• run with the bulls

    get your first month

    of hedgeye free



Solid EBITDA and EPS out of PENN this morning.  Revenues were a little light but that should’ve been expected, particularly with Majestic out there recently calling for PENN to miss.  Margins were much better than we thought which drove the positive $5.5m and $0.09 EBITDA and EPS, respectively, variance from our estimate and we were higher than the Street.  As we suspected, management’s 2010  guidance of $1.00 was too low as they raised full year guidance to $1.13.  Smartly, they did not raise near term expectations too high as they guided Q2 near consensus EBITDA of $141 million.





"Our $883 million planned share of investment in facilities in new markets is expected to deliver attractive EBITDA returns based on several factors, including a first mover advantage in Maryland, the lack of nearby gaming alternatives in our Ohio markets and our focus on matching capital spending to the size of the addressable adult population bases and gaming tax rates.  We believe that by prudently managing our property portfolio and competitive positions in current markets while simultaneously pursuing a range of new opportunities to significantly expand our operating platform and returns, Penn National can deliver significant growth as the economy and consumer spending rebounds which will in turn create new value for shareholders."


- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming




  • Weather impacted several of PENN's properties
  • PENN is implementing strategies to strengthen margins in the current environment through a corporate and property level focus on effective marketing programs and spending, other cost reductions, and staffing rationalizations. However, until revenues begin growing they won't be able to attain prior level margins
  • PENN repurchased 225 shares, or $22.5MM face value, of the Series B Redeemable Preferred Stock at a substantial discount.
  • Guidance changes:
    • One less month of table games at WV
    • Addition of 4 months of table games in Pennsylvania and two months of operating results from Hollywood Casino Perryville
    • $2MM of additional pre-opening expenses
    • $3.1MM of additional D&A expense with $52MM to be incurred in 2Q2010
    • $1.2MM of additional stock comp expense, with $6.8MM to be incurred in 2Q2010
    • Higher blended tax rate of 45%
    • Lower share count
    • 2Q 2010: NET REVENUES - $588.3MM, EBITDA - $141.5MM, NET INCOME - $27.2MM, and DILUTED EARNINGS - $0.26 EPS
    • FY 2010: NET REVENUES - $2,406.4MM, EBITDA - $563.0MM, NET INCOME - $107.7MM, and DILUTED EARNINGS - $1.00 EPS



  • CEO comments--quarterly results are "okay"
  • Focus on improving on margins and on construction/new development pipelines
  • Bad weather attributed to relatively weak performance at Lawrenceburg and Charles Town
  • Hard to say any changes in trend in consumer behavior


  • Pennsylvania casinos--weather impact of few million dollars in February; "clean revenue quarter" for Penn National
  • Update on Ohio referendum: confident in approval of address change; May 4 election--optimistic
  • incremental EBITDA for Pennsylvania and WV
    • tables games original expectations is being met; will take some time to stabilize table games in order to see any results.
    • April weather has been decent, maybe too much sun
  • Mississippi/Louisiana--lot of softness in the region, not many signs of recovery - last year these were the strongest regions
  • Unconsolidated affiliates-- Ohio and Kansas JV arrangements
  • Station's assets--looking at it but Las Vegas locals market is still a regional opportunity.  Thinks BYD's bid is high
  • Hold High-yield bonds of other gaming companies?
    • Small amounts kept
  • Maine table games possibility--efforts have been futile at this time, hopeful for new legislation in November
  • Margin improvements in guidance?
    • discontinued marketing programs will impact revs
  • No change in LV operating environment in last 3 months yet investor sentiment driving up multiples.
  • Still believe Columbus and Toledo will open in 2H 2012.
  • Any change in slot replacement?--not much change.... 1/6 or 1/7 of core. Maryland--state will provide slot machines
  • More customers coming but spending less.  Program-specific, customer-targeting marketing tactics contribute to drive higher expected margins for FY.
  • $2.3 billion debt
  • Capitalized interest: 1.1MM in Q1
  • Cap interest guidance:  2Q - $1.8 MM cap interest.  $7.1MM for all of FY 2010
  • Corporate overhead: projecting 68 MM run rate for FY 2010
  • Tax rate was lower due to favorable 1048 ruling on Pocono sale and few non-deductible expenses (referendum costs)
  • WV/Penn Tables
    • meaningful marketing expenses uptick?  yes, higher advertising expenses. june/july/and partially august
    • media items focused on table games; doubling up existing advertising in those states.
  • Atlantic City market--continue to see oversupply, lack of stability, no interest right now
  • CapEx budget:  2Q 2010 - $85.7MM in project capex and $23.6MM in maintenance, 2010 - $439.8 MM and $94MM, respectively
  • paid $22 per share for preferreds... no buyback expected at this time.
  • Weak revenue guidance: timing of new capacity coming on or bearish view on top properties?
    • were overly optimistic on revenues, not reflection of overall business trends, instead a refinement of forecasting methodology
  • PNK in Baton Rouge project--believes $225MM market will continue to contract, probably $200MM in end of year, do not want to throw good capital in oversupplied market. $250 MM project with high interest expense, bad for PNK.
  • Maryland table games update:
    • No serious legislative proposals yet; governor wants to see the performance of existing operations (e.g. Cecil County) before acting.

