FL: Gravy on Top

Finish Line provided another set of positive data points for the athletic footwear space with the reporting of its much better than expected results. The good news here is, we believe the industry hasn’t really hit its stride yet from a product and marketing perspective.  The benign promotional environment, tight inventories, and category strength in running and toning are the primary reasons why we’re seeing an accelerating trend at retail across much of the space.  However, we have yet to see much from Nike in terms of its product and marketing push- all of which are key to our longer-term thesis that the company is setting up for a three year period of above-trend growth and earnings acceleration.  Along the way (i.e. back to school), we’re likely to see continued strength as product driven demand continues to build.  As a retailer, be it Finish Line or Foot Locker, there is no better way to capitalize on what we believe is a sea change in the space over the next couple of years.


Importantly, Finish Line’s conference call confirmed that at the moment, this is a sector where we can see more than one player post solid sales and margins without it being at the expense of a competitor.  In our view, the single biggest factor in this equation is inventory.  Coming out of 4Q, both Finish Line and Foot Locker reported substantial inventory declines against accelerating (and positive) top line momentum.  FINL reported inventories down 20% against an 8.1% sales increase while FL reported inventories down 7.4% against a 0.6% increase in sales.  As such, we are in scenario that we haven’t seen in quite some time across the athletic space.  Tight inventory, low levels of aged inventory, and consequently less promotional activity.  As we are seeing first hand, this the key driver of ASP increases and quite a healthy scenario for both mall-based chains. 


As it pertains to Foot Locker, it’s important to remember that this is also a company in the very early stages of a major turnaround.  The tailwinds impacting the entire space are gravy on top of what we believe is one of the more compelling opportunities on the long side.  As such, we must be mindful of the separation between a rising tide that is currently lifting all boats and the efforts underway by Foot Locker management to permanently enhance the company’s sales productivity and operating margins.   We still believe the biggest near-term milestone for Foot Locker will come with back-to-school.  This will be our first opportunity to really understand and observe some of the key merchandising, marketing, and store segmentation efforts underway.  Until then, expect the overall demand for athletic apparel and footwear to remain robust, providing substantial support to our thesis, but at the same time reminding us that FL’s heavy lifting is still ahead.  With that said, there were still some notable call-outs from Finish Line’s conference call which we believe are pertinent to Foot Locker and the overall space:


  • Post 4Q trends have dramatically accelerated, with quarter to date same store sales running up 15.5% against a 1.2% decrease in the same period last year.  For reference, Foot Locker mentioned it was tracking up 6% through the very early part of March.  This is the first data point we have gotten in the sector which suggests there is more to be positive about than just easy comparisons.
  • Performance running was a key driver in 4Q and continues to be the leading sub-category within the store.  This is consistent with commentary from FL and HIBB and is fully supportive of FL’s efforts to test and potentially roll-out its RUN concept store.
  • Basketball beginning to show some signs of life.  This is key for Foot Locker, which has a much bigger presence in the category vs. Finish Line.  Basketball has been lagging (likely due to higher price points and lack of product intros), but positive commentary is encouraging.  For Foot Locker, we believe this bodes well for the impending re-acceleration in House of Hoops growth.
  • Finish Line is looking to cull its store base with 30% of the chain up for lease renewals but is not really looking to grow (at least near term) units on a net basis.  Recognizing this is not a growth sector by any means, it’s good to see both major players no longer growing for the sake of growth.  Making efficient use of existing real estate appears to be at the top of both FL and FINL priority lists- a factor which should not be ignored as we consider the potential for margin expansion for both players in the mall. 


Full notes/details from FINL’s call:


Product and Category Review

  • Product Assortment:
    • Leadership position in running, happy with the performance of the running category, high comps and improved merchandise margins, picking the right product to have in doors
    • Toning category is extremely successful and will continue to take full advantage of this trend, believe the category will strengthen throughout 2010 and beyond as brands invest in the shoe
    • Carrying the Best Brands:
      • Footwear: Nike and Puma in running
      • Apparel: The North Face, Under Armour, Brand Jordan
  • Footwear Comps: +10%
    • Running leading way in men’s and woman’s, Toning made a big impact, ASP's for footwear up 7%, strong sell thru at full price for performance footwear. Customer is embracing performance footwear as fashion.  Overall running was the key driver of comps in Q4, Nike continued to be the leader within running. Lightweight models such as Lunar and Free, as well as Air Max and retro-inspired silhouettes performed well.
    • Puma Running came on stronger in Q4
    • Running Comps up double digits
    • Nike Puma and Asics will continue to deliver solid product in 2011
  • Basketball: encouraged by improvement, comps up in mid singles driven by Brand Jordan as well as Nike’s Lebron signature products.  Enthusiastic about basketball going forward. 
  • Toning: Women’s products dominated with Skechers and Reebok, sold through all the Reebok product quickly but are taking necessary steps to get product in stock. Expect to see toning continue to grow in fiscal 2011 as other vendors enter this category
  • Athletic Casual Category: continues to be challenging with comps down mid-teens
    • Men's performed better on a same-store basis compared to women's in Q4.
    • A bright spot was men's Polo launch, which took place late in the third quarter, expect to see continued positive results as they work with Polo to expand and enhance assortment.
  • Kids: comp store sales were up almost 7% for the fourth quarter and were up slightly for the year.
    • Stronger in girls than in boys.
    • Driven by running as Nike Air Max, Puma and exclusive products performed well.
    • Brand Jordan and Skechers Twinkle Toes were also big hits.
  • Softwoods’ comps +9%, apparel and accessories posted solid gains
    • Apparel: worked hard to right size inventory, heavy lifting is behind them.
    • TNF, Brand Jordan, and UA drove the apparel business
    • Licensed products were positive with particular strength in NCAA fleece
    • Expect apparel business to continue to perform well now that they have completed the rightsizing of the inventory and put a strong emphasis on leading brands. The larger gains we experienced upon taking these actions will now level off to a more sustainable growth trend.
    • Accessories: Watches, Sunglasses, Socks
  • Looking Forward:
    • Emerging Channels: Mobile Commerce, evolving with the consumer
    • Light weight running trend will continue to succeed driven by Nike and Puma
    • Basketball’s improvement is encouraging and expect it to continue
    • Month to Date: +15% comps
      • Subtle shift in the mood of the consumer
      • Although the customer is not visiting the malls as much as last year, they are willing to pay for the full price


