Potential for a big FQ2 but the Street looks aggressive on March and June. FY2010 Guidance range of $2.30-2.55 is not at risk.



Judging from the stock trajectory this year, most investors correctly believe that the Street’s $0.58 EPS estimate for FQ2 2010 is an easy number to beat.  We’re 18% above the “consensus” at $0.66.  However, not unlike our commentary on IGT & WMS, the Dec quarter should be the last layup quarter for BYI in FY2010.  We’re only $0.03 (1%) below the Street for FY2010 but 8% below for the back half of 2010.  Part of the issue may be that the Street is too lazy to isolate the quarters in terms of new shipments and just makes the simplified assumption of a continued recovery in replacement demand as the year progresses.


FQ2 2010 Details:

  • EPS of $0.66 vs the Street at $0.58 and $0.59 last year
  • Gaming equipment revenue of $87.6MM
    • 5.3k new unit sold, 4k to NA and 1.3k to international markets
    • Parts & conversion kit sales of $8.6MM
    • Gross margin of 49%
  • Gaming operations revenue of $72.4MM and margins of 72%
  • Systems revenue of $61.5MM and margins of 75%
  • Casino revenues of $9.1MM and gross margins of 58%
  • Other: SG&A $53.6MM, R&D: $21.3MM, Net interest expense: $2.4MM






  • “Estimating fully diluted earnings per share of $2.30 to $2.55 for our fiscal year.” 
  • “Our 26% operating margin is the highest in the industry and we believe has the potential to increase to 28% to 30% over the next few years.” 


Gaming Equipment

  • “We continue to expect margin on our game sales will be in the high-40s over the next several quarters and we believe moving it into the low-50s is achievable within the next two years”
  • “We are selling more conversion kits and Gavin and his team continue to drive down the box cost. So that's one reason why we are cautiously optimistic that we keep it in the high 40s and eventually get up to the low 50s, as we sell more video and keep driving supply chain efficiencies.”
  • “I believe that Bally is underrepresented in North America and even more so internationally. There will be new and exciting international opportunities for Bally over the next 12 to 24 months. We've been building infrastructure in anticipation, and our team is ready to execute. We are excited about new opportunities for us in markets like Italy, Singapore, Australia and potentially, Brazil.”
  • “Domestically, we are focused on expansion opportunities in Illinois, Ohio, Kansas, Iowa, Maryland and Massachusetts. We are also engaged in expanding our already strong position in Mexico as it moves to Class III gaming and we are excited about opportunities in the Italian VLT market. We plan to reenter the Australian market in the next few weeks at a time when it is repositioning itself for large-scale replacements.”
  • “In Mexico, we now have over 70 casino sites running and over 14,000 games connected to Bally systems and the upcoming Class II to Class III migration there opens up very good opportunities for us. And we are negotiating significant agreements for both games and systems in Italy.”


Gaming Operations

  • “Our current order backlog for our newer premium product is the strongest we have seen in the past 12 months.”
  • Re: Mexico impact of Class III:  “We will sell more units down there because we haven't done a lot of that in the past. But we don't expect to see a big drop in our Gaming Operations business either.”



  • “We expect systems margins to get back to the 70s in the near future”
  • “For fiscal year 2010, which we expect to be in a range of $220 million to $230 million. Of this total, we expect maintenance revenues to be in the range of $58 million to $62 million.”
  • “I would say that in terms of overall visibility of the number given a considerable majority of it, we have pretty certain visibility to us.”
  • “When we think about systems margins after those adjustments, meaning that the cost of sales of services will now be charged against systems margins, we would still see systems margins to be in the low 70s% for the balance of the year. I'm not saying we won't have variances out of that, where it could be higher or lower but that would be the target range, low 70s.”



  • “While we do expect SG&A to rise in the second quarter, the successful resolution of our legal matters and the elimination of all previously-reported material weaknesses in our internal controls should enable us to effectively manage our legal and accounting spend in future periods.”
  • “We are using our excess working capital to prudently assist our customers in selected financing transactions, pursuing acquisition opportunities and repurchasing stock”
  • “I think 36% is a good proxy for an effective tax rate for the year.”


