• run with the bulls

    get your first month

    of hedgeye free



Gaming revs on the Strip fell 3%, better than our estimate of a 6% drop, owing to higher slot hold percentage. With CityCenter open and -15% comp, the Strip should be doing better.



Aside from a little higher than expected slot hold, there is not a lot unusual about the January Strip gaming revenues.  Due to the timing of Chinese New Year, Baccarat volume actually fell 6% y-o-y but a higher hold percentage drove Baccarat revenues up 13%.  Overall table hold percentage was normal at 11.8%.


January of 2009 was a horrible month with total gaming revenues down 15%.  The January 2010 2-year comp was down 17%.  The good news, at least for appearances, is that February faces the easiest comp of the year.  February 2009 Strip revenues fell 23%.

PSS: Enjoy The Selloff, Prepare to Act

PSS: Enjoy The Selloff, Prepare to Act


Nice beat, though comp was weak for all the right reasons. This story is on track…period.


As we expected, PSS beat the quarter. We highlighted in our note yesterday the assumptions behind our ($0.10) estimate, and how a loss starting with a 2-handle (the Street was at a loss of $0.26) was not in the cards even if we flexed on some key assumptions. With a print of ($0.18), there was little that came from the event that we found surprising.


In fact, the company’s gross margins and SG&A were in line with our model. The entire deviation was on the comp line, which came in well below our estimate. The bottom line there is that the 3Q Oprah promotion pulled forward more inventory than we modeled. So margins were huge in 4Q, but the company simply did not have enough ‘stuff’ to sell.


So let’s step back for a minute. The crux of why we like PSS is that a) the company increasingly owns both content and distribution, b) some big competition (WMT) is de-emplasizing the footwear business, c) PSS has made structural changes in its model that increases speed to market, d) it finally has the systems in place to be in touch with the right consumers – and market the right product to them in the right channels, e) can, and will, both drive higher AURs on top of increased traffic. Ultimately, the consensus estimates are too low – as proved this quarter.


When I look at this quarter, I poke and prod to see what parts of this thesis were proved wrong. Really, there’s nothing. The company nailed the product, but did not have enough. That’s their biggest miss. I’m ok with that, as it has no bearing in next years’ earnings. I’d be concerned if comps were high but gross margins took a nosedive because PSS missed trends and had too much inventory. That absolutely did not happen.


Will there be more bumps and scrapes along the way here? Of course there will be. But I still think that the Street’s estimates are likely to come out 20% too low for next year. At the same time, having just passed an important yy hurdle, momentum on both the top line and operating margin is strong for the next few quarters. Any meaningful sell-off here is a great opportunity to step back in on one of the few solid stories in retail.


-Brian McGough



PSS: Enjoy The Selloff, Prepare to Act - PSS image 1 revenue table


PSS: Enjoy The Selloff, Prepare to Act - PSS image 2 Margins





Reported EPS: -$0.18

Clean EPS: -$0.19

Street: -$0.26

Hedgeye: -$0.10



  • Revenue: +3.3%
    • Comps: +0.7%
    • PLG: -13.6% (-18.3% wholesale, +1.8% retail)
    • Expiration of the Tommy Hilfiger adultwear license


  • Gross Margin: +467 bps
    • Improvement due to double-digit percentage reduction in product costs from commodity prices and leveraging size and scale of global supply chain. Lower markdowns due to clean and light inventory position, higher sales which leveraged fixed costs such as occupancy, and lower freight and distribution costs related to the new distribution centers being fully operational along with the closure of the Topeka distribution center in Q2 09.


  • SG&A: +3.7%, +13 bps
    • Higher incentive compensation and PLG investments was nearly offset by payroll and other spending.


