November 11, 2010





  • With some retailers just now launching initial forays into e-commerce, it puts Ralph Lauren’s 10th anniversary of into perspective. Keep in mind that despite reporting 21% growth in its e-commerce business in Q2, this channel represents less than 5% of total sales and remains a material growth opportunity.
  • KSS noted that its October sales shortfall was largely a result of a dramatic impact on sales of outerwear during the warm weather trend over the first two weeks of the month.  As a result, outerwear inventories were a bit high coming out of the month.  On the flip side, management also noted that business trends have “returned, frankly, to a much more normalized trend rate for the year”. 
  • On the heels of its pop-up store store strategy, Toys”R”Us is now launching a mobile coupon campaign in additional efforts to capture customers. It’s a significant improvement compared to the e-coupons offered last year, which customers had to print to redeem. Recall that Starbucks launched a similar campaign back in 2009 to mixed reviews though TRU’s demographic will likely be considerably more receptive to redeeming offers through the holidays.



Free Shipping Offered at WMT - Wal-Mart Stores Inc., the world’s biggest retailer, is offering free shipping to homes on almost 60,000 holiday items through its website as it vies for budget- conscious shoppers.  The offer, which applies to products including furniture, jewelry and video games, is on now through Dec. 20, the Bentonville, Arkansas-based company said today in a statement. It isn’t valid on Apple Inc.’s iPod and iPad devices.  Wal-Mart is looking to win back customers in the U.S., where sales at stores open at least a year have declined for five straight quarters. Chief Executive Officer Mike Duke said last month that confidence among consumers, whose spending accounts for about 70 percent of the U.S. economy, is “not very positive” because of high unemployment. <Bloomberg>

Hedgeye Retail’s Take: Bad news for the entire e-commerce sector which will now be forced to compete with similar offers.  Free shipping is once again the ante for simply being in the e-commerce game.


Gap Goes China - The flagships of Louis Vuitton, Ermenegildo Zegna, Cartier and other luxury retailers clustered together on Mid Huaihai Road, a premier shopping street in the heart of the city, now have a new neighbor: Gap. On Wednesday night the American retailer unveiled the first of four wholly owned Gap stores in China in Hong Kong Plaza, a high-end shopping center on Huaihai. A launch party included speeches from regional executives and a fashion show featuring the 2010 holiday collection. The flagship will open to the public today. Two stores will open in Beijing — a two-story flagship in the AMP building on Wangfujing Street and a smaller space in Chaobai City, a regional shopping center — on Saturday and another flagship in the next several weeks on Nanjing West Road in the Venture Tech building in Shanghai in what executives say is a part of an ambitious plan to take Gap Inc. global. In October, Gap Inc., which will also open stores in Italy by the end of the year, said it expects international and online sales to account for 25 percent of revenues by 2013. Those areas accounted for 12 percent in 2009. The retailer’s chief executive officer, Glenn Murphy, has been at the forefront of the company’s global road map. <WWD>

Hedgeye Retail’s Take: With Gap looking to double its international exposure over the next 3 years, it’s no surprise that China will be a key market in which to grow.  While in theory margins should be higher outside of the domestic market, we still wonder how much investment/infrastructure spend will be needed to operate a multi-country, multi-language business across the globe.


Seven Turns Ten - Seven For All Mankind, whose founding in 2000 was a key milestone in the development of premium denim, is marking its 10th anniversary with a limited edition capsule collection, an oversize coffee-table tome and a series of events with magazine partners. The VF Corp.-owned label is issuing a line of anniversary jeans that accentuates its modern, classic aesthetic and is inspired by the clean lines of Southern California’s mid-century Case Study Houses. Each of the five styles for men and women, dubbed Case Study Denim, feature updated interpretations of Seven For All Mankind’s signature design elements, with prices ranging from $255 to $750. The collection is available in the company’s freestanding stores this week. Seven For All Mankind operates 39 stores in the U.S., with another 76 owned and partner-operated stores overseas. <WWD>

Hedgeye Retail’s Take: Oh the irony of selling $750 denim to promote the brand’s 10th anniversary while at the same time the core business remains under substantial pricing pressure.  We would not expect this PR event to help the situation.