The FED is behind the curve and the next few data points on the US economy and employment will drive interest rates higher.  The PPI is yet another data point that confirms our thesis.


Yesterday, the (BLS) reported that the seasonally-adjusted Producer Price Index (PPI) for finished goods rose month-to-month by 0.2% in December, following November’s 1.8% monthly gain.  Importantly year-over-year, December’s annual PPI inflation jumped sharply, again, to 4.4% (versus a 0.9% annual contraction for December 2008), the highest annual inflation rate since October 2008, following November 2009’s 2.4% annual gain. 


Comparing against collapsing oil prices in 4Q08, year-to-year change in PPI inflation has returned to a positive trend and should continue to increase as we move through 1H10.  Annual PPI inflation averaged a 2.5% contraction in 2009 against a 6.3% average gain in 2008. 


On a monthly basis, seasonally-adjusted December intermediate goods rose by 0.5% (up by 1.4% in November), with crude goods up by 1.0% (up by 5.7% in November). Year-to-year inflation was up across-the-board, with December intermediate goods up by 3.0% (down by 1.6% in November) and December crude goods up by 12.3% (up by 4.7% in November).


Howard Penney

Managing Director




I think we might now have an idea of how SBUX is going to market VIA.


One of SBUX’s smaller competitors, PEET, tried to make an entry into the single-serve segment by buying Diedrich Coffee (DDRX) but lost out to a competing bid by GMCR.  In a recent meeting with PEET’s management, the company communicated its continued desire to enter the single-serve segment.  Management gave no details, but I think another attempt at an acquisition is likely.  Whether it is through an acquisition or Peet’s creates its own position within the single-serve segment, the company seems intent on staying within the business of selling coffee, however, and does not want to get into the business of manufacturing single-serve brewing equipment.  Either way, Peet’s will face competition.


It appears that SBUX is also making a bet on the single-serve segment, but is entering the market in a different manner.  Last night on the SBUX earnings call, management said “Our customers have told us that their most frequent usages of VIA are in their homes or at work as a single serve option they favor for its flavor and taste and because and it does not require costly proprietary brewing equipment. Building on the broad customer acceptance through our retail channels we are ramping up VIA launch efforts through our retail company-operated stores outside of North America and poised to introduce distribution of VIA through North America and international channels in the third quarter of this fiscal year.  We're also planning to introduce additional premium coffee varietals and form factors to aggressively go after the at-home and office single serve markets as well as the $21 billion global instant coffee category. VIA continues to excite and represent a major significant opportunity for the company.”


In addition to being sold at Starbucks locations across the U.S. and Canada, VIA is also available at Costco, Target, REI and online at, and  SBUX has plans to sell VIA in the grocery channel but has not yet announced when it will begin to do so.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.



January 21, 2009


Athletic footwear and apparel are setting up to outperform in 2010, which is consistent with our view that this will be a standout space in retail.





Athletic footwear sales were up again last week marking the 7th straight week of positive sales growth – the longest such trend in over 2-years. Coupled with our visit to Nike headquarters last week, this trend gives us further confidence that 2010 will indeed mark the year that athletic footwear outperforms. Other than a BTS induced two week pop in sales back in September, we have to look back to the 1Q of F09 to site positive sales. So what does this mean?


With sales of footwear strongest in February last year this trend is likely to cool as comparisons get tougher in the weeks ahead. However, the balance of the year lines up favorably with a product-driven demand cycle that we expect to see by mid-year as key players (i.e. NKE & UA) rollout new lines after some internal reorganization and arguably reinvigoration – also good for FL & FINL. This is not to take away the from the strength that we’re also seeing in apparel though less notable on the margin as it has outperformed footwear for the last 12-months.


The punchline? In broader retail, earnings revisions we’re looking at near-20x p/e on 25% consensus EPS growth expectations – a stark contrast to what we saw at the March 9th lows. Earnings revisions have been steadily easing over the past three weeks, suggesting that the magnitude of the upside after the sell-side overshot on the way down is coming to an end. When we combine that with our view that the athletic space will accelerate while the rest of retail decelerates, it is something to keep a keen eye on.


