In preparation for ISLE's FQ4 2012 earnings release tomorrow morning, we’ve put together the recent pertinent forward looking company commentary.
Feb 23 - FQ3 Conference Call
- “Once Cape's open, we're truly sort of a de-leveraging story. We're probably leverage-neutral until Cape gets open. Once it gets open I think everybody is going to believe we're a de-leveraging story at that time. “
- “I think, is that if it's gradual, if it inches its way up, it won't be near as dramatic as if somebody wakes up and it's gone up $1.00 overnight or $0.50 overnight. If it's a $0.10 here, $0.15 there, you got to understand, I mean in most of our markets it's not the trip to the casino, people aren't burning a tank of gas to come to the casino, it's the fact that they're spending $30 more a week on gas or $50 more a week on gas whatever overall that would have the impact on them.”
- [Cape Girardeau] “Pending regulatory approval, we expect the property to be open in time for the Thanksgiving holiday this calendar year, at least a month ahead of our previous schedule.”
- “For the rest of this year, we expect capital expenditures to be around $45 million with approximately half of that in Cape Girardeau.”
- “Mississippi continues to be an issue, just in general. If you look across the entire state since the floods of the spring, it's been a real challenge.”
- [Competition] “We're kind of seeing the same results that we're seeing in Kansas City [and Pompano]. We really haven't seen anything yet.”
- “Lake Charles is probably the one place where we got a little work to do [on promotional spending] to get it in line with the revenue stream.”
BBBY’s recent acquisition binge is no coincidence. It’s core business metrics will look very different in the coming three years than they did over the past three.
1) The ‘Amazon Risk’ story is well-telegraphed, but not well-quantified. Here you go…
- Only 1% of BBBY sales come from its e-commerce platform today. That rate has been declining as corporate resources have clearly been focused elsewhere. Unfortunately, e-commerce is something that is nearly impossible to close the gap on competitively without a meaningful capital investment. While not a direct comp, WSM’s omni-channel model boasts e-commerce nearing 40% of sales.
- Demographics are an issue here... A full 65% of those currently using BBBY’s online services are over the age of 35. The younger on-line consumer is going somewhere else. When it comes to e-commerce, the young consumer is the good consumer. Additionally, industry data suggests that BBBY’s online exposure to the 55 & up demographic increased 272bps YoY to ~26% in 2011- bad for online spending. BBBY ranks 9th among the 94 companies we analyzed in terms of leverage to this spending group- WSM is ranked 24th.
- When looking at product overlap between BBBY and AMZN, our in store analysis suggests ~93% of product (exact match or very similar) sold through Bed Bath and Beyond stores can be purchased on Amazon.com.
2) It’s base business is a good one, but not as good as some might think. BBBY outcomped the industry by an average of 6 percentage points from 4Q08-2Q11. This is the same time that the company consistently beat quarterly EPS expectations by an average of 20%, and it became known as one of the bullet-proof quality names in retail. It is definitely a quality name. But let’s not forget that this period of outperformance is the precise time it (helped cause and) benefitted from the bankruptcy of Linens n’ Things.
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CONCLUSION: Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market.
On AUG 31, 2011, we published a note titled: “PHILIPPINES: ONE OF THE BETTER STORIES IN GLOBAL MACRO”; the conclusion of the note was as follows:
“The Philippines is shaping up to be one of the better country-level fundamental stories in Global Macro over the intermediate term and our core three-factor quant model is supportive of our bullish thesis.”
Since that date, the country’s benchmark PSEi Index is up +14.2%, which roughly double the comparable return of the S&P 500 and, over that duration, +14.2% good for sixth place atop the performance leader board of the 84 global equity indices and SPX sector ETFs we track. Moreover, of the 48 international currencies we track, the Philippine peso’s (PHP) -2.2% decline vs. the USD since AUG 31 is good for 9thplace atop that performance leader board – meaning the dollar-based returns of US investors would have been far more protected relative to the vast majority of other international equity investments during this latest intermediate-term King Dollar breakout.