Top-Line Strength at Mizuno - Mizuno Corp. saw its second-quarter profit nearly double, thanks to strong sales in Europe and North and South America. The athletic company, based in Osaka, Japan, said Wednesday its net income for the period ended Sept. 30 was 1.78 billion yen, or $21.6 million at current exchange, a 91 percent improvement over 931 million yen, or $11.3 million, in the same period last year. Revenues from Europe and North and South America more than doubled, on a currency neutral basis. However, revenues from Japan, Asia and Australia nearly halved. As a result, total group revenue stayed flat at 76.2 billion yen, or $923 million, compared to a year ago. The company said sales of sports shoes, especially running shoes, were strong in the quarter, and that it is seeing a strong recovery in the golf business. <WWD>

Hedgeye Retail’s Take: Another positive data point for technical running which is in-line with recent comments from Saucony.


Acra Focus on Plus-Size Bridal Category - Plus-size brides can’t get any respect. Just ask Yukia Walker. When Walker was shopping for a wedding gown three-and-a-half years ago, she suffered one insult after another. Walker got the cold shoulder from retailers that didn’t stock dresses for her size 20 frame. Stores didn’t have samples in her size, so she was forced to try on dresses with the backs cut out. “It was a very humiliating and humbling experience,” Walker said. “My sister had to try on my wedding gowns for me. It was very disheartening. I had to get a size 16 and go on a crash diet. I ended up with a wedding gown that I hate. ” After her experience, Walker decided to fill what she perceived as a major gap in the market. In September, she opened Curvaceous Couture, a 5,000-square-foot bridal salon in Columbia, Md., that specializes in sizes 16 to 32. Curvaceous Couture sells brands such as Ian Stewart, Enzoani, and Pronovias. Prices start at $1,000. “We give customers the opportunity to try on styles that actually fit them,” Walker said. “When you’re making a sizable investment, it’s embarrassing to have to endure such humiliations as not finding dress samples in your size.” While lower-priced lines for plus-size brides exist, high-end bridal collections in large sizes are scarce. “The luxury market has generally shied away from big sizes,” Walker said. “We’re interested in partnering with [the brides] and making them feel beautiful and special so they come away with a positive experience.” <WWD>

Hedgeye Retail’s Take: Another attempt to capitalize on the plus-size niche but this time may be different.  Pop-culture reality TV show, “Say Yes To Dress”, might actually help jumpstart the efforts of Curvaceous Couture. 


Men's Accessory Demand Robust - Accessories are a popular add-on item for men seeking a quick update of their styles. As a result, retailers are highlighting the category with more offerings and enhanced presentations — and the investment seems to be paying off. Saks Fifth Avenue last month introduced a new accessories outpost on the sixth floor of its flagship, with expanded assortments of Tod’s, Gucci and Ferragamo leather goods as well as watches and jewelry. Large leather goods, such as briefcases from Ferragamo and Mont Blanc, have been among the top performers. “We’re getting a nice lift from leather bags and leather goods,” said Tom Ott, Saks’ senior vice president and general merchandise manager of men’s wear. “Guys today are looking for the correct kind of bag to go with their lifestyle.”  In the past, men were content to make do with their outdated, worn leather pieces. “But now we see a renewed interest in all shapes and sizes of small leather goods, as well as exotics,” Ott said. Although the price of exotic skins such as alligator may be high, “if it’s a great make and a great skin, a guy will spend. Before the recession, if it just had a great name it would sell; now it has to have a great name and a great make.” Ott predicted that the category will continue to gain in importance. “The younger male consumer is very fashion-aware, and he wants to accessorize correctly,” he said. “This is a trend you saw in women’s wear first, but now men are embracing it too.” <WWD>

Hedgeye Retail’s Take: We question just how much demand for large men’s leather goods is coming from domestic consumers – chances are that foreign based tourists are capitalizing on currency arb much like what we’re seeing with luxury watch sales of late.


Fortune 500 Doubles Use of Twitter - America’s biggest corporations have dramatically increased their participation in Twitter, according to “The Fortune 500 and Social Media,” a yearly report from the Center for Marketing Research at the University of Massachusetts Dartmouth. Three in five Fortune 500 companies now have an active Twitter account, compared with 35% in 2009. This is even more than the number that have Facebook accounts, at 56%. More than a third of the companies with Twitter accounts regularly responded to consumers with @ replies or retweets within a brief period of time, making a solid effort to engage the 26 million US adults eMarketer estimates use Twitter at least monthly. <emarketer>

Hedgeye Retail’s Take: With the top 100 companies accounting for 39% of last year's accounts, adoption among the ranks between 200-500 drove growth in 2010. It's no surprise that specialty retail with 23 companies was the industry most strongly represented.


