Death of FL Greatly Exaggerated

In advance of today’s Nike analyst day, it’s first meeting in three years, there was much speculation about an unveiling of a major company-owned retail rollout.  Taking this a bit further, there was also a belief that this announcement would be detrimental to Footlocker and its efforts to ultimately compete with Nike, it’s largest vendor.  Now that the presentation is complete, we remain confident that this speculative threat in the domestic market was greatly exaggerated.


The bottom line here is that Nike plans to add 280 stores, of varying formats, sizes, and product offerings on a GLOBAL basis over the next five years.  Management went on to further clarify that the North American market will likely see less owned-retail growth as Nike is mindful of an already advanced wholesale/retail partnership network here.  Overall, we heard nothing that would impair Foot Locker’s ability to achieve and potentially surpass its EBIT margin goals of 7.5+% over the next few years. 


Importantly, there were subtleties that stood out that may benefit FL and its relationship with Nike.  First, we heard a thorough discussion about the company’s sophisticated tools which allow Nike to analyze specific markets and potential sales opportunities across all points of distribution (not just Nike owned stores).  Secondly, we also heard the mention of House of Hoops as an example of how they can work with a partner to specifically target a local market with a very specific product offering and merchandising message.  While these are just little anecdotes, we continue to believe this is indicative of the positive transformation in the relationship and collaboration between the two companies.


Overall, our view on Foot Locker remains unchanged and favorable following what we heard today.  Nike’s product driven initiatives and investments in infrastructure will benefit the 3,500 unit chain well beyond the potential challenges Foot Locker may face from an uptick in Nike owned retail.  Importantly, the speculative threat centered on massive retail growth was overdone.


Eric Levine



Expecting an in line quarter, it's going to be all about outlook and cost control



"Table drop, slot coin-in and visitation [at River Rock] witnessed double-digit improvements when compared to February 2009.  Unfortunately though, the benefit of these increases was offset by a table hold percentage of 14.9%, well below River Rock’s historical average.  While this is always very effective marketing, it did in combination with the Olympics related closure of Hastings Racecourse contribute to February 2010 revenues in BC declining by 7.6%, when compared to last year.  In January 2010 for comparison, BC revenues were essentially flat, when compared to January 2009."

- Milton Woensdregt, Chief Financial Officer


Milt kind of said it all with the comment above.  The local government numbers showing the gov't share of provincial casino revenue numbers also tells us that revenues in 1Q2010 should be modestly down y-o-y.  Everyone already knows this, so in this quarter all eyes will be on March and April trends and cost controls.  We estimate that GC will report an in-line quarter with revenue of $94MM, slightly below the Street's $95MM estimate.  However, despite lower revenues, GC should be able to slightly exceed the consensus EBITDA estimate of $31MM.


Aside from the poor hold at River Rock in February and closure for part of the quarter at Hastings, the y-o-y comparisons are pretty clean - that is, no weather or major hold issues in either quarter.  Local share of provincial casino revenues data implies that Great Canadian's BC casinos had a 5% y-o-y decline in gaming revenues.  We're estimating a 4% y-o-y decline in BC gaming revenues.  On the call we will be focused on:

  • March and April trends.  We think March was pretty uninspiring - the data implies 3-4% degradation from last year
  • Early signs of feedback on the new player tracking rewards program
  • Feedback on additions at Georgian Downs and View Royal and the slot refresh at Nova Scotia
  • Evidence of control and ROI on their marketing expenditures


1Q2010 Detail


We estimate that River Rock will report $29MM of revenues and $11.4MM of EBITDA.

  • We estimate 4% decline or $22.3MM of gaming revenues, assuming:
    • 7% increase in drop, 18% hold; 10% increase in slot coin in and 7% win rate
    • In 1Q09 table hold was 21.9% and slot win % was 7.1%
  • 15% increase in other revenues driven by a 10% increase in F&B and a 29% increase in hotel revenues
  • $17.3MM of operating expenses, which compares to $17.4MM last quarter and equates to a 3% increase from 1Q09, driven by an increase in marketing costs.