  • EBIT: +454 bps


  • CF/BS:
    • Inventories: -10%
    • Cap Ex: $84 (down $45 due to completed spending in previous year)
    • Cash: increase in cash was driven by lower working capital and higher earnings from stronger operating performance.
    • Debt: Net debt at the end of 2009 was $456 mm lower by 208 mm. Repaid an incremental $40 mm of long-term debt during 4Q. Paid down $22 mm on 8.25 senior sub board



  • Tax: 20%, higher than 2009
  • D&A: $140
  • Cap Ex: $100 (increase of $16 mm, over half spending from stores and incremental IT projects)
  • Inventory: will be higher driven by sales growth
  • 2010 Stores: -15 net [-60 stores domestic, +25 stores international (Columbia additions), +20 stores in PLG (Stride Rite additions and Sperry retail concept)]
  • Working Cap: 2010 networking capital is expected to be a use of cash due primarily to increases in inventory and accounts receivable as a result of sales growth
  • SG&A: goal is to lower operating costs, but
  • GM/Occupancy: 1/5 of stores come up for renewal in 2010



  • Product Costs: Costs will be down mid single digits in 1H, which is less than Q4.  There maybe costs that could turnaround from a positive to a negative in 2H but don’t have much insight on this yet.
  • PLG Retail: some prices were too low, PLG retail expansion and turnaround is taking longer than expected due to not changing the management fast enough, but now that it’s in place strategy in motion.
  • Boots: underplayed boots in 4Q and by the time it came to replenish, it was too late in the game to safely replenish.  Ran out of boots in Q4 which hurt total sales.  Boots will not be a play in Q1 or Q2 at PSS.
  • CRM: Effects of CRM worth the investment and continue to invest.
  • Economy: unemployment is still 1/10 in the US so this economic situation is not over, people aren’t as afraid so there are some changes, but some sectors are still materially impacted. 
  • Toning/Fitness Category: consumer response is great, but there won’t be a material impact until they fully catch up with the trend.  Every style developed is winning, demand is high and price sits well with consumer.  Its in all doors. 
  • The Oprah Impact: hurt the inventories by 60 days so that impacted for quite a while.  Oprah impact was about $19.9 - $20 mm on revenue. 
  • ASPs: planned on fairly tight, relatively small increase. Based on just how the consumer traffic is out there, it might be something where PSS might want to take it up a tick more, than where it is now. Still working on engineering the prices. Really increased value scores and pricing scores in the second half of the year.  
  • Relationship with brands in wholesale and other retailers: announcing later a new relationship with one of PSS’s brands and another retailer.  Planned to be a great American brand.  Very happy when PSS brands find the perfect home with a winning retailer.  
  • Easter Impact: there will be an impact from an earlier Easter for Payless especially.   
  • Stride Rite: placed the good better best strategy in December and started seeing benefits in Q1. 


PSS: Enjoy The Selloff, Prepare to Act - PSS SIGMA





RRGB is up 20% since reporting 4Q09 results, which to remind, the company missed EPS expectations, reporting $0.10 versus the street’s $0.15 estimate.  Same-store sales came in at -10.5%, better than the street’s -11.1% estimate, but -10.5% is not anything to get excited about and implied a continued sequential decline in 2-year average trends.


Yes, the entire FSR group has traded higher and RRGB’s short interest is high at 18.2% relative to the FSR group’s average of 14.4%.


Investors seem to be pricing in the fact that the new advertising will definitely work…assuming the company will achieve positive comps in 2010 (guidance of  +2.4% to 3.4%) and will get the necessary return on the significant increase in investment behind advertising (doubling total marketing spending in 2010 to $31M from $15.2M in 2009 and increasing television spending to $16M-$17M from $2.3M).


Or are investors just really happy with the governance changes brought on by the Clinton Group?  RRGB announced that it signed a standstill agreement with Clinton Group and Spotlight Advisors on March 4th.


