Brazil, How Low Can You Go?

With the nearly every major equity index down on the day on fears that Greece’s sovereign debt may spill well beyond its borders in what has been termed the “contagion effect” by the media. It appears consensus is beginning to understand that after eight centuries of data, sovereign debt crises have never ended with just one country. Others - perhaps Spain - will soon join the dance.  While that is a topic for another discussion (see my colleague Daryl Jones’ note from this morning titled “Bearish Enough On Spain?”), we’d be remiss not to call out the  near-3.6% intraday decline in the Bovespa, which, at the time of this print, had declined more than any major equity index outside of Europe.


Domestically, at 2.8% MoM in April and 19.7% YoY, Brazil’s March industrial production rose at the fastest pace in five months, signaling concerns that the Brazilian Central Bank’s recent Selic rate hike from 8.75% to 9.5% may not be enough to cool accelerating growth and inflation – which itself (CPI) sequentially accelerated to 0.39% MoM in April and  5.22% YoY for the 12 months though mid-April. The rate hike was the first since September of 2008.


Perhaps global sovereign debt concerns will continue to douse global markets. Unfortunately for Brazil, those aren’t the only concerns facing the Bovespa currently. The key issue is indeed slowing demand from China.


Chinese PMI slowed to 55.4 in April from 57 in March, raising concerns that Chinese demand for commodities will continue to wane. In addition, as a result of the Chinese government tightening, an estimated $400 billion yuan may flow out of property into equities, according to some estimates. Steps taken to cool the white-hot growth include China raising the reserve requirement ratios three times in the year-to-date. In the most recent change, China’s reserve requirement will increase 50 basis points effective May 10, the People’s Bank of China said on May 2. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones.  The intention of these measures are to slow loan growth and the velocity of money, which is a derivative for Chinese demand for commodities.


Some other steps taken by the Chinese government to directly combat property speculation include: 

  • China's Banking Regulatory Commission ordered 78 state-controlled companies to exit real estate sector;
  • Chinese Banks are now asking for 40%-50% down payments  for second mortgages;
  • In March, Chinese officials raised deposit requirements for buyers at land auctions to 20% of the minimum price to increase costs for developers;
  • China's State Council raised down payment requirements for second homes to at least 50% and have pegged mortgage rates to no lower than 110% of the benchmark rate;
  • China told banks to stop loans for third-home purchases on April 19th;
  • The State Council has approved a real-estate tax trial in Bejing, Chongquing, Shenzhen, and then in Shanghai following the World Expo;
  • The housing ministry vowed on April 20 to punish developers that "artificially" create supply shortages and ordered builders not to take deposits for sales of uncompleted apartments without their approval;
  • China's Securities regulator will require developers to submit fund-raising plans for strict review by the land ministry; and
  • On April 20th, China ordered developers to not take deposits for sales of uncompleted flats. 

All told, these tightening measures coupled will slow construction and temper global demand for commodities including oil and copper.


The Bovespa continues to be highly correlated with the price of oil, so where oil goes from here (down nearly 4% intraday), the Brazilian stock market goes with it.


Darius Dale



Brazil, How Low Can You Go? - 1


Brazil, How Low Can You Go? - Brazil CPI


The central principal of investment is to go contrary to the general opinion, on the grounds that if everyone agreed about its merits, the investment is inevitably too dear and therefore unattractive.”

  ~Warren Buffet


Our 2Q10 theme, APRIL FLOWERS/MAY SHOWERS, suggested that the S&P 500 could sees a 4-7% correction in 2Q10.  We did not think it would happen in a matter of days.  While Buffet took some heat over the weekend for talking up his book, he is still the ORACLE OF OMAHA.  As he suggests in the quote above, the persuasive bullishness of late is just to “dear” to the masses.   