GIL: KM Short, Based on Post Q2 Headwinds

Keith added GIL to his list of recent shorts in retail before the close yesterday. It's less a call on the quarter (we actually expect a strong one, even without extrapolating HBI’s blowout), rather on what’s ahead thereafter. Following a great set-up in Q1, it gets even better in Q2 with favorable gross margin compares down 1300bps (mix, manufacturing, and cotton). Looking through to the next few quarters the tailwinds ease and become stiff headwinds in a hurry. With cotton prices testing new highs intraday (~$0.85), continued outperformance will require strong consumer demand to offset elevated commodity prices. As a reminder, GIL’s cotton exposure accounts for ~33% of COGS.  Recall that while Hanesbrands frequently cites its ability to increases prices as an offset to cost pressures, Gildan is in a less defensible position given its lack of branded product.



GIL: KM Short, Based on Post Q2 Headwinds - GIL S 4 10

Q2 THEME - Inflation’s V-Bottom - PPI is HOT

Today’s PPI number gives us another chance to reiterate one of our key 2Q themes - Inflation’s V-Bottom.


Stagnating consumer confidence figures suggest that most consumers don’t trust the direction the country is going in.  We are in agreement with that sentiment and think that most politicians lie and Washington’s free money man, Ben Bernanke, can’t see inflation.  Or, at least, he doesn’t want to -- until he has to.


The PPI rose 6% year-over-year in March and was up 0.7% sequentially - more that the 0.5% consensus estimate on Bloomberg.  Today’s PPI report recorded its largest annual gain since September 2008 and was up on the back of a 2.4% rise in food prices, its sixth straight monthly increase. The increase can be attributed to a 49.3% increase in prices for fresh and dry vegetables (meats and eggs also contributed to the increase in prices for finished consumer foods.)


As an aside, I point this out as my beloved Restaurant stocks are white hot on the back of accelerating sales trends and higher margins on lower food costs, a trend that will come to an end in 3Q10!


Look no further than the chart of PPI below to see Inflation’s V-Bottom.


Howard Penney

Managing Director


Q2 THEME - Inflation’s V-Bottom - PPI is HOT - bernanke

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.



Each week we provide an update on initial jobless claims because we think it's one of the best leading indicators for the credit-sensitive names we follow and history has shown there to be a very high correlation. The reality, however, is that there has been quite a divergence that has taken place in the last four to five months.


Let's just get this week's data out of the way first. Claims for the most recent week, out this morning, dropped 24k to 456k from 480k (revised down 4k) in the prior week. This caused the rolling 4-week average to actually increase by 3k to 459.5k from 456.8k.


We hate to be the ones to take away the punchbowl, but consider this. As the charts below show, at 456,000, claims are at the same level they were at on 11/28/09 (457,000). In other words, claims have gone nowhere in almost five months. Compare this with the colossal improvement in claims from April 2009 through November 2009. In stark contrast to recent claims trends, the XLF has barreled higher some 17% over the last 4.5 months, with high-beta Financials rising by multiples of this.


