Slot replacements should easily exceed 50k this year.



With IGT and WMS already reporting and per discussion with some industry contacts, we think slot replacements should exceed 13,000 for Q1. Last year, replacements were roughly 8,500; so big y-o-y growth.  We suspect Q2 could be even better. PNK just said on their conference call that they were increasing maintenance capex this year in part to more slot purchases. For all of 2010, we think replacements will exceed 50k, up from our previous estimate of 47k.


What is there not to like?



"Pinnacle generated solid first quarter operating results which reflect the initial benefits of our heightened focus on achieving operating efficiencies and exercising financial discipline throughout the Company. Our success with these strategies in the first quarter should provide an excellent foundation for further progress throughout the balance of the year.  Our operating and growth strategy is to build profitable revenue through the Company's commitment to a 'best-in-market' approach to the guest experience, further operating efficiency improvements and a disciplined view on capital spending and expansion."

- Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment



PNK's numbers this morning blew away expectations, even ours, which were materially above the Street and this is just the first quarter of their "reorganization."  The beat was clean and across every property driven primarily by lower unproductive promotional and marketing expenses.



  • "Pinnacle's L'Auberge du Lac and Boomtown Bossier City properties recorded improvements in operating margins related to cost discipline, with L'Auberge generating its second-best quarterly Adjusted EBITDA despite a small revenue decline. These benefits were partially offset by lower spend-per-visit at Boomtown New Orleans relative to last year and the impact of the June 2009 opening of an expanded and re-branded riverboat casino near Pinnacle's Belterra Casino Resort"
  • "River City Casino generated positive Adjusted EBITDA in its first month of operations despite such higher costs."
  • "In Baton Rouge, our development project will diversify Pinnacle's operations into an attractive new market that we believe is currently underserved.  We are actively engaged in the design phase of the project.  Current plans call for the property to feature a modern dockside riverboat casino with at least 1,300 slot machines, 50 table games, a hotel with at least 100 rooms and other amenities."
    • "In March 2010, Pinnacle entered into a guaranteed maximum price contract for the development of its Baton Rouge"
  • "In March 2010, the Company received a $6.5 million legal settlement related to the recovery of legal fees."
  • "During the quarter, Pinnacle incurred severance costs of approximately $1.0 million due to employee terminations."
  • "In April 2010, Pinnacle completed the sale of its corporate aircraft for gross proceeds of $10.5 million. In addition, Pinnacle has begun the process of selling its two seaplanes."
  • "The President Casino is currently scheduled to close on June 28, 2010, at which time it will be considered a discontinued operation."


  • Will focus on building a world class marketing team
  • Just at the beginning of establishing a disciplined approach to manage their business
  • Will focus on how they can be a better company in their internal meetings taking place over the next few days
    • Anthony sounds like the "Anti-Dan"... did I hop on the right call?
  • Centralizing purchasing decisions to lower costs and get better service
  • Have over 10,000 slot machines today and hired a guy that is going to help better yield manage their slot floors and get better pricing/deals from manufacturers
  • Had some help from the consumer in 1Q2010 and took much better care of that revenue than in 4Q09.  Were more careful with marketing spend
  • If you compare 1Q2010 to 1Q09, in 1Q09 they didn't feel the recession yet- (ie their costs were still high)
  • Capex:  Cash capex in the quarter was $59MM (RC = $42MM, Bossier = $3MM, $1-1.5 across several other properties and spent $7.5MM wrapping up Sugarcane Bay - last quarter of spend)
  • $45MM to Baton Rouge, will spend $40-45MM on maintenance Capex - as they step up spend to refresh their slot floors


