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ASCA EC: COMPETITION COULD FORCE DOWN SLOT “PRICING”

When analysts examine pricing in the gaming industry the focus is usually on room rates or table game denominations. Often overlooked is slot hold percentage which can be manipulated by casinos. Better quality properties and casinos in less competitive markets typically exhibit higher hold percentages, because they can.
  • Until early August, Ameristar operated the top quality facility in the Northern Indiana and with the exception of Elgin (geographically not a competitor), generated the highest revenues of all the Chicago area properties. East Chicago’s competitive position gave management the luxury of maintaining a slot hold percentage of 9.4%. By comparison, the Chicago market averaged only 8.2% year to date. Even the higher quality facilities downstate, Argosy Lawrenceburg and Pinnacle Belterra, averaged in the low 8s. See the relative hold percentages in the first chart.
  • Harrah’s Entertainment introduced its expanded and renovated facility in early August. Horseshoe Hammond is now clearly the nicest facility in the market and its proximity to East Chicago will provide a serious threat to ASCA. As visitation and volume migrate to Horseshoe, ASCA may be forced to lower its pricing (hold percentage) to protect its market share. The second chart shows the impact on ASCA’s revenue, EBITDA, and EPS assuming a market average hold percentage was in place over the last four quarters. A $0.21 negative impact is clearly meaningful at 15% of TTM EPS.
ASCA EC and Horseshoe benefitting from high slot hold %
"Normalized" slot hold could have material impact

The Sweet Spot on the Lemon

I’m pretty religious about triangulating the trade off in sales, inventories and margins for most retailers. Yes, it paints an accurate picture as to financial health (or lack thereof) for a company or an industry, but more importantly, it sheds light on how management teams change their respective behaviors when business deviates from plan.

Nine times out of 10, when you can make a case for sales growth outpacing inventories and margins improving, you want to own the stock in question. Today the stars are aligning, but unfortunately we’re faced with a ‘one out of 10’ scenario.

The chart below aggregates results for Macy’s, Kohl’s, JC Penney, and Nordstrom. After six quarters of sheer ugliness, we’re finally at a point where sales growth is outstripping inventories and margins are up. Next quarter I think we’ll see the same. The problem is that we’re seeing such a positive sales/inventory spread because inventory levels are being driven down mid-high single digits in tandem with comp plans of low-mid single digit comps (I won’t elaborate on how poor their track records are for planning comp). Positive sales/inventory spread is nothing to write home about when a retailer simply throws in the towel and orders less inventory.

What does this mean for 2H?
• If demand is in line and the group hits plan, without cutting muscle from its SG&A base (I’ll give them the benefit of the doubt), then we’ll be looking at low-mid single digit earnings decline.
• If demand strengthens, then there will not be enough product to satisfy customer demand. Perhaps discounting is less severe. But overall it will be very, very tough to comp positive when inventories are planned down mid-single. In this scenario, earnings look flat at best.
• If demand weakens further, all bets are off and we’re back to a double digit EPS decline.

Not a very good decision tree, huh? This phenomenon holds us over until holiday and 1Q09 – exactly when I think that sourcing pressures will intensify the most.

If you’re long any of these names, start praying.

RRGB – Price Versus Traffic: An Important Relationship

RRGB appears to be joining the ranks of those companies that are taking the right steps to address the aspects of the business that it can control. Following the company’s 2Q earnings call, I was encouraged by management’s decision to slow new unit growth for FY09 and to hear that they do not anticipate taking any more pricing for the remainder of the year.
  • RRGB has been aggressively raising prices at the expense of traffic. This trend was magnified in 2Q when traffic declined 4.4%, down significantly from 1Q’s 0.4% decline. Thankfully, CEO Dennis Mullen stated on the conference call that “we’re nervous about pricing in this economy.” Average check was up 4.3% in 1Q and 4% in 2Q and the company guided to an average of 4% for the year so there will not be a significant drop off in the back half of the year, but I was happy to hear the company will not be implementing another pricing increase when they roll off about 3% of price in 3Q. Restaurant margins should deteriorate further in 3Q as the company is up against its most difficult same-store sales growth comparison from 2007 and will not have has much price to offset these declines. That being said, I think the company’s decision to be more disciplined with its pricing strategy is the right one as margins will not improve until RRGB gets more people in its restaurants.
  • RRGB lowered its FY09 unit growth target to 17-20 company-owned restaurants (down from FY08’s goal of 30-32). The company’s capital expenditures as a percent of sales have been coming down while its net cash flow from operations/net income ratio has moved into positive territory. RRGB’s decision to slow its growth will only help to support these two trends, which I view as a definite positive. The company’s FY08 capital expenditures of about $80 million to $85 million should decline to close to $50 million in FY09. RRGB will not see the real benefit of this reduced capital spending until 2H09, however, as the company’s new unit growth will be heavily weighted to 1H09.
  • Lingering concerns:
    I continue to be wary about RRGB’s national advertising campaign and whether it is yielding adequate returns. The company lapped its initial launch in 2Q08 with an even amount of advertising weeks in the quarter year-over-year and traffic declines worsened. Although 2Q was a difficult quarter for all restaurant operators, I continue to believe that the company will require incremental advertising investments to provide a lift in traffic (for reference, 3Q08 will have 7 weeks of advertising versus 5 weeks in 3Q07 and 4Q08 will have 3 weeks versus no advertising in 4Q07). Going forward, RRGB’s advertisements will include product promotions rather than solely being a branding initiative as it has been, which is a good sign, because from what I have witnessed, branding advertising campaigns do not typically work for restaurants.
  • RRGB’s board recently authorized an additional $50 million share repurchase effective through 2010. As I have said numerous times, I do not think borrowing money to buy back shares (as the company did in 2Q) generates shareholder value. The company’s lowered new unit growth for FY09 will free up additional cash, but I would not like to see RRGB offset this shareholder-friendly capital allocation decision by then borrowing money to buy back more stock than it should.

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Myriad (MYGN): Mr. Tobin's Q

My Partner, Tom Tobin, fortuitously called this one ahead of the quarter; MYGN closed down -5% today. Tobin tends to be lucky, often. I have attached an aerial picture of the 3 year ramp that MYGN has had to 20,000 feet. The shorts look like they covered the top (short interest peaked there at close to 30% of the shares out).

See Tobin's Portal postings for the fundamental view into and out of today's conference call. I see downside risk here to $52.51.
KM
  • MYGN breaking $63.71 today was a material negative event
(chart courtesy of stockcharts.com)

The Dead Heat: MGM vs. LVS

The Question here is which of these two charts looks worse? And I can't give you an answer... after dropping 9% and 11% today, respectively, they both look scary.

My partner, Todd Jordan, continues to be cautious on this group for structural reasons that you'll find on balance sheets, or Todd's portal.

KM
  • MGM broke my short term "Trade" support line of $30.23 today
  • LVS broke my short term "Trade" support line of $46.19 today
chart courtesy of stockcharts.com
chart courtesy of stockcharts.com

Lehman (LEH): When Will Fuld Show Us What's Really In His Hand?

Did he lie? Did he fib? Did he know? Do we care?

Accountability has not been part of the leadership equation here. Transparency was not part of the Fuld business model either. There is officially no love for the "Level 3 Asset" scheme, and now Fuld wants to sell the Street real estate and Neuberger Berman?

He may very well do that, and at the same time, the Street is selling his stock. Down another -13% today. That's an unlucky number. Luck may not save the day here anyway. Ever play ‘Monopoly’ against someone who is levered up and forced to sell assets?

KM
  • LEH support? $11.35 looks like next stop
Chart courtesy of StockCharts.com

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