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IGT should beat the Street for the Dec Q but the next two Qs could be tough.



We are projecting a beat by IGT, $0.22 vs. consensus at $0.20, driven by higher unit sales.  Tempering our enthusiasm, however, are lower estimates for the March and June quarters.  Longer term, we think there is potential for IGT and the rest of the suppliers to out earn Wall Street expectations.  The big caveat for IGT is stability in the Wheel line of products.  As wrote about in our 11/27/09 post, “IGT: HOW LONG WILL THE WHEEL KEEP TURNING?”, IGT remains heavily reliant on the Wheel games at the same time recent court decisions have opened the playing field.


FQ1 2010 Earnings Call Preview

We think that IGT will beat the street this quarter but that estimates need to come down for the rest of the year. Longer term we think there could be upside to the numbers provided there is little degradation in the Wheel and the timing of new markets does not slip

  • We’re at $0.22 cents vs. $0.20 cents for FQ1 2010 and $0.82 for FY2010 vs. consensus of $0.89
  • FQ2 (March) at $0.18 vs the Street at $0.20
  • We think the Street’s F2011 estimate of $1.11 could actually be low, again if new markets do not slip and the Wheel is stable


FQ1 Details:

  • Product sales of $267.1MM & gross margin of 51.2%
    • 6.8k North America shipments, comprising of 4k new unit shipments, 0.3k deferred units, and 2.5k replacements.  We have total new & expansion shipments to NA markets of 12.5k units in the Dec quarter.  We assume that IGT gets 40% share excluding Aria, which will be recognized on a deferred basis. We estimate that NA replacements will be 7.5k for the market in the Dec Q
    • ASP of $15.5k in NA:  we expect MLD to become a greater % of AVP sales as IGT has materially expanded the content available on MLD making the $3,000 price difference more compelling
    • International product sales are more of a guess, but we have roughly 8k units

 Gaming operations revenues of $285.2MM and gross margin of 59.0%

    • 250 net new casino participation placements
    • 100 net new racino & leased placements
    • Average win per day of $50.30

 Deferred revenues:

    • IGT procured a 50% share of CityCenter’s 1,940 slots, which will be recognized over the next 8 quarters
    • Systems revenues for CityCenter will remain deferred for 2 years, after which MGM must decide whether to buy the system for a fixed fee or pay based on a variable daily fee model.  CityCenter will take the next 2 years to determine the ROI of IGT’s SB system.
    • Currently there are 8-10 locations with SB banks (including those trialing the product)

 Other assumptions:

    • SG&A:  $95.0MM
    • R&D:  $53.5MM
    • Net Interest expense:  $26.0MM
    • Tax rate:  39.5%

Massachusetts and Number 8

With the odd turn of events into the Massachusetts special election, one of our top 10 ‘probable improbables’ (presented on 1/8/10) is looking even more scary.  Number 8 on our list is, “labor and the threat of unionization become a major issue in 2010”.  The could be a big, big deal for retail.


As it stands, the Employee Free Choice Act (EFCA) was introduced and championed by the late Senator Ted Kennedy. Today’s candidates are on complete opposite sides of the topic.  Coaklely (D) is a strong advocate of the bill and vows to continue to keep Kennedy’s legacy alive.  Brown (R) strongly opposes the EFCA, and with his lead at the polls, could put the bill into jeopardy.  Regardless of the outcome, there is no question that the idea of increased labor organization is gaining mindshare.  While our original thoughts may be slightly altered with a Republican victory, the key point is worth republishing. 


#8. Unionization Becomes a Major Issue. Regardless of your political view, one thing that is pretty difficult to deny is that after a tough 2009, Obama is backed into a corner as it relates to placating the masses. He’s not doing so with the Economy, and certainly not with Afghanistan. Health Care Reform is likely a bust. So what’s next? Stepping up to vilify the self-proclaimed Wall Street Elite much the same way FDR did in launching the Mellon Tax Trials in 1935 (Andrew Mellon was then the former Treasury Secretary, and the richest man in America). For what it’s worth, Mellon was exonerated, albeit two years after he died. So goes the shallow world of politics.


