Takeaway: A big beat was in the offing but this was pretty impressive, particularly with the flow through
- Consumers growing more confident
- LV Locals: all 4 major Local properties achieved EBITDA and non-gaming gains. Expect roadwork (impacting Suncoast/Sam's Town) to be completed by Labor Day. On a combined basis, the Orleans and Gold Coast generated revenue growth of more than 6% and EBITDA growth of more than 20%. This was the best second quarter EBITDA performance for these properties since 2008. The release in Gold Coast our growth throughout the business with increases in gaming revenue, non-gaming revenue and cash ADR.
- Downturn LV: gaming and non-gaming revs up YoY. Increase in table games and slot volumes. 2015 visitation has been strong.
- Midwest/South: 11 out of 12 properties grew EBITDA. IP rev grew $3m and $4m in EBITDA. IP has delivered 3 straight quarters of double digit EBITDA growth. Treasure Chest- good performance among casual players.
- Delta Downs: hit record EBITDA in April. Flooding in May/June resulted in slightly lower EBITDA in 2Q.
- Blue Chip: continue to increase market share
- Kansas Star: record 2Q EBITDA (+10% YoY); improved operating margins by 130bps
- Atlantic City: Borgata posted 5th consecutive quarter of EBITDA growth. Borgata sold 5k additional room nights in 2Q and F&B was up.
- Non-gaming grew across the portfolio in 2Q
- Delta Downs doesn't have enough hotel rooms to meet demand; will be adding 167 hotel rooms/suites
- Paid down $45m in debt in 2Q. YTD, debt reduction has been $125m
- 2Q Capex: $39m ($5m at Peninsula). YTD invested $58m.
- Delta Downs $45m project: expect to spend $10m in 2015 and remainder in 2016.
- 2Q Borgata Capex: $10m
- FY 2015 GUIDANCE: 2H Wholly-owned net revs same as 1H. 65-75% EBITDA flowthrough. Expect LV Locals EBITDA to grow 5-5.5% for FY 2015. Downtown EBITDA to grow 14% in FY 2015. Expect Midwest/South to grow EBITDA to 7-8% YoY. Expect $170m in EBITDA (BYD receives 50%) and increased property taxes for Borgata.
- Borgata leverage at end of 2Q was 4x
- Will save $12m in interest expense savings when they do decide to retire Borgata's 9 7/8% notes in the next 12 months
Q & A
- Nice Cash ADR growth in LV Locals
- July trending similar to Q2 across all properties
- Continue to have conversations about acquiring assets
- Revenue growth in-line with expectations. Strong flowthrough
- Consumer is getting stronger
- Customer spend is up, including unrated play and casual play
- Buy MGM's part of Borgata? Happy with partnership. Would want the right price to buy their share.
- No comment on PNK/GLPI deal
- AC promo environment: normal
- LV Locals margin opportunity: still sees more opportunity. Current margins are sustainable.
- Delta Downs $45m project: expect to attract younger demographic
- NOL: just under $982m
- Maintenance capex for slots: will stay as is
- M&A: Hope to do something at least leverage neutral
- Downtown charters: today, they run 4 charters a week (used to run 7/wk). Lower because commercial airlines have increased their lift from Hawaii.
- Rated play from Hawaii is up
- No timing on when they will receive $88m tax refund
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There will be a time Del Frisco’s Restaurant Group (DFRG) is a LONG, but for now we want to keep it on our bench as we wait for further evidence that management will make better capital allocation decisions.
At DFRG’s current market value, the Del Frisco Double Eagle segment accounts for ~74% of the market value. The implications are that The Grille and Sullivan’s are destroying shareholder value. Therefore, to create shareholder value from these levels significant changes must be made in the future capital deployment plans in those concepts. Management hinted on today’s earnings call that changes might be coming, but the stock reflects zero confidence that management will make the right decisions.
