In-line with us but well above the Street. Here are our notes from PENN's Q3 conference call. 



"Third quarter revenue, EBITDA, net income and EPS surpassed guidance and reflect the combination of higher than anticipated contributions from new gaming offerings at two properties and our commitment to achieving operating efficiencies, and undertaking rational marketing programs and spending throughout the organization. Our properties' third quarter EBITDA exceeded guidance by $12.0 million pre-tax, or $6.9 million after-tax, amounting to $0.06 per diluted share upside relative to our guidance."

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




  • "Notably, third quarter 2010 property level EBITDA margins, excluding pre-opening costs of $2.8 million at Hollywood Casino Perryville, rose to 28.5% compared with 27.8% in the same period in 2009 and 27.0% in the 2010 second quarter. The significant margin increase is attributable to the further rationalization of our marketing and promotional offers to customers as well as the benefit of operating leverage related to the incremental revenue being generated at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course following the placement of table games at these properties during the quarter."
  • Acquisition and development update:
    • "Last month, we established a joint venture that will own and operate in Texas the Sam Houston Race Park in Houston, the Valley Race Park in Harlingen and a planned racetrack in Laredo, subject to regulatory approval and certain other closing conditions."
    • "Broke ground in August on Hollywood Casino Toledo, are proceeding with design, planning and environmental remediation activities related to Hollywood Casino Columbus ahead of a planned groundbreaking early next year, and have commenced construction of Hollywood Casino Kansas City."
    • "Early in the current quarter, Penn National purchased all the outstanding debt of M Resort from Bank of Scotland for $230.5 million... Since announcing the debt purchase, we have been in a constructive dialog with the property's equity holders regarding ownership and future operations."
  • "The Company repurchased 1,117,610 Penn National common shares at an average price of $23.21 during the third quarter."





  • Comment on the margin improvement "surprise" in West Virginia
    • They already started "smarter marketing" programs at PA & WV. They did expect margin improvement on the business in PA given the lower tax rate on tables and also saw business move from electronic table games to live tables games at a lower tax rate. Also saw a lot of un-rated play which is always more profitable.
  • Is there room for margins to continue to improve in PA & WV?
    • Hesitant to say that there will be improvement from here
  • M Resorts timeline and gameplan?
    • They own the debt today, not the property
    • Allows them to leverage their new database
    • Sees significant upside there
    • YTD revenues $106.5MM and EBITDA was $9.5MM through August
    • Drew down the R/C for $145MM and the rest of the PP came from cash on the balance sheet
    • Think that over time they can get this property to produce a nice investment for them
    • The current management team has continued to improve results at the property QoQ.  They also believe that their current customers would enjoy going to this property
  • What kind of EBITDA did they assume on M when they acquired it?
    • N/A
    • Feel very comfortable that they will be able to improve results at the property to produce a good return for their shareholder in the foreseeable future
    • They have 390 rooms there that they are struggling to fill and their database can help them do that. At the very least, they can fill those rooms during shoulder periods with gamblers vs. low quality guests.
    • The majority of their database will still want to stay on strip but there are only 390 rooms to fill here
  • Maryland win per unit per day was higher than what they were looking for.  How to think about the property on a run rate basis?
    • Has started to stabilize in October. Still very early to give an indication of where win per unit will settle out. It's meeting their expectations
  • Louisiana?
    • Have an advantage in terms of certainty of financing and execution
    • Not prepared to announce any capital plans.  They are looking at an existing boat that would be a good fit (not one that they currently own)
  • Capitalized interest was $1.6MM
  • Depreciation in Perryville?
    • Not a lot on $93MM
  • Doesn't think that someone that acquires Green Valley Ranch can actually invest enough money to make it nicer than M Resorts.  Not worried that someone will acquire it and make it better per se. It's already a really good property.
  • In Ohio - Gaming Commission will have its first meeting on Monday to swear in new members. Following meetings will be post election.
  • VLT's at tracks? Lottery commission is continuing to put together rules and regulations on how VLTs will function. They do support slots at tracks.
  • M Resorts timeline?
    • Stepped into the banks shoes. Sorting through their options. Whatever they do will require approval from the Nevada gaming commission - hopefully by 4Q2010
  • Maryland and Texas will be money losing ventures but are willing to incur that cost for a period of time until they decide otherwise. Hopes that TX follows PA's example.  Texas is in front of the racing regulatory commission for approval now.  The timeline there is for 2Q2011.
  • Cash at 9/30 $237MM
  • Capex: $74.1MM with $51.8MM in new project spend, $22.3MM of maintenance spend
  • In 4Q: 89.7MM of capex - $69.3MM of new project capex
  • Charles Town - how big can that market get?
    • Seeing very strong play. Table limits are high. Play has been strong and stable over the last few months - have seen no erosion in play so far.  Unclear how much better it gets from here.
  • Lawrenceburg a little under pressure?
    • 3Q was the anniversary of their refurbishment. Have a competitor whose asset is up for sale and has been very promotional to boost the numbers into the sale process. Will not follow suit.
  • Still seeing a bumping along the bottom across most of their properties. They are doing a better job managing their expenses and that's where they have seen margin upside
  • Public polls have shown that it will be a tight race in Arundel. Think that voters originally intended to have slots at the track, not at the mall. Think that the mall has traffic issues and is an inappropriate location. Think that the Baltimore Sun - who is in the pocket of Cordish - has exhibited "shameful" behavior. They can move faster to open slots at their sites and their site is already zoned and entitled.
  • Promotional environment in other markets - Kansas City market got better as the quarter progressed. Chicagoland has been fairly stable. Tunica has continued to be very promotional.  Other markets it has been reasonable - and PNK has actually been pulling back.
  • View on regional M&A?
    • Always interested in quality properties at a fair price
    • Pricing is likely to be too rich for them
  • Zia - they have seen higher price of oil drive the feeder markets that go into that market which is why they are seeing YoY growth there
  • What are they prepared to spend on lobbying in TX?
    • They are part of a coalition there. Always want to spend as little as possible
    • Think that is it goes to a vote that voters are in favor of gaming
  • Think that they will see YoY margin expansion in the 4Q, hesitant to go into 2011 now
  • Texas acquisition is not closing in 4Q
  • Think that markets are still tight and consumers are still not spending in most of the places they operate. It's still tough.
  • Alton and Aurora were clean quarters. Joilet - they had anniversaried the reopening of that facility. Saw declines there coupled with unusually low hold on tables which impacted results. Did continue to cut promotional spending there. Joilet will have a transformation in the 4Q with the full reopening and rebranding to Hollywood.
  • There is nothing that would preclude them from applying for the Laurel Park asset on Nov 3rd.  They think that the government will want to move as quickly as possible to get the process underway. The government has made it clear that slots belong at Laurel - can have an RFP out in 30 days.
  • Columbus - any concerns that the project will be delayed beyond 2012.
    • Still on schedule to finish up remediation in Feb.  Expect to break ground at the end of 1Q2011.
  • M is not their final goal for a strip property.  That said they don't think they will be acquiring anything there anytime soon
  • They are including the interest from the M debt but none of operating results in their guidance