The fact that RRGB is trading at 5.9x NTM EV/EBITDA relative to the FSR group’s average 7.5x multiple signals that investor confidence is not as high as recent stock performance implies.  More tales of the tape…


Notes from the presentation:


Broad consumer appeal and an exceptional experience

Menu has not changed dramatically since the restaurant was first started

Unique brand positioning

  • Attract teens
  • High income women
  • Between casual and fast casual
  • Equal distribution between lunch and dinner (49% lunch)
  • 37 min lunch, 42 min dinner

Menu is heavily influenced by children

Strong brand loyalty

  • 55% at 75k and above category, high income


California, Arizona concentration

Working on brand awareness in new markets such as East coast and Mid West


Developing 11-13 new company restaurants

  • Proceeds from operating cash flow
  • Using FCF to pay down debt


Using TV  advertising

  • Brand awareness scores improved significantly


Did not use TV in 2009, used coupons, digital, and direct marketing

Guest count in 2009 declined

  • Did market research and found that brand awareness was lacking
  • Needed to get back on TV
  • Need to offer value
  • Stress variety in menu, not just about burgers


2010 marketing

  • Brand awareness
  • Value
  • Variety


4Q09 campaign was tested in 10 markets

  • SSS was lifted 900 bps during three week period in those markets


Spring, summer, and fall campaigns

  • Spring
    • Burger and Salad at discounted prices


4Q LTO mix was 10%

  • 90% still offering off the menu
  • 300 bps price mix hit from promotional items
  • Other items still remain on the menu


Bounce back coupon to bring guests back

Increasing gift card program


New units:

NRO AUVs are 80% of comps…not dropping further than existing restaurants

  • 500 bps improvement in margin from 2007 class to 2009 class
  • Maturity curve is faster for new units

Reduction in construction cost

  • 2006 = 2.5m
  • 2010 = <2m


Financial Review:


Sales mix:

80% food, 20% beverage.

14% non alcohol. Non alcohol is just as profitable

60% of sales are from burgers


Commodity costs:

Not contracted for beef or cheese

Commodity basket is expected to deflate 2.5% pre promotional item impact


Despite top-line pressure

  • Operating cash flow only down 1%
    • Using it to pay down debt

FY10 Guidance

  • Positive SSS of 2.4% to 3.4%
    • Breakeven of media +50-100 bps of profit
    • $2.30 of revenue lift for each dollar of spend
  • 887 to 895m in revenue
  • 11-13 units
    • One is open, four being constructed, rest in the back end of the year
  • Franchise partners building 4/5 units, 1 under development
  • G&A flat year over year excl bonus expense
  • Incremental marketing spend of 14-15m dollars in 2010 (TV)
    • 16-17m in total
  • Tax rate 19%
  • Capex of 35-40m
    • 22-26 from new unit development (2m per build)
    • 3m in corporate infrastructure
    • Remainder in maintenance
  • Leverage max ratio is 2.5x, at 2.13x 2009
    • Expecting to maintain safe margin


Howard Penney

Managing Director

FL: Camping Out at the Mall

We attended Foot Locker’s analyst meeting and came away with essentially the same view we walked in with.  There is still a great opportunity ahead for the company and the shares.  On the flip side, it was clear that management, including CEO Hicks, is not going to offer up every possible detail, strategy, and plan on a silver platter.  After all, there is a process here that is unfolding in front of us.  One in which management has to earn the Street’s attention through results, not lip service.  And one in which expectations are being set with a goal to exceed them.


What we heard was a broad based plan that was largely in-line with every bit of research we’ve put out over the past few months leading up to this strategic “unveiling”.  There is no need to rehash the finer or broader points of the company’s publicly available PowerPoint slides.  The broad objectives that we set out to examine in detail are the same objectives management is focused on.  These include: improving assortments and differentiating the company sub-brands, developing and growing a meaningful apparel business, improving the in-store and online shopping experience, focusing on growth where it makes sense, increasing productivity (both sales and inventory), and building a team to drive results. 