  • Running: Running success is not an overnight trend of the business, have been working on the category for 12 years.  Have worked with NKE management to take the leadership in the running category.  The product engine continues to flow from Nike, Puma, and all the technical brands.
  • Expenses: Permanent reductions made in 2009, only new costs going forward will be variable.  Still areas of opportunity to go after cost reductions.  Shifting focus from cost savings in 2009 to driving top line in 2010.  Will grow SG&A to support Sales.  Will not need more labor.  Efficiency program more than labor additions in SG&A.
  • March Trends: Traffic trends behind the 15% comp is a little better, flat, clearly big drivers have been conversion.  Inventory is the lowest in the 21 years they have seen.  The mix ends up being the best product due to such tight inventories.
  • Toning: a sustainable business, not seeing cannibalization of other categories (women’s running was strong in Q4). Still too early to tell if there are repeat customers. 
  • Growth: plenty of room to grow profit and sales.  Internet is great. Looking to grow outside of the core of the business.  Have learned from prior experiences and  will use those to head in the correct direction instead of hesitate and be discouraged.  Shareholders should be aware that FINL is working on other avenues outside of the core business to drive growth. Not prepared to discuss these avenues of growth but working on them currently.
  • SG&A: leverage occurs around -3% to -4%, leverage position will come down a bit but still remains at a slightly negative comp.  Absolute dollars SG&A growth will be up if sales are up, down if sales are flat.
  • Long Term Size of Finish Line Store Base: size of the stores is more related to the size and the volume of the malls they operate in.  “A” malls will have larger stores, lower level malls with less traffic will have smaller stores.  Long Term store portfolio depends on the landlords.  Will stay in those 20-30 stores planned to close if the real estate community offers better opportunities.
  • Staying Liquid with Open to Buy: recipe for inventory cleanliness.  Have worked hard on reducing aging inventory as a % of the mix.  Inventory levels are up in running and toning and other successful categories.  
  • Regional Trends: Sales across the country are consistent right now.  Not making up the difference of what they lost in the West, but trends have certainly stabilized.
  • Management: Very Optimistic Group
  • Real Estate: 30% of the store base is up for renewal in the coming year, hope to not close the 20-30 stores.
  • Reaction to Foot Lockers Apparel Renovation: Will stay strong on strategic initiatives, competitors will help drive FINL into a better business.
  • Apparel: real growth came from the men’s apparel
  • Casual Footwear Business: relative to the inventory position, athletic casual segment is part of the strategic reduction. As they focus on the performance side, casual athletic shrinks.  Still focused on the fashion elements of casual athletic.  Much more focused category going forward.  Polo is resonating well with customers in a pure fashion play.  Nike, Adidas, Chuck Taylors (growth slowing down a bit) all offer solid casual athletic product. 
  • Sales, Inventory, Margins: Key focus has been growing sales faster than inventory.  Margin expansion might slow but will continue to improve, but the sales-inventory rate is the key focus.  Still not at the best historic level of inventory turns.  At just over 2.7 inventory turns and have more to improve. 
  • ASP’s: selling more product at regular price.  More runway for ASPs but too early to tell.


Eric Levine



From Josh Steiner's update on housing (3/26):


In the last few days there have been at least three notable positive developments, on the margin, related to housing, and arguably one big negative.


First, California passed a plan yesterday to allow a $10,000 homebuyer tax credit, which would be effective May 1, 2010 and run through December 31, 2010. The timing of the plan is no coincidence - it's timed to begin the day after the planned expiration of the Federal Government's $8,000 homebuyer tax credit. The legislation calls for $100 million to be allocated for first time homebuyers, defined as anyone who hasn't owned a home in the last three years. There is a further $100 million allocated for any buyer of a new, unoccupied home. The initiative, at a total cost of $200mn, will be tacked onto the state's deficit of $20bn. There was only one state legislator who voted against the bill on the grounds that California couldn't afford it. We wouldn't argue there. Gov. Schwarzenegger signed it into law yesterday. A similar program to this one was in place last year, but was exhausted in just four months (March-June). A further positive may be in the cards as well. A separate bill that would have exempted state taxation on forgiven mortgage principal was supported in principle by Gov. Schwarzenegger, but was vetoed because of unrelated riders tacked onto the bill. It is expected that this issue will be taken back up in coming months. For reference, California passed such a law in 2008 that had a two-year shelf life, so this bill is simply aimed at extending a law already on the books, but set to expire.


Second, Bank of America rolled out a plan two days ago, on a very limited basis to facilitate a measure of principal forgiveness. The program intends to keep underwater borrowers in their homes to stem the tide and cost of foreclosure in coming years. Aimed squarely at high-risk Countrywide borrowers with subprime and Option ARM loans who are 60 days delinquent or are current but are likely to become delinquent, and who are significantly underwater (i.e. 20% or greater), the program would enable up to 30% principal forgiveness over five years. For instance, on a $400k loan where the home is now worth $300k, Bank of America would move $100k into a separate, interest-free account, and would forgive $20k/year for up to 5 years provided the borrower remained current. The catch is that Bank of America is only targeting 45k borrowers for principal forgiveness with this program. The program is expected to ultimately forgive $3bn in principal. For reference, the most recent First American Corelogic data shows $801bn in total negative equity represented by all underwater borrowers, so Bank of America's program would address roughly 37 bps of the problem. A step in the right direction, but clearly not enough to solve the challenge.