  • It's premature to say whether this is the new operating margin run rate. "We are at the beginning of really taking a look at how to manage our company in a way that doesn't cut cost mindlessly"
    • My guess is that there is room to improve since this is just the first quarter of implementing changes
  • Pleased with the start of River City - but it's just the beginning.  Several competitors have been very aggressive in sending out promotions. They will not break out the 2 St. Louis properties
    • Have 1 marketing team overseeing both properties
    • Have 1 HR department
    • Basically being careful about not cannibalizing each other
  • Wind-down cash costs for Sugarcane Bay?
    • About $10MM - $4MM of which is to put things back in service that Dan took out...bulk of it will be in 2Q.  Putting back lighted surface parking lot and bus stop with a canopy area.  Thinks they can have that back up by end of May
  • What is the possibility of a license returning to the market near Sugarcane Bay?
    • Haven't heard of anyone wanting to be in that market
    • Risks to adding another license in that market - and thinks it will deter people from entering - for example - ISLE has 2 licenses - and the second does 12% of their total revenue and combined those 2 do less than 50% of what they do with one
  • Baton Rouge - any change of downsizing budget?
    • Costs are more likely to go up with enhancing the scope given the size of the site (500 acres)
  • Belterra - has consistently had issues - what's the opportunity there?
    • Hasn't been there yet. He's focused his time early on Louisiana and St. Louis.  He hasn't formed an opinion on that property yet
  • Update on sales of discontinued operations?
    • Yes - but there is nothing to report yet.  Hope to announce things soon (Sounds like the Argentina stuff will happen soon but that AC will take a while)
  • Texas?
    • Believes Texas is closer to having gaming then ever before - but what that means in terms of probability of getting gaming is hard to know
    • Oklahoma has over 100 casinos. With plenty within an hour of the Texas border.
    • Chickasaw is close to closing on a racetrack in Dallas
    • Rick Perry, the Governor, says that he will not support the expansion of gaming in the state- but it's unclear whether he would support slots at tracks.
    • When they looked at Sugarcane Bay - the potential of gaming in TX was a deterrent
  • Think that the St. Louis market growth that was seen in March will decrease to a lower rate of around 2% in 2Q2010. 
  • Run rate on corporate expense?
    • Can't nail that down yet - since they are still liquidating that.  For example - the jet that just sold - and then when the hanger lease expires at the end of June it will decrease again. 
    • Have already consolidated their corporate offices - now in Spanish Ridge Avenue as of last weekend
  • Argentina?
    • Expect to come to a resolution relatively soon
  • The $8MM of corporate includes $300k of severance - the rest is spread throughout the properties.
    • More slimming to come
  • Any interest in bidding on last Kansas license?
    • They are evaluating all opportunities out there
  • What will they do with the cash proceeds from Argentina?
    • Pay down the R/C even though it's an unrestricted sub
    • Argentina did $9.1MM of EBITDA last year
  • Thoughts of tapping the bond market?
    • No maturity until 2012 - have plenty of time
    • Will continue to be opportunistic in tapping the markets
    • They can fund Baton Rouge on the RC and from FCF and proceeds from asset sales... they have plenty of liquidity


Restaurants yesterday did not show much broad-based strength with decliners outnumbering advancers.


After last week’s earnings-driven run in restaurant stocks, it will be interesting to see how this week unfolds.  Today we have BWLD, PEET, KONA, and PNRA all reporting their 1Q10 earnings.  All of these names traded down on weak volume except KONA, which outperformed all of its peers as it has done for the last 30 days.  Also this week, PF Chang’s, Burger King, and Ruth’s Chris are reporting over the next few days.


In terms of costs, expectations for a surge in meat prices are growing.  A Bloomberg article yesterday outlined the factors behind this expectation.  Supplies of beef, pork, and poultry are estimated to be the lowest since 1997 due to the surging cost of feed forcing farmers to reduce herd sizes.  Given the high levels of unemployment, this rising cost being passed on to consumers could lead to further value-seeking for those visiting restaurants at a time when restaurant stocks are at near-record levels.


TALES OF THE TAPE - stocks 427


TALES OF THE TAPE - comds427



Howard Penney

Managing Director

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R3: UA: Very Nice Setup for 2010


April 27, 2010





UA printed the right numbers for the right reasons. Accelerating top line due to capital deployed over the past 2-years to proactively grow its business. Top that with a 10% decline in inventories, and yes, guidance remains too low.


Solid numbers out of UA on most accounts. Printed $0.14 vs our $0.13, the Street’s $0.10, and $0.08 last year. UA blew away the top line, with 14.7% top line growth and 197 bps in EBIT margin expansion. On the plus side, apparel came in +30.5%. Not bad when you consider all those people who avoid this story because of their view that growth in this core business is slowing?  On the flip side, the bears will chew on footwear sales being down by 25% to 43mm. That’s actually spot-on with our expectations (we had footwear -28%), and think that this will accelerate meaningfully throughout the year as the footwear organization put in place by Gene McCarthy last summer starts to kick in.


One thing we think that UA will need to account for is why it only raised FY guidance by the 1Q beat. Either way, these numbers are incredibly conservative – especially when we’re seeing sales momentum on a 10% decline in inventories in one of the few spaces in retail that will have increasing wind at its back over the next 12 months.  


UA remains one of our favorites. 