Last week, the government reported that real GDP increased 3.2% annualized in the first quarter.  This print was slightly below consensus +3.3% and vs. prior +5.6%.  Personal consumption expenditures (PCE) were +3.6%; higher than consensus +3.3% and prior +1.6%.  PCE accounted for 2.5% of the reported gain and business investment accounted for 1.6% points, of which 1.5% was due to a continuing relative buildup in inventories.  The big concern with the Q1 GDP report is whether or not the trends in PCE are SUSTAINABLE.


As I wrote the other day, SUSTAINABLE growth in PCE requires continued growth in real disposable income.  Without growth in income consumption can only be borrowed from the future quarters through borrowing more and/or the consumer spending his/her savings.  In the current environment, neither of those sources is real or sustainable.  In 1Q10, the quarter-to-quarter trend in real disposable income was contracting.  Real consumer credit, which has been reported only for January and February, was also contracting in the first-quarter versus the fourth-quarter.  


If the U.S. banking system were able to function normally, it would be lending more money, not contributing to a slow downward spiral in consumer and business credit outstanding.  Needless to say, these trends show no basis for SUSTAINABLE growth in the economy or PCE.


The US market bulls expect the market to continue to move higher on stronger earnings.  A Bloomberg survey suggests expectations for total profit from Standard & Poor’s 500 Index companies of $88 to $90 a share this year, and close to $100 a share in 2011.


It seems unlikely that these strikingly bullish estimates incorporate proactive slowing of the free money trail in a number of regions around the world in 2H10 and 2011.  With the Chinese market down 13% year-to-date, worries about a slowdown in China are increasing.  The Government is proactively saying things are too hot.  The number of countries that are “proactively slowing” growth is increasing every week; it’s becoming the norm not the exception (Australia joined in last night and India has a real inflation problem to address).  Just to name a few….


With this trend solidly in place, and critical component to overall earnings growth, we would argue that over the next four quarters the risk/reward points to the downside in emerging economies; thereby placing much more pressure on the developed world recovery to meet the S&P 500 earnings growth numbers.  Such a recovery is not a likely event! 


We have been very vocal about the mounting sovereign solvency issues in Europe.  In many ways, the European crisis echoes the way the U.S. banking crisis brought the global banking system to its knees.  At that time, the global monetary policy-makers allocated trillions to prevent systemic collapse.  In total, the sovereign debt crisis in Europe could also threaten systemic collapse.  As with the U.S. banking crisis, I expect that everything possible will be done to prevent that type of massive melt down. 


As a result, U.S. fiscal stability is the key to keeping global systemic risk in check.  Unfortunately, our balance sheet issues are very much the same as those facing the PIIGS.


April Flowers/May Showers



Howard Penney
Managing Director

HIBB: Tidbits from Hibbetts

We visited with Hibbett Sports’ management team last week at their headquarters and came away feeling more confident that same store sales continue to improve and margins continue to expand in the near-to-intermediate term.  Our sense is that following a positive start to the quarter there was little if any deceleration in comps, which management highlighted were up ~14% including Saints and Alabama sales through the first 39 days on the March Q4 earnings call (core up 11%-12%).  With near-term results remaining positive, comps getting substantially easier next quarter, and full year results likely to shake out closer to $1.50 versus the Street at $1.30, we expect near-to-intermediate term outperformance to continue.  In addition to incremental company specific highlights, there were several notable observations:


  • When pressed on the company’s ability to meet or exceed prior peak operating margins (last achieved in 2007 with or without a 53rd week in that year), management responded with a confident “yes”.  Key to driving margins higher are productivity gains ($200/foot goal driven by 3-5% annual same store sales), gross margin gains driven by systems enhancements (auto-replenishment, store level allocation) and resumption of growth over time to a 5-7% unit growth rate.


  • Enthusiasm for “toning” goes way beyond the shoes themselves.  While HIBB chief merchant was bullish on Reebok and a potential resurgence in the brand, she was also broadly enthusiastic about the prospects for a pick-up in women’s overall.  The marketing spend and excitement surrounding toning has given the women’s category new life, after three years of negative comps.  Importantly, it appears that the vendors are working hard to make this trend last by going beyond selling as many shoes as possible.  Apparel and youth rub-off sales have been picking up as the female traffic has picked up.