Third, the White House is set to unveil today a renewed effort to combat foreclosure. Using existing funds under the $75bn HAMP program, the Administration has rolled out 5 key, new initiatives that it thinks will, on the margin, help a significant number of additional homeowners keep their homes. The new programs will be implemented over the next six months. The final details of the program will be rolled out later today, but we provide below the preliminary details.


1. Unemployed homeowners would be given a reprieve of 3-6 months, during which their mortgage payments could not exceed 31% of their income.


2. The government will double incentive payments to lenders in exchange for modifying second liens. This is a small step in the right direction, as second liens have been a major roadblock to effectively modifying first lien mortgages.


3. The government will increase financial incentives for lenders to facilitate short sale transactions.


4. Similar to the Bank of America announcement detailed above, the government will provide financial incentive for lenders to forgive principal on loans with LTVs greater than 115%. As proposed, the plan would call for lenders to forgive this debt over a three year time period (vs. BAC's 5 year time period). It's unclear what the offsetting financial incentive from the government will be.


5. The government will role out an FHA refinance program, whereby borrowers can refinance their loans up to 100% LTV with the FHA provided that lenders forgive the balance above 100%. For loans where there is a second lien, the FHA will permit refinancing up to 115% on a CLTV basis.


On the flipside, the OCC and OTS released a joint report yesterday with updated performance reporting for loans modified under the HAMP program. The conclusion is that re-default rates remain quite high, though they do seem to be improving with more recent vintages. For instance, 61% of loans modified in 3Q08 had re-defaulted within 12 months. For comparison, loans modified in 4Q08 had a 58% re-default rate after 12 months. On a shorter-term duration, six months out from the quarter in which loans were modified, re-default rates have fallen from 48% for 3Q08 to 34% for 2Q09. This clearly represents progress, but that level of re-default rate suggests that there are ultimately a high proportion of borrowers that are still either willingly (strategic) or unwillingly (job loss) re-defaulting. Principal forgiveness initiatives, should they gain further momentum as we think they will, should help to further improve success on this front, as will generally improving economic conditions.


On the negative front, Bernanke's testimony yesterday raised the risk of the Fed potentially selling some of its Agency MBS paper. We've written in the past about the risks we think exist from the Fed exiting its $1.25 trillion Agency MBS purchase program at the end of this month (i.e. next week). Clearly the Fed would add insult to injury if, on top of removing their $1.25 trillion bid, they also added significant supply to the market.


Conclusion. On the margin, there have been several positive developments in short order for the housing market, with one potential negative. We are currently working on a larger piece looking at the upcoming challenges facing the housing market, and we will explore these themes in greater detail in that report.


Joshua Steiner, CFA


The Macau Metro Monitor, March 29th, 2010



According to The Times, prefectures across Japan are investigating the feasibility of ending their bans on casinos, but only for tourists. In Japan, betting is legal on horse, bicycle and power-boat racing. There is also a national lottery and the country’s highly-lucrative 14,700 pachinko outlets. Las Vegas Sands has expressed interest in the Japanese market.



The Macau government today revoked Viva Macau’s air operator certificate, following a row between the airline and Nam Kwong Oil, who refused to supply any more fuel to its fleet. The government commented, “Due to Viva Macau’s failure in fulfilling its commercial responsibilities and repeated infringement of public interests, the Macau government, after very careful consideration of the negative impact to Macau’s tourism industry, requested Air Macau to terminate the sub-concession contract with Viva Macau in order to protect public interests. Air Macau consented to the request of the government." The government has meanwhile tried to rebook stranded passengers on alternative flights, while helping Macau residents stranded abroad. Total number of people affected by the end of Viva Macau’s operations is still unclear.

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Brinker Analyst Day – March 2010, Dallas Texas


On Thursday after the close, Brinker announced the sale of its On the Border concept and expects the transaction to close in late June, if not earlier.  Proceeds are $180 million and OTB generates about $330 million in revenues.  Management anticipates recording a gain on the transaction at closing.


Management also revised guidance upward on Friday:

  • $1.40-$1.44, excl MG
  • Better comps with decline of (1%)-(2%) vs. (2%)-(4%)
  • Cost of sales at 28.5% vs. previous guidance of 27.5% (the increase is pro-forma for OTB)
    • Reflects the impact of promotions and OTB sale
  • Interest expense down $5 million
  • $50 million payment on term loan will reduce balance

Despite the downturn, EAT now has the opportunity to create value for shareholders over the next five years.  While nothing comes easy, I like the direction the company is headed.  Brinker is doing to its Chili’s store base what Applebee’s can’t, given DIN’s excessive leverage.   


Brinker’s analyst meeting focused on the company’s ability to move to the next level from an operations standpoint.  As the company has navigated these turbulent times, it has disposed of non-core assets, refranchised a significant amount of stores and reduced leveraged, while returning free cash flow to shareholders.  More recently, Doug Brooks, CEO, hired and promoted talented people to the senior leadership team to help implement a plan to reinvest the company’s substantial free cash flow back into the business.


The goal is to grow EBIT margins by a net 400 bps (or more) and double EPS in 5 years. 


The bulk of the margin improvement will be accomplished by using new technology in retrofitted kitchens across the company, allowing the company’s kitchens to be more efficient. 


Notes and commentary on the analyst meeting are below:


Some of the margin and growth drivers to focus on for next five years: 

  • Chili’s remodel program - $300,000 per store
  • Kitchens being modernized and made more efficient - reduce ticket time by 5 minutes
  • Doubling the size of international presence to take advantage of demographic trends
  • Expanding Maggiano’s reach

A look at the international opportunity:  The goal is to get to 425 restaurants by 2014 from the current level of 218.  Importantly 70% of the unit growth is locked down with franchise agreements in place. 