We’ll be back with a refreshed model and any new take-aways after we digest the rest of the results.


R3: UA: Very Nice Setup for 2010 - UA SIGMA 





- Radioshack noted that although the company began selling the iPhone in some locations during its fourth quarter, sales did not have a meaningful impact on the quarter’s results given the limited rollout. However, by the end of the current quarter, the iPhone will be available in 3,000 locations. When asked if the company would be selling the next iteration of the phone at launch sometime this summer, the answer was neither yes or no.


- Let the Wal-Mart protests begin (again). Word has it that Wal-Mart is once again seeking entry in the New York City area, this time via Jamaica Bay in Brooklyn. While there has been no formal announcement or deal signed, union protestors and politicians are already planning their anti-Wal-Mart efforts. Expect protest to begin in the next week or so.


- Research firm Permuto has defined the “average online shopper” as: 56% female, 42 years old, mean household income of $65,000, and an annual online spend of $446. Interestingly, 88% of worldwide consumers have made an online purchase within in the past 6 months.





R3: UA: Very Nice Setup for 2010 - Calendar





Asian Governments Assisting Apparel Industries - Asian nations are assisting their struggling textile and apparel sectors financially. India, the second largest emerging economy in the region, will continue to have the 2% interest subsidy on bank loans to certain sectors that are labor intensive such as textiles, leather, handicrafts, cotton yarn, which are particularly hard hit by the fall in global demand. Pakistan textiles production continued to decrease because of lower cotton availability, electricity and gas shortages. Cambodian government is also in support measures for its apparel sector. Measures introduced to boost industrial output have included temporary tax relief for apparel industries, and $10m for re-training laid-off Cambodian apparel workers.  <>


US Import Clothing Prices hits Record Low - According to the business information company Textiles Intelligence, the average price of clothing imports in United States has fallen to its lowest level in over 20 years. As of the end of 2009, the import clothing price is sitting at USD$2.96 per square meter equivalent (SME), which is 6.1% drop from the previous year, and 21% lower than the average price of USD$3.75 per SME that held for much of the 1990’s. <>


Anta Sports Expects Sales to Grow +15% in 2010 - Anta Sports Products Ltd., China’s largest maker of athletic shoes, said sales may grow by at least 15% this year as it opens more stores. Anta, which sponsors China’s Olympic Committee as well as international women’s tennis players Jelena Jankovic and Zheng Jie, is benefitting as Chinese consumers buy more casual shoes and clothing. Retail sales in China rose 17.9% in the first quarter from a year earlier.

The Chinese shoemaker’s net income last year rose 40% to $183 mm and sales gained 27%. Anta plans to increase its outlets by 8.5% to 7,200 this year while product orders will increase as retailers replenish stock. Anta may consider raising prices in the fourth quarter as raw material costs such as cotton rise.   <>


Bangkok Malls Struggle As They Enter Week 7 of Closed Doors - Bangkok malls, which have been closed for almost a month as antigovernment protestors have massed outside their doors, are looking for ways to help the small shops that are struggling as the protests stretch into their seventh week. At Siam Paragon, Bangkok’s upscale luxury mall, management is considering lowering rents, hiring shop employees who haven’t been able to work and redesigning marketing plans for the rest of the year to help tenants regain business, said a spokesman for Siam Paragon Development Corp. The mall has managed to open only five days during the past month. <>


WMT Lawsuit - A federal appeals court Monday allowed a potentially landmark gender-discrimination lawsuit against Wal-Mart Stores Inc. to go forward as a class action. The opinion stemmed from a labor suit brought by Wal-Mart employee Betty Dukes and five other plaintiffs in 2001. Their complaint alleged the retailer’s corporate structure discriminated against women in terms of pay and opportunity for promotion, among other accusations. In its six-to-five opinion Monday, the appeals court affirmed the class-action certification, and stood by the lower court’s finding that members could seek back pay as well as injunctive and declaratory relief. <>


Neiman Marcus CEO Hands Down the Reins - Burton M. Tansky, president and chief executive officer of Neiman Marcus Inc. and its wholly owned subsidiary, The Neiman Marcus Group, and a leading figure in luxury retailing for three decades, will retire on Oct. 6. Karen W. Katz, president and ceo of Neiman Marcus Stores and executive vice president of the group, will succeed Tansky as president and ceo, in a transition that has been long expected but remained a mystery as to exactly when. <>