  • There is no question that HIBB still views itself as a formidable growth retailer, with over 350 potential sites identified in existing markets.  However, the near-term outlook for store growth remains tempered by a lack of new development in the company’s target markets.  There has been no sign of credit easing for HIBB landlords and strip-mall developers, which is the key reason why HIBB will only open 15-20 stores this year (net of 10-15 closings).  Re-use properties are plentiful, but not often in the right centers or the right size.  Movie Gallery is likely the biggest source of opportunity for re-use over the next 12 months. We also got a sense that given tight supply in existing markets, the company might branch out to contiguous states providing further upside.


  • Underlying recent positive trends is a simple fact.  The customer is responding to newness and innovation, with little price resistance.  HIBB best selling shoe is currently the $160 Nike Air Max 2010.  This is the first time in over three years we have heard of sell-throughs being this strong for a $100+ silhouette.


  • As it relates to unemployment, there is a very high correlation between unemployment and comps at the state level. During our meeting, management noted that its best performing states also happened to be those with among the lowest level of unemployment. For example, Nebraska, Iowa, and Kansas have all reported comps north of 20% while posting unemployment of 4%, 6%, and 6% respectively.


  • Gas prices are critical to the sun-belt consumer, particularly at the $3/gallon level.  Management highlighted this is a particularly important confidence level for sun-belt consumers and one where there is a notable correlation with sales growth.  At the time of our trip, prices were ~$2.80.


  • Tax refunds have not had a material impact so far on sales results. If anything, the effect has actually come a couple weeks later than last year.  Moreover, the broader ramp in consumer spending is having a far greater impact than any tax related benefit.  In other words, management was a bit dismissive that this factor alone has been a key contributor to nearer-term strength.


 - Casey Flavin & Eric Levine



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A small EBITDA miss but not really relevant. Surpisingly, previously stable Downtown disappointed but how quickly the LV Locals market improves will be the main driver going forward.



BYD missed our EBITDA estimate by only $1.4 million but we were below the Street.  The big negative was Downtown Las Vegas which had been holding in nicely, but missed our Q1 estimate badly with EBITDA down 37%.  The positives were cash flow and debt paydown.  Going forward, all eyes are on the LV Locals market which is clearly getting less bad, although down 11% on a -32% comp is not exactly table pounding, but at least it wasn't a miss from expectations. 





"We continue to be encouraged by improving trends in our business, which clearly reflect the signs of an emerging recovery. Our Las Vegas Locals market reported the best year-over-year comparison in nearly two years, and business levels are returning to normal seasonal patterns in this region. Given the positive developments in our business, combined with continued improvement in the national economy, we expect to generate year-over-year growth during the second half of 2010."

- Keith Smith, President and Chief Executive Officer of Boyd Gaming



  • LV Locals: "While conditions remain challenging in the region, the fundamentals of our business are strengthening, and we saw sequential improvement in this region for the second straight quarter."
  • Downtown: "Results reflect lower ticket pricing and higher fuel costs associated with our Hawaiian charter operation, as well as lower Downtown visitor volumes."
  • Midwest & South: "Regional results were impacted by declines at our Louisiana properties as the market continues to normalize, partially offset by Adjusted EBITDA growth in Illinois and Indiana."
  • Borgata: "The decline was principally due to reductions in visitation caused by severe winter weather, which impacted the property repeatedly throughout the first quarter."



