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HBI 1Q Preview


In looking at the upcoming quarter for HBI before the market open tomorrow, we expect few surprises. We’re shaking out at $0.34 for the quarter. Relative to consensus, we expect slightly stronger top-line results to be offset by lighter margins. We don’t expect disappointment as it relates to guidance, as the company still has three quarters of the ‘Gear for Sports’ acquisition to go, which will relieve strain in the P&L that might otherwise be there in the core business. Here’s a look at our assumptions for the quarter:



  • Top-line growth of 10% in the quarter will be driven equally by organic and inorganic growth in Q1.
  • The Outerwear segment will account for the majority of growth. Gear For Sports alone will account for 5% with another ~2% driven primarily by continued strength at Champion. The balance of incremental revenue is going to be derived from shelf space gains (~2% alone from DG) in addition to modest price increases towards the end of the quarter.

Gross Margin:

  • Cotton remains the primary driver here. With average cost of $0.82 versus $0.52 last year, we expect margins down -200bps by our math with pricing and supply chain savings of nearly +100bps partially offsetting a -300bps cotton headwind.


  • Aside from the top-line, this is where we are most differentiated from consensus. We expect SG&A growth of 8% driven by two key factors, the incremental Gear costs (~$10mm) and continued 3rd party fulfillment expenses of another ~$10mm.

Taking into account $4mm in incremental interest expense related to the acquisition and a tax rate of 21% (one of the greater variables, which could tweak earnings higher) we’re looking at $0.34 versus the Street at $0.34E for the quarter and $2.66 vs. $2.73 for the year. Given the challenging setup from a SIGMA perspective, we see limited opportunity for upside in the quarter with compares getting progressively more favorable providing an offset over the balance of the year. We have numbers going up to $3.11 in EPS next year with FCF increasing from $173mm to $297mm (~$3/sh) in ’11 and ’12 respectively.


With the shares up over 20% since reporting Q4, pricing, additional shelf gains, and the latest update on where cotton is secured will be key elements in driving continued outperformance from current levels that we will be looking for on tomorrow’s call.


Additionally, one of the keys to the management’s strategic plan and our thesis is that Hanes will be able to command a certain element of pricing in order to navigate current inflationary pressures. In order to track the progress and timing of these price adjustments as well as consumer receptivity, we’ve created a tracking mechanism utilizing our SportScan data that captures ASPs, YY change, and resulting sales growth across four different categories – Champion, Undergarments, T-shirts, and Socks. The charts below illustrate the results. Call us with any questions, or if you’re interested in receiving this with regularity going forward please let us know.



Casey Flavin



HBI 1Q Preview - HBI MdlgAssmpts 4 11


HBI 1Q Preview - HBI S 4 11


HBI 1Q Preview - HBI PriceMonitor1 4 11


HBI 1Q Preview - HBI PriceMonitor2 4 11


HBI 1Q Preview - HBI PriceMonitor3 4 11




We’re projecting 8-12% YoY growth in Strip revenues assuming fairly normal hold.  WYNN was likely the standout.



Based on McCarran Airport traffic volume growth of 2.2% and our statistical analysis, we believe the Strip will post solid growth for March, despite very high slot hold last year.  Table volume and revenues should drive the upside.  This would represent a turnaround from February when the Strip was down 10%.  We believe WYNN may have captured outsized market share on the high end tables and our EBITDA estimate of $87 million remains the highest on the Street for Wynn/Encore Las Vegas.


WYNN is reporting tonight and its likely strong Las Vegas performance should be good for MGM’s stock.  Moreover, if these Nevada gaming revenues are where we think they are, that also should be a positive catalyst for MGM, assuming they are released in May before MGM reports earnings.  However, we’re don’t think MGM performed nearly as well as WYNN on the gaming side in Q1 so the actual earnings release could disappoint some of the MGM bulls.


Here are our projections:




MAR was the first chink in the lodging armor but HST might be the biggest. We remain worried about Q2 RevPAR.



HST’s Q1 results may disappoint the sell side bulls, some of whom have EBITDA estimates in excess of $180MM.  The company will report the quarter on April 28th.  We’re projecting $147MM of Adjusted EBITDA, 14% below consensus of $171MM and FFO of $0.11 cents, 1 cent below the Street.


Looking forward, we’re also 9% below the Street’s 2011 EBITDA estimate, which happens to be above the high end of company’s guidance of $1.035BN.  Expectations, both formal and informal, may have gotten too aggressive.  Q2 and Q3 remain our chief concerns.  We don’t believe the Street is reflecting the truly difficult comps from the May through July period of 2010.  As we’ve written about, absolute dollar RevPAR may have been boosted by pent up demand and it appears statistically that dollar RevPAR has slowed sequentially since then on a seasonally adjusted basis.  We’re about 12% below the Street for Q2 and Q3 EBITDA.


1Q2011 Detail:

We estimate that HST will report 1Q2011 revenue of $929MM and $168MM of Property level EBITDAR (margin expansion of 150bps YoY)

  • Property level revenue of $867MM
    • Total RevPAR growth of 9.2% to $119
    • Room revenue of $535MM, +10.5% YoY
    • F&B revenue of $272MM, +8% YoY
    • Other revenue of $60MM, +5% YoY
  • $664MM of property level expenses
    • CostPAR increase of 3%, producing estimated room expenses of $149MM
    • F&B expenses of $199MM
    • An 8% increase in hotel departmental expenses to $240MM
    • Other property level expenses of $75MM, a 3% YoY increase or a CostPAR decrease of 1.5%

Other items:

  • Corporate expense of $26MM
  • D&A of $139MM
  • Net interest expense of $86MM


Notable news items and price action from the past twenty-four hours, as well as our fundamental view on select names.

  • EAT price target raised to $28 by JPM, based on low valuation relative to peers and an upwardly revised 2012 EPS target.
  • EAT was downgraded to “Negative” from “Neutral” at Susquehanna.  The twelve-month price target is $20 per share.
  • EAT declined 2.7% on accelerating volume yesterday.
  • MCD market share gains are likely to continue, according to Janney Montgomery.  The note cites a report by Technomic, a foodservice industry consultant, on annual market share figures for 2010. 
  • RRGB overhauled its menu, implementing a 1.5% price increase and resurrecting several dishes that had been removed from the menu.
  • AFCE’s Popeye’s Louisiana Kitchen announced that the Popeyes restaurant system achieved supply chain cost savings of approximately $16 million in 2010.
  • SBUX launched its tenth annual Global Responsibility Report, which outlines fiscal 2010 performance in ethical sourcing, environmental stewardship, and community development. 
  • PZZA was cut to “Hold” at Stifel Nicolaus.
  • KONA gained 1.7% on accelerating volume.



Howard Penney

Managing Director

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