Our favorites include NKE, BBBY, FL, FINL, PSS and UA (we like it more after the print given the recent positive change in sentiment).  On the flip side, we don’t like ROST, JCP, M, FDO, and DG.


R3: ATHLETIC STARTING OFF 2010 STRONG - Footwear and Apparel in the Sports Retailer Channel




  • In an effort to emphasize Coach’s opportunity for growth in China, management offered some interesting statistics regarding brand awareness. Coach’s unaided awareness in China is currently 8%, while it is 72% in the US, and 63% in Japan. Interestingly, the Chinese consumer’s intent to repurchase Coach is 94%, a figure greater than in the US or Japan. Given the limited growth prospects remaining domestically, we expect to hear more and more about China over the next couple of years.
  • Keeping with the China theme, super-luxury brand Hermes recently (and quietly) purchased a Chinese brand called Shang Xia. The acquisition will allow Hermes to offer a lower priced product, locally sourced and tailored specifically to the Chinese luxury consumer. While it is very clear that the Chinese luxury consumer clearly favors western brands, the move is interesting in that it is an attempt to plant the seeds and cultivate a Chinese-only luxury offering. Additionally, this allows Hermes to appeal to a wider target audience without damaging its high-priced namesake brand.
  • With the winter Olympics on the horizon, marketing efforts are beginning to perk up. Labatt just announced that is joining the “unofficial” Olympic party with the opening of Club Bud, a party venue open for just five nights during the event. Interestingly, Labatt has partnered with the NHL, Lululemon, Under Armour, and Burton to produce themed evenings on each night. Molson is actually the official beer supplier to the Olympic games despite these “unofficial” efforts...




Deckers Outdoor Makes A Simple Decision - Deckers Outdoor Corp. is shifting some senior brand responsibilities and moving its Simple brand from under the UGG brand umbrella managed by Connie Rashwain to instead report into Teva brand President Peter Worley.  “This is an exciting opportunity for both the Simple and Teva teams to engage, exchange ideas, and collaborate, as we evolve and develop both unique brands,” stated Peter Worley.  “Connie Rishwain has lead and supported the Simple Brand and the Simple team to date.  This move will allow Connie to dedicate more of her time and focus on the UGG Brand and its continued future success.  We look forward to great things from the Simple Brand under Pete’s leadership,” stated Angel Martinez. <>


Istithmar's CEO Switch Ignites Speculation About Barneys - With David Jackson, the chief executive officer of Istithmar World, out of the job as of Tuesday, the Dubai-based investment company appears intent on accelerating restructuring efforts for its various operations, including its U.S. retail holdings, Barneys New York and Loehmann’s. Aidan Birkett, the chief restructuring officer of Istithmar’s parent, Dubai World, on Wednesday said Andy Watson would be interim ceo, succeeding Jackson. “We are pleased that Andy is stepping in as acting ceo of Istithmar World,” said Birkett, who is leading the moves by Dubai World to renegotiate $27 billion in debt. “His experience will be vital in actively managing the portfolio of assets held by Istithmar World.” Under Jackson, Istithmar World “expanded rapidly as a private equity investment house during the years before the economic crisis hit,” Birkett said, adding, “Today, Istithmar World is focused on the steady-state management of existing assets to maximize value rather than on private equity investment.”  <>


Obama: will insist on consumer financial protection - President Barack Obama said on Wednesday he would keep consumer protection at the heart of his proposed overhaul of financial regulation, despite suffering a serious political setback in the U.S. Senate. It's very important to have a consumer finance regulatory authority that is willing to actually enforce the law, so that people aren't getting gouged," Obama told ABC News in an interview marking his first year in office. The White House separately said that Obama would discuss financial reform in remarks on Thursday after meeting in the Oval Office with Paul Volcker, the former Federal Reserve chairman who heads Obama's economic recovery advisory board. Obama's desire for a new consumer financial protection agency and other parts of his ambitious reform agenda became even harder to achieve after his Democratic party on Tuesday lost its 60-seat Senate majority in an upset victory in Massachusetts by Republican Scott Brown. This "supermajority" allows Democrats to overcome Republican delaying tactics in moving legislation through the Senate to Obama's desk to be signed into law. Republicans oppose key parts of Obama's plans to tighten rules on complex financial firms, whose reckless betting on the property market tipped the financial system to the brink of collapse in 2008. Its members have also opposed a financial responsibility fee he wants to slap on banks to recoup billions of dollars taxpayers spent on corporate bailouts. <>