N Brown to Expand Into US Targeting Plus Sized Women's Market - N Brown Group Plc, the U.K. owner of the Fashion World and Simply Be catalogs, will expand in the U.S. this year as it targets heavier women in the country, a potential $35 billion market. <>


Gilt Groupe Expands Operations Leadership with a New VP - The luxury e-retailer named Christopher Halkyard vice president of operations. He will be responsible for managing Gilt’s supply chain and distribution network. He has held supply chain positions with Marc Ecko Enterprise and L’Occitane en Provence. <>


Deckers Outdoor Corp. Hires Marketing and Information Technology Execs - Footwear manufacturer Deckers Outdoor Corp. has named Jessica Buttimer vice president of marketing and Yul Vanek vice president of information technology. <>


American Apparel Opened a Shop-in-shop Inside London's High-end Department Store Selfridges - The 700-square-foot store is the first and only permanent American Apparel store of its kind and will be designed to highlight the company's latest women's styles. This is American Apparel's eighth location in London.  <>


Sport Supply Group Acquires More Assets - Sport Supply Group, Inc. has acquired substantially all of the assets of Coaches Sports Corner, a regional team sports distributor based in Sandusky, Ohio, and certain assets of Greg Larson Sports, a national cataloger and regional team sports distributor based in Brainerd, Minnesota. <>



We weren’t expecting a great quarter and it wasn’t. However, the positive long-term outlook remains very much intact.



FQ3 was setting up as a positive catalyst for WMS, that is, until the stock took off from $38. At $48, the quarter had to be good, and it wasn’t.  Should people be concerned? We’re not. We feel very good about the long-term. Here are the major takeaways: 

  • WMS gained ship share in North America this quarter – guessing they are up to between 27-29%
  • Replacements in NA are accelerating faster than we expected
  • Australia and Mexico are promising for WMS
  • Gaming operations were disappointing … but a large part of that is probably just due to timing and the June/Sept quarters should show handsome install base gains

Product Sales:

WMS beat our expectations on products sales and margins; however, the beat was low quality.

  • Total unit shipments missed our number by 287, all on the international front.
  • Domestic shipments were 192 better than we thought – driven by stronger replacement shipments.
  • While domestic replacement units should be seasonally up again in June vs. March there are several new casinos openings which may slip into Sept from June
    • Sugar house – if it ships in June it will be at the very end of the quarter and that’s 1,700 units
    • Gun Lake – we originally had 1,200 units shipping in the June quarter but it looks like they are having funding  issues and so September at best               
  • International missed our estimate by 479 units – we clearly thought the number would be up y-o-y
    • International revenues were up 5%
    • Bigger piece is that Europe didn’t rebound as much as WMS expected from the tone at ICE show - That’s actually why they toned down expectations for the June quarter.
    • Our guess is that WMS shipped about 400 to Mexico and roughly 200 units to Australia this quarter.
    • Latin America  - we weren’t expecting huge growth there and there really hasn’t been any replacement in that market in the March Q.
  • ASP was $400 better than we estimated and expected to be strong in the June quarter as lower priced shipments will be offset by the premium pricing on xD

Gaming Operations:

Slightly better product revenues were more than offset by worse gaming operations (basically everything was a little worse than we expected – install base, yields, and margins)

  • $1MM of the miss came from the removal of 193 standalone games – we assumed that standalone games would be flat
  • Net WAP placements were also below our estimate
  • We didn’t take into account the favorable jackpot benefit in 3Q09
  • Net yields were also lower than our estimate
    • For the first time, yields within each category didn’t go up aside from mix shift
    • More susceptible to industry trends as they get bigger footprint wise
  • They attributed good/bad to timing in that business…for the last few quarters, their footprint hasn’t grown because they have been trying to shift the footprint to WAP. They timing of when the old ones will get taken off exactly and when they get replaced with the new ones (a big issue for IGT) is difficult to estimate with any precision
    • Expect the footprint to accelerate in the 4Q2010 – due to WAP in the 4Q2010
    • WAP’s will have their largest net placement quarter in FQ4.
    • Older games have now stabilized with refreshes – expect stand alone to stabilize or only decrease a little – not like the last few quarters
    • LAP’s should stabilize (may even increase slightly due to the success of Goldfish)

Other stuff was better…

  • R&D and SG&A were a little lower than our estimate
  • Taxes were way lower - but that’s not sustainable

Begging Blankfein To Speculate

“Bernanke is, in fact, begging us to speculate.”

