Leapfrog reported a very nice quarter last night. Virtually all key metrics turned positive or confirmed a positive trend. Revenues grew for the first time since Q2 2005 and average inventory days outstanding shrunk for the 3rd straight quarter. The margin picture looks good as well. Gross margin expanded 310bps in Q2 and the SG&A ratio declined 11.5%. EBIT margin increased for the 3rd straight quarter, up 22%.
  • Clearly, management’s long-term strategy and implementation is finally paying off. We introduced LF on our portal in our 6/26/08 posting “LF: A HOP BACK IN ITS STEP” and the company hasn’t disappointed. New products (with higher margins) are off to a great start, impacting revenues about a quarter earlier than expected. Tie ratios should improve gradually, driving gross margins higher. After years of heavy SG&A spend, the company can now dial that down a bit with the exception of advertising. Consistent with Q2, accelerating sales will leverage SG&A nicely.
  • Despite the strength of the quarter, management left its guidance unchanged for the year. The bears will say that sales were just pulled forward into Q2. I disagree. Management is being appropriately conservative given the consumer environment. Don’t be surprised if they continue to beat their guidance though. LF is probably less dependent on the economy given the fully revamped and reloaded product offering. They’ve barely scratched the surface with their new products internationally. That’ll change in the back half of 2008. Domestically new products are still being rolled out with significant advertising support.
  • Concentrating the long side of your consumer portfolio on names less tied to near term economic factors like LF seems to make a lot of sense in this environment.

Ben's Spinal Tap

One by one, all of the asset bubbles perpetuated by politicized central bankers and levered long investors alike are popping. Commodities from copper to soybeans, to everything CNBC’s “Fast Money” was flashing that you load up to the gills with in May – pop, pop, bang!

“Demand Destruction” quickly became the bull market narrative (crude down, stocks up), but that seemingly has not played out. How much of the pain trade can they hold the line on here in August? Who flinches first? Who do you trust? Those would be three questions I’d start with this morning as we head into Bernanke’s inevitable painting of both sides of the political fence today.

This is why I moved to 85% cash at S&P 1284 last week. Realizing full well that that positioning doesn’t get the asset management community paid on the management fee side of their existence, I’m ok with that. I protect my family’s hard earned capital over Wall Street’s compensation structures. At a young age, when I left home to play hockey, I trusted my left hand to shoot the puck, and my right one to throw a fist. Wall Street has proven to throw people under the bus as regularly as a pro scout would if you broke your leg – be careful who you trust out there. Trust your own work, stand up for yourself, and live to play another day. Your cash is king.

That “cash is king” phrase is more than something catchy that I was taught on the trading floor at Credit Suisse First Boston in 1999. The US Dollar is trading at a 6 week high this morning versus the Euro, and currencies levered to commodities deflating (Aussi, Canadian, Russian, etc…) are getting hit hard. If you are in cash, and that cash is US$ denominated, your august performance is off to the relative performance races.

Ben Bernanke’s rhetoric this afternoon holds the keys to the US Dollar, your home, and your portfolio’s fate. The big immediate “Trade” lower in everything commodities is behind us. In order to establish deflation as an intermediate “Trend”, Bernanke needs to step up the hawkishness and get people to actually believe that he is not going to behave like the “Helicopter Ben” cartoons we’ve been posting. Crude, Gold, and Commodities trading at $119/barrel, $892/oz, and 401 (CRB Index), respectively, is not going to break open my wallet to start buying stocks again. Crude, Gold, and Commodities closing under $103.51, $859, and 382, will however. C’mon’ Big Ben! I’ll call you “Big Brown” and drop the “Helicopter” stuff if you show some spine here.

In the meantime, Asian investors ran for the exits again overnight. “Demand destruction”, of course, is a horrific thought if you’re a “growth” investor. I am thankful that we sold our China long position. Chinese stocks broke my short term momentum indicator overnight, closing down another -1.9%, and stocks in Hong Kong did the same, trading down -2.5%, through my critical support level. Indonesia raised rates to 9%, and stocks there fell another -1.9%, while the Philippines reported a July inflation rate of +12.2% year over year – a 16 year high.

Asian growth is slowing. “Trend” line inflation in Asia is accelerating because wage inflation there is secular. Wage inflation was a critical component of the US Bear market in the 1970’s because ¼ of Americans were part of a union. That clearly is not the case today, but stocks don’t trade on today, or yesterday – they trade on the prospects for tomorrow… and if Obama has anything to do with it, US wage deflation won’t be what I am writing about next.

Good luck out there today,


Ameristar Casinos issued its Q2 earnings release and it couldn’t have been easier to predict. Similar to virtually every other quarterly release in the sector, Q2 Adjusted EPS met reduced estimates but exceeded GAAP EPS (see my 8/4/08 posting “ADJUSTED EPS: TAKE THE GOOD, LEAVE THE BAD”). Q2 revenues missed expectations but SG&A made up the difference. Layoffs were, of course, announced. Finally, ASCA implicitly lowered expectations for the rest of the year. Our summer interns could’ve predicted the contents of this release right down to the number of terminated employees.