We estimate Boulevard will report $16.9MM of revenues and $7.8MM of EBITDA.

  • We estimate a 4% decline in gaming revenues to $14.4MM, assuming:
    • 5% decrease in drop and 19.15% hold; 6% decrease in slot coin in and a 7% win rate
    • 1Q09 has an easy hold comparison of 18.3% on tables and slot win % of 6.9%
  • We estimate that other revenues are flat relative to 4Q09 results at $2.5MM or up 5% y-o-y
  • $9.1MM in operating expenses, down 3% y-o-y

GC 1Q2010 PREVIEW - boulevard


We estimate that Vancouver Island properties will report a $10MM of revenues and $5.9MM of EBITDA.

  • We estimate a 2% decline in gaming revenues to $9.1MM, assuming:
    • 3% decrease in drop and 23.5% hold; 2% decrease in slot coin in and a 7.2% win rate
    • 1Q09 table hold was 24.2% on tables and slot win % of 7.2%
  • We estimate that other revenues will increase to 860k.
  • Operating expenses flat to 4Q09

GC 1Q2010 PREVIEW - vancouver


Other properties:

  • We expect Nova Scotia revenue of $10.8MM and $2.6MM of EBITDA.  We actually expect gaming revenues to be up almost 4% at the Nova Scotia properties this quarter and costs to be in-line with last quarter.
  • We expect Georgian Downs to be flat with last quarter revenue wise and EBITDA wise.
  • Great American properties should be up handsomely due to the FX benefits of a strong Canadian dollar.
  • Racetrack revenues should be down about 10% y-o-y given the closure at Hastings.


In preparation for OEH's Q1 earnings on Thursday, we've highlighted management's forward looking commentary from its Q4 conference call. 