R3: WMT, RL, TRU, GPS - R3 11 11 10


Groupon’s Coupons - Facing steep competition from sites like LivingSocial, BuyWithMe and flash sale merchants like Gilt Groupe that are entering the local deal market, daily deals behemoth is attempting to simplify the process for merchants to redeem its local deal coupons called Groupons. It’s doing it with a free bar code scanning app for mobile devices using Google Inc.’s Android operating platform that enables merchants’ staff to use a smartphone’s built-in camera to scan and redeem Groupons presented by customers. Groupon says it plans to launch a similar app for Apple Inc.’s iPhone and iPod Touch and will soon ship as part of a special merchant promotion Android phones and iPod Touches preloaded with the Groupon app to thousands of affiliated businesses. When an employee uses the app to scan a Groupon coupon, purchase data is immediately transmitted to the merchant’s interface on, allowing business owners to track redemption and the total amount spent by a customer, Groupon says. Groupon may be giving its merchants a little extra TLC because it’s feeling heat from new competitors looking to tap its successful business model. Groupon, one of the first in the space, takes a hefty 50% cut of each coupon sold, according to its web site. It takes a lower 30% for deals promoted through Groupon stores—virtual storefronts where merchants can run their own deals. Stores are different from traditional Groupon offers because consumers must choose to follow a store.  <internetretailer>

Hedgeye Retail’s Take: As the coupon phenomenon continues to push towards paperless solutions, it’s no surprise to see one of the top deal concepts leading the push to gain share in the process.


U.S. Apparel and Textile Imports Increase in September - but the frenzied effort to restock inventories that drove substantial increases in July and August cooled somewhat. Combined shipments of apparel and textiles to the U.S. rose 16.7 percent compared with a year earlier to 5.2 billion square meter equivalents in September, the Commerce Department’s Office of Textiles & Apparel said Wednesday. September was the fourth highest month of textile and apparel imports in 2010. Apparel shipments were up 13.3 percent to 2.5 billion SME and textile shipments advanced 20.1 percent to 2.6 billion SME. The overall trade deficit narrowed to $44 billion in September from $46.5 billion in August. Companies are looking to scale back their orders after rebuilding stocks in recent months, said Nigel Gault, chief U.S. economist with IHS Global Insight. Combined imports from China rose 22.1 percent to 2.7 billion SME, with apparel up 12.5 percent to 1.2 billion SME and textile increasing 31.8 percent to 1.4 billion SME. Shipments of textiles and apparel from Vietnam rose 27.1 percent to 252 million SME, with apparel gaining 22.8 percent to 177 million SME and textiles up 38.5 percent to 75 million SME. Mexico increased its industry imports 21.4 percent to 235 million SME, as apparel rose 7.6 percent to 79 million SME and textiles climbed 29.9 percent to 155 million SME. A number of countries had import increases driven by apparel shipments. Honduras saw combined imports rise 35.8 percent to 118 million SME and Haiti’s shipments increased 28.4 percent to 29 million SME. Apparel imports from Cambodia increased 14.7 percent to 99 million SME and shipments from El Salvador advanced 37.5 percent to 79 million SME. Shipments of textiles and apparel rose from all of the top 10 U.S. suppliers, except South Korea, which saw imports decline 20.4 percent to 101 million SME. The top five apparel suppliers in September were China, Vietnam, Bangladesh, Indonesia and Honduras. China was also the largest textile supplier, followed by India, Pakistan, Mexico and South Korea. <WWD>

Hedgeye Retail’s Take: Keep in mind this is a substantial deceleration from the August rate of +29% reflecting retailers push to restock earlier than usual driven by transportation cost inflation fears. We expect a continued sequential deceleration with inventories now at higher year-over-year levels coupled withretailer interest in avoiding excess buildup.


China Shoe Manufacturer Migration - The number of shoe manfacturers in Wenzhou city has dropped to current 3035 from 4,000 at the peak period as companies in other inland cities such as Hebei, Henan and Hunan can produce cheaper products. According to China Leather Industry Association, the shoemaking industry in inland areas recorded a rapid growth that challenges the position of shoemakers in Wenzhou. Due to lower costs of labor and water and power supply, shoemakers in inland areas gain more market share of the low-end shoe market in China. The size of the shoemaking industry in Wenzhou has continued to shrink for several years. More than a thousand shoe manufacturers have been shut down over the past seven years. <FashionNetAsia.