None of this is surprising or for that matter overly complex.  Executing each of these points after years of risk aversion and lack of change is really what matters.  For more details, take a look at our recently published Black Book or listen to a replay of our recent conference call on the subject (call or email us if you need details).  To be fair, not everything we heard was already known or predicted before today’s meeting.  A couple of details emerged that were in fact incremental:


  • Management indicated that while apparel is a small percentage of the company’s overall product mix, its poor performance resulted in 50% of the overall decline in revenues over the past few years.  Now that’s just bad.  On the flip side, this also accentuates the opportunity to upgrade apparel.  The benefits of a positive mix shift driven by an improved apparel offering are key to both productivity gains and gross margins.
  • Management acknowledged that the company’s image as a basketball dominated retailer needs to change.  This will come in the form of two initiatives.  First, eliminate unproductive basketball SKU’s and fill the product vacancies with other highly productive footwear (i.e running). Second, actually step up development of House of Hoops, but in a targeted manner.  This puts an emphasis on basketball in markets that warrant it, not just in a wholesale, homogenous manner.
  • Marketing is likely to become a bigger part of the equation.  Management will look to become more efficient with existing marketing spend, but will also step-up incremental spending as well.  This is likely more of a 2011 event, but should it should be noted that management is focused on making marketing investments to drive sales and productivity.  While not specifically addressed, we still believe there is substantial savings coming from the company’s catalog costs alone.  Importantly, any increase in marketing will not occur until noticeable product adjustments have been made.
  • Capex is also trickling higher over the next few years, likely towards a $140 million run-rate (currently $110 million).  This will drive an improved in-store experience (i.e. remodels, refixturing) but also 60 new stores per year, primarily in Europe.  Importantly, the company’s dividend remains fully intact and share repurchase is also on the table to put excess cash to work.
  • While no formal commitment was made to a near-term timetable, it sounded like there will be noticeable product enhancements in place for back-to-school.  Footwear is likely to see more meaningful brand additions and editing, while apparel may only be moderately impacted.  From a sub-brand perspective, Lady Foot Locker is ahead of the overall chain in its efforts to upgrade its apparel to a more performance oriented presentation.  Nike was highlighted as an important part of Foot Locker’s model, but no specifics were given on any near term product/marketing partnerships.  We continue to believe these two are working closely together to potentially use a portion of the store base as a Nike only platform, as well as to develop exclusive programs for each sub-brand.


Overall we liked what we heard.  Yes, there is always an appetite for more details and specifics.   An effort to monitor real changes will require frequent visits to each of the company’s retail brands over the next several months.  As the process to differentiate and upgrade product within the organization unfolds, it should become very clear that the company is making strides towards no longer competing with itself.  Unfortunately, this will not take place overnight.  The biggest risk in the near-term in our view is not if comps remain positive mid single digits, but rather how much hype is building.  In our view, the five year plan is one that it is likely achieved in three years or less.  It’s just less clear what is realistic to expect over the next few months.  For this, we’ll just have to camp out at the mall and report back on the efforts underway.


Eric Levine



The Following note was published by Joshua Steiner Head of Financials at Hedgeye Risk Management.



With Healthcare reform taking up all the oxygen in the District, we thought it worthwhile to point out that there is significant progress being made behind the scenes on Financial reform. After weeks of delay, the Financial Times reports that Senate Banking Committee Chairman Dodd (D-CT) and Senator Corker (R-TN) seem to be winding down their backroom horsetrading, and a financial reform bill may be introduced later this week. The latest iteration holds that the Federal Reserve will cede regulatory oversight of all but the top 23 bank holding companies (those with >$100B assets) to a new agency to be born out of a merger of the OCC and OTS. This will affect some 4,950 banks. Separately, the Fed will also cede oversight of all state chartered banks to the FDIC (a further 874 banks). Our take? The Office of Thrift Supervision (OTS) is known in the industry for being a weaker regulator than the Fed. From a systemic risk management standpoint, we think this move is incongruent with the goal of imposing stronger industry regulatory oversight. In other words, in the long run this is a bad idea. That said, the Office of the Comptroller of the Currency (OCC) is a strong regulator, so it's unclear what this new, merged super-regulator will look like. While Fed Chairman Bernanke cannot be pleased about losing such a significant portion of his organization's mandate, he must be breathing a sigh of relief that he gets to keep the too-big-to-fail banks under his purview - a clear compromise by Chairman Dodd. Conclusion: this represents no change for the big banks, and a potential positive for the rest of the sector (softer regulator).