-Jeremy Grantham


Jeremy Grantham is one of the most important thought leaders in modern day finance. After seeing the forest beyond the trees in the early 1970’s when he started one of the first index funds, he has successfully realized the art of managing money – having money to manage. With $107 Billion in assets under management from his perch in Boston, the investment world is a better place with his hedgeye for risk management in it.


Grantham’s Quarterly Letter for April 2010 was titled “Playing With Fire” and, as usual, it didn’t disappoint. There is actually an addendum to his letter titled “Friends and Romans, I Come To Tease Graham and Dodd, not to praise them” that is one of the better contrarian (and quantified) analyses of some of the Perceived Wisdoms associated with value investing that I have read. I highly recommend studying his conclusions.


Studying what we know is easy. In fact, it gets easier and easier to understand what we know if we choose to wake up every morning focusing on those certainties. Unfortunately, those who use VAR models (Value at Risk) have recently learned the hard way that managing risk in an ever increasingly interconnected world doesn’t start with certainty. Real-time risk management starts with accepting uncertainty.


Now, Grantham doesn’t spend as much time on interconnectedness as I do, but he certainly took some time in his letter to address the realities of the societal risk associated with a government sponsored Piggy Banker Spread (marking the short end of American savings rates to model so that the banks can borrow there and beg you to speculate on stocks/bonds). Without going through his entire note, here were some of his best quotes:

  1. “The Fed’s promises look good and, as long as you’re not a small business, you can borrow to invest or speculate at no cost.”
  2. “Collectively, we forego hundreds of billions of potential interest, but at least we can feel noble because we are helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if brain dead.”
  3. “The urge to weasel and own a little more emerging is a direct result of the lack of clearly cheap investment alternatives.”

Over the short 12 years I have spent in this business, I have come to realize that the only people worth respecting are those who have the mental malleability to change. Markets and the risks embedded in them are constantly changing and we, as a profession, have a special duty to change with them. Grantham does a great job of calling it like it is, and shunning the Glaring Groupthink that ultimately gets investors run over.


Today, Lloyd Blankfein is going to get run-over by the populist madness of crowds. He’s already released his proactively predictable defense. He’s once again proclaimed his mystery of faith that he is smarter than you and Goldman “managed our risk as shareholders and regulators would expect.”


That’s actually a very appropriate summary of what Goldman did. They did exactly what the likes of Grantham and I would expect. They bought the 2006-2007 leverage top, saw in-house funds like “Goldman Alpha” get annihilated by “6 standard deviation events”, then asked their friends to bail them out as they “hedged” the final stage of the selloff, ultimately perpetuating a bottom.


Having their ex-CEO (who signed off on using VAR (Value at Risk) as a risk management tool as they levered themselves up the wazoo in 2004 and beyond) twilight as the US Treasury Secretary is risk management in and of itself. Gotta have the inside man if you want to get anything done in Washington folks. No wonder why Hank Paulson puked as the entire narrative fallacy what these guys call “risk management” blew up in their face.


We have a lot of friends at Goldman. Our call on the stock isn’t personal. It is what it is – right. We took plenty of heat for saying the stock would go to $151/share, but it went there and that’s all I have to say about that.


The point here is to hold certain actors of the new era of Goldman leadership accountable. Blankfein was a corporate tax lawyer and then a precious metals salesman, not God. He’s made his way to the top the good old fashioned American way. Now he’s looking over the precipice of history’s lessons. Real leaders take the fall.


There are $63B reasons (his derivatives book) and a huge ownership stake that will give the likes of Warren Buffett the opinion that Blankfein should be saved. Or are there? Maybe the stock is telling us something folks. At 7x earnings, value investors must be calling it “cheap”, but that doesn’t mean the Blankfein leadership discount won’t remain. The cheap gets cheaper - until it doesn’t.


In front of his shareholders, employees and Americans alike, Mr. Blankfein will be interviewing for his job today. We’ll see if he can detach his emotion and ego from the kind of risk management “shareholders and regulators” should “expect.”


On a breakdown and close through $151/share, our immediate term TRADE line of support for GS is now $142.29. The intermediate term TREND line of resistance that we signaled on Friday April 16th ($165.59/share) remains broken.


Mr. Blankfein, “value” investors around the world, are “begging you to speculate” that you are indeed smarter than the collective wisdom of the crowd. However populist these winds blow for or against your case today, Godspeed.


My immediate term lines of support and resistance for the SP500 are now 1207 and 1221, respectively.


Best of luck out there today,



Begging Blankfein To Speculate - blank


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