – Diamond Jo Casino, Diamond Jo Worth, Sam's Town Shreveport and Sam's Town Tunica. Schwartz will be responsible for the operations of three properties – the IP, Treasure Chest. Gibase, Bogich, Schwartz and Schutte will report directly to Paul Chakmak, Executive Vice President and Chief Operating Officer. and Amelia Belle

Takeaway: BYD senior management needs to cut SG&A, not increase overhead.


27:HK Galaxy – launched the "World Baccarat Master of Macau" baccarat tournament featuring a total prize pool of HKD41 million.  The eight month tournament offers monthly qualifying tournaments and will culminate with the Master Championship Tournament in April 2015 with a top prize of HKD 5million and a champion's diamond ring.  Galaxy also plans other "World Master" events including a World Slot Master of Macau tournament.

Takeaway: Galaxy providing strong marketing and promotions programming to help generate interest in Galaxy Macau and thus drive GGR growth.


GENK:MK – Genting Bhd is rumored to file a bid to operate a casino at Spain’s BCN World. Genting could be one of the bidders for one of the six casino licenses to be issued for the project.  Today was the deadline to present a bid.  Each casino licensee would have to invest a minimum of EUR300 million (US$403 million) in BCN World.

Takeaway: Building a global gaming empire one market at a time. Better hope the gaming tax rate is very low.


GTK:IM – GTech Canada, a unit of Italian GTech SpA, won a contract to provide its Intelligen VLT information system to Greek lottery operator OPAP SA.  GTech is expected to connect its system to OPAP and concessionaire VLTs beginning in late 2014, following system certification by the Hellenic Gaming Commission.  GTech said it was chosen from among four vendors in an open procurement process to provide the system “to monitor and control up to 35,000 VLTs in OPAP’s planned new network”.


GTECH has signed a seven-year contract with the Tennessee Lottery which it expects to yield $130 million in total revenue.  Under the deal, a unit of GTECH will provide new lottery systems and related services starting from April 2015. The contract could be renewed for another seven years after that.


 Takeaway: Two nice wins for GTECH


ISLE – Chief Legal Officer, Edmund Quantmann sold 5,870 shares of ISLE stock via a 10b5-1 sale on Tuesday, July 22nd at an average price of $8.22 and now owns 68,302 shares of stock.


BYI – announced a contract to provide systems, including its iVIEW DM picture-in-picture technology and business intelligence software, to connect the 3,100 slot machines at the Muckleshoot casino in Washington. 


PNK – Orange Capital again calls for PNK to split into an OpCo/PropCo REIT. Orange believes such a transaction would result in shareholder value of $35 to $42. Orange noted how the firm is "unsatisfied with the (PNK) company's response to date."

Takeaway: Given our work and analysis in the gaming REIT conversion area, we doubt the potential value creation as outlined by Orange. We further believe a tax-free spin-off is NOT an option available to PNK. 


IMF Speaks Out on Macau – The IMF executive board commended the Macau authorities’ focus on promoting non-gaming services, and encouraged them to explore more opportunities, including via broader integration with mainland China, further financial development and greater public investments in infrastructure and human capital. The IMF also encouraged the Macau officials to introduce more anti-money laundering measures to safeguard integrity in the gaming sector, in particular to “bolster customer due diligence requirements” in line with international standards and “to strengthen oversight of all market players, including junket promoters and their associates”.

Takeaway: Where was this advice five years ago?


Macau Airline Service – Macau International Airport Co Ltd is considering launching new routes to the northern cities of Xian (Shaanxi province) and Shijiazhuang (Hebei province) in the coming months and is in talks with airlines regarding the new service, including Air Macau. Also, later this year Xiamen Airlines will initiate new direct service linking Macau and Tianjin. 

Takeaway: Helping the gaming operators reach further into the outlying provinces for new gamblers.