  • Opening 95-105 in 2011 and 2012

EAT opened 50 restaurants outside the U.S. in 2009 - most ever for Brinker or any casual dining brand.

  • Partnership with CMR in Mexico will be expanded
  • Already opened 19 JV restaurants there
    • Largest international market

Overseas, the casual dining market is where the U.S. market was 20 years ago:

  • Middle class expanding
  • Need for convenience
  • Buying patterns becoming more sophisticated
  • Making choices based on quality


Potential markets….

  • The U.S., U.K., Japan, and Germany are more mature
  • BRIC’s are at the bottom provide more where the US was 20 year ago.  On the BRIC side, there is an opportunity to take advantage of brand attachment

Only pursuing markets that can sustain more than 5 markets:

  • Agreed franchise agreements in India and Russia for 25 units in each market
  • 2 franchises open in India

Franchise partners are rigorously vetted in terms of financial stability and reputation.


Tailoring business for local tastes:

  • Business doesn’t depend on expats
  • Don’t serve pork in Middle East, serve more vegetarian options in India

Real Estate costs are higher in international markets.


Investment costs are calibrated according to volumes of each restaurant to maximize volume.


EAT can penetrate markets quickly and profitably seen as QSRs have laid the roadwork in terms of supply chain:

  • Model provides a compelling business model with high margins
  • EAT knows how to maintain strong franchise relationships
  • Doubling size of international business by end of FY14



Carin Stutz


Carin is the operators’ operator at EAT.  As such she is in charge of the biggest part of the Chili’s turnaround.    She is empowered to reengineer kitchens and operations to innovate and improve margins.  She views the restaurant as two distinct operations:


(1)    Retail business

  • What guests see
  • New initiatives on retail side of the business

(2)    Manufacturing operation

  • Food
  • Quality
  • Process hasn’t changed much since the segment began to grow significantly
  • Equipment, flow, and process have remained relatively unchanged
  • Shoehorning new products into kitchen
  • Menus getting bigger, consistency challenged

The idea is to introduce new technology into the kitchen that will make it faster and more productive.  A comparison to QSR was used where the efficiencies in the back of the house have not been as technologically advanced. 


Use of technology and back-of-house processes will give 300 of 500bps improvement EAT is seeking to achieve.

  • Cooking technology
    • Accelerated cooking to increase speed in kitchen
    • Consistency in proteins
    • Overall margins (lower labor)
    • Improved workflow
  • Today’s station based kitchen is being adjusted
    • Retrofit of kitchen, menu items will be prepared more sequentially to stop cooks having to cross kitchen
    • Allows more efficient staffing
    • Building kitchens from scratch, reduce overall space requirements
    • Most efficient operating model
  • New POS and back office systems
    • Enable EAT to better understand exactly what customer wants
  • Kitchen Display System (should be able to drive more than half of the margin improvement)
    • Tool’s in place and working well
    • Allows for significant through put enhancements
    • Improved efficiency of kitchen staff
    • Reducing ticket time by 5 minutes, delivering a faster yet appropriately paced experience for guests


Where the 300-400bps will come from:

  • Higher execution, fewer voids and therefore better sales
  • Inventory management
  • Fewer labor hours
  • Easier to use equipment
    • Possible better wage rates




The time line here is very important to mapping out the success and when is expected to hit the P&L  Currently EAT plan to have KDS process improvements in place by start FY11, POS by 2QFY11, retro fits of kitchens by FY2013.

  • Closing for less than a day for retro fits
  • No closure for POS, KDS (should be able to reduce some technology related G&A)

New tech + lower investment costs +elevated margins = effective business model



Steve Provo, President at Maggiano’s



  • Maggiano’s “ain’t no Ringo”
  • Maggiano’s is a very strong brand, in a segment of industry that is still growing post recession
  • Poised for aggressive expansion

45 restaurants, 21 states, 1 international.


Maggiano’s is doing $8 million dollar AUVs.


Maggiano’s is a 20 year brand with three points of differentiation:

  • Is it real?
  • Is it truly not replicable?
  • Can you make money?

Maggiano’s ability to handle large parties is a differentiating characteristic.  Banquet facilities can handle, and feed, 200 people.  All the differentiation in the world is meaningless without delivery.

  • External survey of casual dining - Maggiano’s outperforms on taste, hospitality, and is getting better
  • Internal survey - Last two years have seen significant improvement



  • Business is not as strong as brand
  • 1/3 of units built from 2002-2007
  • 74% only use Maggiano’s once per year or less
    • Birthdays, anniversary, proms
  • 30 times a year, average casual dining
    • Only 1 or 2 Maggiano’s occasions per year
  • Need to move beyond special occasions



  • Marketing strategy being changed
  • Email, direct mail, and social media
  • Very strong returns on these marketing strategies
  • Far away from Nieman Marcus type returns
  • With loyalty and average check, it is possible to emulate



  • Today and tomorrow
    • Order on of the pastas and you take home another one for free
    • Strengthens differentiation
    • Value strategy – pasta is lowest food cost item
    • Mixed at 20% on average in testing and food costs declined
    • Doubled guest perception
    • First time in 19 years the primary reason was no longer a birthday
  • New promotion
    • Meal for two
    • Price is $40, shared appetizer, two entrees, shared dessert
  • Loyalty program for preferred guest
  • Refer a friend program
  • Targeting admins and party planners
  • Private dining sales and corporate has returned to sales growth

Returning to new restaurant growth is not about sales alone.


Variable cost structure needs to improve:

  • Attacking cost of sales
  • Waste-management process
  • Testing baking bread again
  • POS

3 closest competitors are PFCB and CAKE:

  • Both have 3 times the numbers of units
  • Italian bigger than Chinese, private dining capabilities are superior
  • High end and corporate guests that are leading
  • Next 15 years are about the baby boomers


Wyman Roberts - President of Chili’s


A lot of negativity around bar and grill.  However, that is where the game is, that is where people will continue to gather with family and friends.  Maggiano’s lives and dies by what it does: make a promise and then deliver, which is where the company is going with Chili’s - everyone knows Chili’s.