Massachusetts and Number 8 - Consumer Confidence Chart


Is this possible today? You bet.  But another way to show his support for those that voted for him, Obama could go the Labor route. Tom Tobin, our Health Care Sector hear, said it perfectly…


“Kids and independents elected Obama.  It may be that the 2010 midterm elections do not matter since the likelihood of losing a majority in the House appears slim.  But a political focus would also have to include the 2012 Presidential election as well.  Where Labor was a factor in the 2008 elections, replacing the optimistic kids who were on a messianic mission and the independents will be a tall order.  This is why I have the Employee Free Choice Act on my radar.  I think Obama may have made a mistake in pushing Health Reform I first, but rather should have used his fleeting political capital to secure what will surely be an enduring and growing base of union members should the Bill pass.”


Massachusetts and Number 8 - Vote table


What does this mean for retail? Everything!  Call a retailer and ask them what this means. They’ll probably say something that sounds like “We pay our store employees well and don’t think this is a problem.” C’mon man, are you kidding?  Don’t you realize that you should be monitoring the gap between your pay and work rules and those of your competition? Also, if you’re managing an Abercrombie, your competition for employees is not just American Eagle. It’s also the Nathan’s selling greasy hot dogs in the food court. Retailers should turn to China to see how labor changed the competitive landscape. Why did factory wages rise in China by over 30% in 2006? Because the migrant workers coming in to factories to cut, sew, glue, and generally get treated like dirt by non-compliant factories saw that they could go to a major city like Beijing and work at a KFC instead for more money and a better lifestyle.  This is an extreme example, of course, but if this Employee Free Choice Act gains traction, then it will be a big, big deal for retail.

Inflationary Compares

With the December 2009 CPI now in the history book, the inflationary pressures following the collapse of oil prices in 2008 has worked its way through the system, leaving annual CPI inflation close to 3%. 


Importantly, what follows in the months ahead will be still higher annual inflation, with the pace picking up in response to the weak dollar policy of the “WE SEE NO BUBBLES” administration.  The 2009 weakening of the U.S. dollar resulted in a spike in oil and energy prices, as a well as in other dollar-denominated commodities.  Our 1Q2010 theme “RATE RUN-UP” is based on inflation stemming from 2009 monetary policy decisions, not from stronger economic demand in the USA.


The increase in the December CPI was primarily due to the Energy index, which rose 18.2% in 2009 after falling 21.3% in 2008.  The December CPI confirms some of the key issues facing the consumer.  The increase in the Energy index was caused by the gasoline index, which rose 53.5% in 2009 after declining 43.1% in 2008. The food index, which rose 5.9% in 2008, fell 0.5% for the 12 months ending December 2009, the first December-to- December decline since 1961.  The December CPI report was the first time since June 2009 that food-at-home prices rose faster than food-away-from home, and both increased for the month.  


Given the underlying reality that the economy is being propped up by the Obama Administration and a more serious inflation problem than is generally expected, the risks to reporting a trend towards higher-than-expected inflation and weaker-than-expected economic growth is growing.


Howard Penney

Managing Director


Inflationary Compares - bb


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An analyst jacked up her Q4 estimates to unrealistic levels.



We were fans of WYNN and its Q4 outlook.  Expectations were creeping up along with the stock price and today Bernstein dropped a bomb.  Their Revenue and EPS estimates went to $878 million and $0.46 up from $771 million and $0.13, respectively.  Consensus is $0.10 and $781 million.  That’s quite an outlier.  Why they still have a market perform rating and a $64 price target on the stock with those estimates is a another issue.


In our 1/8/09 note we discussed higher numbers for WYNN.  While there could be upside to our $818 million revenue estimate and our $204 million EBITDA estimate, we think Bernstein is over the top, potentially setting the stage for a disappointment come earnings day.  EPS is less important for WYNN but our projection there is $0.17. 


