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Konami has emerged as a real force in the slot world but CYQ1’s ship share is not sustainable. History says BYI and IGT will regain some share back from Konami in CYQ2.



There’s no question that Konami has been steadily gaining ship share over the last 2 years.  The games are popular and the Street is abuzz over the new big “player”.  However, we would caution investors who are using Konami’s March quarterly ship share percentage and absolute number of units shipped to extrapolate results for the full year.  The March quarter is Konami’s fiscal 4th quarter and has historically been its strongest quarter for unit shipments due to timing of new product releases and corresponding special promotions.

As illustrated in the chart below, Konami’s March quarter is typically followed by a very weak June quarter.  In 2008 and 2009, the June quarter saw sequential declines of 49% and 61%, respectively, corresponding to a ship share drop of 7 and 10 percentage points.  Therefore, while we expect Konami’s shipments to be up from 1,038 units last year, we are expecting a material sequential drop this year. 




We’re projecting that roughly 18k units are shipped in North America in the June quarter, which is a little north of the 17k units we estimated were shipped in the March quarter.  If Konami ships 1,200 units less sequentially, that means that 2,200 units are up for grabs for WMS, IGT, BYI and ALL.  Therefore, there should be some sequential share gains amongst the other top 4 suppliers.  In looking at the chart, it appears that IGT and/or BYI could be the prime sequential beneficiaries of the “Konami phenomenon”.

European Call-Outs By the Charts

  1. Bucking the Trend: positive divergence from Germany - DAX breakout with inflation low and stable over the last months. Most recent CPI reading showed a sequential decline to 0.9% in June Y/Y. 
  2. Greece Is Not Done: Greek 10 YR Bond Yield like Greek CDS price indicates no reduction in risk. (For a point of reference, 5/10 marked the issuance of the €750 Billion European bailout “Band Aid”).
  3. PIIGS: excluding a meaningful breakout in Greek CDS, the remaining proverbial PIIGS show no sign of abatement. We expect risk to heighten as the sovereign debt spotlight continues to move across the continent.

European Call-Outs By the Charts - mh1


European Call-Outs By the Charts - mh2


European Call-Outs By the Charts - mh3


Matthew Hedrick



The Macau Metro Monitor, June 28th, 2010


IRs BOOST TOURISTS Straits Times, Reuters, STB

Singapore had 946,000 visitors in May, a 30.3% YoY growth. It is the highest ever recorded visitation number for May. Singapore has now seen record numbers for the months of December 2009 to April 2010.  Arrivals from Indonesia, India and Malaysia continue to lead with 186k, 116k, and 82k, respectively.  Hong Kong (48.8% YoY), Malaysia (48.7% YoY), and Taiwan (47.4%) visitors had the highest growth.


In other news, average occupancy rate grew to 85%, up 17.1% from last year, and hotel room revenue has soared 45.2% YoY. In addition, Singapore's Changi Airport, Asia's fifth-busiest, saw traffic increase 21.6% YoY, its highest monthly percentage growth in six years.  "The increase in passenger traffic was partly driven by the Vesak Day long weekend and the beginning of the mid-year school holidays at the end of May," Changi Airport Group said in a statement.


BYE, BYE SUBSIDY SCHEMES macaubusiness.com

The Macau government’s “Four Percent Home Purchase Loan Interest Subsidy Scheme” and the “Home Purchase Guaranteed Loan Scheme”, both introduced in June 2009, will expire today.  It is believed that the government will not extend either scheme.


The “Four Percent Home Purchase Loan Interest Subsidy Scheme” was a scheme providing a subsidy for the interest payments on the monthly loan installments, with the highest subsidized rate being 4% per year.  The “Home Purchase Guaranteed Loan Scheme” was a scheme mainly assisting permanent residents of the Macau SAR to purchase their houses by guaranteeing the bank loan.  Both schemes were only available for housing units whose bank evaluated selling price was below MOP2.6 million.


The unemployment rate for March-May 2010 was 2.9%, down by 0.1% over the previous period (February-April 2010).  Total labor force was 326,000 in March-May 2010 and the labor force participation rate stood at 71.5%, up by 0.4% from the previous period.  The number of the unemployed persons held stable at 9,600.