While we've been patient in our weekly posts, waiting for claims to resume their downtrend, we think that enough data (20 weeks now) is in to begin to warrant some caution around prospective performance in the XLF. If claims continue to trend sideways at these levels, it will be difficult, and, frankly, unlikely, for Financials to continue to move higher if the backdrop of further employment gains stagnates. Because claims are a leading indicator, we treat them with greater significance than the unemployment rate. We have other reasons to be cautious heading into the seasonal summer doldrums, namely renewed housing concerns. Couple this with the blowout 1Q10 results so far, and layer on the marked increase in consensus expectations around normalized earnings, and it is starting to feel like the Financials are better positioned for correction than further gains. We don't want to be alarmist with this call, but the reality is that it was the inflection in jobless claims that marked the bottom at the March 2009 lows, and claims are now sending us a new signal so it's time to pay attention.


As a final word around the census, we've been bullish on the lift the census would add going into its peak employment months, but we're almost at the point now where it's time to start focusing on the drag it will create on the backside as the peak month of employment, May, is just 8 days away.




The following chart shows the raw claims data.




The following chart shows the census hiring timeline.





Joshua Steiner, CFA


Allison Kaptur

R3: HBI: Thank the Consumer


    April 22, 2010





    HBI’s results after the close last night confirm the pickup in consumer spending that has been building over the past few months.  In fact, the pick-up occurred even sooner than expected, during what are seasonally slower months for HBI.  Stronger topline and solid gross margin expansion resulted in an upward earnings revision to the year and now has management focused on driving 2011 growth.  The call suggested that management believes 2010 is essentially ‘in the bag.’


    Growth for the balance of the year will continue to be driven by retail shelf-space gains accounting for 5% of HBI’s 6%-8% full-year top-line guidance, with the remaining 1%-3% of growth expected from further consumer spending improvement, pricing increases, and/or more aggressive restocking. To the extent there’s further upside, the company is going to reinvest it right back into the business-  much like it’s done for the past 3-years.


    Looking forward, we are mindful of the inflationary commodity cost increases beginning to mount. What’s interesting to note is that management doesn’t expect the need to take pricing to offset increases until 2011. Based on Q1 results, it appears that HBI is likely to have its first year of positive top-line growth since its spin-out from Sara Lee giving management ample opportunity to manage costs if needed.


    Below are some of the highlights from the call:


    Sales growth: +8.2% (7% cc) -- Revs higher due to shelf-space gains of 6%, increased sell through, retail inventory restocking, and FX contributed the remaining 2%. Every business segment except Hosiery had positive sales growth. All geographies except Japan and Western Europe were positive. Sales growth jumped on the 2 year trend sequentially to -2.6%  from Q4 09’s -7.6%.


    GM %: 35.3%, up 458 bps yy. Increase due primarily to the benefits of higher sales, lower commodity cost, lower manufacturing cost, and favorable timing of $5 mm or 54 bps. Lower cotton costs contributed $13 mm or 140 bps to GMs.


    SG&A: +8.5%, +8 bps of margin growth, Media and other marketing spend increased $13 mm or 140 bps compared to last year. Distribution and selling expenses were also higher due to increased sales. Direct-to-consumer operating profit declined due to planned investment for growth in stores and Internet businesses.


    Q&A Call Outs:


    Cotton: Cotton costs for the first quarter were $0.52 per pound, a $13 million positive impact. Cotton costs for the full year of 2010 should average $0.69, compared to $0.55 in 2009, up $34 million. Q2: $0.61 -$7mm impact, Q3: $0.72 -$13mm impact, Q4: $0.80 -$27mm impact.


    Costs and Pricing: Cotton and Oil going up. As they have said before, if HBI sees systemic inflation they will increase price. With the sustained increases they are currently seeing they would need to increase prices by 2011. Timing will be between back-to-school or holiday, or at the beginning of their retail year, which would be early in 2011 (most likely). Incremental cost of $5 mm to execute price increase. Need about a good 90 days on the retail side to be able to implement a price increase and need to talk to retailers about a month or so in front of that. The supply chain is starting to feel price cost pressures working its way through the supply chain that start to show up in people's fourth quarter.