  • "To drive revenue and EBITDA, we have minimal opportunities now to cut cost further.  It’s now about the revenue line."
  • "The key focus in 2010 will now be on the sale of developed real estate.  In January, we completed the first phase of Porto Cupecoy, our 184 condominium development on the Dutch side of St. Martin in the Caribbean. To-date, 99 apartments have been sold and closings have now commenced."
    • "Gross sales to-date are over $68 million, of which $34 million has been received and invested in the project.  This leaves the further $34 million of closing proceeds, which will be received over the next few months as units are handed over to the buyer.  This will be sufficient to repay the outstanding debt and the residual construction costs, which means that we will then have further 85 units left to sell, three of that which should generate free cash flows of approximately $60 million.  This cash flow does not include additional projected sales of our mega-yacht marina slips, all commercial component, which we anticipate to produce the further $15 million of net cash...We will definitely sell the units within the two-year period. "
  • "So, the weather, has hit us on three fronts in 2010.  Firstly in Peru, major flooding, we have to close the Cuzco-Machu Picchu railroad, which will be reopened in early April.  This will have an impact on our hotels business, and whilst it is, we hope a non-recurring item... Net of insurance, we expect to lose between $2 to $4 million of EBITDA for the year."
  • "We completed two great acquisitions in January, the Grand Hotel Timeo and the Villa Sant’Andrea in Sicily, backed by successful equity raise from our shareholders.  Both properties are currently closed and will reopen in late May as Orient-Express property.  These along with the new Peru Hotel, Rio Sagrado, Hotel das Cataratas in Brazil, the villas at Jimbaran Puri Bali and the expanded Cambodian property will add to our portfolio in 2010."
  • "Our January revenues were up just over 10% ....  This growth was dominated by our rest-of-the-world properties, particularly the southern hemisphere ones, which are currently in high season."
    • "Copacabana Palace was up almost 40%, Russia up a healthy 6%, and both Africa and Asia in positive territories."
  •  "Quarter one bookings are currently tracking 6% ahead of the same time in 2009.  However, we expect ADR to be slightly lower in the first quarter, due in part to aggressive pricing decisions for shoulder season months. Quarter two bookings are currently tracking 10% below 2009 levels, but this gap is closing each month. One month ago, the gap was 60%. The equivalent numbers for quarter three, 8% down at the moment and this was 14% one month ago; obviously the third quarter is our high season quarter."
  • "Bookings for our Trains and Cruises businesses, 23% ahead of this time last year, and this is on a revenue basis. And VSOE, 25% ahead, encouraging news."
  • "The bulk of the Sicilian debt falls into the after-2012 category. The $60 million repayable in 2010 includes $27 million drawn on the Cupecoy project, which will be repaid over the next six months as the sold units are delivered and the final installments are collected from buyers."
  • "At this early stage, we’re expecting cash tax in 2010 to be in the range of 12 to $14 million."
  • "The largest maturing loan in 2011 is the European facility... it remains our intention to have this debt refinanced by no later than early in the fourth quarter of this year."
  • Properties update:
    • "Reid's and Madeira, La Residencia, Ritz Madrid, even Grand Hotel have big occupancy drops, but only small drops in rate.  I think actually the Grand has a slight increase in rate because the rooms mix change so much. So, I think having experienced a 15% drop in occupancy and only 5% drop in rate, one would like to think that the occupancy numbers would come back quicker and rate tends to follow."
  • "Booking windows in Brazil have been very short.  Copacabana Palace is sitting 16% up on rooms booked at the moment, but that is a small proportion of the overall number of rooms that they would book for the year.  On the other hand, the Peruvian hotels tend to be booked sort of eight, nine months on average in advance and they are sitting mainly because of the closure of the train line at the moment; they are sitting between 10 and 15% down.
  • Lender refinancing to credit facility: " The tone is very good.  Clearly, the pricing is going to be difference to the current pricing which is I think 70 – 90 basis points on that facility.  A year ago, it was going to be, if we’d done it a year ago, [inaudible] we would have been easily over 300 basis points, but I still feel today we can achieve something in mid-200s."
  • Portfolio customer breakout: "It’s about 40% North America, 40% Europe, and 20% Rest of the World, and it’s quite interesting when you look at the spend per capita. I was in Russia recently and at the top of the league table were the Russians, lined number two were the Americans, UK was number three. We came to see that in the domestic market, the domestic customer is the higher spender followed by Americans."

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Lead, Follow, or Get Out of the Way . . . Hedgeye Is Long of Oil

Position: Long Oil via the etf USO


In the last nine weeks, we have seen a bifurcation in the price of oil and copper.  While the correlation is still high, oil has outperformed Dr. Copper. Specifically, copper is down 8% over the last nine weeks, while oil is up 1%.  Prices matter.


As we have often said, Dr. Copper received her PH.D in economics for her work as a leading indicator.  As Keith mentioned in the Early Look today, Dr. Copper seems to be signaling that global growth may be set to moderate.   This, of course, isn’t surprising given the steps that China has taken to slow loan growth and property construction.  In a tight note yesterday, Darius Dale highlighted a few of these points, the most important of which are:

  • 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; and
  • 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.

This headwind is obviously bearish for the price of Dr. Copper, since China consumes roughly 1/3 of the world’s copper, a large part of which goes into construction.


In contrast, oil has a more favorable set up.  We bought oil earlier this morning in the Virtual Portfolio as it neared its TAIL Line.   Two bullish points that we want to highlight on oil this morning relate to geo-political risk and drilling activity in the Gulf of Mexico.


We do not have the intention of being alarmists, but if the event in Times Square reminds us of anything, it is that terrorism is alive and well.  While the car bomb has been described as “amateurish”, the fact remains that the perpetrator was able to drive and park a car bomb in Times Square.  Given the amount of news in the news cycle in recent days relating to Goldman Sachs and sovereign debt issues, the brazen nature of this attempted attack was left somewhat unanalyzed.  The reality is, even if there were merely a hundred such individuals in the United States, they could do serious damage.  The ultimate derivative of such attacks is that the United States accelerates military action in the Middle East, which puts at risk global oil supply, at least in the short term.