Now that Q4 expectations have been ratcheted up the focus should be on the forward numbers.  The Baccarat business in Vegas and Macau has been off the charts.  Is it sustainable?  We worry about the sequential slowdown in the Chinese economy, the waning federal stimulus, and the Chinese stock market.  These macro variables could deflate the baccarat VIP “bubbles” in both Las Vegas and Macau.


MCD is scheduled to report December same-store sales numbers in conjunction with its 4Q09 earnings results before the market opens on Friday.  Contrary to the last two months, there should not be any significant calendar shift/trading day adjustment as December 2009 included the same number of weekends as the prior year; though Christmas did fall on a Friday in 2009 versus a Thursday in 2008.  It is important to remember that the reported numbers in December 2008 did include a calendar shift, which negatively impacted comparable sales growth by 0.5% to 3.2%, varying by area of the world.   


Taking that into consideration, I wanted to provide comparable sales ranges for each geographic segment as a benchmark of what I think would be GOOD, NEUTRAL, or BAD results based largely on 2-year average trends. 


U.S. (facing +5.0% comparison from last year; calendar shift hurt result by 0.5% to 3.2%): 

MCD removed the Double Cheeseburger from the Dollar Menu in December 2008 and raised the price to $1.19 (the Double Cheeseburger was replaced by the McDouble on the Dollar Menu). The YOY pricing favorability associated with this menu change went away in December 2009.

GOOD: Any positive result would reverse the prior two months of declines.  Looking at the October and November results together to normalize the impact of the calendar shift in both months, a positive result in December would signal a slight acceleration in 2-year average trends.  For reference, a 0.5% or better would point to a return to 3.0%-plus 2-year average trends on an underlying basis.  Although 3%+ 2-year average trends are not that impressive for MCD, it would imply a pick-up in trends relative to October and November.


NEUTRAL:  -1% to flat implies 2-year average trends that are in line with what we saw in October and November on a normalized basis.  Like last month, this range of results, though neutral from an investor sentiment perspective as it relates to expectations, is not a favorable sign for current trends.  Before October, MCD had not reported a decline in U.S. same-store sales growth since March 2008 so three consecutive months of declines would not be good.  Prior to November, MCD had not reported consecutive monthly declines since early 2003. 


BAD: Below -1% would signal a slight deceleration in 2-year average trends from October and November.  MCD has not reported a monthly comparable sales decline of greater than 1% since March 2003.


Europe (facing a relatively easy +5.4% comparison from last year; calendar shift hurt result by 0.5% to 3.2%):

GOOD: Better than +6% would signal a sequential acceleration in 2-year average trends from November.  To recall, November sales trends in Europe were not good as 2-year average trends decelerated rather significantly on a sequential basis from October (even after adjusting for the calendar shift).  MCD attributed the slowdown to continued weakness in Germany and more broadly, to the sluggish economy.  A +7% or better is needed to show that the November weakness was only a 1-month occurrence.


NEUTRAL: +5% to +6% would imply that 2-year average trends are about even with November levels.  Like in the U.S., this range is neutral relative to expectations, but would point to continued softness in top-line trends in Europe relative to results for the better part of 2009.


BAD: Below +5% would highlight that trends have not improved in Europe, but instead, have actually decelerated on a 2-year average basis from the already depressed November level.


APMEA (facing a relatively easy +5.7% comparison from last year; calendar shift hurt result by 0.5% to 3.2%):

GOOD: Better than +4.5% would signal that 2-year average trends have remained strong and actually accelerated sequentially from October and November on a normalized basis.


NEUTRAL: +3% to +4.5% would imply underlying 2-year average trends that are about even with what we saw in October and November on a normalized basis.


BAD: Below +3% would point to 2-year average trends that have slowed somewhat from the prior 2 months and would likely be a sign of continued weakness in Japan and China.


R3: Peak of the Earnings Revision Cycle?


January 19, 2009


We’re seeing signs that the end of the earnings revision cycle may be near.