  • 4.2 billion dollar business globally
  • 1,500 restaurants
  • Strong AAV – 2.8 million
    • Company domestic are at AAVs of over 3m
  • 55% company domestic, 32% domestic franchise, 13% int’l franchise
  • Maintain a lot of share (9% of bar and grill) of market
    • Competitors are vulnerable, chains should have advantage over independents also
  • Scale, brand
  • National network presence
  • Chili’s and Applebee’s are the only ones that it continually works for (national network, effective business model, marketing all in sync)
  • Affordability
  • Good food
  • Quick meal
  • Powerful brand


Customer survey has been going on for decades and Chili’s has grown:

  • 1999 Chili’s still a growing brand
  • Last year Chili’s took a hit
    • Almost all brands took a hit
  • Leadership and operational excellence needs to sustain vision held with partners to get desired results


Brands in bar and grill can be schizophrenic:

  • Promotions and specials can send contradicting messages with no clarity of focus
    • 5 dollar sandwiches, high price steaks
  • Best CD brand has boring marketing
    • Bore you with marketing, wow you with consistency and delivery


Chili’s aligns with older and younger demographics very well:

  • Not barbelled, not skewed
  • Chili’s skews more to higher income demographics
    • Less need for these people to eliminate occasions in casual dining

Why do people come?

  • Don’t want to cook
  • Night out
  • Want to unwind with friends
  • Treat myself

Focusing on the “not cooking tonight” category

  • Great for Chili’s
  • Handheld food
    • Burgers, tacos, quesadillas, chicken tenders


Advertising needs to gain traction with social media:

  • National media needs to be complemented with electronic marketing
  • Bennigan’s never maintained relevance

***Better food***

  • Upgraded burgers
    • Better beef, better preparation, fresh product
  • Ribs
    • Elongated smoking process, will fall off the bone
  • New tacos
  • New pulled pork sandwich
  • New soup
  • Caribbean salad

Difficult sometimes to get permission to move forward from the core customers.

  • Have received positive feedback from customers


  • Shrunk menu from 12 pages to 8 pages
  • Reduce time, greater focus

Remodel program

  • Ignite revitalization of the brand
  • Fleet isn’t that old
  • A lot were built in the last ten years
  • Target budget for first remodel opening this summer is 300k
  • Getting the chain back to a position where they can start thinking about growing again

Business model

  • Casual dining in the last two years has focused on deals
  • 3C has been a bold strategy
  • Brand building message was incorporated with the deal

Mix lowered in promotional package

  • Goal is to become less dependent on mix
  • Focus on quality and freshness
  • Using promotions as a key messaging platform

Competitors driving core customers but Chili’s has been focusing on exposure and changing how people perceive the brand versus competition.



  • Make sure that staying focused and resonating in key markets
  • Use media and focus it, use scale, TV, electronic, direct mail
    • Bringing Maggiano strategies to Chili’s
  • Less aggressive promotions
    • Will, however, remain competitive
    • MRT and RUTH would never have anticipated the promotions they are doing right now
    • But the goal is to build a strong brand and not be too promotion-focused
  • Seeing a $5 increase on to-go check because of new online ordering program
    • Prompts customers to have a dessert etc.
  • Virtual gift cards
    • Go online, customize gift cards, and print it out
    • No need to ship, passes a major hurdle for online gift cards
    • Grew gift card sales this year, even in this economy

Looking to improve margins 300 bps target in next few years in “manufacturing” process - Looking at front of the house, 3 benefits:

  • Better guest experience
  • Costs less money, less ancillary support
  • Teammates make more money


  • “Big 6” franchisees
    • Meet quarterly, share P&Ls, best practices and initiatives


  • Reducing energy costs
    • Lightbulbs – changing to LED bulbs
    • Return is instant, customer looks better

Hoping to be focusing on new unit growth in the not-too-distant future



Chuck Sonsteby - Financials


Strengthened business model while improving balance sheet


  • Goal wasn't merely survival
  • Rationalized asset base
    • Prepared for success with improving macro environment
  • Closing 59 under performing restaurants
  • Constantly evaluating portfolio

Returning cash to shareholders - from 2004 to 2008 the share base shrank by 37%

  • Paid down 295m of long term debt in a difficult sales environment during downturn
  • Improved margins without compromising quality

Introduced new items that favorably impacted cost of sales that, in checking with guests, did not negatively impact the brand or the experience:

  • G&A held steady at 4.5% of sales
  • Maintained dividend while others did not, actually increased it
  • Strong free cash flows
  • Cash of 110m
  • Free cash flow continues to grow
  • $237m in FCF this year

Annual cash flows for chili's restaurants that have been open for at least a year

  • None is negative
  • Underlying asset base is very healthy
  • A lot of earnings power left in the system

Signs that the macroeconomic environment is improving

  • Need to focus to maximize earnings stream
  • How can we get margin improvement without taking away from experience?

Trend in operating margins?