Regarding the so-called Volcker rule, Senator Dodd has been a staunch roadblock to its inclusion in any legislation coming out of his committee. He's acquiesced to include some vague language around proprietary trading that will give regulators some theoretical power to curb banks proprietary trading activities on the margin, but we think it amounts to little real change on this front. Conclusion: a positive as this is unlikely to inhibit proprietary activities by any banks.


The Consumer Financial Protection Agency, arguably the single most important element of the reform legislation has been reduced from being a standalone agency to being the Bureau of Financial of Protection within either the Fed or Treasury. Clearly the banks would prefer if it were housed within the Fed. Chairman Dodd, as recently as last week, had indicated a willingness to house the division within the Fed, however pushback from House Financial Services Committee Chairman Barney Frank (D-MA) may result in a compromise whereby the division is housed within the Treasury - not as good for banks as if it were at the Fed, but not nearly as bad as if it were a standalone agency. For reference, Senator Shelby (R-AL) would like to see consumer protection manifest as a watchdog agency within the FDIC. Conclusion: a modest negative for the banks, but relative to expectations a neutral to positive development.


Separately, we think it's also worth pointing out that republicans have been quietly gaining steam in the polls ahead of the midterm elections this November. While it's still more likely than not that Democrats retain majorities in both the House and Senate, we think the following charts capture the changing momentum pretty well. The first chart shows the Intrade contract on Democrats maintaining a majority of the House of Representatives, while the second chart shows the contract for Democrats maintaining a majority of the Senate. For the House, odds that Democrats will remain in the majority after this Fall have fallen from 85% to 55% since early last year. For the Senate, odds of Democrats maintaining a majority have fallen from 95% to 65% in just the last few months.





While we're not yet calling for a change in control of Congress this Fall, the probability of it happening is clearly rising. With that in mind, here's a look at how Financials performed (and the market more generally) on the heels of the last time Republicans took control of both Houses of Congress while a Democrat was President.




Joshua Steiner, CFA


Most of management’s commentary was a repeat of what we heard on the company’s fiscal 1Q10 earnings call about three weeks ago.  Management did say that it is still comfortable with its 2Q10 same-store sales guidance of -8% to -10% at Jack in the Box.  In response to a question about the competitive landscape, CEO Linda Lang stated that she thinks the industry will see some immediate relief on the discounting front when BKC removes the dollar double cheeseburger from its menu in mid-April.


Similar to the company’s earnings call, management spent at least the first five minutes of the presentation (and more time later) outlining all of the macro issues that are facing the company rather than talking about any company-specific issues.


Notes from the presentation:


One of the key aspects is unemployment

  • Especially at breakfast
  • Food prices dropping at grocers
  • 2009 was weakest year commercial food service industry has experienced in 30 years
  • Discounting has increased sharply

 Cost structure being improved

  • G&A initiatives

 Regional concentration is exacerbating effects of unemployment on JACK

  • Texas, California both terrible markets

 Demographics also unfavorable

  • Young males, Hispanics are struggling

 Customer base skews 1/3 more Hispanic than competitors




  • Texas has caused slowing of sales from Q4 to Q1
  • California has stabilized (rate of decline has stabilized)
  • Guidance unchanged

 Discounting among big players

  • Bar and Grill has begun to encroach on price point for premium QSR products and may be creating a trade up effect
  • Prices for food at home are experiencing deflation


  • Adjusted marketing plans to better respond to market conditions
  • Reallocation of media spend to reach multiple consumer markets…hmmm
  • New products and platforms


  • Rolling out new menu, “Craft two”
  • Mix and match menu and compelling price point
  • Also more for kids
  • Trends improved through quarter although down for the quarter as a whole

 Refranchising strategy

  • Number of restaurants being refranchised was 194 in 2009
  • Franchise ownership is at 46%, going to 70-80% for FYE 2013
  • Expecting to pass 50% mark in 2010
  • Proceeds were 116.5m and gains were 78.6m in 2009
  • Q1 gains so far were 408k per restaurant