Hedgeye Retail’s Take: Production flight out of Wenzhou has been swift with 25% shifting inland and cross borders. The city’s likely to see further contraction with future volume primarily driven by increased demand in Vietnam, Indonesia and other neighboring countries.


Pakistan Government Criticized for Raising Petroleum Prices - The Pakistan government is condemned by the Pakistan Leather Garments Manufacturers & Exporters Association (PLGMEA) for raising the rates of petroleum products by 9%. The already weakened export sector is confronted with a number of issues including that of acute power cut, deteriorating law and order conditions and rising prices of raw materials. The government’s decision of raising the rates of petroleum products has further distressed the industry. Moreover, as most of the times the garment units provide transportation facility to their workers, this rise in prices of petroleum products would certainly raise the transportation cost. Also, the leather garment factories use some of the chemical solutions which are obtained from petroleum products, due to which the production cost is bound to rise. A year-on-year hike of 50% in leather exports during the third quarter of the current year, has greatly elevated the prices of leather garment exports. Meanwhile, massive floods in the country have also claimed lives of a number of animals, leading to scarcity of raw hides and skins. <FasionNetAsia>

Hedgeye Retail’s Take: As the saying goes - when it rains, it pours. Despite having the ability to curb mounting pressures on Pakistan’s leather industry with subsidies it looks like input costs for luxury brands are only headed higher near-term.


















TODAY’S S&P 500 SET-UP - November 11, 2010

As we look at today’s set up for the S&P 500, the range is 33 points or -1.04% downside to 1206 and 1.66% upside to 1239.  Equity futures are trading lower tracking a mixed show from European indices and the broader Asia.  Gaining momentum is concern over the state of the economies in Ireland and Portugal.


California's fiscal outlook, which shows a budget problem of $25.4B that must be addressed prior to the enacting of a 2011-12 state budget, is making headlines this morning.  Along similar lines, reports are also emerging that Harrisburg's (PA) City Council has hired a law firm on a pro bono basis for counsel on a possible bankruptcy filing.


Earnings and guidance from Cisco (CSCO) is weighing on the Nasdaq futures and technology in general. No major economic data is due today, and the bond market is closed in observance of Veteran's Day.

  • Advance Auto Parts (AAP) raised 2010 EPS forecast to $3.80-$3.90 from $3.70-$3.80, vs est. $3.85
  • Aegean Marine Petroleum Network (ANW) 3Q adj. EPS, rev. miss est.
  • Armstrong World Industries (AWI): BofA is arranging a $550m term loan B with interest rate 3.5ppt- 3.75ppt over Libor as it seeks to make shareholder payout and refinance debt, according to a person familiar with the matter
  • Brooks Automation (BRKS) 4Q rev. $181.6m vs est. $177m
  • Cisco Systems (CSCO) sees 2011 rev up 9-12%, implies $43.64b-$44.84b, vs est. $45.26b. Stock down as much as 12% in German trading; also watch BRCM, CAVM, CTXS, FFIV, JNPR, MOT
  • Concur Technologies (CNQR) sees 1Q adj. EPS 18c vs est. 22c
  • Dendreon (DNDN) Provenge drug has “moderate” evidence showing that it works, according to a tech assessment
  • Kulicke & Soffa Industries (KLIC) sees 1Q rev. $125m-$135m vs est. $202.5m
  • Marriot International (MAR) plans to add 30,000 rooms worldwide annually for next three years; open 100 hotels in China
  • Optimer Pharmaceuticals (OPTR) told FDA it is terminating Pruvel study
  • Prudential Financial (PRU) said it started a public offering of $1b of its common stock to help pay for AIG Star deal
  • Rosetta Stone (RST) forecast 4Q rev. $76m-$81m vs est. $83.2m
  • SurModics (SRDX) reported 4Q adj. loss-shr, rev. below est.
  • Thermadyne Holdings (THMD) said it will sell $250m senior notes to fund LBO
  • Watson Pharmaceuticals (WPI) says second-largest holder Quiver to sell its entire stake, 10.54m shares