  • Average annual sales hasn’t changed much in last few years
  • Operating margins have decline significantly since 2004
  • Biggest driver of this increase is labor
    • Wages and wage hours have been increasing over time
  • There is a lot of room for progress
    • Need to improve in the kitchen and provide a better product and experience
  • More consistent food and faster service while eliminating some kitchen positions and inefficiencies
  • Operating margins will improve 300 bps with 100m in investment
  • ROI of over 50% after tax, payback in two years

Labor has always been cheap in the U.S and technology has been expensive

  • The lines have now crossed

Credit markets opening up


Capex in 2011 will be 125m, 2012 will be 160m

  • Cost of 100 bps of depreciation that will offset 500 bps of improvement

Not anticipating much investment in domestic market until it can be justified

  • It will be some time before capital will be committed to domestic growth

Use of free cash flow

  • Dividends and share repurchases
  • 27% increase in dividends, as announced this morning

Authorized 250m of share repurchases

  • Total authorization of 300m+

Maintaining investment grade rating is crucial to maintain ease of access to capital


Existing term loan due in October this year

  • Will pay down 50m in 4QFY10

Expecting to refinance term loan over three-to-five years

  • Provides additional liquidity without needing to draw down on revolver

Impact on EPS

  • Capital investments
  • Proceeds from OTB

Full year guidance will be given in August on 4Q earnings call.


Long-term growth model - 10-12% EPS growth per year:

  • Operating margin expansion accounts for 1%
  • International and domestic growth development  accounts for 2-3%
  • Share repurchases accounts for 3-4%
  • Same-store sales accounts for 3-4%





Q: Expound on the GEM guest satisfaction scores at Chili’s.

A: Guest scores at Chili’s are mixed.  Some solid improvement and scores that typically align with traffic growth, like value. Also saw pressure in operations around other scores, like pace. The speed and the pace issue came home to roost for us.

Got pushback from people who didn’t like change but slowly people are starting to move back up.


There hasn’t been much reduction at restaurant level, in operating cost. Cost of sales, and labor, have not been significantly cut. The new menu improvement didn’t cut portions.



Q: Understanding 300 bps…

A: A lot of room to improve was observed. Burger cooked in 7 minutes, shouldn’t take till 15 minutes to deliver. In KDS, instead of using it as a ticket system, now will be used as a throughput tool.  New kitchen and cooking equipment. 



Q: Refranchising?

A: Going to read an analysis the company carried out before we get back into further refranchising.



Q: 300 bps…are incremental benefits a couple of years out? What is the timeline?

A: You’ll see it step up a bit. 2011 before we start to see progress.


Building restaurants with new technology in place in international markets, like in Mexico.  In December, did a full mock up. Could produce up to 200 plates per hour. Went from eight cooks down to five. Back to front manufacturing process is being streamlined effectively. The cook times are significantly faster. In the first month, month and a half, the cook times are impacting the front of the house.


Another opening in May with that technology and another in July.



Q: Detail about Mexico and 5 minute time vs restaurant itself?

A: Technology helps to cook food faster. Medium rare burger will be the same every time. Engineering the guest experience.  It does cook the product faster.



Q: The online ordering system, a 5% increase…percentage of online vs to-go business?

A: Without any marketing, above 5% of to-go are already using online where available. The 5% impact is significant. Don’t want to get into too much detail.



Q: BPS improvement, when it will take, plus or minus for OTB, comps?

A: Assumption for margin expansion is on an apples to apples basis, applies to chili’s. If you look at today’s release vs comparable quarter, the difference is about 20 cents per share. On discontinued operations for OTB, it does not include shared cost, cannot break out anything but directly attributable costs for OTB.



Q: G&A leverage coming from OTB deal?

A: Has not been determined as yet with deal not being closed.



Q: 400 bps is as reported, not excluding OTB?

A: Yes.



Q: Implicit SSS number included in assumption?

A: Between 1% and 2%.



Q: Increased profitability as scale grows in global business?

A: Anticipate that to be quadrupling in size, in terms of where we are today.



Q: Return on investment?

A: 15% return on gross investment is the aim while holding the topline. That’s a low target but as volume grows we see returns get very substantial: similar to that of a Chipotle.


Looking at more JV opportunities.



Q: More detail on remodeling program versus the one you did in 2007?

A: Expecting a return…franchisees won’t invest unless it’s worth it. They keep us honest.

Versus the one a couple of years ago, this remodeling effort is clearer as to what’s going to revitalize the brand and drive traffic. We saw traffic improvement with the last remodel.



Q: The Maggiano’s consumer demographic vs competitors?

A: High end casual dining guests do have more of a population of every day guests. Sliver of population use Maggiano’s regularly. Our guest base are generally more affluent and are heavy users of the category. 



Q: How do you view the business in a couple of years?

A: We can drive sales higher but there is a lot of work to do and it is a choppy environment out there. Comps at a 1 or 2% in the shorter term.



Q: Investment and returns…

A: Kitchen technology will drive 300 bps of margin improvement. 100m of investment.

Reimage program is more modest, looking at 18m in first year and 35m in the second.  They are still looking for 15% ROI.



Q: How will you strategize reinvestment and reimage based on profitability of store base?

A: Benchmark is 300k. Will fluctuate depending on whether there is a need, whether it can be afforded.

It’s going to be done case by case. From a marketing perspective we would like to bring the message from market to market, although that’s easier said than done.



Q: Portion and price…

A: Grain based proteins will be up, will have price uncertainty in that regard. There is a connection between commodities and the topline and economy. Escalating commodity costs generally mean escalating sales…



Q: How is the impact of healthcare imbedded in labor line?

A: Trying to understand how it will impact, just like everyone else. Reconciliation bill got passed. Brinker covers students on policy and no preexisting conditions so short term no incremental cost. Everything we’re talking about from remanufacturing and remodeling puts more pressure on us to make effective impact on the operating margin.



Q: Same restaurant sales…

A: Still a company with multiple brands. Our focus is on getting better before getting bigger. Two differentiated brands right now. Iconic brand in Chili’s, have to reposition it in the market. Italian brand is very strong. Down the road we will have more businesses.


Weekday night and lunch business, banquet business coming back.  Chili’s is choppier; consumer confidence is still bad.