We think that 2010 will be the year we shift away from the group call, and towards the individual company/stock call. The first three weeks of the year are not particularly supportive of this view, but seem to be setting up for the delta on revisions to finally be hitting peak.


Why do we say this? Simply put, we’re seeing earnings revisions decelerate and stock performance erode on the margin at the same time we’ve got an acceleration in expected EPS growth approaching peak growth on near-peak multiples.


Remember that back in March, we had trough multiples on trough earnings. Ten months later, we’re close to the opposite.


Could there be another 5% hidden in there? 10%? Yeah…I guess. But we’re definitely past the 7th inning stretch.  As the 9th inning approaches, we’d better have done our analysis on which team can win a championship regardless of a Macro tailwind.


R3: Peak of the Earnings Revision Cycle? - 1


R3: Peak of the Earnings Revision Cycle? - 2




  • After acquiring leather goods brand Lambertson Truex from bankruptcy this past summer, word has it Tiffany is nearing the brand’s relaunch. The new line is expected to be shown to the press in April and is likely to hit stores in September. This will mark the Tiffany’s first efforts in the luxury leather goods arena.
  • As one of the few brands still without functional e-commerce, Carters is on track for its .com launch in the first half of 2010. While management is conservative with expectations for sales and profits coming from the direct business, we can’t imagine why over time this won’t become a meaningful contributor to both Carters and Osh Kosh. We wonder if baby registry is also on the horizon…
  • Unlike other off price retailers that have been reporting consistently strong results, Burlington Coat Factory seems to have been hit hard by unseasonably warm November weather. After posting positive same store sales for September and October, the company finished the quarter with a 5.2% decline. Management attributed the weak results to warm weather patterns in November. Given that scenario, we wonder how much sales picked up in December/January when the cold freeze swept across the country. Management did not offer any insights, but given the company’s “coat” heritage it would not be surprising for the trends to have changed dramatically in the last 3-4 weeks.




Carlyle Planning Moncler IPO Next Year, Weighing Acquisitions - The Carlyle Group, the world’s second-largest private-equity firm, is planning an initial public offering of skiwear maker Moncler next year after adding stores and boosting sales. “We’re doing a number of things that would allow us to hold an IPO” of Moncler, Marco De Benedetti, head of Washington-based Carlyle’s private equity business in Italy, said in an interview at his Milan office. “That may be in a year or so.” Moncler “is a business that’s caught the attention of buyers, but we’re not in negotiations to sell it right now.” Carlyle bought a 48 percent stake in Milan-based Moncler in 2008 and has helped the brand add more than 30 stores, compared with four previously. Sales probably grew 23 percent to about 370 million euros ($532 million) in 2009, the company said. Carlyle is now looking at potential investments in the fashion industry that could be merged with Moncler before a sale. “We’re looking at potentially buying a brand we could add to Moncler, something that could be integrated” into the label, De Benedetti said. The ideal target would have sales of as much as 100 million euros, he said.  <bloomberg.com>


Australia's Rebel Group IPO plans on hold - Private equity firm Archer Capital has stalled plans for an initial public offer of shares in Australian sports retailer Rebel Group due to market concerns, a source with direct knowledge of the situation said on Monday. Rebel Group has been valued at up to $735 million. The decision could dim the outlook for other IPO hopefuls in the retail sector, such as Pacific Equity Partners' REDGroup Retail, which owns Australia's two largest bookstore chains, Borders and Angus & Robertson. The source, speaking on condition of anonymity because the matter was confidential, highlighted that the market prices of some recent retail offers remained below their issue prices. Rebel Group, which includes the Rebel Sports and A-Mart All Sports sporting goods chains, was formerly known as Ascendia Retail. Local media put the value of the group at up to A$800 million ($735 million) and said it had planned to list by March. <reuters.com>