  • 42% of system units in California
  • 28% of system units in Texas
  • 26% of company units in California
  • 30% of company units in Texas

 Capital expenditures

  • Refranchising strategy and completion of reimaging should bring capex down to 110m per year from 2013 onwards

 G&A excl advertising

  • G&A as % of system sales has been decreasing
  • 2006 to 2009 decline was 120 bps
  • In 2014, fully franchised, should be at 3.5% (5.2% in 2009).
  • Most of peer group are in 3-4% range

 Share repurchases

  • 750m returned to shareholders over last 5 years
  • 40m in Q12010

 Debt repayment schedule is expected to be light



  • Movement from company owned to franchise model
  • Continued expansion for Jack in the Box beyond 18 states
  • Growth of high ROI Qdoba
  • Growing FCF


Q: Are you seeing any change in consumer spending/behavior?

A:  We are seeing a lot of stabilization in California. Believe our sales have hit a bottom in California.  Rate of decline has stabilized…ambiguous…higher end retailers are seeing improvement, hopefully that trickles down. Our consumer base will be the last to go back to jobs and come back

Q: Market share in CA?

A: We don’t believe that we have lost share but it has been a shrinking pie.


Q: Macro environment implies that JACK’s customer is typical for QSR, over-indexed to Hispanics perhaps, but brand has been positioned up.  Is premium positioning working against you in the near term?

A: Promotional offerings are there.  We’ve had to run concurrent premium and value products whereas beforehand we did not need to do that. We’ve had to bring down price point of premium products through recipe-ing and portion sizing (making margin-friendly products at compelling prices)


Q: Capex degradation seems understated given the level of refranchising?

A: A good portion of the capex is related to planned new store openings and a resumption of spending on Qdoba.


Q: You’ve had a strategy of opening new markets with the intent to franchise them. How many markets are you “seeding”?

A: New contiguous markets are our target.  AUV’s in these markets outperform new stores in existing markets. Denver could be an example. In Corpus Christi we had an opportunity to show that AUV’s were attractive there and then sell the location to a franchisee.


We do have new markets that are franchise developed. Colorado Springs, Albuquerque…


More challenging to get financing so seeding strategy helps


Q: Health of franchisee system?

A: Very, very good. Growing franchisees. Average franchisee now has 10 units vs. 4/5 units a few years ago. Focus on taking costs out of the business has helped franchisees.


We sold 194 restaurants last year when people didn’t think we could sell 150. The aim for this year is 150-170.


Q: What about franchisee in Texas?

A: We sold restaurants in Texas last year and continue to do so this year. It’s a 20 year deal, not just looking at this year.  These restaurants are projected to provide attractive cash flow over the next 20 years.


Weather has impacted sales in Texas, also lapping reconstruction-post-hurricane sales figures.  Operators in Texas remain positive.


Q: Where will operating income and cash flow go with refranchising?

A: Bringing down G&A cost. Much less maintenance capital going forward. EBIT margins will improve and we’ll give guidance on that in the not too distant future.


Q: If you were 100% franchised, you’d get 5% royalty less 3/4% of G&A, ex rent?

A: Yes but we’d have less G&A.


Q: Level of discounting seems to be moderated in FSR. Any indication of this following suit in QSR?

A: BKC going off dollar double cheeseburger will bring improvement in April


Q: What did you finance last year in terms of the 194 stores and has that changed in the last 7/8 months in conversations with franchisees?

A: 22 million worth of financing support last year.  A “good portion” of that is repaid. 1Q has seen $12m range of support for existing franchisees.  Less requests for assistance as we’ve moved through 2009 and into 2010


Q: Qdoba, how it fits in company.

A: we were looking for a concept with strong consumer appeal. Not geographically concentrated, strong management team.  Fast growing segment.  May look to divest at some point. 


Q: Capex..

A: When we get to 110 figure, we will continue to invest in new restaurants and expect a return on that cash. 


Q:  What will you do with excess FCF?

A: funding new restaurant growth of perhaps another Qdoba-esque acquisition at some point and of course returning cash to shareholders.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.