So where does this leave us? ASCA is an economically sensitive stock with few catalysts. The positive catalysts that do exist are related to November state referendums: table limit betting increase in Colorado and the loss limit removal in Missouri. There are other ways to play those catalysts. The downside catalysts are more numerous: The economy and gas prices, a leveraged balance sheet and big debt maturities in 2010 ($1.3bn), and new casinos in Kansas and St. Louis. Let’s not forget the near term biggie: the hit on Ameristar East Chicago from the massive expansion and renovation of the Horseshoe in Northern Indiana.

PENN is not without its own economic vulnerability. However, I keep coming back to liquidity. To me liquidity is the single most differentiating factor in this struggling industry. Why would I pay the same multiple for ASCA as I would for PENN, the gaming company with the most liquidity, run by the best stewards of capital. PNK also looks more attractive at a 0.5-1.0x multiple discount and a buffer from the economic environment due to its Texas exposure. For those targeting ASCA as an acquisition candidate; that may eventually be the case but it likely won’t be PENN on the other end of that transaction. If PENN is buying any company it will be PNK.

If ASCA can raise $500m in sub debt this year liquidity runs dry in 2010. If they can't....

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RT – One Day Until The Live Demolition

Ruby Tuesday is literally blowing up one of its locations on Tuesday, August 5 at 3 p.m. ET “to bid a final farewell to the past with one elegant, understated gesture: Demolishing the last old Ruby Tuesday,” as the company states on its website. The company has launched a massive reimage program, remodeling 650 restaurants in the last 12 months, as of 4Q08. So when it says the “last old Ruby Tuesday,” it is referring to a location that has not yet been upgraded.
  • This live demolition, in of itself, is funny. It is made even more ridiculous when you consider that the reimages have not yet proven successful as the restaurant upgrades represent a change in strategy with RT attempting to enter the more upscale restaurant market. These restaurant reimages have alienated a big portion of RT’s prior customer base. Management stated on its last conference call, “we probably hurt ourselves by taking the eye off the ball when we remodeled approximately 650 company-owned restaurants in less than 12 months, as well as by losing some of our guests, we believe lower end guests who maybe felt less comfortable in our reimaged restaurants.” The company is making a big deal about saying goodbye to the “old Ruby Tuesday,” but it is also saying goodbye to a lot of its former loyal customers.
  • Make sure to watch it live at!

EAT – 4Q Less Than Toxic

As I have said before, the company’s improved capital allocation decisions should generate more favorable returns going forward as should its move to a higher franchise ownership mix (expected to reach 35% franchise ownership by the end of 2008). Additionally, Brinker’s recent restructuring of its restaurant support center in 3Q08, which represented a 10% reduction of costs, should give the company some leverage on the G&A line.
  • 3 recent data points to think about:
  • Our proprietary grass roots survey gives us confidence that the favorable trends at Chili’s from last quarter have continued. Chili’s same-store sales were up 1.6% in 3Q08 after being down 2.4% in 2Q and negative for all of fiscal 2007. These improved trends seem to reflect management’s sentiment from its 3Q earnings call in April when they said, “so the short-term trend appears positive and we’re off to a good start and expect the stimulus checks to help in May and June. In addition it appears California and Florida are doing better. With still negative performance both those markets appear to have bottomed down in December and have shown improvement each month since.”
  • NPD data points to an uptick in traffic trends within the bar and grill segment in the March-May 2008 timeframe. According to NPD, casual dining posted a 1% increase in traffic with the bar and grill category posting the largest incremental year-over-year traffic gains, up 4%. The casual dining “varied menu” lost traffic, which suggested a trade off to bar and grill.
  • Bennigan’s recent filing for Chapter 7 bankruptcy protection and the subsequent restaurant closures should benefit Chili’s as Bennigan’s was a direct competitor within the bar and grill segment. Additionally, Chili’s more penetrated U.S. states overlapped with those of Bennigan’s so the closures should also help Chili’s from a capacity standpoint (please refer to my Bankruptcy Cycle Continues – July 30 posting for more details).
EAT Same-Store Sales

Father Knows Best

I find it both amusing and telling to see the timeline below of the 3 years leading up to the demise of Boscov’s – which filed Chapter 11 today. The punchline is that the founders of the business saw this coming. They cashed out in early ’06 – the same time private equity money was free, and the writing was on the wall for the apparel retail business heading into ’07 and beyond. Boscov’s is not alone in founders cashing out at the top. Goody’s, Chick’s Sporting Goods (before sale to Dick’s), as well as others. Whenever a founding family looks to sell 100 years of blood sweat and tears. Run. Fast.

Thanks to First Rain for directing me to several articles on the topic.

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