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R3: FINL’s ‘Whoops’ on UA Footwear


June 28, 2010


Finish Line’s management team slipped on Friday, giving indication that Under Armour’s basketball product is on the way sooner that many may think.





Finish Line’s management team slipped on Friday, giving indication that Under Armour’s basketball product is on the way sooner that many may think. So many people we talk with seem to blindly accept that UA footwear will not meaningfully push until 2H11. But c’mon… don’t you think that management would buy themselves just a little time to execute this initiative? After the first go around, where results were so-so at best, they’re not going to get this wrong. That’s not because it’s written in the cosmos, it’s because they’ve proactively invested for it, beginning last summer. I don’t believe that basketball will be UA’s saving grace, but will be one of the many categories that allows the company to take this from being a $150mm footwear brand, to being a $1bn brand.  


R3: FINL’s ‘Whoops’ on UA Footwear - UA Youtube 


Kevin Plank Q4 08 CC (January 29, 2009)Beyond running footwear, there are growth opportunities for us long-term in soccer boots and eventually once the product is

ready, basketball.”


Kevin Plank Q1 09 CC (April 28, 2009)“We have no designated date as to when we will be launching basketball, other than the fact that exactly when we are ready.” …  “But again we believe that we are going to be very important in basketball. We also believe that we have the luxury of being patient as to the point when we decide to enter that market. And we will do so, frankly, first and foremost and only when the product is 100% ready. So we're biding our time and going to make a strategic decision around that.”


David McCreight Q2 09 CC (July 28, 2009)As it relates to basketball we currently are already on court. We'll continue to read the market place there and roll out when appropriate.”


Kevin Plank Q3 09 CC (October 27, 2009)We've got 20 Elite high schools. We've got Brandon Jennings in the NBA, so we have presence and we more importantly have feedback from all levels of competition

and we will be evaluating and making those decisions to go at it, first and foremost when the product is ready and when we're ready to support it and tell a big story. Go heavy or go home.”


Kevin Plank Q4 09 CC (January 28, 2010)Being a great footwear company is not just about making a big splash with launched products, and we have no major footwear launches planned for 2010. However, we are developing our basketball footwear and positioning for a future launch. While you won't be able to find Under Armour basketball footwear for sale at retail, you will find it being tested and authenticated throughout 2010 on the feet of ten Division I basketball programs, more than 20 top high school programs, as well as on the feet of NBA Rookie of the Year contender, Brandon Jennings. We can be patient because of the multiple growth levers that

allow us the patience to prioritize.”


Kevin Plank Q1 10 CC (April 27, 2010)As it relates to basketball, number one, we are very committed to getting into this category. And for us it's not a question of if as much as it's a question of when.” … “I think we are very, very pleased, I think, with the progress we've made to date. And I think we're frankly sitting in the catbird as to the timing and when we choose to enter this category. And I think we'll be opportunistic with that approach, but it doesn't have to be something we can force. And, frankly, as you can see, with the strong Apparel business we can use timing to our advantage and are not forced from a revenue standpoint. So the answer to that is we're not making any declarations as to when we're going to enter the market. But when we do we'll walk in with a point of view and we'll enter with strength.”


Sam Sato FINL Q4 09 CC (June 25, 2010)"As we move into Q3 and beyond, Reebok under the Zig Tech is introducing a basketball shoe as is Under Armor and we've seen both of those and put orders against that and think there's a tremendous opportunity for us to capture some business in that category as well."






-Finish Line noted that it is developing a couple of prototype concepts in conjunction with Nike. The first is a shop-in-shop concept focused on Nike Running. The second is a prototype focused on showcasing Brand Jordan. Both tests are in development with no specific rollout plans at the moment. However, management is bullish on the opportunity for running and suggested this could be a big opportunity over time.


- A new study suggests reusable shopping bags are full of bacteria and should be washed frequently. The University of Arizona study found that 12% of its sample bags (collected from Tuscon, LA, and San Francisco) contained e. coli. Maybe disposable bags weren’t so bad after all?


