Operators’ hiring expectations are almost at pre-recession levels.


According to the People Report Workforce Index, 42% of respondents to a survey of restaurant operators said they expect to add hourly workers in the third quarter while a mere 5% plan to cut labor.  None of the respondents plan to fire managers while almost 50% plan to hire at the management level.  According to an article published by National Restaurant News, approximately 50 restaurant companies from quick service, fast casual, casual dining, and fine dining, responded to the survey.  From the results of the survey, it seems that quick service and fast casual are poised to do more of the hiring.  Hiring accelerated in the first half of 2010 with restaurants hiring 64,000 employees during the period.


Despite the slew of negative economic data emerging of late and the reported slowdown in casual dining trends as reported by Malcolm Knapp, reflected in the recent downturn in stock prices, it seems that restaurant operators are seeing a need for larger labor forces in their restaurants. This could be a leading indicator for an uptick in demand.  The possible pitfall of this thesis is that the People Report Workforce Index could be at “peak” levels, given business’ tendency to sometimes “hire at the top and fire at the bottom”.


RESTAURANT EMPLOYMENT - labor index restuarnts


Howard Penney

Managing Director


Solid Q2 and guidance


"While the economic recovery remains unpredictable, Penn National expects to continue to benefit from our focus on operations and margins, the substantial cash flow from our diversified operating base, modest maintenance cap-ex requirements and robust development pipeline. We remain confident in our ability to deploy our capital to generate significant value for our shareholders by continuing to execute on our long-term strategy of expanding and diversifying our facility portfolio through yield focused investments in existing facilities, the development of greenfield projects and, when available, accretive acquisitions. We believe this approach has served Penn National and its shareholders well and we intend to adhere to these financial and risk management strategies while remaining opportunistic in the current environment."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming




  • Business isn't wonderful but it is stable with some bright spots (mostly on the development side).
  • Impact of table games in PA?
    • Have 40 table games and 12 poker games. Have seen some lift on slot play, but it's very early. Other competitors just opened on Sunday.
    • Charlestown has been a ramp up, as employees get licensed. Operating 60 table games and 14 poker tables.  Have seen a lift in slot volume and an increase in Asian play from the DC market.
  • Impact of Buell Park and Maryland Jockey Club on EBITDA guidance
    • Maryland track has a highly profitable 2Q with Preakness and then, they lose money for the other quarters of the year. For both quarters, they will have $3.5MM of total losses from this track in 2H2010.  2011 will have the benefit of Preakness.
  • Stock buyback?
    • Purchased stock because they thought it was cheap and even more accretive than a potential acquisition.
    • How about a 10b5-1 program? No, they like the discretion of being able to buy back stock.
  • $398MM of cash, $1.518MM of bank debt; $2.1BN of total debt; $60MM Capex in Q2, $23MM of which is project Capex; 2010 capex of $431MM, $92MM of which will be maintenance.  Assumed that license fees for Ohio will get paid this year instead of next ($100MM).
  • Ohio - VLTs at racetracks?
    • Don't have a sense of timing on the declaratory judgment that the governor requested.
    • Whatever the governor does will end up in the courts.
  • Any opinions on the proposed gaming rules in Ohio?
    • It's all preliminary at this point, so there's no point to speculate on them now.
  • Christie's proposed changes for AC... any opinion?
    • Thinks that there will still be a lot more pressure on AC given all the new supply coming to the NE in the near term.  So while the proposal is positive, AC still has too much hair on it for them.
    • Still years away from gauging when AC will even out.
  • Kentucky - opinion?
    • Just moved to instant racing machines, so it will be interesting on whether this will turn into a push for full slots... may just push it back since they just couldn't get there on legalizing full slots.
    • Rules and regulations are just being formed - no games yet.
  • Vegas?
    • Not aware that Rio is for sale. There is no active process that involves them..
    • Looking at Green Valley ranch, but are realistic that they won't get there on valuation or that they may not trade and just remain with the existing debt holders.
  • Margins implied for back half guidance?
    • Implied downtick - single biggest factor is negative factor from race tracks and then Perryville ramp when they open.
  • Spend per customer? Any change in trends?
    • No, still sluggish.
  • Aurora margins were very low - business was moved from Joliet last year plus one time payment to city and $330k of severance.
  • Racetrack (MD and OH) EBITDA could be break even next year.
  • Arena District land book value is now $10m - no time frame yet on disposal.
  • Pre-opening expense reflected in corporate, Penn National, and Charles Town.
  • Q2 cap interest was $1.7m, $2.1m expected in both Q3 and Q4.
  • Referendum will be held on whether to allow slots at the Cordish mall - PENN doesn't think it will pass.
  • $25m buyout of 10% Ohio minority interest was a negotiated price.
  • No major impact on Gulf casinos.
  • No public polls on Anne Arundel but a lot of support for slots at Laurel Park versus the Mall.
  • PENN opting not to open temporary casino in Ohio - great sites, so no need for temporary casino--don't want to pay pre-opening twice.
  • No change in spend per visitor in July from Q2.
  • Promotional activity - most of it is at St. Louis and southern MS (has been ongoing). PENN reduced it at most of its properties in Q2.
  • Gaming capacity in OH - reduced number of slots expected at opening, was just fine tuning.
  • Ohio budgets - no cost increases associated with remediation.