  • One day: Dow +0.09%, S&P +0.44%, Nasdaq +0.62%, Russell 2000 +1.22%
  • Month-to-date: Dow +2.05%, S&P +2.55%, Nasdaq +2.22%, Russell +4.48%.
  • Quarter-to-date: Dow +5.27%, S&P +6.79%, Nasdaq +8.87%, Russell +7.38%.
  • Year-to-date: Dow +8.81%, S&P +8.68%, Nasdaq +12.95%, Russell +17.50%
  • Sector Performance: Energy +1.29%, Financials +1.12%, Consumer Disc +0.89%, Materials +0.50%, Tech +0.08%, Healthcare (0.03%),Industrials (0.3%), Consumer Spls (0.31%), Utilities (0.44%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Polo RL +7.29%, Harman +4.93% and Halliburton +4.91%/Assurant -11.16%, Dean Foods -9.76% and Invesco -3.92%.


  • ADVANCE/DECLINE LINE: 697 (+2145)  
  • VOLUME: NYSE - 1117.12 (+0.46%)
  • VIX: 18.47 -3.20% - YTD PERFORMANCE: (-14.81%) - BEARISH TREND
  • SPX PUT/CALL RATIO: 1.61 from 1.59 +0.96%  


  • TED SPREAD: 16.39 0.507 (3.194%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • YIELD CURVE: 2.21 from 2.26


  • CRB: 317.11 -0.63% - First down day in 9
  • Oil: 87.81 +1.26% - BULLISH
  • COPPER: 396.90 -1.83% - BULLISH
  • GOLD: 1,395.32 -1.93% - BULLISH


  • EURO: 1.3739 -0.80% - BEARISH - Down 3.22% in the last 4 days
  • DOLLAR: 77.634 +0.25%  - BULLISH - Up 2.30% in the last 4 days



European markets:

  • FTSE 100: +0.23%; DAX: +0.28%; CAC 40: (0.01%)
  • European markets were initially buoyed by economic data out of China before continuing worries over the financial health of peripheral Europe and disappointment over corporate results reversed the early modest gains.
  • Cisco Systems trades down over (10%) in Germany on an “AIR POCKET” post EPS.
  • Peripheral debt spreads continue to widen.
  • Major indices currently trade little changed with falls in peripheral markets of over (1%) in many instances.
  • Just 4 sectors trade higher led by industrials and autos.
  • Mining shares are little changed overall despite higher metal prices, banks and technology shares are the leading decliners.
  • UK Q3 home repossessions 8,900 vs prior quarter 9,400

Asian markets:

  • Asian Markets: Nikkei +0.31%; Hang Seng +0.8%; Shanghai Composite +1.0%
  • Asian markets were weaker today, with most major markets falling except China and Japan
  • Chinese banks rose in Hong Kong on despite expectations China will raise interest rates; higher reserve requirements called for yesterday went largely ignored by investors.
  • Japan rose slightly on a weaker yen, with fears of overheating limiting gains.
  • Japan September core machinery orders (10.3%) m/m vs (9.4%) consensus. October CGPI +0.9% y/y.
  • China October CPI +4.4% y/y vs +4.0% consensus. October PPI +5.0% y/y vs +4.6% consensus. October value-added industrial output +13.1% y/y vs +13.4% consensus. October retail sales +18.6% y/y. October new loans CNY587.7B vs CNY490B consensus. October M2 +19.3% y/y vs prior +19.0%.
  • Australia October unemployment rate 5.4% vs 5.1% consensus. 

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














The Macau Metro Monitor, November 11th, 2010




LVS said in a report, "Until adequate labour quotas are received, the timing of the completion of phases I and II [parcels 5 and 6 in Cotai] is currently not determinable with certainty... it is currently working with the Macau Government to obtain sufficient construction labour."  Sands is also considering opening only parts of Sites 5 & 6, saying it "is progressing on alternative scenarios for completion of selected portions of phases I and II with the construction labour currently onsite”.  The final phase of the Cotai project will begin “as demand and market conditions warrant it”.  The report also reiterated Sands' confidence in securing parcels 7 & 8.


Secretary Tam said the government is “keeping an eye” on the junket price war situation, to prevent “vicious” or “harmful” competition.  Mr Tam noted that, so far, the government had no evidence of violation of junket rules by gaming operators.



China’s new yuan denominated lending in October dropped to RMB $587.7 BN from RMB $595.5 BN In September, easily beating market estimates of RMB $500BN.  China's M2 supply totaled RMB 69.98 TN, up 19.3% YoY.

