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The Form 4s related to SHFL's 17.6 million share offering were filed today. While it was nice to see buy side participation by the Board, the CEO, and some other senior executives, there was one notable asbsence. President and Chief Operating Officer Paul Meyer did not buy any stock on the deal. I also heard from some investors that Mr. Meyer was not involved in the deal roadshow. Hmmmmmm.
In the interest of full disclosure, I own shares of SHFL.


Those of you who know me and/or read my portal, you know I like math. I’ve pulled out my old textbooks and broken some chalk but I still can’t figure out how the analysts’ math works on ROI when “I” goes up by 20%. Somehow, with no scope change, projected ROI remains unchanged and is always 15%. Analysts are young these days so they may not be aware that we used to get away with 20% in the good old days. I guess with a low cost of capital, 15% sounds good enough. Oh wait, cost of capital is likely to bust the budget too.

The following chart displays the estimated cost overruns of some of the major casino projects over the last decade. We tried to adjust budgets for EBITDA enhancing scope changes to be fair. The conclusion is obvious. Casino projects rarely come in at, near, or under budget. Possible explanations are numerous: materials inflation – certainly, unfettered optimism – maybe, aggressive guidance – possibly. In any case, remember to make that adjustment in your ROI calculation the next time a new project is announced.


While positive on the long-term outlook for the lodging industry, Laurence Geller, CEO of Strategic Hotels recently predicted a weaker 2009 than 2008. His view is consistent with my 6/22/08 portal posting “IF YOU DO MACRO YOU WON’T DO THESE STOCKS”. Mr. Geller is highly respected and a straight shooter so what are the analysts seeing that is so different? By my calculation, the Street projects a median increase of 5% and almost 10% in revenue and EPS, respectively.
  • Street estimates have come down considerably since my 6/27/08 posting “NOT BEARISH ENOUGH, NOT EVEN BEARISH”. The second chart shows the trend of declining estimates. We applaud the more realistic estimates. However, analysts continue to project positive RevPAR and flattish margins in 2009. Lodgers will be lucky to show flat RevPAR in 2009 which translates into some serious margin compression. So I have to ask again; Are analysts bearish enough?

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Leather: Price Deflation?

During today’s conference call, Coach CEO Lew Frankfort commented that “leather is a little cheaper to us this year than last year” . We set out to try and quantify what “a little cheaper” means in dollars. We think it was a bit more of a benefit than Mr Frankfort suggested.

Securing accurate data for Leather prices can be tricky –we extrapolated the price data on the attached chart from US government figures covering exports of raw (un-tanned) cattle hides to China (the world’s largest importer). We calculate only a modest raw cost increase -roughly 25% since 2002. While the cost of transport and processing have increased dramatically due to rising oil costs and increasing environmental controls for tanners, we’re still looking at around a 10% decline from 2007 peaks.

The US primarily exports hides raw due to the onerous environmental issues attached to operating a tannery. There are so few leather producers operating in the US today that Redwing, the last major domestic manufacturer of leather footwear, owns dedicated tanning facilities to meet internal demand. Interestingly, press reports from China have indicated increased regulation of tanning operations there has led several firms to invest in tanning operations in Africa –notably Kenya.

One note: Much of the finer leather used by producers for brands like Coach are actually of different, higher grades of hide (“wet blue” etc.) than the one charted here. We used the most common grade as our base for calculating the % change since it afforded us the greatest amount of price and volume data depth by far.

Andrew Barber

HBI: Two Words -- Systemic Change

Is it me, or did HBI's CEO just say that there is a systemic change to cost and pricing dynamics in this industry as it will last beyond 2008? Not news to you, or to me. But this is a massively meaningful change in HBI's public tone. Bad news all around. I think that HBI still has meaningful cost levers which will help it take share in such a climate. I'd hate to be Gildan right now.
There's never been pricing power in this space -- so why start now?

America’s Chicken Crisis!

Two chicken processors reported and for the first 9 months of fiscal 2008, Tyson’s chicken segment and Pilgrim’s Pride have collectively lost $263 million. This trend can’t continue.
  • Pilgrim’s Pride reported a net loss from continuing operations of $48.3 million in 3Q08 and a net loss of $193 million year-to-date, primarily as a result of higher feed costs, which were up 41% YOY in the quarter and are expected to be up $900 million for FY08. Something has to change for PPC! The company has cut back on chicken production to increase prices, but reductions have not yet been enough to cover costs. The average breast meat price in 3Q was $1.47 per pound and prices have already declined 10% since the end of the quarter to $1.33 per pound. Management stated that based on current expectations, breast meat prices need to reach $2.15 per pound just for the company to breakeven. That means prices need to increase over 60% just for PPC to cover its costs. Chicken prices are inevitably going higher.
  • Additionally, Pilgrim’s Pride stated that it is taking steps to shorten the duration of its fixed price sales contracts. It is moving away from its previously standard 1-year timeframe to 90 day contracts. Currently, 17% of its sales are being driven by annual basis contracts, but they will expire as of January 1 and the company has no intention to enter into any new annual contracts at that time.
  • Darden and Sonic have both commented about their decreased opportunities to enter into longer-term contracts, resulting in their having to float more of their key commodity exposures. I wrote about the impact this increased volatility will have on restaurant operators’ income statements on June 25, highlighting that it eliminates some certainty to the restaurant industry’s earnings model.
  • PPC management also stated that it is not seeing customers walk away as a result of these new terms, which indicates that restaurant operators recognize that these shorter term contracts are part of their current reality.
Thank you, Walt Disney for the picture of Chicken Little

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