  • Visitor volume has increased over the last 5-6 months in the locals Las Vegas markets. They expect that convention business will improve in the second half of the year
  • Will aggressively pursue M&A
    • Stations - continue to be interested in acquiring them
    • Also looking for additional acquisition opportunities that can create shareholder value
  • Expect a similar y-o-y decrease in EBITDA in 2Q2010 and a return to EBITDA growth in the 2H2010 in the Las Vegas locals market
  • Downtown was impacted by a combination of lower ticket prices and higher fuel prices which accounted for 1/3 of the decline.  Rest of it was due to Hawaiian economy and state gaming tax introduced in Hawaii
  • Level of growth they saw in LA during 08 & 09 wasn't sustainable and expect the declining revenues to continue through 3Q2010
  • Excluding weather, they think that Borgata's EBITDA would have been flat y-o-y
  • Believe they will return to overall growth in 2H2010
    • On an aggregate basis, not at every property
    • Apples to apples basis - not including Borgata
    • Yes, they mean EBITDA growth too
  • I don't understand why they are pumping up Borgata if they want to buy it on the cheap? hmmmm
  • Starting next quarter they will fully consolidate all of Borgata's revenues and expenses, and all BS items
    • Minority interest will also increase obviously
  • 6.5x was their leverage ratio at the end of the Q
  • Corporate expense this Q is a good run rate for the rest of the year
  • Interest expense: $125MM for the year plus Borgata's interest expense of $5-6MM per year.  Next year Borgata's interest expense will be impacted by refinancing of that facility
  • Maintenance: 55-60MM and Borgata's is 15-20MM for the year



  • Weather impact was really only at Borgata $5-6MM
  • Florida - now that the tax rate has been lowered they are re-evaluating that market but still watching how it develops
  • Stations assets - at this point they will wait and see what the judges ruling will be before they move forward
  • Would they consider selling their interest in Borgata's along with MGM?
    • Will see what happens. Right now they will just wait and see and don't have any interest currently in selling their stake but will wait and see
  • Las Vegas locals market- what does it mean that they are seeing normalizing trends?
    • Historically the 1Q has been the best quarter for the market and for the first time in a while 1Q was better then 4Q - and hence the seasonality comment
    • Spend is still obviously down but is seeing an uptick in visitation - the first time in 2 years
  • Confident that Borgata will be able to compete going forward in the face of supply in PA
  • Lower visitor volumes Downtown?
    • Number of commercial airline visitors was definitely down y-o-y
    • In addition saw lower levels of traffic from street levels
    • Not driven by less local visitors
  • Business as usual vs. just increasing promotional environment at Borgata to deal with new supply and table games. Borgata reallocated costs across the property when slots came to PA initially.
  • New Jersey doesn't need new capacity to stimulate demand
  • They just have a simple right of first refusal for MGM's stake in Borgata... lol no they can't force a potential buyer to pay the same for BYD's stake
  • Opening City Center is impacting their Downtown properties as well as the historically low rates that are driving people to try to upgrade
    • Cooler crowd

ROST: KM Covering

Keeping a trade a trade. While we still believe this is one of the better shorts in the intermediate-to-longer term, Keith is covering ROST on market weakness and ahead of sales day. We’ll revisit at a different time/price.


Headline miss but ASCA actually beat our EBITDA slightly. Below the line was worse. Maybe we were too conservative but East Chicago wasn't the disaster we thought.



Despite the weather, George Bush, low hold, and other excuses, ASCA actually beat our EBITDA estimate slightly.  They missed the Street, of course.  Below the EBITDA line items were worse so EPS looked bad.  While the excuse game gets a little much sometimes, we actually feel a little better about the properties going forward, particularly East Chicago.  However, EPS will likely go down significantly going forward, due to a higher tax rate, corporate expense, and interest expense.   