Early Look

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No Money, Need Crisis

“This country’s out of money and we better start thinking.”

-Erskin Bowles


Erskine Bowles is a Democrat. He was Bill Clinton’s Chief of Staff the last time this country ran a budget surplus. Now he’s President of the University of North Carolina and Co-Chair of President Obama’s Debt and Deficit Commission.


If you already haven’t, google ‘Bowles Pelosi’ this morning and you’ll see why professional US politicians are tee’ing up America’s balance sheet to implode. The good news is that this isn’t “new” news. Those who aren’t paid to be willfully blind get it at this point. The American political machine has crossed its proverbial Rubicon.


This is going to be critical news for the next few weeks because yesterday afternoon Messrs Bowles and Alan Simpson (former Republican Senator from Wyoming), released a “draft” of their debt and deficit report that’s due out on December 1st.


Commenting on the draft, compare and contrast these views:

  1. “Without tough choices, we’re on the most predictable path toward an economic crisis that I can imagine.” –Erskine Bowles
  2. This is “simply unacceptable” –Nancy Pelosi

Then consider the PR guy’s take from Stan Collender (former Democrat budget analyst): “Mathematically, it apparently works… Politically, it is going to have a lot of trouble getting support from more than just the two co-chairs.”


Finally, here’s President Obama’s take: “So before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts.”



  1. Bowles is calling it like it is.
  2. Pelosi doesn’t know what it is.
  3. PR guy knows what math is.

Question: Does the President of the United States have the leadership to listen, hear, and execute on the toughest fiscal decision of the century?


Ironically enough, as the Debt and Deficit Commission’s draft was being released, I was sitting in Peter Orszag’s office at Princeton University. Orszag, of course, just left Obama’s team after running the OMB (Office of Management and Budget). He’s done the math too.


We’ll send a research report out to our clients later on today that goes through the details of Hedgeye’s discussion with Peter, but the overall takeaway is that he not only agrees with our (and Reinhart & Rogoff’s) conclusions about structural debts and deficits, but he agreed that we’ll likely need another economic crisis in order to rid ourselves of this unbearable political polarization.


Now, to be clear, Orszag introduced and effectively utilized the word “polarization.” At Hedgeye we use words like: fiat, conflicted, compromised, fools, risk, charlatan, dogma, etc… but it’s all one and the same thing. And guess what Washington people? Americans have a Ph.D. in their gut on this too.


This morning Bloomberg released a poll (which I’ll editorialize) that confirmed most of what the objective mind in you has already internalized:

  1. 75% of people think Quantitative Guessing (QG) will be “ineffective”
  2. 60% of people (down from 71%) trust Bernanke at the wheel
  3. 44% of people trust Geithner has a clue on economic matters

Now at least Geithner is on the record admitting that he “isn’t an economist.” So when you read his quotes from the G20 this morning suggesting that the debauching of the Dollar has nothing to do with our professional politicians burning it at the stake, take his word for it – he doesn’t do interconnectedness.


Back to Orszag, Bowles, and the American leaders who remain brave enough to stand up against the tyranny of a compromised Congress…


Fellow citizens, it’s time. On this Veteran’s Day we need to ask ourselves if the time to rid this country of Pretended Patriotism isn’t now, when will it be?


As Peter Orszag stated plainly, the clock has been ticking. Any independent analyst who isn’t trying to snag a banking bonus or Washington consulting fees gets this. US municipalities and states are already in fiscal crisis – they’ll eventually need to be bailed out too (QE3). But who is going to pay for it? Will America allow Congress to raise the US Debt Ceiling in 2011? If America can’t issue debt at these artificially low rates, what happens next?


Maybe Mr. Macro Market is already giving us a preview of the answer – US Dollar UP, and US Treasury Yields UP. This is new as of the last week. We’re seeing immediate term breakouts in both. The Buck won’t Burn forever – particularly if we find a President who gets that this debt and deficit buck stops with him.


My immediate term support and resistance levels for the SP500 are now 1206 and 1239, respectively. I covered some short positions on yesterday’s opening market weakness and now have 10 LONG versus 11 SHORT positions in the Hedgeye Portfolio. I remain short the Euro (FXE) and long the US Dollar (UUP).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Money, Need Crisis - 1


History shows that new Macau properties cannibalize a company’s existing core property. The sell side doesn’t appear to be reflecting that in their WYNN price targets.