SAKS Appeal

In light of today's filing that reveals a substantial increase in Diego Della Valle interest in SKS, we revisit some telling comments that he made 11 days ago in a NY Times profile. The original article appeared on page one of the business section in the NY Edition on October 10th.  Here are his thoughts on Saks:


Della Valle says he became interested in the retailer on his first visit to the United States as a youth, when he stopped in at a Saks Fifth Avenue store—to which his father used to sell high-quality shoes—and was “overwhelmed by the size of the store and by the amount of people shopping.” He says he views Saks as having “enormous potential for growth with an excellent management in place.”


All the investment comes from Della Valle’s own private purse and is not linked to Tod’s. Though he refuses to say if he is pursuing a takeover, he bought the shares when they were a bargain and has said he has no plans to sell.


Valle's stake now makes him the company's largest holder,  just ahead of its other billionaire stakeholder Carlos Slim.  The two combined own apporximately 36% of the company's outstanding shares with the next largest owner at 5.5%.


Eric Levine









RE: PSS, LTD, ARO, WMT & Franchises


October 21, 2010


Both Limited and Payless look to the franchise model to provide lower-risk growth outside of their core markets.  While this arrangement is not new to domestic brands looking abroad, it’s likely that a substantial number of franchises will need to open before a material positive P&L impact is felt.





- A Sperry Store walk through with senior management revealed that the company is still evaluating an apparel line extension.  While no specific plans have been made to launch “Sperry Apparel”, the brand is working with a partner to co-merchandise apparel in its 7 company-owned stores.  This effort will help to determine which aesthetic , price points, and product categories may work alongside the heritage shoe brand.  We’re thinking this may be akin to what J Crew has done with bringing in outside brands to compliment its core offering.


- Google’s Think Holiday presentation revealed that the biggest e-commerce chopping day in advance of the holiday’s is not Cyber Monday.  Instead, Green Tuesday (Dec 14th) is currently forecast to be the largest pre-holiday day for internet shopping with sales expected to be $1.095 billion.  For comparison, Cyber Monday is expected to produce $775 million in revenues.