    Weather: direct-to-consumer business had mid-single digit gains for the quarter despite significant weather disruption.


    Outerwear: sales grew 11%, driven primarily by Just My Size growth. Outerwear is a segment where price increases happen more regularly and will start happening with pre-booked orders. The outerwear business is where there are early commitments, about two-thirds of that segment is pre-booked with commits. HBI already has some visibility into 3Q and 4Q and that is where some of the guidance upside is coming from.


    Consumer: consumers are still value conscious, seeing their willingness to trade up products and channels. This behavior has been consistent across all categories in the US. Additionally, domestic retailers seem increasingly optimistic and are raising both inventory and pre-booked order levels.


    Guidance Upside Discussion: HBI had always discussed a 6% increase in the first half from shelf space and in fact saw 6% in the first quarter. What they didn't expect was actually stronger consumer spending and having it actually begin to impact in Q1, so that’s where the upside is fitting in.


    Programs: all of the early reads show the programs are working and on track to being able to hit their goals, pleasing both HBI and obviously their retail partners. Those programs, as consumer spending may continue to go up, actually have the chance for exceeding their plans.


    M&A: Strategy is to invest in brands to grow topline and use supply chain to improve operating margins. One tactic of cash could be acquisition, but this is not a growth strategy.  More focused on executing business strategy than M&A. 


    Long Term Growth: Believe the company can grow 2-4% consistently (goal of 3-4%) each year through share gains, category growth, inflationary apparel environment, and international strategy. 


    Geography: Japan and Western Europe went into the recession on a lagged basis and they look like they're coming out a little bit more slowly


    Consumer Spending Increase: Management believes there is at least 1% to 3% of sales growth this year from a consumer spending rebound. Has been pretty consistent since Christmas, seeing strength in periods of time that aren't key selling periods. Saw a little bit of strength at back-to-school, but it came for a few weeks and then sort of dissipated. “The fact that we saw the sustained increase in January and February and early March, when people don't normally get out there and shop, is what told us that it was something macro going on.”


    R3: HBI: Thank the Consumer - HBI SIGMA


    R3: HBI: Thank the Consumer - HBI Table 





  • In what is truly a humanitarian move, executives from brands including Nike, Ralph Lauren, Ed Hardy, True Religion, and Diesel have agreed to allow seized counterfeit apparel to be sent to Haiti. The 125,000 tons of merchandise are being shipped to Haiti to help clothe victims of the recent earthquakes. This certainly beats the normal incineration process.

  • It’s no secret that Liz Claiborne has been on the hunt for new leadership and creative inspiration for the company’s Juicy Couture brand. The track suits are no longer pulling all the weight and the original founders have since moved on. Enter up and coming designer, Erin Fetherston. Fetherston and Juicy will collaborate on the summer-fall 2011 collection as well as Holiday 2011. She will also be the guest creative director. For those wonder where Juicy may be heading take a look at http://erinfetherston.com/index.html

  • Add New York designer/retailer to the growing list of partners aiming to reinvigorate Keds. The retailer will begin selling a Keds slip-on in a special Ikat print beginning next month. Fashion mags are already on top of this one, much like previous buzz surrounding Keds collaboration with Neiman’s, The Gap, and Alice & Olivia.




     R3: HBI: Thank the Consumer - Calendar





    SportsOneSource 2010 Brand Strength Report - Brands like Converse, Skechers, Puma and Jordan found increased support from consumers that signaled the ultimate in brand commitment when they indicated they would leave a retail store to buy the brand elsewhere if the store they were shopping in did not carry the brand they wanted.  Converse and Jordan, both owned by Nike, Inc., leapfrogged over a number of other brands into the top ten brands that consumers found to be “non-negotiable” brands. Overall, Nike (26.5%) led the field, New Balance (12.7%) came in second, and Adidas in third (7.7%). Several prominent outdoors companies made the list including Timberland (2.8%), The North Face (2.7%), and Columbia (2.1%), which finished 11th, 13th, and 14th, respectively. <sportsonesource.com>