 RCL beat consensus driven by better cost controls but net yields were softer than guidance.


"Demand for our cruises remains on track with our earlier projections. The strengthening of the US Dollar will clearly result in a reduction of our reported yields, but also provides a corresponding reduction in expenses. Most importantly, our continued focus on cost controls and efficiency is driving improved earnings."

- Brian J. Rice, executive vice president and chief financial officer



  • "Business conditions have remained on target in each of the company's main markets while improved cost control has enabled the company to raise its earnings guidance for the year"
  • "Operating costs were lower than expected due mainly to strong cost control, energy conservation measures, expense timing and currency fluctuations"
  • "Based on current estimates for 2010, the company anticipates that 30% of its net revenues, and 20% of its NCC excluding fuel will be denominated in currencies other than US Dollar, with the British Pound and the Euro being the most significant components."
  • Guidance:
    • Net Yields: 4% for 3Q and 3% - 4% for FY2010 (7% and 4% - 5% respectively on a Constant Currency basis).
    • NCC: -1% for 3Q and -1% to -2% for the full year.
    • EPS: FY2010 increased by $0.10 from $2.25 to $2.35 and 3Q EPS from $1.52 to $1.57.



  • Only negative factor in results is weakness of Euro and Sterling.  Cost management will help alleviate currency impact.
  • Already assumed "lackluster 2010 with a slow and steady recovery."
  • Do not see immediate need to tap capital markets.
  • Strong dollar adversely impacted EPS by 2 cents.
  • Net ticket yields up 7.1% YoY
  • Timing of maintenance and marketing expenses shift also impacted lower NCC. (100 bps)
  • 3% improvement in fuel consumption, mainly from newer vessels... these improvements will carry forward.
  • Booking environment: "stable and remarkably consistent"; revenue projection unchanged. Volume of bookings up 11% since 1Q.  Much higher advanced bookings as % of load factor.
  • Domestic bookings very consistent; European bookings showing resilience despite credit crisis.
  • Since beginning of 2010, booking window expanded, close to pre-recession times. Buying patterns are positive at this time.
  • 1/2 of revs come from non-US guests.
  • Revs impacted by Euro, Pound, and Canadian Dollar (degree of impact in that order).
  • Currency has lowered yields by 100bps since last guidance.
  • For 2011,
    • "steady and consistent, off to an encouraging start"; low visibility.
  • In 2Q, increased % of debt of fixed interest--fixed debt ratio from 45% to 55%; entered into fixed-to-floating swap, obtained $100 MM cash proceeds.
  • 3 vessels on order--Allure of the Seas, Celebrity Silhouette Solstice IV, and V.
  • Dreamworks element on Allure of the Seas.
  • Allure of the Seas to be delivered in October; will start trip in Port Everglade on Dec 1.
  • Celebrity Silhouette--to be delivered in July 2011.
  • Alaska and European pricing strong for Celebrity ships.
  • 50% of capacity will be Solstice class once Silhouette joins--will be youngest fleet in the market.