- Proving that c-list celebrity fashion brands usually don’t last, Jersey Shore’s JWoww’s line Filthy Couture has shuttered after just one season.  No word yet on the success of other wares being peddled by The Situation or Snooki.





Payless ShoeSource Expands Into New International Markets - The retailer, a division of Topeka, Kan.-based Collective Brands Inc., Wednesday announced it has struck franchise deals to open Payless stores in four new international markets: Indonesia, Mexico, Malaysia and Singapore. The franchise model for Payless is proving to be a strong strategy to accelerate PSS's ability to place stores in new countries and with minimal capital investment. In Mexico, Grupo Axo, which has worked with such brands as Coach, Marc Jacobs and Emporio Armani, will partner with Payless on a projected 41 Payless stores in three years. Both companies believe Mexico can ultimately support as many 300 stores, significantly raising Payless’ profile in the fast-expanding Latin American market. Jakarta, Indonesia-based Map Active will represent Payless in Indonesia, Malaysia and Singapore. The company expects to open 20 Payless units across the three countries by 2011, with a larger rollout to follow. The news comes after previous announcements that Payless would enter the Middle East in 2009 and the Russian market this year. <>

Hedgeye Retail’s Take: The franchise model is just getting underway representing a significant additional growth channel for the company beyond its coveted Saucony and Sperry brands. The bigger question at this point is how aggressive these franchise partners intend to ramp locations – surely more to come here today with the company hosting its analyst day today.


Limited Brands Looks to International Growth - Leslie H. Wexner, chairman and chief executive officer of $9 bn Limited Brands Inc., is back at it — looking at the big picture, especially abroad. “I would guess the potential on international is probably equal to the U.S. If I believe I could do $20 bn in North America, there is probably another $20 bn across the world,” he said, with Limited’s major brands — Victoria’s Secret, Pink, La Senza and Bath & Body Works. Wexner cited the possibility of opening “several hundred” stores in the Middle East, including 200 in Turkey. And in Brazil, where a new 1,000-square-foot Victoria Secret airport store is running at about a $10 mm annual rate, The perception of Victoria, Victoria’s Secret beauty and accessories is high and Brazil probably has the potential for 300 to 500 stores. <>

Hedgeye Retail’s Take:  Rare comments from the CEO and founder of Limited indicating substantial growth for the brands.  However, recall that most growth in the Middle East and Turkey is conducted through licensing/franchise arrangements.  While more profitable from a margin rate perspective, it will take significant scale to see these efforts impact the P&L.


Aéropostale Opens Flagship in Times Square Friday - The 19,000-square-foot flagship, which opens in Times Square here Friday, will have high-tech interactivity residing alongside good, old-fashioned New York imagery. A 120-foot animated billboard made up of 2 mm LEDs features varying content, including the store’s own shoppers, who can dance with virtual Aéropostale models in a 700-square-foot room called the Balcony. A camera embedded in the screen will film their antics and display them on the billboard 20 minutes later. Just the idea of the Balcony, a room devoid of product and cash registers, and devoted solely to shoppers’ entertainment, is unorthodox. The flagship has been designed to raise Aéropostale’s profile and is viewed as the company’s ticket overseas. <>

Hedgeye Retail’s Take:  Finally, all three major teen retailers have flagships in Manhattan!  Note that ARO, AEO, and Forever 21 are all located in Times Square with megastores.


Africa's 1 Billion Consumers Too Many for Wal-Mart to Ignore - Members of Africa’s burgeoning middle class prompted Wal-Mart Stores Inc. on Sept. 27 to propose purchasing Massmart, the African continent’s third- largest retailer, for $4.6 bn. With 288 stores in 14 African countries, purchasing Johannesburg-based Massmart would enable Wal-Mart to profit from one of the world’s fastest- growing retail markets. Africa’s population reached 1 bn last year and after economic growth averaging 4.9% from 2000 to 2008 the number of families with an income of more than $20,000 a year has exceeded India’s, according to a report by McKinsey & Co. Inc. <>

Hedgeye Retail’s Take:  While it’s easy to paint Africa with a broad brush given its 1 billion consumers, we highly doubt we’ll be seeing any Massmart/Wal-Marts opening in some of the more politically unstable nations on the continent.  Growth likely remains centered in the most developed and stable nations.