U.S.-Made Apparel Prices Flat in December - Wholesale prices for U.S.-made apparel were flat in December compared with November and rose 0.2 percent from a year earlier, the Labor Department said Wednesday in its Producer Price Index. Women’s domestic apparel prices declined 0.1 percent month-to-month, but were up 0.1 percent from December 2008. Men’s apparel prices were flat in December and increased 0.6 percent year-over-year. Prices for all U.S.-made goods rose a seasonally adjusted 0.2 percent in December, driven by a rise in food prices.  <>


Global Output Set for Slow Rebound - World output is forecast to grow 2.4 percent this year, rebounding from a 2.2 percent decline last year, with emerging economies such as China and India leading the recovery, according to a United Nations report. The study estimated world trade volume, which fell 12.5 percent last year, will increase 5.4 percent. The rebound largely will result from $2.6 trillion in fiscal stimulus measures by major economies that “effectively arrested further erosion of confidence worldwide” caused by the recession, the report said. But U.N. economists cautioned the recovery will be uneven and fragile.  <>


Americans See Economic Recovery a Long Way Off - Two-thirds (67%) believe it will be two or more years before recovery starts. Americans are thinking in terms of years, not months, when pondering how much longer it will be before the U.S. economy starts to recover. The vast majority (67%) believe it will be at least two years before a recovery starts, and nearly half (46%) think it will be at least three years.The findings are from a USA Today/Gallup poll conducted Jan. 8-9. With a full third of Americans (34%) saying it will be four or more years before a recovery starts, the mean response is 4 ½ years -- putting the average predicted onset of recovery well into 2014. Public opinion about the timeline for recovery is seemingly in conflict with recent economic reports suggesting the U.S. economy grew in the second half of 2009, possibly setting the stage for recovery this year. However, much of the current economic analysis is highly cautious, in part tempered by the continuing high rate of unemployment -- thus, perhaps, contributing to Americans' skepticism about a speedy return to business as usual. Americans' outlook for recovery today is similar to what Gallup found in July 2009. Americans living in households earning $90,000 or more annually are more optimistic about when recovery will occur than are those in households with lower income levels; still, the majority of all income groups expect to wait at least two years before the economy starts to recover. The extent to which the balance of power in Washington influences Americans' economic optimism is evident in the partisan responses. Democrats -- who generally have more confidence in the leadership of President Obama and the Democrat-controlled Congress -- are much more optimistic about an economic recovery in the near term than are independents or Republicans.Much of the responsibility for economic recovery will be assigned -- fairly or unfairly -- to President Obama. Indeed, already more Americans disapprove than approve of the job he is doing on the economy. In general, Americans do believe presidents' policies can influence the direction the economy takes. The poll finds about half of Americans -- regardless of party affiliation -- saying a president has "a great deal" of influence over national economic conditions. Another 35% say a president's policies affect the economy "a moderate amount," while 10% say they have little impact.The American public seems braced for a long road to economic recovery. Not only do most Americans expect to wait two or more years for a recovery to start, but the majority continue to believe the economy is getting worse. While such pessimistic views could help Obama in terms of keeping the expectations bar low, now that he is entering his second year, Americans are likely to increasingly judge his performance on the economy by his own economic policies. <>

Chinese Ox In A Box

“We have two classes of forecasters: those who don’t know – and those who don’t know what they don’t know.”

-John Kenneth Galbraith


This morning you are going to see a host of perpetually bullish market forecasters start to get worried about China. It’s about time. As we have been saying for the last few months, the Chinese Ox is in a Box in Q1 of 2010.


The way that this works is that China reports a better than “expected” GDP number for Q4 of 2009, CNBC cheers, but the local market reaction in both China and Hong Kong is lower stock prices. Then, all of the revisionist forecasters start asking why? And, finally, they end up knowing what they didn’t know.