  • On-board spending
    • On-board rev up modestly in 2Q; Pullmantur revs in Dominican Republic hurt by Haiti in 2Q.
    • +1 to 2% YoY for 2010.
  • Spain market
    • Seriously depressed, no signs of nearby recovery; hasn't gotten better or worse since 1Q.
  •  Booking
    • Booking window: pricing up a bit YoY
  • Euro down 7% from peg since 1Q; Sterling down 3% from peg since 1Q; Canadian $ slightly favorable.
  • Net Cruise Costs per APCD, excluding fuel guidance:
    • Benefiting 100bps from FX
    • 5 cents of benefit of "absolute lower costs."
  • 4Q pricing weakness?
    • 4Q as expected.
    • Most sensitive to significant changes, but no indication of any changes at this time (e.g. bookings).
  • Expense cuts permanent?
    • Low inflationary period have helped.
    • Won't see 100% of reductions as seen in 2009.
  • No change in ship building philosophy
    • Talking to shipyards: more margin improvement in future rather than just capacity growth.
  • Oasis and Allure of the Seas together for 2011: do not expect same yield performance as Oasis by itself.
  • On-board revs: beverage doing well; art auctions not going well.
    • Revs from Non-US customers: flat to slightly up YoY.
  • Close in bookings and pricing:
    • 2Q exactly as expected.
  • FX Impact:
    • 100% of FX impact on revs will be on ticket.
  • Solstices doing well in Caribbean; Eclipse doing well in UK market.
  • Higher pricing for Solstice ships; other ships as expected in terms of pricing.
  • Crawling back 30-33% of what happened last year--North America contributing, improvement in European pricing.
  • Current cost of capital:
    • WACC: just under 9%; will climb as de-leveraging continues.
    • Cost of debt is very low: solstice ships--LIBOR+100bps
    • Interest expense guidance unchanged despite the new swap.
  • Book to load factor:
    • Customer source-- for 3Q, increase in European guests, particularly UK guests; for 4Q, more guests coming out of North America and more European guests source into the Caribbean.
  • Pleased with Developmental products--sourced with non-US customers.

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A surprisingly good quarter out of PENN and solid guidance.



Once again, PENN did well on the cost side to offset the sluggish regional gaming trends.  EBITDA of $142.2 million beat our estimate by almost $5 million, driven primarily by better than expected margins at the two big racinos:  Charles Town and Hollywood at Penn National Raceway.  PENN raised 2010 EBITDA guidance slightly from $578m to $580m, again a surprise given the top line trends. 


EPS guidance is a little confusing as PENN includes non-recurring items, so it appears they are lowering guidance from $1.13 to $0.98.  However, that is not the case.  Q2 Adjusted EPS of $0.29 beat our $0.25, so we will likely be raising our full year Adjusted EPS estimate of $1.12 by $0.04, give or take a few pennies.


We’ll have more details later but if PENN can hit its guidance, the stock looks very cheap given the long-term growth associated with the high ROI projects in new markets, particularly Ohio.  We think PENN can grow EPS at a 25% CAGR over the next 3-4 years.


The table below summarizes the property performance in Q2 relative to last year and our estimates.




HOT’s 2Q2010 results blew past consensus numbers and bested ours. The beat was solid and the raise in guidance – in our opinion – was way too conservative.