    WSM Jumped on Acquisition Prospects - Williams-Sonoma Inc.’s shares jumped to a two-year high and trading of bullish options surged to the highest level since July on renewed speculation that the U.S. gourmet-cookware retailer may be acquired. Williams-Sonoma increased 6.1% at 4:15 p.m. in New York Stock Exchange composite trading.  <bloomberg.com/news>


    Fast Fashion Retailers Hurt by Volcanic Ash - As the volcanic ash made its way to northern Europe over the past week, the massive air transportation gridlock that has brought the region to a halt has also had impact on the apparel industry. The fast fashion sector that relies heavily by air transportation now face some great challenges as well, for instance, fast fashion retailers who move products by air to ensure a regular flow of new designs into their stores or product samples that need to be move several times between overseas factories and buying offices in Europe, have all been fall behind the schedule, backlogs will further delay the logistics. Supply chains has also been affected as manufacturers depend on air freight are missing buyers’ deadlines. There are reports that Europe-bound garments are starting to pile up at factories and airports stretching from Bangladesh to China.  <fashionnetasia.com>


    Swiss Watch Exports Jump - Swiss watch exports confirmed a strong rebound in the first quarter with a rise of 32.8% in March compared with the same month last year to $1.14 bn. “The recovery is therefore clearly confirmed, with the first quarter showing an upturn of 16.6% and a return to levels recorded in 2007,” the federation stated. Sales of timepieces priced above $468 grew by more than 40% in value terms, signaling a return of consumer confidence following a sharp drop in luxury watch sales in 2009. The top three markets showed a marked pickup, with sales in the U.S. up 56% versus March 2009, while Hong Kong sales jumped 67.7% and China saw a rise of 89.8%. <wwd.com/business-news>


    Simon Property Group Adds Investors for GGP - Simon Property Group Inc. said late Wednesday that it had added $1.1 billion in commitments from four investors — ING Clarion Real Estate Securities, Oak Hill Advisors, RREEF and Taconic Capital Advisors — as part of its effort to effect a recapitalization of General Growth Properties Inc. The funds are in addition to the $2.5 billion previously pledged by SPG and $1 billion from Paulson & Co. and follow GGP’s rejection in February of Simon’s offer to purchase bankrupt GGP for $10 billion. <wwd.com/business-news>


    S&P Ratings to Review Barneys - Standard & Poor’s Ratings Services put Barneys New York Inc.’s corporate credit rating on review with positive implications Wednesday in another sign of the improving prospects for luxury apparel. Barneys is rated “CCC,” meaning its obligations are vulnerable to nonpayment. A review, typically completed within 90 days, could bump it up to a “CCC-plus” or possibly into the more desirable, although still speculative, “B” family. <wwd.com/business-news>


    Benetton Looks to Grow Again in the US - After paring its U.S. retail fleet years ago, Benetton has kept a low profile. But last week, the Italian fashion firm stepped out with a party in the Meatpacking District’s Boom Boom Room to spotlight the winners of the global online casting session for the fall ad campaign, “It’s My Time,” and hinted Benetton may get some second wind Stateside. According to another Benetton source, the company is definitely looking at new initiatives in the market. It could be renovations or expanding stores, or something else. It’s about finding the right formula. In the Eighties, Benetton peaked in the U.S. at 600 stores. The count is down to about 100 units, either company-owned or franchised. <wwd.com/retail-news>


    Miss Sixty to Close 10 US Stores - Miss Sixty is closing 10 of its remaining 20 stores in the U.S. The Chieti, Italy-based company suffered a series of financial setbacks during the height of the recession, entering administration, a British bankruptcy process, in the U.K. Miss Sixty in 2008 lost $28.6 mm, compared with a profit of $13.1 mm, in 2007. Last year, Miss Sixty closed two full-priced stores in Honolulu and Dallas. At the time, Miss Sixty SpA founder, chairman and creative director Wichy Hassan said the company’s U.S. stores were simply not working, in part due to mismanagement. <wwd.com/retail-news>