Over time, despite assurances from each respective President that this would not occur, the United States has become increasingly dependent on foreign sources of oil.  In the table below, we’ve outlined the U.S.’s increasing dependence on foreign oil over time, which, in aggregate, emphasize the increased geopolitical risk factor that should be incorporated into the price of oil.


Lead, Follow, or Get Out of the Way . . . Hedgeye Is Long of Oil - Dependence of Foreign Oil


The other important point to emphasize, which is bullish for oil, is the oil spill in the Gulf of Mexico.  The oil spill is quickly becoming the most substantial potential environmental disaster in decades in the United States.  For comparison purposes, the Exxon Valdex spill was 11 million gallons, but in this situation, a well is leaking, which has many times the capacity of a tanker.


We are already seeing the impact of this spill from a policy perspective.  Specifically, Governor Schwarzenegger from California has withdrawn his support for expanded drilling off the coast of California.  In the worst case scenario, offshore drilling in the United States is dramatically curtailed, or halted outright.  In a more realistic scenario, costs for offshore drilling from insurance and increased infrastructure increase dramatically.  Regardless, the nominal cost of drilling offshore in the United States will go up, and supply will tighten on the margin.


In the shorter term, the oil slick could disrupt production in the Gulf.  The key offloading port for oil in the United States is Louisianan Offshore Oil Port, which is where many foreign tankers offload their oil.  If the slick gravitates towards that area, it could halt 300K barrels of daily oil production and 1.3 billion cubic feet of natural gas product, which is equivalent to a major hurricane shut in.  The slick would obviously slow the offloading of tankers as well.


We are buyers of oil this morning as it trades down towards it’s long term TAIL line.


Daryl G. Jones
Managing Director


Lead, Follow, or Get Out of the Way . . . Hedgeye Is Long of Oil - Oil v Copper

Fade Fear: SP500 Levels, Refreshed

As prices fall and volume/volatility spikes, we are tightening the durations in our models. Managing risk in down tapes is what we specialize in. I love days like this.


As of 1030AM EST time, here are our refreshed risk management lines for the SP500: 

  1. Overhead resistance remains material at the TRADE line of 1192; use that as a stop sign for your shorts
  2. Immediate term support (oversold line) = 1160
  3. Intermediate term TREND support = 1144 

The gravitational suck of the math in our model suggests that there is a heightening probability that we take a good hard look at 1144, but that doesn’t mean we are going there today. The slingshot bounce off of 1160 could easily drive a +2.7% move to 1192 and nothing will have changed.


The reality of the math remains. The SP500 is broken from a TRADE perspective and holding TREND line support.


It’s time to fade fear, from a price.



Keith R. McCullough
Chief Executive Officer


Fade Fear: SP500 Levels, Refreshed - S P


Management struck a satisfied but cautious tone during the conference call.


Led by extremely strong top and bottom line results, DPZ posted an extremely strong quarter yesterday that had largely been priced into the stock which, before yesterday, had run up over 90% YTD.  Over the past couple of years the company has contended with softer consumer environments and high inflation in food costs.  Of late, consumer spending has been stronger and personal consumption expenditures have rebounded strongly on a year-over-year basis.  Additionally, while the commodity basket was up 4.1% for DPZ during 1Q, the company is not significantly exposed given contracts currently in place with suppliers. 


It was interesting to note that, even with the company maintaining cheese guidance of $1.50-$1.70 per pound for later in the year, there seem to be no plans to adjust pricing.  Promotions such as “two medium two-topping pizzas for $5.99 each” have proved profitable, according to management’s commentary, once “Coke, chicken and bread size” are included. 