Gap hires a Limited Brands exec as its chief information officer - Tom Keiser has joined Gap Inc. as executive vice president and chief information officer. Keiser is responsible for improving Gap’s global technology platforms. He reports to Gap chairman and CEO Glenn Murphy. Keiser had been executive vice president and chief information officer at the Limited Brands, operator of such multichannel retailers as Victoria's Secret and Bath & Body Works. “I’m excited about joining Gap Inc. as the company executes on its plan to further expand online and internationally,” says Keiser. “And I look forward to leading the I.T. team to ensure we have the most effective infrastructure and platform to support this growth strategy.” <internetretailer.com>


Gilt Groupe names communications and brand execs - Online luxury retailer Gilt Groupe Inc. has hired Conde Nast Digital executive Jennifer Miller as its vice president of corporate communications and named Christian Leone, Gilt Groupe's vice president of marketing and communications, as its vice president of brand relations. Miller will focus on developing relationships with the consumer press, engaging consumers directly and enhancing employee communications. She previously was executive director of public relations for Conde Nast Digital where she oversaw the public relations team for the company’s web-only brands such as Style.com and Epicurious.com. Leone is responsible for building and developing relationships with brands. He reports to Alexandra Wilkis Wilson, the company’s founder and chief marketing officer. <internetretailer.com>


Nike Launches Golf Clubs Without Tiger Woods  - Nike Inc. will launch new golf clubs that are not directly linked to Tiger Woods. Instead, Nike said its Victory Red STR8-FIT Tour fairway woods, which will go on sale Jan. 28 for $299, were designed with input from all 13 U.S. golf endorsers. Promotional materials make no mention of Woods, whose tradition of wearing red shirts on the final day of golf tournaments inspired the Victory Red name, according to the Wall Street Journal. The materials note that the clubs were tested in tournament play by  Lucas Glover, who claimed his first major victory last year when he won the U.S. Open Championship. <sportsonesource.com>


Gildan Activewear Missing Six Employees in Haiti - Gildan Activewear Inc. is unable to account for six of its 44 employees in Haiti, Chief Executive Officer Glenn Chamandy said in a memo to employees. As reported, one of Gildan's three contractor facilities in Haiti was "substantially damaged" in the magnitude-7 earthquake that struck Tuesday. In an internal memo, the Montreal apparel maker said its immediate efforts have been focused on trying to provide assistance to the operator of the destroyed facility, Palm Apparel. As the earthquake occurred when the plant was in full production, a large number of workers have been trapped under the collapsed building structure. The company said the six Gildan employees it hasn't yet been able to reach in Haiti may be trapped in the building rubble.   <sportsonesource.com>


Macy’s CEO elected National Retail Federation chairman - Terry J. Lundgren, chairman, president and CEO of Macy’s Inc., was elected this month chairman of the board of the National Retail Federation, a major trade association whose e-commerce arm is Shop.org. Lundgren succeeds Myron E. Ullman III, chairman and CEO of J.C. Penney Co. Inc.

Other officers elected during NRF’s recent annual convention include:

  • Stephen I. Sadove, chairman and CEO of Saks Inc., first vice chairman
  • Kip Tindell, chairman and CEO of The Container Store, second vice chairman and chairman of NRF’s awards and nominations committee
  • Robert M. Benham, president and CEO of Balliet’s LLC, corporate secretary
  • Roger N. Farah, president and chief operating officer of Polo Ralph Lauren Corp., chairman of NRF’s finance committee.

Each officer will serve a two-year term.

Also elected to the NRF’s board for three-year terms were:

  • Marty P. Albertson, chairman and CEO, Guitar Center Inc.
  • Daniel Lalonde, president and CEO, Louis Vuitton North America Inc.
  • Laurent Milchoir, CEO, Etam Group.