    Lane Bryant Says TV Networks Censored Saucy Spot - Lane Bryant is up in arms that two networks—Fox and ABC—have resisted airing a sexy lingerie ad from the company in time periods where the networks have broadcast other racy fare. In a post on LB's Inside Curve blog, the company complains that "ABC and Fox have made the decision to define beauty for you by denying our new, groundbreaking Cacique commercial from airing freely on their networks." The ad, which was initially available on YouTube and at lanebryant.com/sexy, has since been removed. It was created by Omnicom Group agency Zimmerman. The post also claims that ABC "restricted our airtime" and refused to air the spot during Dancing With the Stars, while Fox "demanded excessive re-edits and rebuffed it three times before relenting to air it during the final 10 minutes of American Idol, but only after we threatened to pull the ad buy." <brandweek.com>


    U.K. Wal-Mart Subsidiary Asda is Planning for More Online Sales - Asda, a U.K. grocer and retailer owned by Wal-Mart, has completed rolling out a national service enabling shoppers to receive goods ordered online at the local store or at their home. <internetretailer.com>


    Down to Earth Footwear - This spring, Waltham, Mass.-based Earth Footwear is celebrating the 40th anniversary of Earth Day with a spring ’10 launch of its biodegradable sole, which will be rolled out across the line. Joining athletic company Brooks and sneaker brand Simple, Earth will use an additive that helps outsoles biodegrade 10 times faster than a normal shoe. The additive is the newest environmentally oriented action from the brand, which already uses water-based adhesives, recycled PET linings and insole boards made of recycled milk cartons. <wwd.com/footwear-news>


    VFC Sponsoring 2011 US Figure Skating Championships - VF Corp. will be a local "presenting sponsor" for the 2011 U.S. Figure Skating Championships that will take place in Greensboro, NC, in January. VF is based in Greensboro. Sponsorship activities will focus on the company's Lucy and Kipling brands. <sportsonesource.com>







The Macau Metro Monitor, April 22nd, 2010




The Macau government said Wednesday it hasn't authorized casino operator Sands China Ltd. (1928.HK) to hire foreign workers to finish construction of its massive expansion project in Cotai, suggesting the casino and hotel development could face further delays. The comments come after Sands China Chief Executive Steve Jacobs said Monday the company plans to hire all 2,000 qualified workers available in Macau for the project, but the rest of the construction force would need to come from Hong Kong or mainland China.


An official at Macau's Human Resources Office, which handles companies' requests to hire foreign workers, said the government would consider importing non-resident workers "only if the local market can't provide sufficient labor force and provided that the rights and interests of the local people aren't affected."

SHUN TAK PROFITS JUMP 510% macaubusiness.com


Shun Tak Holdings’ underlying net profit surged 510% in 2009, to HK$1.19 billion. The results were positively affected strong property sales. The company plans to launch the sale of 92 serviced apartments in One Central in the middle of the year. The complex will also see its five-star 213-room Mandarin Oriental Hotel to be launched in mid-2010. Shun Tak also revealed it “holds a 79% interest in a columbarium project in Taipa, providing approximately 50,000 columbarium niches to the undersupplied Macau, Hong Kong and Zhuhai markets. Foundation works are completed and superstructure work is in progress with tentative completion before the 2nd quarter of 2011.”


Two major sites solely held by Shun Tak, including a 4.3 million square feet project at the Nam Van lakefront earmarked for the Harbour Mile development comprising primarily residential apartments, as well as the Jumeirah Hotel Macau project in Cotai, are under review by the Macau Government, the company said.



Information from the Statistics and Census Service indicated that the Composite CPI (103.01) for March 2010 increased by 1.88% YOY, attributable to the price increase of  Food & Non-Alcoholic Beverages.

The CPI-A (102.8) and CPI-B (103.05) for March 2010 increased by 1.26% and 2.0% YoY respectively.  The CPI-A relates to about 50% of the households, which have an average monthly expenditure of MOP6,000 to MOP18,999.  The CPI-B relates to about 30% of the households, which have an average monthly expenditure of MOP19,000 to MOP34,999.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.