The high end of HOT’s new FY guidance touches our prior estimates while 3Q guidance looks like a sandbag – with the high end of guidance meeting the Street as usual.  If it were another company, we would be worried that they were back end loading results, however, this is classic HOT fashion – beat, raise for the year, and sandbag the coming quarter.  If HOT’s results aren’t up on these results, then only a change in Macro sentiment will help them.


2Q2010 Detail:

Starwood reported $723MM of revenues and $226MM of EBITDA, beating our estimates by roughly 4% on both metrics. 

  • Owned revenues of $437MM came in $21MM above our estimate and owned EBITDA of $90MM was $16MM above our estimate or 17% better.
    • The entire beat on Owned, leased, and other hotel revenue came from F&B and Other.  RevPAR of $143.09 was actually $0.07 lower than our number and room revenues were spot in line with our estimate.
    • Food & beverage and other revenues grew a staggering 18% YoY.  While the comp is easy (2Q09 F&B and Other revenues were down 36%), this is still impressive and is likely a reflection of the mix shift to better rated corporate business and a pickup in banquet business.
    • As a result of the strength in non-room revenues, RevPOR increased 5.9% YoY, compared to .7% YoY growth in 1Q2010.
    • Even more impressive was that CostPAR only increased 70bps, which lead to margin improvement of 4% YoY to 20.6%.  We would note that 2Q09 was the easiest margin comp as margins decreased 10.2% YoY that quarter compared to a 6.9% decrease for 2009.
  • Fee revenues of $177MM came in $1MM above our estimate.  Management & Franchise fee growth of 17.5% was better than HOT’s guidance of 11-13% and our estimate of 14.4% growth.
    • Base Management fees of $69MM were spot in line with our estimate, while incentive and franchise fees were each $2MM higher.
    • This was somewhat offset by lower “low quality” other “stuff” which was $2MM light of our estimate.
    • Amortization of deferred gains was still $20MM/Q.
  • Total VOI and Residential Sales and Service revenue of $137MM was $5MM better than our estimate, due to stronger residential sales.  Timeshare results of $34MM were 12% higher than our $30MM estimate.
    • Originated sales revenue of $177MM was lower than our estimate due to lower contract sales and lower YoY pricing, which was somewhat offset by a lower percentage of sales revenue getting deferred.  35% margins on originated sales was inline with our estimate.
    • Residential sales were $5MM higher and there were no associated expenses – which is a bit odd and is why the overall results in this segment was better than our estimate.
    • Other Sales and Services Revenue of $62MM was $1MM higher than we expected but margins 7.6% lower (i.e. expenses were $5MM higher)
  • Other Stuff:
    • SG&A was $12MM higher than our estimate – company claims it's due to timing of incentive-based accruals. However, they raised FY guidance for SG&A growth to 6-8% growth from 3-5%.  Anyway, higher pay for better results is no surprise given the crummy years that the sector has had.
    • D&A was $4MM lower than our estimate.
    • Net interest expense was $2MM below our estimate and $2MM light of company guidance.


Initial claims rose by 37k last week (39k net of the revision), the largest jump since May of 2009.  This comes on the heels of the prior week’s decline of 29k, which was the largest improvement since February of this year and the lowest weekly number since mid-08.  At 464k, the number reported today is right back in line with the 450-470k range the series has occupied for all of 2010.  On a rolling basis, the deterioration was more modest, rising 1.25k to bring the rolling total to 456k. We note that there seems to be significant seasonal volatility at work, as similar gyrations appeared this week in 2008 and 2007 (see the second chart below).  Ultimately, initial claims need to be in the 375-400k range before unemployment meaningfully improves. 






Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.Not surprisingly, Consumer Discretionary has the largest inverse correlation to Initial Claims (r-squared = 0.68) on a 1-year basis. On the flip side, it is a surprise to see that the Financials have the second lowest inverse correlation to Initial Claims (r-squared = 0.20) on a 1-year basis.




As a reminder, May was the peak month of Census hiring, and it will remain a headwind through the September data as the Census continues to wind down.





Joshua Steiner, CFA


Allison Kaptur