UnionPay – UnionPay International announced that overseas consumption by Hong Kong and Macau UnionPay card-holders increased by 49% YoY in 1Q 2014.  A total of some 15 million UnionPay cards have been issued in the two Special Administrative Regions. The compound annual growth rate of UnionPay transactions rose by more than 64% and the local card issuing business jumped by almost 100%, doubling the number of cards issued to clients. UnionPay's business in Hong Kong and Macau has been developing as the fastest districts outside mainland China since the company launched its business in the two Special Administrative Regions in 2004. Finally, the number of the company’s cooperating merchants in the two regions has increased 7.6-fold over that of 10 years ago. 

Takeaway: Just when the UnionPay money laundering headlines were going away, the Company gives regulators more food for thought.


BCN World – The BCN World project threatens to follow in the footsteps of Sheldon Adelson failed EuroVegas. BCN World's main promoter, businessman Enrique Banuelos, requested an adjournment to purchase the land where the new complex will sit. According to local media reports, Veremonte, the investment vehicle of known Valencian businessman, signed a contract with La Caixa to secure a preemptive purchase of Lumine Mediterranean Beach & Golf Community, a subsidiary of the Barcelona bank which also owns the land adjacent to Port-Aventura.  However, that contract expires next Wednesday and Banuelos has no liquidity to pay 377 million euros to complete the acquisition. Thus, Banuelos asked the bank to modify the conditions of the agreement and delay closing until December 31.  La Caixa accept the postponement, but instead modify its acquisition conditions, as a price increase.

Takeaway: BCN World is not actually located in Barcelona but rather about 70 miles down southwest of Barcelona, between Salou and Tarragona Spain


SugarHouse Casino Expansion – SugarHouse casino, located near the Delaware River in Philadelphia, broke ground on a $164 million expansion. The expansion, which is expected to open next year, will more than double the size of SugarHouse, to 260,000 square feet from 108,000 square feet, not including a 600,000-square-foot, seven-story parking garage that will give poker players, in particular, quick access to the tables. A 30-table poker room is part of the expansion plan.

Takeaway: 700 new slots could be shipped in 4Q 2014


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

P: As Good As It Gets Wasn't Good Enough (2Q14)

Takeaway: P had everything working for them in 2Q14, which amounted to decelerating revenue growth...It only gets tougher from here


  1. THE GOOD: P produced revenues above its 2Q14 guidance range, but only inline with consensus, and well below our estimates.  Total listener hours accelerated sharply (up 29% y/y vs. 13% in 1Q14), largely driven by surging per-listener usage.  P increased 2014 revenue guidance increased by $15M to $895M-$915.  
  2. THE BAD: Inline Revenues translates to a marked deceleration in revenue growth, which is a concern on a 33%-100% increase in ad load, on what could be its peak growth in listening hours for the year.  The road get tougher from here as P comps past both the listener cap and ad load increase.  Further, the guidance raise was likely fueled by seasonal political ad spend.
  3. THE UGLY: The longer-term story.  The dichotomy between user growth and monetization (ad load) will become more evident from here.  There is limited headroom on both fronts; declining engagement (hours/user), if not the users themselves, may be closer than some would like to believe given P's attrition issues that have gone largely unnoticed.  Increasing ad load will only exacerbate the issue, especially with growing competitive threats competing for a share of P's 77% internet radio market share.



P produced revenues above its 2Q14 guidance range, but only inline with consensus, and well below our estimates.  P delivered continued strength in mobile advertising, with revenues growing 54% y/y (vs. 59% in 1Q14) on our estimate of a 40% y/y increase in mobile ad-supported listener hours.  Listener hours on a per-user basis accelerated sharply in 2Q, up 20% y/y (vs. flat in 1Q14), with total ad-supported hours up 23% (vs. -2% in 1Q14).  P raised its 2014 guidance by $15M to $895-$915


P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Ad hours 2Q14



Inline revenues is actually a disappointment when considering everything P had going for them this quarter.  2Q14 is the first, and only full comp, on the mobile listening cap that led to per-user listening hour declines last year, in turn, the surge in 2Q14.  Further, P's redesigned ad feed (2 double-ads every 20 minutes vs. 1 ad every 15 minutes prior), cumulatively increased ad load by 33%-100%.


Combined increasing ad load on surging hours led to a deceleration in advertising revenue growth: 39% in 2Q14, which had the extra benefit of surging listener hours, vs. 45% in 1Q14, which only carried the increased ad load.  Moving forward, P will comp out of both tailwinds next quarter, so it only get tougher from here.