In the aggregate, China’s Q4 GDP  is the equivalent of the bark on the tree. Whereas the December and January growth numbers, combined with an explicit change in Chinese monetary policy, is the forest. China is tightening monetary policy as inflation accelerates. Slowing sequential growth and accelerating sequential inflation is what is putting Chinese stocks in an intermediate term box.


Slowing growth and accelerating inflation? Yes, that’s been our forecast, and here is the data:


1.       Industrial production growth slowed in December to +18.5% year-over-year (missing expectations)

2.       Consumer Price Inflation (CPI) accelerated, big time, in December to +1.9% year-over-year (up from +0.6% last month)

3.       Money Supply growth (M2) slowed 200 basis points in December to +27.7% versus a record high of +29.7% (y/y) in November


What’s most interesting about this call for China to tone down what we have called speculative loan and money supply growth, is that the Chinese government absolutely agrees with us. They will not pander to the politics of inflating asset prices. They have learned what not to do from us.


Within China’s Q4 economic growth report, the government removed the language of “moderately loose monetary policy.” For all of the US Federal Reserve watchers out there, that would be the equivalent of Bernanke removing the “extended and exceptional” language in his currently conflicted and compromised stance.


It’s one thing to be in the political penalty box for doing something like starving your citizenry of fixed income on their savings accounts. It entirely a different thing to put yourself in the box with an explicit attempt to slow speculative borrowing. The latter is China’s strategy. The former is America’s. And for those like Goldman who came out saying “buy China” on January 1st who didn’t know that… well, now they know.


We hosted our Macro Themes conference call for our subscribers last week, and we will be presenting the case for the Chinese Ox In a Box later on today on Yale’s campus at an investor lunch. If you’d like a replay of our call and the slides, please email sales@


Now that I have issued you a shameless sales plug, here are the top 3 conclusions from our Chinese Ox In a Box presentation:


(1)    Money supply growth slowing.  Right now the central bank has not stated a 2010 target for growth in M2, but had a 17% goal last year.   The actual growth rate was more than 25% for 2009, peaking at 29.7% growth YOY in November.  We think that money supply growth could be cut by 1/3 of its current pace.

(2)    Loan growth slowing in 2010. Chinese banks extended 9.59 trillion Yuan of loans in 2009, compared with 4.15 trillion Yuan in 2008 (+131% y/y growth). We think loan growth could drop by at least 1/3 of its current pace.

(3)    Bullish on the Chinese currency. The Chinese Yuan appreciated +18.7% between 2005 and 2008, but has been basically flat for the past 18 months. This will change, when the Chinese government decides to raise both lending and currency rates again in 2010. We think that currency appreciation will be at least +3-6% in the coming 6-12 months.


Additionally, here are the key lines of resistance that have now built themselves into real-time Chinese stock market prices:


1.       China’s Shanghai Composite Exchange = 3204

2.       Hong Kong’s Hang Seng Index = 21,829


We remain bullish on China’s long term TAIL, but that’s an investment view that has 3 years in duration. When one is bullish on something for the long term, that doesn’t mean they have to be bullish on it at every price.


Our call for Q1 on China is simply that, an intermediate term call of caution. It’s what our Hedgeyes are forecasting so that you can proactively manage the risk associated with stock market prices that have stopped going up.


Best of luck out there today,






EWC – iShares Canada — We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF on 1/15/10 we bought Canada.


XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

VXX - iPath S&P500 Volatility — The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.


EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

CYB - WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



IEF – iShares 7-10 Year Treasury One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.


EWJ - iShares JapanWhile a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY - iShares 1-3 Year Treasury BondsIf you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


The Macau Metro Monitor. January 21rst, 2010



The Statistics and Census Service reported that consumer prices in Macau increased 0.8% y-o-y in December and 1.2% in 2009.



Resorts World Sentosa partially opened yesterday with 1,340 rooms in 4 hotels, including a Hard Rock hotel and a property designed by Michael Graves. The casino opened is scheduled to open in March following delays in getting license approval. The 7,300 seat-ballroom will host its first event at the end of this month and Universal Studies theme park is scheduled to open its doors over in several weeks.  Genting expects tourists to make up 60% of visitors to its casino with 25% of those visitors coming from China.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.