EMC Sports Acquires Soffe Accessory Business - EMC Sports Inc., a division of Eric McCrite Co., has purchased from New Balance the Soffe Accessory business, patents and licenses. The patented hair and sleeve scrunchies are sold by major retailers and team dealers. Since 1989 Eric McCrite Co. said it has been distributing “Soffe” and other brand name sporting goods, at wholesale, to team dealers, retailers and decorators. Eric McCrite, at EMC Sports, Inc., said, "When we first looked at this business we thought the majority of sales came from cheerleading, but that is not the case, the bulk of the sales are with the sports related sleeve and hair scrunchies. Our basketball, lacrosse, softball and volleyball scrunchies in 12 team colors are what drives the business with cheer and dance following close behind." <sportsonesource.com>


Crabtree & Evelyn to Exit Bankruptcy - Bath and body soap marketer Crabtree & Evelyn Ltd. plans to emerge from bankruptcy by the end of this month. The Woodstock, Conn.-based company set the timetable Thursday when a Manhattan bankruptcy court approved its first amended reorganization proposal. After coming out of bankruptcy, the company will close on a $26.3 million exit loan from its parent, Malaysian firm Kuala Lumpur Kepong Berhad. As part of its restructuring, the retailer exited 35 retail sites, leaving 91 locations in operation. It also has a new e-commerce platform, crabtree-evelyn.com.  <wwd.com>


Caccia Dominioni Said Leaving Benetton -  Benetton chief executive officer Gerolamo Caccia Dominioni is expected to leave his post in April at the end of his three-year contract, according to sources in Italy. A spokesman at the Italian apparel manufacturer declined comment Monday. Caccia Dominioni was previously the London-based vice chairman and chief operating officer of Warner Music International, a division of Warner Music, and he succeeded Silvano Cassano as Benetton ceo in 2007. Cassano left the company after clashing with the Benetton family over international strategy. Alessandro Benetton holds the title of executive vice president, and his father, patriarch Luciano Benetton, that of chairman. Sources say the involvement of the family could also have led to friction with Caccia Dominioni. As for the future, the question is: Could another nonfashion executive take Benetton’s helm? Cassano is a former Fiat executive and his predecessors Luigi De Puppi and Carlo Gilardi came from the worlds of home appliances and banking, respectively.  <wwd.com>


Consumer Prices Rise in December - Retail apparel prices rose a seasonally adjusted 0.4 percent in December compared with November and advanced 1.9 percent compared with a year earlier, the Department of Labor said today in its Consumer Price Index. Women’s apparel prices rose 0.6 percent month-to-month and increased 2.9 percent year-over-year. Men’s apparel prices declined 0.3 percent in December, but rose 0.5 percent in 12-month comparisons. The overall CPI was up 0.1 percent in December, and rose 2.7 percent compared with a year earlier. The so-called core prices, which excludes the food and fuel sectors, also rose 0.1 percent for the month and advanced 1.8 percent year-over-year. Discounts in December weren’t as steep this year as in previous year’s, which helped drive prices up, said Jessica Penvose, an economist with the Labor Department. <wwd.com>


Gallup Economic Weekly: Job Creation Remains Weak - Economic confidence falls, but consumer spending continues to exceed year-ago comparables. Gallup's Job Creation Index suggests that the job situation deteriorated last week with slightly fewer companies hiring while slightly more were letting employees go. Add in the disappointing December jobs report, and it is not surprising that economic confidence also worsened last week. Still, consumer spending continues to be encouraging. Although flat compared with the prior week, it remains slightly above last year's same-week comparables, as upper-income Americans who are less affected by job market conditions are spending a little more now than they were at this time last year. Job Creation as reflected by U.S. workers' reports of their own employer's hiring/firing activities deteriorated last week. Gallup's Job Creation Index was at -2 -- down from the +1 of the prior week. Hiring was down slightly as 23% of employees reported their companies were hiring compared with 24% the prior week.of U.S. workers said their company was hiring and 14% said their company was letting workers go. Economic Confidence took a tumble last week as Gallup's Economic Confidence Index worsened to -29 -- 7 points worse than the -22 of the prior week. Economic confidence is essentially where it was last month after showing improvement during each of the past three weeks. nearly a dollar from levels a year ago.Consumer Spending was unchanged last week with self-reported daily spending in stores, restaurants, gas stations, and online averaging $68 -- the same as during the prior week and up a modest 6% from the same week a year ago. <gallup.com>

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