"In comparison to the extremely strong first quarter of 2009, when we established several all-time financial performance records, the initial quarter of 2010 proved to be more challenging due to a variety of negative factors that impacted our operating results....We continue to see soft consumer discretionary spending in most of our markets, as most significantly evidenced by market contraction on a year-over-year basis in our Vicksburg, Kansas City, Council Bluffs and Jackpot markets"

- Gordon Kanofsky, Ameristar's Chief Executive Officer



  • "Our luxury hotel and the favorable regulatory changes in Colorado spurred year-over-year gross gaming revenue growth of $12.0 million in the Black Hawk market during the first quarter, and we were able to capture more than 100% of that"
  • "Ameristar East Chicago's admission levels and operating results continued to be adversely affected by a permanent bridge closure in the fourth quarter of 2009 that has made access inconvenient for many of the property's guests. The bridge closure contributed significantly to the 47.2% decrease in Adjusted EBITDA as compared to the prior-year first quarter."
  • "The first quarter of 2010 was adversely impacted by low table games hold at several of our properties, including Ameristar East Chicago where a high-limit player affected Adjusted EBITDA by approximately $1.6 million."
  • "Our Midwest properties were negatively impacted by the increased frequency of inclement weather... Additionally, the poor weather conditions were often present during weekends and holidays."
  • "Employee benefits expense increased year over year by $1.9 million."
  • Outlook: "Although we were presented with several challenges during the first quarter, we are fortunate in that some of them are expected to be subject to the law of averages, such as the inclement weather, low table games hold percentages and spikes in health benefits claims"
  • 2Q2010 Guidance:
    • D&A: $27 to $28MM
    • Interest expense, net of capitalized interest: $34 and $35MM (includes non-cash interest expense ~$2.8MM)
    • Tax rate: 42.5% to 43.5%.
    • Capital spending: $15 to $20MM
    • Capitalized interest: $0.2 to $0.3mm
    • Non-cash stock-based compensation expense: $3.0 to $3.5MM


  • Comparison between 1Q09 and 1Q2010 was difficult as everything went right for them last year
  • Implemented almost all of their cost controls by 1Q09, and therefore they are particularly happy with their margin performance given the top line results.
  • Used 42% of Adjusted EBITDA to pay down debt
  • Still playing around with the marketing & promotions at East Chicago to get maximum efficiencies. 
  • The bridge is permanently shut down, but the state will allow the use of the highway to improve access to the property late this year. By 2012 they will complete the second phase of a project to really help the egress to the property
  • Continue to see the consumer being very frugal with their money
  • Few unexpected items in the Q included:
    • increase in benefits to healthcare charges and some particular non-recurring timing issues, weather- especially on peak times like holidays and weekends and low hold
  • Hotel occupancy at Blackhawk has been exceeding 90% since opening. Attracting a lot of visitors from the Denver market. Their gross gaming revenues increased by $14.9MM and market share grew to 26.9%
  • Game plan is to retire debt with their FCF.  Retired an additional $12MM of debt in April
  • High cash balance is related to certain interest payments they need to pay in 2Q2010
  • Expect to retire $70-80MM of net debt for the year and are slightly ahead of that plan.
  • Once the swaps expire on 7/19/2010, they will see a substantial reduction in interest expense in the 2H of the year by roughly $12MM


  • Weather likely impacted them by several million
  • Overall impact of low hold was a couple million
  • Also getting impacted by road construction / access issues in St. Louis which will be completed over the next few months
  • Didn't seem to be particularly interested in acquiring any Stations assets
  • Any signs from the consumer that things are improving?
    • No
  • Are East Chicago costs normalized this quarter?
    • Yes but they are still tweaking the promotional campaigns
  • Benefit charges had to do with changing providers and a large claim settlement that was outstanding. There has also been some accelerating trends on healthcare costs. However, those costs will be more balanced going forward
  • There were also increases in SG&A as well. Corporate run rate excluding stock comp should still be $47MM for the year
  • Capital spending for 2Q 2010: $15-20MM
  • Still have over $4MM of construction payables outstanding pending the outcome of their lawsuit with Walton in St. Charles
  • The stock comp guidance doesn't include the deferred comp plan.
  • The point of their hotels is largely for promotional purposes
  • Gas prices did have a negative impact on them last time they were over $3.50/ gallon
  • Found that the consumer was very happy to spend ASCA's money in 2008 when things were weak but that wasn't efficient for them - as soon as their promotions dried up, so did spending.

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