Neiman Marcus Launches Gift App - Upscale department store Neiman Marcus has launched a holiday gift app for Apple Inc.’s iPhone and iPod Touch devices that offers shoppers free delivery and gift wrap, and the ability to shake their devices for a special surprise. The app displays gift ideas updated daily by the Neiman Marcus buying team and a Surprise Me feature that enables shoppers to view unique gift ideas by shaking their mobile devices. Shaking an iPhone activates the device’s accelerometer, which triggers a function within an app. Shoppers also can browse by price range choosing Little Gems, $100 and under, $200 and under, or $300 and under, or select Indulge to browse more expensive items.  <>

Hedgeye Retail’s Take:  Just one of many “holiday” apps on the way to spur purchasing and add some fun into the process.  The jury is still out however on the “shaking” motion.


Fewer Shoppers Per Channel For Holiday - The NPD Group Inc. went looking for the hot channel for holiday shopping and couldn’t find one. According to a survey by NPD, the percentage of respondents who plan to shop various tiers of distribution for their holiday purchases fell for all of the top 10 distribution channels studied. Discount stores retained the top spot from a year ago but were down to 54% of shoppers from 58%, and online shopping remained at number 2 with a decline to 35% from 37% last year. National chains stayed at number 3 as they dropped to 29% from 32%, and department stores moved up to number 4 from number 5 but still registered a decline in percentage of shoppers, to 22% from 25%. Warehouse clubs dropped to number 7, at 17%, from number 6, at 21 %, last year. Electronics stores fell from number 4 last year, with 26%, to number 6, at 19%. Outlet stores were eighth on the NPD list with 16% of respondents planning to shop there, down from 20% in 2009. Apparel specialty stores retained their ninth-place finish, but were likely to attract 15% of shoppers, down from 18%. In 10th place were off-price retailers, at 13%. <>

Hedgeye Retail’s Take:   Most notable here is the drop in share expected for the consumer electronics chains.  We believe this is largely a result of e-commerce growth and to some degree improved merchandising from the discounters in the CE categories . 


Swiss Watch Exports Grew 25.5% in September - Swiss watch exports continued their double-digit growth in September, rising 25.5%, boosted by sales of gold and steel timepieces, the Federation of the Swiss Watch Industry said. "After nine months, the sector has once more confirmed its clearly positive trend and even picked up the pace slightly," the federation said. Watch exports rose 20.8% between January and September. Hong Kong, the largest market for Swiss timepieces, remained the growth leader with an increase of 50.3%, while France emerged as the top European market with a 44.3% jump. <>

Hedgeye Retail’s Take:  This trend remains consistent with prior data suggesting luxury watches (and goods) remain in a substantial recovery mode.  Importantly, while a rebound is underway domestically, most data suggests the strength is centered in Asia with some pockets of strength in Western Europe.

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Conclusion: The MCD quarter was clean across the board.


September Sales Trends - up 6.1% globally:

  • US accelerated about 40 bps on a two-year average basis (adjusted for calendar shifts)…off of a strong month
  • Europe two-year average trends improved about 210 bps off of a weak August
  • APMEA improved about 120 bps, also off of a weak August


Notable trend - US margins continue to be on a roll…peak in sight? US margins are up more than 200 bps YOY each quarter this year….up 270 bps in 3Q10 (7th quarter of growing margins…prior to that, 8 quarters of declines).


Changes to the Outlook section were minor and there was no commentary on 2011:


Systemwide Sales:


2Q10: The Company expects net restaurant additions to add 1.5 to 2 percentage points to 2010


3Q10: The Company expects net restaurant additions to add nearly 1.5 percentage points to 2010




2Q10 - For the full year 2010, the total basket of goods cost is expected to decrease 3-4% in the U.S. and to decrease 1-2% in Europe.


3Q10 - For the full year 2010, the total basket of goods cost is expected to decrease 3-4% in the U.S. and to decrease 2-3% in Europe, reflecting favorable comparisons in the first nine months of this year.


Capex and unit growth:


2Q10 - The Company expects capital expenditures for 2010 to be approximately $2.4 billion. About half of this amount will be reinvested in existing restaurants, including the reimaging of over 2,000 locations worldwide. The Company expects net additions of about 325 restaurants, which reflects the strategic closing of restaurants by McDonald’s Japan.


3Q10 - The Company expects capital expenditures for 2010 to be approximately $2.3 billion. About half of this amount will be reinvested in existing restaurants, including the reimaging of approximately 1,800 locations worldwide. The Company expects net additions of about 275 restaurants, which reflects the strategic closing of restaurants by McDonald’s Japan.