Later in the call, a discussion of comps revealed that the +14.3% domestic comp was driven exclusively by traffic, with check “slightly down”.  Clearly any move injurious to comps would be a mistake for DPZ and the two obvious drivers of traffic were promotions and the new advertising campaign which, management said, had a high correlation with the sales improvement.  The company emphasized the new pizza as the key driver of trial and repeat customers this quarter but long-term guidance being maintained at +1% to +3% for domestic comparable store sales, despite the +14.3% growth in 1Q10, seems to have been insufficient to maintain investor confidence in the stock’s run (traded down nearly 13% yesterday).  FYI, the 14.3% domestic comp was versus +1.0% in 1Q09.  The quarterly comps to hurdle for the remainder of the year (-0.7%, 0.0%, and +1.4% for 2Q09, 3Q09, and 4Q09, respectively) are in line with those lapped so successfully during the just-reported quarter so guidance assumes a significant deceleration in trends.


Specifically, management said, “we’re certainly expecting solid results in the second quarter. This is a company that had 12 years without a negative comp … But we feel very good about getting back to consistent, positive comps as a company in our domestic business.  Not only did we have good trial on this new pizza, but our repeat numbers were great, our frequency has increased. There was strength across all consumer metrics. So, we feel very good about where we are.  All of that said, our long-term guidance remains positive comps of 1% to 3% on the domestic business.”  Beyond that, management wouldn’t get into specifics when questioned further on trends in 2Q.






DPZ Notes from the earnings call

  • Strong start to the year
    • EPS up 75% yoy on broad-based performance
  • Business is stabilized and company is poised to develop well
  • US momentum


  • Global retail sales grew 17.4% incl. FX
    • Robust domestic SSS growth
    • Strong int’l SSS growth
    • Int’l store growth


  • One of the best quarters ever
  • SSS +14.3% vs +1% in 09
  • Franchise up 14.2%, company 14.7%
  • Closed 17 stores
    • Shifting towards opening
    • Ending 2010 with flat domestic growth


  • 54 new stores
  • SSS +4.2% constant dollar vs +6.6% in ‘09

Total revenues

  • Up 18.4%
  • All operating divisions saw revenue growth
  • 2/3 of revenue increase attributable to supply chains
  • Higher volumes due to new pizza
  • Higher royalties
    • SSS and store count growth

Operating margin

  • Increased 70 bps vs last year
  • High volumes QoQ
    • Offset by higher cheese and meat prices
  • Company owned margins increased 1.4% YoY
  • 20%+ margin levels at company owned stores
  • Labor and occupancy costs dropped as a results of the increased leverage due to higher volume


  • $1.44 vs 1.23 last year for cheese
    • Some predicting increases/decreases…we see $1.50 to $1.70 range by end of year but not apparent yet
  • Supply chain margins benefitted from product mix changes, offset by higher commodity costs


  • Increased due to strong operating performance
    • Bonuses and expenses

Income tax

  • 38% this quarter
  • 39% will be normalized tax rate


  • $0.41 (or $0.35 adjusted)
  • Improvement is from
    • Lower interest expense
    • Foreign currency ($0.02)
    • Lower tax ($0.01)
    • Higher share count negatively impacted

Balance sheet

  • Bought back and retired ~$60m of principle on outstanding fixed rate senior notes at a discount
  • Leverage at 6.1x
  • 28m unrestricted cash
  • 27.4m of FCF in 1Q
  • Anticipating improving FCF on 2009


SSS increase is unprecedented

  • MCD posted a similar comp in 1Q04 at the beginning of a strong period for their business
  • Rare pace of sales growth is not something expected to continue at this level
  • DPZ responded to critics and produced an improved product


  • Suburban and high income customers coming on board
  • Online ordering nearing 25% of sales
  • Transparency has won a lot of custom and positive PR


Lessons learned

  • No tolerance of poor operators in system
  • Weeding out franchisees that won’t operate at the higher level
    • Reduction of store closure speaks to progress on that front



  • Retail sales will surpass domestic sales in just a few years
  • Want to nearly double the top ten international store counts internationally
  • International was 34% of operating income in 2009
    • Only YUM, MCD and BKC’s international businesses contributed more
  • International DPZ is larger than the system of any of its competitors


  • Potential is strong
  • Demographics are favorable
    • 1.2 billion people
    • DPZ is the largest QSR brand there
    • Median age is 25 vs 34 in China
    • Economy growing at high single digit rate
    • Great franchisee in that market

Bain Capital has done some distributions recently that brought down their holdings

  • No surprise to see them continue to distribute these shares
  • Recently bought into the master franchise project in Japan
  • Distributions were easily absorbed by demand





Q: Sales outlook? How is the category growing? Taking share from frozen pizza?  Dynamics besides the new pizza launch that may be driving comps?