Howard Penney

Managing Director




  • Gaming revenues grew 21.7% to HK$34.1BN (US$4.4BN) and Adjusted EBITDA increased 41.8% to HK$2.27BN (US$293MM). If calculated on a US GAAP basis, EBITDA margin would have been 10.8%.
  •  In 2009 SJM's overall market share gaming revenue rose to 29.4% from 26.5% in 2008.
    •  Share of Mass market table revenues was 40.7% and SJM's share of VIP gaming revenue was 25.8%.
  • VIP table revenues accounted for 58.8% of total gaming revenues. At Dec 31, 2009, SJM had 320 VIP tables with 30 junkets compared to 180 VIP tables with 40 junkets at the end of 2008.
    • Average net daily win per table increased to HK$229,536 (US$29.6K).
    • RC Volumes increased 29.8% y-o-y to HK$718.8BN
    • Hold rate decreased to 2.78% in 2009 from 2.88% in 2008
  • Mass market revenues accounted for 38.3% of total gaming revenues in 2009. At Dec 31, 2009, SJM had 1,404 mass table, including 249 new mass tables at Oceanus and 99 mass tables at Casino L'Arc, compared to 1,154 mass tables at Dec 31, 2008.
    • Average win per daily table increased to HK$29,978 ($US 3,866)
  • Slot machine revenues comprised of 3% of SJM's total gaming revenue in 2009. SJM had 4,567 slot machines at year end, compared to 3,867 last year.  The increase was mainly due to the addition of 521 slots at Oceanus and 383 slots at L'Arc.
    • SJM operated slots in 15 of its casinos and 4 slot halls.
    • Average win daily per machine increased to HK$3,955 (US$510)
  • Casino Grand Lisboa Adjusted Property EBITDA was HK$1,654MM (US$213MM) with an EBITDA margin of 17.5% (or 25.8% if prepared on a US GAAP basis) 
    • Daily win per Mass table increased 23.6% to HK$35,908 ($4,630)
    • Net win per VIP table increased by 12.9% to HK$329,905 (US$42.5K)
    • Net win per slot grew 27% to HK1,241 (US$160)
    • "During the year two VIP promoters relocated from Casino Grand Lisboa to satellite casinos, and in October 2009, 16 new VIP gaming tables were added to the 36th floor of Grand Lisboa. After October 2009 the property’s VIP gaming revenue increased, and Casino Grand Lisboa contributed $22,974 million in VIP chips sales in the month of December 2009, or 32.9% of the Company’s total VIP chips sales for that month"
      • We understand that this is where SJM is offering a 55% payout to junkets in return for absorption of certain costs
    • Average daily visitors were 26,241
  • Casino Lisboa contributed gaming revenues of HK$9.4BN
    • VIP operations accounted for HK$7.76BN and RC VIP volume of HK$290.2BN
    • Average VIP win per table of HK$347,141 (US$44.8K)
    • Mass market revenues were HK$1,630 and slots revenues were $27MM. Average net win per mass table were HK$30,942 (US$3,990)
  • Casino Jai Alai & Oceanus contributed gaming revenues of HK$681MM
  • "During 2009 SJM obtained more attractive terms in revised service agreements for its satellite (third party-promoted) casinos, and opened three additional satellite casinos: Casino Jimei, Casino Lan Kwai Fong Macau and Casino L’Arc Macau."
  • CAPEX projects:
    • Grand Lisboa: The 2 additional VIP floors are scheduled to open with 31 tables in 4Q2010.
    • Lisboa: Will renovate certain mass market and VIP gaming areas in 2010
    • Casino Jai Alai & Oceanus:  In April 2010 they will open a new set of escalators leading to the overhead walkway to Casino Oceanus from the ferry terminal. Later in the 2010 SJM will open a second walkway connecting Oceanus to Jai Lai.  Subject to approvals, SJM will also commence renovation plans at former Casino Jai Alai premises.
    • Longer term plans for 2 sites on Cotai:
      • 10,000 square meter site directly across from LVS's convention center
      • 73,856 square meter site adjacent to the Macau East Asian Games Dome
      • No timeline - but they are taking a wait and see approach - want to see how 5 & 6 do.


  • Dividend of 9 cents per share was recommended by the Board and will be considered at May's Board meeting
  • Opened/ Reopened 4 casinos in 2009
  • Improved operational efficiencies, only increased employees by 300 despite large gaming increase
  • They are very optimistic about the future
  • Will renovate some part of Casino Lisboa and install some IT and player tracking systems. Will also outfit more floors of Casino Grand Lisboa for additional VIP tables
    • BYI is installing the mentioned tracking systems