 MCD - STRONG QUARTER INDEED - U.S. restaurant margins






 MCD - STRONG QUARTER INDEED - mcd apmea sep


Howard Penney

Managing Director



Initial Claims Drop, Yes, But Odds Are They'll Be Revised Higher Next Week

The headline initial claims number fell 23k last week to 452k.  There was a significant revision to last week’s number, increasing it by 13k.  If the revised number had been printed last week, it would have represented one of the top five largest increases in reported initial claims for the year to date.  The prior week’s revision has now been upward for 25 of the last 26 weeks.  If upward and downward revisions were equally likely, the odds of this occurring by chance would be 1 in 2,684,355 (or  1/(26/2^25)). Rolling claims came in at 458k, a decline of 4.25k over the previous week. All told, claims remain in the same band they’ve occupied for the year, and we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.


We don't want to go out on a limb here, but it strikes us that the market is focused mainly on whatever the current print is. Based on chronic upward revision, the illusion can, and is, being created for those who look only at the current print that the jobs environment is improving. In reality, as our charts below show, however, unemployment claims have remained flat as a pancake this entire year. There is no improvement in the data. We just want to make that crystal clear.






In the table 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.




Joshua Steiner, CFA


Allison Kaptur


PENN posted a great quarter in a tough environment, exhibiting strong operations but also the importance of exposure to new markets. 



PENN’s new markets were table games in both PA and WV where the numbers are off the charts.  And there is more of that on the horizon.  While we remain concerned with domestic gaming demand in existing markets, consistent with history, ROIC in new markets will continue to outpace cost of capital by a wide margin.  Maryland had little impact on Q3 due to the late September opening but initial results suggest a 25% ROI.  Up next:  Toledo then Columbus, both 20%+ ROI opportunities.  In fact, as we wrote about in our 06/07/10 note, “COLUMBUS WILL DISCOVER THE AMERICAN CASINO”, Columbus could be the highest EBITDA-producing regional casino (non-Indian) in the country.  Both these properties and their Kansas casino are scheduled to open in 2012 but PENN won’t be done then.  The company recently positioned itself to own and operate three racetracks in Texas where there is a decent probability that slots at racetracks will be legalized sometime in the next five years.


New markets are great for most operators fortunate enough to get a license.  But that’s only part of it.  As demonstrated in Pennsylvania most recently, PENN seems to generate outsized ROIs.  Hollywood Casino is generating a 26% ROI on its $310 MM investment in PA.  Preliminary results in MD imply a 25% ROI on PENN’s newly opened casino there.  PENN keeps construction costs low – MD cost only $98 million – stays on budget, and operates efficiently.  Virtually every property/expansion PENN does comes in on time and on budget.  We expect the same from Ohio, Kansas, and Texas.  They also don’t overspend on their stock.  PENN bought back over a million shares at an average cost of $23.21 during the quarter.  The stock closed last night at $31.18.


PENN’s results this morning came in largely as we expected but much better than consensus – EBITDA of $162MM was actually $1MM better than our estimate while revenues were $4MM lower primarily due to our modeling of the newly acquired tracks.  Generally speaking, cost controls were better across the board, and flow through on the newly introduced table games in WV and PA was also stronger.


Here are the details of the quarter: 

  • At Charles Town, tables games lifting total property revenues by $32MM sequentially, while only increasing non-gaming tax related expenses by $6MM QoQ, resulting in 318bps of margin lift sequentially and a 373bps lift in margins YoY.
  • In Pennsylvania, table games lifted sequential revenues by $5MM but only increased non-gaming tax related expenses by $1MM, which resulted in EBITDA margins expanding 560bps YoY and 220bps sequentially.
  • Hollywood Aurora, Argosy Alton, Hollywood Bay St. Louis, Hollywood Slots & Raceway Bangor beat our EBITDA estimates handily  
    • At Aurora, net revenues came in $0.2MM ahead of our estimate, while costs (ex-taxes) were almost $1MM lower sequentially, despite flat revenues.
    • At Alton, revenues were $0.5MM better than we estimated and costs (ex-taxes) decreased QoQ despite revenue growth.
    • Despite more difficult cost comps, Hollywood Bay St. Louis continued to bring down expenses by 9% YoY
    • At Bangor, margins were almost 100bps better than we estimated driven by an 8% YoY reduction in expenses
  • Empress and Hollywood Tunica missed our EBITDA estimate by more than 10%
    • Empress reported net revenues that were $1MM higher than we estimated but margins were worse.  Despite revenues decreasing QoQ, operating expenses (ex –taxes) actually increased by $1MM.
    • Hollywood lost some share in Tunica, coming in at 6.5% vs. 7.2% last year and 6.9% in 2Q2010
  • The loss at Maryland Jockey Club was almost $3MM larger than we forecasted
  • Other stuff:
    • Corporate expense was $17MM, $2MM lower than we estimated
    • Net interest expense was $3MM higher
    • Bought back over 1m shares at an average cost of $23.21



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