- In one of the more unique sponsorship opportunities we’ve seen, Old Navy is the official retail sponsor of this year’s Coney Island hot dog eating competition. Old Navy has created a custom shirt that competitors will wear, which will also be available for purchase in 1,000 Old Navy stores. This is just sad...





The Great Trade Down Continues - Americans are continuing to trade down in greater numbers in the wake of the economic downturn, even as consumers in other developed markets begin to lose their taste for bargain hunting. Trade Down findings from a Boston Consulting Group report called “A New World Order of Consumption.” 2010 survey results show that trading down is still going strong in most markets, but it has fallen from the overall peak level found in late 2008. Trading down continues to gain strength in the United States, where it is up 5% over 2008 levels. In the last study two years ago, 48% of Americans indicated they were trading down, this year 53%. 18% said they were trading up and 29% said they weren’t changing their spending mentality. 51% of European respondents indicated they were trading down this year, off from 56% in 2008. 56% of U.S. respondents indicated they were trading down on their own apparel purchases, versus 19% who were trading up. In the beauty realm, 52% were trading down on facial skin care and cosmetics, versus 21% who were trading up.  <wwd.com/business-news>

Hedgeye Retail’s Take: We wonder if the retailers who benefitted the most from the ‘Trade Down Factor’ – Dollar Stores – are paying attention. 


FIFA Acknowledges Problems with World Cup Ball - FIFA has finally acknowledged that there may be something wrong with the Jabulani World Cup ball, but won't act on the problem until after the tournament. <sportsonesource.com>

Hedgeye Retail’s Take: This is like a broken record. Same thing happened with the Adidas ball in 2006. But really…the issue at hand is that the ball has the appearance of a knuckleball when kicked. But this hardly synchs with a tournament that has been rather low-scoring,  


Chinese Footwear and Apparel Exports to Vietnam Surge - China's footwear, textile and garment accessory exports to Vietnam have increased 45% in the first five months of this year, according to the Vietnam Customs. From January to May, China's textile exports rose 29.69% year on year and apparel exports increased 13.13%. In May, the textile and apparel industry saw total export value reach US$16.43 bn. <fashionnetasia.com>

Hedgeye Retail’s Take: Yes, this coincides with the start of the Asian Free Trade Agreement where a 4% tax between Asian nations was put to bed starting Jan 1. 


Global Retail M&A on Rebound with Focus in Europe - Already this year, the value of global acquisitions of apparel manufacturers, as well as apparel and shoe, jewelry and department stores jumped 133% to $11.28 bn, according to Dealogic. And Europe led the way with $6.98 bn worth of deals in the four sectors this year, even excluding BCBG Max Azria Group and Nicolas Berggruen’s agreement to buy Karstadt Department Store Group. The global retail M&A dollar figure advanced despite a decline in the number of deals to 207 from 280 at this time last year, indicating companies are starting to take bigger bets as they consider combinations.  <wwd.com/business-news>

Hedgeye Retail’s Take: No shocker here. 


Sport-Haley Acquires Bette & Court Golf - Sport-Haley, Inc., the maker of golf and lifestyle apparel, completed the acquisition of all of the assets of Fantasi International, Inc., a Florida corporation doing business as Bette & Court Golf. <sportsonesource.com>

Hedgeye Retail’s Take: The interesting part of this is that we’re seeing more activity in the ‘down and out’ golf category. Mre signs of it having found bottom. Probably good for Dick’s/Golf Galaxy.


Athletic Trend: Hiker Hybrids - Athletic brands are taking their style cues from the great outdoors this fall. Blending the classic hiker silhouette with sneaker-based shoes has resulted in a varied collection of looks, from rugged to sleek, understated to over-the-top. Brands with the in style products include: Adidas, Puma, K-Swiss, and other smaller brands. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Makes sense.