  • Oceanus is ramping up nicely using their yield management systems. Target is 20k win per table and they believe they will hit that.  The initial ramp was slow.
  • New service contracts with promoters clearing 5% net share of gaming revenues. Have 13 to 14 of the 3rd party casinos on the new form of contracts.  New contracts allowed them to increased EBITDA by HK $500MM
  • Will start breaking out quarterly numbers going forward and provide more disclosure
  • Old Lisboa is making positive EBITDA and the promoters casinos are also positive EBITDA contributors in 2009
  • Don't think that the table cap will have much of an impact on them. They don't plan to add more capacity over the next 3 years. They can always reshuffle their tables to increase their efficiency
  • Would they consider going to Cotai?
    • Taking a wait and see approach on Cotai
    • Want to see the timing of 5 & 6 and how well it does when it opens
  • Given the liquidity in available opportunities in Macau they will continue to hold a lot of cash
  • L'Hermitage?
    • They have a strategy there.  Its built to lease but they aren't planning on doing anything there imminently
  • Commission rate that they are paying to junkets
    • EBITDA margin was 17.7% in 1H09 and 17.5% for FY meaning that they got no leverage in commission caps
    • Not a VIP business at Lisboa - increased the VIP mix there - and therefore decreased the margin
    • Moving forward if they continue to expand VIP as a % of total their margin will be impacted
  • Wouldn't assume that just because of the table cap that SJM won't be building anything new over the next 3 years. They have 1,700 tables out of 5,000 or so in the market. If they want to open something new they can reshuffle their tables
    • Pursing the Portuguese school site next to Grand Lisboa
  • EBITDA at Grand Lisboa going forward? In 2010 - VIP has been the source of growth in the market, and that growth comes at a lower margin, though still additive. So margins will be down in 1Q2010 y-o-y.
  • Will they continue to payout their historical payout ratio of 50% 
    • Yes - for the time being unless they have a very strong financial commitment to make
  • Hard call to say how VIP and general Macau growth will trend for the rest of the year.
  • Why report quarterly results?
    • BC their competitors do it and HK will move to a quarterly system within the next few years
  • Don't know the impact of tightening measures in China on the rest of the year.  Don't see this level of business activity as a bubble. Have no idea how the rest of the year will grow.
    • China says GDP growth will be close to 8% and thinks that Macau will do a little better
  • Minority interest is all Ponte 16
  • What is driving this huge growth in VIP business. 
    • Think its money supply - there is lots of cash floating around... you can put your cash in the bank or lend it to your junkets to lend out to gamblers... and make a return that way
    • Thinks that the government has continued with the loose monetary policy
  • Risk of the government clamping down on growth
    • China has not changed the visitation scheme.  China wants a rotation of visitation vs. operators just tapping the same players repeatedly
    • China said that they will continue with monetary easing and that should continue to benefit them
  • CoD hasn't generated the level of business that many expected - so they are still taking to a wait and see approach to Cotai (in regards to the site across from LVS's convention center that they were looking at developing at some point in the future)

Aussie-Rules Economics

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

-F.A. Hayek


Either the Reserve Bank of Australia’s Chief, Glenn Stevens, has it really right these days or he is setting himself up to get this really wrong. Economics is not a science of laws. After all, as American historian Ben Bernanke recently told Congress: “Monetary policy is an art.”


It’s no secret that I am fond of Mr. Stevens ability to stand outside the political arena in making tough monetary policy decisions. He has raised interest rates multiple times since the narrative of a Great Wall Street Compensation Depression began. In doing so, he has actually seen the Australian unemployment rate drop and domestic consumption rise.


No, these aren’t Japanese or Americans style policies. These are Aussie-Rules Economics, mates. In Australia, the man who runs the place isn’t on 60 Minutes or writing Op-Eds for the Consensus Street Journal either. Glenn did his FIRST television interview last night since being appointed head of the RAB (he was appointed in 2006). Rock-star member of the Global Bubble in Politics this man is not.


When you read his quotes, consider them within the context of Washington’s current buy-in to government bailout Keynesian economics:

  1. “It’s not wise to leave interest rates right down at rock bottom any longer than you need”
  2. “It would be not doing people any favors to have a prolonged period of very low rates and then hammer them unexpectedly”
  3. “I think it is a mistake to assume that a riskless easy guaranteed way to prosperity is just to be leveraged up into property… It isn’t going to be that easy.”

You’d think with a radical hawk flying around the East side of this world like this that his stock market would be collapsing? Or would you? What is the best way to measure a country’s long term health anyway – by the recent up or down tick of its stock market? How about the strength of its currency; its bond market; or its international credibility?


Maybe I have a bias towards Glenn Stevens because he obtained his Masters in Canada (University of Western Ontario). Maybe I’m just a stickler for getting a rate of return greater than zero on moneys I have in a US Savings account for my children. Heck, maybe I’ll go hire another 30 people during the next economic downturn without government support if I actually generate some fixed income on those savings!


These are fascinating times by any economic measurement. I often wonder how our accomplished historians running on fear-mongering US politics think about where John Maynard Keynes’ fame came from – challenging the bureaucracy of Perceived Wisdoms that were born out of the last mega-cycle of government excess (the 1920’s in Britain).


Too much to think about on this rainy morning in New Haven. That’s a good thing, but I need to give you some macro meat to chew on in the meantime. Shifting gears, here’s where our Hedgeye macro lines washed out into last week’s end:

  1. The Buck Breakout continued to the upside – the US Dollar Index was up another +1.1% last week, taking its rise since the late November lows to +9.4%.
  2. The Euro was oversold again on the news of another lagging indicator (Portugal’s debt downgrade) – my immediate term risk management range remains 1.33-1.36.
  3. The CRB Commodities Index closed down another -1.8% on the wk and remains below my intermediate term TREND line of 275 (interest rates and US Dollar up hurts).
  4. WTIC Oil finally broke my immediate term TRADE line ($80.78); we sold out of our 3% position in Oil in the Asset Allocation Model on the breakdown.
  5. Volatility (VIX) in US Equities rose +5% on the week, but the VIX remains broken across all 3 of our investment durations (TRADE, TREND, and TAIL).
  6. 2-year Treasury Yields continued to breakout to the upside (we call this the Rate Run-up); the long term TAIL line of resistance at 0.96% is now support.
  7. 10-year Treasury Yields continue in what we call a Bullish Formation (bullish across all 3 investment durations); immediate term TRADE support = 3.71%.
  8. 3-month LIBOR continues to rise 1 basis point at a time and now stands at 0.29%, up +16% from where that reference rate was at the beginning of the month.
  9. 10-year swap spreads went negative for the first time (by 10 basis points); this means said ‘AAA’ rating of American finance is finally under attack by the quants.

On the calendar this week you have 3 big factors to proactively prepare for: the end of the Fed’s MBS bailout program and month/quarter end for the asset management industry on Wednesday; then the US unemployment report on Friday.


I am thankful that US Congress has gone to recess until April 12th. It will give me less morning news-flow to read that saddens me. Aussie-Rules Economics are making me feel better already.


My immediate term support and resistance levels for the SP500 are now 1157 and 1173, respectively.


Best of luck out there today,



Aussie-Rules Economics - Pic of the Day