Additionally, Philippine President Benigno Aquino has stated in recent weeks that while he “prefers to let market forces decide [the peso exchange rate]”, he’s comfortable with a 5%-plus appreciation from current prices to the 41 per USD level and will seek to protect it in the event it depreciates towards the 45 per USD level (-4% from current prices). Relative stability on the currency front can’t be discounted as a positive factor in today’s environment of rising FX volatility – a phenomenon that has repeatedly eroded the earnings growth of developing-nation corporations in recent years (see: India, Brazil, Turkey, etc.).
From a forward-looking perspective, Philippine’s TREND-duration GROWTH/INFLATION/POLICY outlook remains quite supportive of further equity market gains over that timeframe and sober and proactive fiscal and monetary policy means the country has quite a few levers to pull in the event the situation in Europe takes a dramatic turn for the worse.
In addition to his team’s victories on the policy front since his inauguration in JUN ’10 (six-year term), President Aquino has won over investors with his reform agenda, a core tenet of which is tackling the perception of corruption that has casted a dark shadow over the Philippine economy over the years. The recent conviction of foyer Chief Justice Renato Corona for illegally concealing his wealth sends a powerful message that neither corruption nor tax evasion will continue unabated under Aquino’s watch. That’s a positive for international investment flows into the Philippine economy – particularly from investors who are rightfully becoming less enamored with the TAIL-duration fundamental outlooks in some of the more notable developing nations like China, India and Brazil.
In the current investing environment where inflows continue to be hampered by the economic and financial market volatility stemming from excessive gov’t intervention, taking share is the best outcome any country can ask for. No doubt, Philippines has been taking share; as recently as today, Aquino and his team won an additional $650-$750M of foreign direct investment into his $200-plus billion economy from UK corporations. The next stop on his international road show is the US, where Aquino and his trade, finance, energy, defense, tourism, transport and foreign affairs secretaries will meet with President Obama on JUN 8. We expect additional “wins” as US corporations/investors may find the Philippines to be an increasingly attractive destination for diversifying their EM exposure.
All told, Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market. Furthermore, we believe fiscal and monetary policy levers as well as the country’s reliance on domestic (i.e. not external) demand for economic growth should keep the PSEi Index outperforming in an environment of continued Global Macro headwinds.
In an 8K released this morning, FNP announced that it will be offering $150mm in 10.5% secured notes due 2019 with the intent to:
- Pay for all or portion of expected exercise of the buyout option for a 51% interest in Japanese JV partner Sanei International
- Repurchase $37.1mm of 5% Euro Notes (€28.6mm)
- Effect the redemption of the remaining €52.9mm aggregate principal amount of Euro Notes outstanding (not due until July 2013)
The bottom-line here is that we’ve never seen a higher-end brand take back control of its content and distribution and it not be a positive event.
Here’s what this means for FNP:
- It’s further reducing the remaining Euro Note position and the related volatility embedded in the Other Income line on the P&L at a time when the USD is strengthening = Positive.
- It’s taking over majority control of Kate Spade’s Japanese business similar to what the company did in China last summer, increasing FNP’s control over international brand growth (~15%-20% of brand sales) in the process = Positive.
- Less volatile, but more expensive debt. This comes as a bit of a surprise in the current interest rate environment. However, the company is effectively pushing out the duration of its debt exchanging debt due in 2013 for debt now due in 2019 so it’s about a wash.
- As for the EPS impact, there is a fair amount of variability here primarily as it relates the profit contribution of the JV. We will have a more detailed analysis on this to follow. In looking at the initial net impact on interest expense alone, it results in $11-$12mm of incremental expense when accounting for the increased rate, change in cash balance, etc., which equates to ~$0.06 in EPS dilution. Assuming a similar structure to Kate’s China JV in which wholesale sales are still realized as such, but now FNP realizes incremental profits in the Other Income line, and depending on the number and productivity of doors in Japan as an offset, this may end up being an accretive deal from Day 1.
We expect the company to continue to reduce and eliminate the remaining Euro Note exposure over the next few quarters in light of USD strength – patience here has proven prudent. With the balance sheet greatly improved, we don’t think $40-$50mm in incremental debt is a concern relative to this time last year.
That said, while we would have liked to see it at lower rates, this move gives FNP greater control over Kate Spade’s international growth trajectory. With Kate accounting for over 50% of EBIT, we like this move in aggregate. We’re at $0.66 and $1.00 in EPS in F13 and F14 respectively (pre filing). FNP remains a top long idea.
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