There things management can do to regain investor confidence:
- Stop new unit growth of “The Grille” in 2016
- Close all underperforming stores
- Demonstrate confidence in the trajectory of “The Grille’s” average unit volumes
Hoping that management will see the need to make these changes is not reason enough to go LONG DFRG.
DFRG reported 2Q15 earnings this morning and it was overall a disappointing performance. Consolidated revenues increased 9.5% to $73.8 million but fell short of consensus estimates of $75.4 million. Comparable same-store sales (SSS) also missed across the board, Del Frisco’s Double Eagle reported +1.0% SSS versus consensus of +2.3%, showing a sequential slowdown over the last four quarters. Sullivan’s Steakhouse SSS decreased -3.0% versus a consensus estimate of +1.4%. And finally, Del Frisco’s Grille decreased -6.3% versus consensus estimates of -2.3%. Reported EPS was $0.16 versus consensus estimates of $0.19, further showing the current weakness across the business.
Del Frisco's Double Eagle 2-year trends are concerning, as they have decreased sequentially three quarters in a row.
Management’s reasons for poor performance were mostly blamed on external factors; weather affecting patio sales, Father’s Day shift, construction at NYC Double Eagle and conventions switching locations, among a few others. The Grille concept continues to struggle and we were hoping with the exit of Jeff Carcara, they would lessen their focus on the concept. For now their voiceover is the opposite, as they continue to sink capital into the Grille and Sullivan’s.
Recent restaurant development remains focused on the Del Frisco’s Grille concept, which just posted a -6.3% comps. At the end of the second quarter DFRG opened a Del Frisco's Grille in The Woodlands, Texas. In the third quarter, they have already opened a Del Frisco's Grille in Plano, Texas and will be opening a Del Frisco's Grille in Stamford, Connecticut and a Del Frisco's Double Eagle Steak House in Orlando, Florida. The remaining three Del Frisco's Grille locations in Little Rock, Arkansas; Hoboken, New Jersey; and Cherry Creek, Colorado will open in the fourth quarter. Management also closed the Sullivan's Steakhouse in Denver, Colorado during the second quarter upon its lease expiration.
Management adjusted the outlook for the remainder of 2015 down, annual comparable same-store sales are now expected to be 0.5% to 1.5% down from previous estimates of 2% to 3%. Annual adjusted EPS growth between 5% and 9% versus previously projected 15% to 18%.
We remain hopefully in the underlying business and the strength of the Double Eagle concept. Management needs to get smarter about capital spending, deploying it where the best return for shareholders is created. Until we hear something along these lines we are not comfortable jumping in on the long side.
The stock market reaction to the earnings is overwhelmingly negative as it is currently trading down ~16%. We will continue to monitor the name from the sidelines as we wait for the right entry point.
Takeaway: Jobless claims hit their lowest level since 11/24/73. The labor market faces extreme resistance against improving much further from here.
Below is an excerpt from a research note analyzing this morning's initial claims data from Hedgeye analyst Josh Steiner. If you would like to setup a call with Josh or Jonathan or trial their research, please contact email@example.com
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The chart above shows that seasonally adjusted initial claims just hit 255k, the lowest level in forty two years. The last time claims were lower was November 24, 1973, when the reading came in at 233k. While this exemplifies extreme strength in the labor market, it also represents a point of extreme resistance against claims going any lower.
We continue to point out that this party has an expiration date, which we estimate to be about five quarters from now.
In the last three cycles, once claims dipped below 330k they remained there for 24 months, 45 months, and 31 months, in the late 1980s, late 1990s/early 2000s, and 2006-2008 period, respectively before the economy went into recession. In the current cycle, claims have been below 330k for a little more than 16 months and counting. The average of these last three cycles is 33 months, which would translate to another ~5 quarters of track.
"Just wait until the next market move of down 10%. We haven't had one in almost 1,000 trading days," Hedgeye CEO Keith McCullough wrote recently. "Please, do not let the same people who blew you up at the 2000 and 2007 bubble tops do it again."