A: Expecting solid results in 2Q, repeat numbers were great, frequency picked up, strength across all consumer metrics.  Long term guidance remains 1%-3% on domestic business.  Unclear if there is share being taken from frozen. Category has some weakness in ’08 and ’09 and some of this is recapturing those consumers.  Pizza is the fastest growing category vs the rest of the restaurant industry at the moment



Q: Weather impact?


A: If weather had any impact, the new pizza overwhelmed that impact.



Q: Comment on day part/day of week/geographies?


A: More strength in dinner day part.  Lunch and sandwich business all held up well.  Relative strength in dinner part versus a sea of strength!  International markets at 4.3% vs long term guidance of 2%-3% shows that we were strong really across the board. 



Q: Flat unit growth…with the improving unit economics your seeing are you getting more interest from possible franchisees?


A: the improving results are encouraging, particularly for existing franchisees.  The vast majority of growth going forward is going to come from existing franchisees. 



Q: Commodities?


A: Not seeing serious pressure – margins are up, sales are up, feel good about unit economics… we’re still running the same promotion that was started at the start of December. 



Q: In light of earnings growth, any thoughts on share repurchase?


A: Near term we’ll continue to buy back debt.  FCF at 1.5m per week rate…we’ll continue to buy back debt and will be focused on returning best returns possible for the shareholders.  We think that’s the right strategy right now.



Q: Other platforms, sandwiches?


A: These new platforms, like American Legend, have provided higher price points and the American Legend offers room for customers to trade up.  Although that’s been the focus of conversation, other platforms have done well.    



Q: Sensitivity of cheese to earnings?


A: looking at commodities being stable.  For the quarter, basket up 1.1%. cheese is most significant.  Inventories and production are up.  Maybe cheese will hit the $1.50 to $1.70 range in back of year but not seeing it.  Wheat, meat and poultry all look stable.



Q: Check was down? Comment on check and traffic mix, please.


A: It was all traffic.  We drove a lot of traffic.  Check was slightly down and all of the growth was from traffic.



Q: On G&A line, in January you saw a pickup in G&A, did a fair amount of that go in 1Q or is it going to be loaded in 2Q?


A: 3m of G&A and offset in revenues…call center is an example.  Primarily front loaded to first half.  The 1Q increase is related to sales growth and sales awards and incentives and bonus plan. 



Q: Marketing…any unusual laps?


A: Strong all year, we had franchisees commit to a new contract that started on January 1 that moves spend to 5% of sales. Record weeks on air this year.



Q: Considering how to spend your cash going forward?


A: We’re seeing the results of previous investments.  This is the best quarter a major US QSR chain has had.  The sales boost puts a lot of pressure on capacity and the system coped very well.



Q: International opportunity to invest more equity?  Given growth and scale would the company not look to put equity in international markets?


A: Never say never, but we like the model we have. 



Q: Advertising in Q1, was there a high correlation between sales improvement and spend? Is 1Q heavier in terms of advertising?


A: The day we went on air we saw an increase in sales, so consumers reacted quickly. Advertising clearly worked. It will continue to be strong through 2010.



Q:  Online sales were at 25%? Does it have a higher average ticket…with ticket down, why was that if online sales increased by 5% as % of sales versus 4Q?


A: Online sales were up by almost 5% and it continues to grow.  Skews heavily towards delivery.  It does have a higher ticket than phone or carry out sales but there are higher levels of customer satisfaction when orders come through online.

Increase in sequential online sales by 3/4% but on a year over year basis the impact on check isn’t that big.


Howard Penney

Managing Director

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