Utah Ski and Snowboard Visits up 2% - The Utah ski and snowboard industry closed the 2009-10 winter season this past Sunday with a total of 4,048,153 skier days, up 2% from the 2008-09 season at 3,972,984. Visitation was boost by abundant and late powder. <sportsonesource.com>

Hedgeye Retail’s Take: Nice to see any form of location-based entertainment (most such venues are in a secular decline) show decent growth.


FQ4 was likely not a great quarter but expectations are pretty low and 2011 ship share should improve from the depths of FQ3.



When BYI reports its FQ4 results, EPS may come in at the lower end of its guidance range and perhaps a slightly below current consensus estimates.  We’re also a touch below the street for FY2011 given likely delays in IL, NY, and potentially Italy.  However, a small miss off of consensus should be no surprise and likely good enough with the stock down 25% from its 52 week high and only 3% above its low of the year.


BYI is at a potential inflection point, given their recent ship share losses coupled with the very recent launches of its new Pro Series Alpha II cabinet and Cash Spin product.  We view fiscal 2011 as a make or break period for BYI.  The next few quarters (beyond FQ4) will either prove out the bear thesis that ship share is heading to low double digits or validate the bull thesis that ship share will recover with the new cabinet and product launches.


As shown below, BYI’s ship share has taken a clear share hit since averaging 21% in 2008.  In 2009, BYI’s share slipped to 18% and most recently to 14% in the March quarter.  While 21% share is probably too high, we do think that BYI’s share will rebound to the high teens by the December quarter for two reasons.  First, customers have likely been postponing BYI purchases during the last two quarters while BYI readies its new Alpha Series cabinet for release.  In addition, a significant number of game titles will become available for the new platform in the September and December quarters which should facilitate sales momentum for the new cabinet.  Second, it appears that Konami was at least partly responsible for BYI’s March share loss.  Konami increased its own share 4.4 percentage points sequentially but that is not good run rate to use for the balance of the year as the March quarter (fiscal year end) is always Konami’s best.




While video has historically been BYI’s Achilles heel, its V32 cabinet is doing very well and the core video product should see a nice lift with the new cabinet launch.  According to the company, roughly 50% of units being shipped today are video. BYI’s gaming operations business is also doing well.  We continue to hear that the company is executing well on multiple fronts here with the Tower Series, new wheel games, and excitement surrounding Cash Spin.  If the anecdotal evidence proves correct, gaming ops growth could accelerate over the next few quarters.


Given the recent move down, the stock now trades at 13x forward earnings.  This looks low especially considering the very favorable long-term fundamental backdrop for the slot suppliers.  Execution on the new cabinet and game library will be critical.


While the level of discounting in casual dining continues to decline, growth in guest counts remains depressed. 


Malcolm Knapp reported May same-store sales and traffic results of -0.9% and -3.9%, respectively.  For same-store sales, this constitutes a two-year average number of -3.8%, which is down sequentially from the -3.5% (revised) two-year average decline in April.  The traffic number represents a two-year average of -4.9%, a sequential improvement of 10 bps from April’s two-year average traffic number.  During earnings calls pertaining to the first quarter, management teams had been mentioning an improvement in traffic numbers in April that did not manifest in the Knapp track numbers.  May shows a slight improvement in two-year traffic trends but, on a year-over-year basis, traffic trends are indicating softness.   


In terms of the general consumer environment, Knapp signals the ongoing financial crisis as the primary cause of weakness in sales.  This is reflected, according to Knapp, by increasing mortgage defaults and continuing high levels of unemployment and underemployment.   Knapp also cites a recent Wall Street/NBC News poll that showed that 62% of adults believe the country is on the wrong track, the highest level since before the 2008 elections. 


The chart below shows that the discounting level is abating; the unusual excess of guest counts over same-store sales indicated a discounting environment.  The level of discounting seen for a large part of 2009 seems over with comparable sales exceeding comparable guest counts by 3% (the largest margin since May 2008) in May.  Knapp states that value propositions with “meaningful products for the majority of concepts will continue to be very important”.  If macro headwinds persist, it seems it will be difficult for casual dining companies to meaningfully elevate traffic trends without further discounting.


KNAPP – UGLY TRAFFIC NUMBERS - knapp discounting



Howard Penney

Managing Director


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