P did increase revenue guidance (up $15M), but much of that is fueled by the biennial ad spend around elections.  Management stated that political ad spending had been in the "high single-digit millions" in prior years, and that it should be higher this year.  


P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Ad Load distribution


User growth slowed into the high-single digits for the first time.  That was largely telegraphed by P's monthly releases, but still drew a few questions during its earnings call.


In the link below, we speak about the headwind to P's user growth moving forward. Declining engagement (hours/user), if not the users themselves, may be closer than some would like to believe given P's attrition issues that have gone largely unnoticed.  Further, we expect P's stated strategy of progressively increasing its as load will exacerbate this issue given a growing wave of competitive threats looks to capture some of P's ~77% market share in internet radio.


There is more work to be done here, largely breaking down P's TAM, which includes the proportion of its total accounts that may duplicate user accounts.  We have started doing some survey work, and will be publishing a note shortly.  Stay tuned.


P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Attrition


For more detail on our longer-term thesis, see note below.  If you have any question, or would like to discuss in more detail, let us know



P: Shot Across the Bow

07/23/14 10:27 AM EDT




Hesham Shaaban, CFA




A Q2 beat and unchanged implied 2H guidance. Might as well sell?  We beg to differ.




We’re buyers of PENN on the stock's weakness given likely better than expected July revenues to be released by the states in 1H of August, our expectation of a Q3 earnings beat, and the potential for a strong opening for PENN’s 2 new racinos opening in mid to late Q3. 


PENN’s stock took a surprising turn down following a strong market opening.  The 11% intraday reversal was likely driven by guidance confusion, PNK’s ugly results and an uncomfortable conference call, the weak performance by PNK’s new racino - Belterra Park, and animal spirits.



Admittedly, we thought management could’ve provided better Q3 guidance.  July is looking about 400bps better YoY than June per our model and supported by channel checks.  Indeed, revenue guidance was strong but the flow through looks pretty conservative.  Nevertheless, implied 2H guidance was unchanged, and Q3 guidance came in a little better than the Street when factoring out the Kansas City EBITDA adjustment and pre-opening expenses.  We think these items caused some investors to conclude that guidance was lowered and lower than the Street.  It wasn’t and forward estimates are likely not going down.


We remain above the Street and management guidance for Q3 to the tune of $5-6 million in EBITDA on an apples to apples basis.  The regional gaming states will begin to release July revenue figures in 2 weeks which should be another catalyst.  Finally, we suspect the Street is pessimistic regarding the Youngstown and Dayton racinos which should open August/September 2014.  Assuming no change in current regional gaming trends, we suspect the Street’s Q4 EBITDA estimate of $57 million will prove light as well.



Looking ahead to July, our model is projecting only a 1% YoY decline in same store sales for the mature regional gaming markets versus the 5% drop generated in June.  Our advance read into Missouri and Pennsylvania suggests both of those markets are in the black on a YoY basis relative to our previous expectation of another monthly decline.



Indeed, PNK’s results were not encouraging.  But it had to catch up with them one of these quarters.  PENN has kept investors sober about regional gaming trends and the sell side estimates conservative.  We think that remains the case going forward.


There is no doubt that PNK’s Belterra Park racino has had a disastrous opening and investors are likely making the read through to PENN’s upcoming racino openings in Youngstown and Dayton. However, as PENN management pointed out on their conference call, these markets are much more isolated (see Toledo) and will face very little competition.  Location is everything when it comes to racinos.



On an apples to apples basis, excluding pre-opening but making management’s KC adjustments, we’re projecting Q3 and 2014 EBITDA of $71 and $290 million, respectively, versus management guidance of $66 and $279 million.

CHART OF THE DAY: U.S. Housing Compendium Courtesy of Your Favorite Macro Team

CHART OF THE DAY: U.S. Housing Compendium Courtesy of Your Favorite Macro Team - Compendium 072414


To quickly review the evolution of our housing call: After being discretely bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly negative at the beginning of 2014 and elevated #HousingSlowdown to a top Macro theme for 2Q14. 


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