On its Q3 conference call, WYNN pushed back the opening of its Cotai development to 2015.  That should’ve resulted in lower price targets given the time value of money.  It didn’t.  More importantly, we don’t think analysts are incorporating the likely cannibalization of Wynn Macau/Encore from Wynn Cotai.  The argument against cannibalization is that Wynn Cotai will be more of a Mass property and its location on the Cotai Strip will attract a different customer than that of the existing Wynn Peninsula properties.


Really?  Circumstances were very similar when LVS opened Venetian in 2007 and MPEL opened City of Dreams (CoD) last year.  As the following chart shows, 70% of Venetian’s 15% market share came from Sands and Altira donated more than 60% of CoD’s 8% share. 




On a year over year basis, revenues at Sands (post-Venetian for 12 months) declined 27% while revenues at Altira (post-CoD for 12 months) fell 20%, versus the same store revenues for the market gaining 24% and 34%, respectively, over those same time periods. 




So how much cannibalization would this mean to WYNN?  Assuming, the market grows to $30 billion in 2015 and consensus gross gaming revenues for Wynn Cotai of $3 billion are accurate, the property will capture a 10% share.  If history holds, Wynn Macau/Encore will suffer a share loss of 600-700 bps.  Given the maturity of the market that seems excessive.  However, even if we assume 325bp share loss (half of of the midpoint), that translates into almost $1 billion in lost gross gaming revenues which we estimate would cost Wynn Macau/Encore about $250 million in EBITDA.  Think that sounds extreme?  Sands Macau EBITDA declined $216 million (from $457m) in the 12 months following the opening of Venetian which, incidentally, generated $504 million in EBITDA.


Consensus EBITDA estimates for Wynn Cotai are in a $550-650 million range.  The analysts seem to be applying a 13-14x multiple on that cash flow and discounting it back at a 10-15% rate.  This analysis produces $15-25 of incremental target price value after subtracting out the $2.5 billion investment cost and the minority interest.  Indeed, all of the price target derivations we reviewed were in the $15-25 range.


However, we don’t think these analysts are factoring in the potential $300 million loss of EBITDA at Wynn Macau/Encore as a result of Wynn Cotai cannibalization.  Using the same multiples and discount rates on the cannibalization yields offsetting negative value of $10-14 per share.  Wynn Cotai looks a lot less valuable under this more realistic lens.


Disappointing Q3 results were not only softer than 2Q but also missed the S$400 whisper 




NOTE: All dollar figures are in Singapore Dollars unless otherwise stated

  • Group revenue was S$744MM and EBITDA was S$347.6MM
  • RWS revenue was S$731.8MM and EBITDA was S$346.5MM
  • Hotel occupancy was 71% and ADR was S$250
  • Universal Studio Singapore ("USS") continued to operated at a daily maximum capacity of 8,000 with an average visitor spend of S$81
  • The Group's UK operations, which are in discontinued operations, delivered revenue of S$93.8MM and EBITDA of S$8.7MM. The reduction in YoY results was mainly due to poor hold and the weakening of the Sterling vs. the Singapore dollar
  • "RWS goes into the last quarter of 2010 with four hotels fully operational and with an enhanced line-up of food and beverage and retail offerings. The resident circus-spectacular show Voyage De La Vie opened in July to good response."
  • "Battlestar Galactica and the much-anticipated Journey to Madagascar rides are expected to expand the attractions in the first half of 2011. This, together with the world debut of Transformers in the second half...The capacity is expected to increase substantially from 8,000 to 18,000."
  • "We are still in the initial year of operations as we continue to improve operational efficiency, integrate overall resort management and methodically implement marketing plans."
  • "Construction of the West Zone has commenced. We are expecting to start operations progressively from year 2011, beginning with the Maritime Xperiential Museum in the first half of 2011, followed by the world‟s largest aquarium, the Marine Life Park, the destination spa and a variety of luxurious accommodation at its Equarius Hotel and Spa Villas."



  • Describes LVS as a very aggressive competitor
  • Revenue only decreased 15% despite the entry of a new player
  • EBITDA margin decreased to 48% due to the expiration of warranties on gaming equipment and the ramp of their show.  Hold has also normalized from a very high win rate in the 2nd quarter.
  • The market is still in the infant stages. Over the next few years, they expect that the better IR - ie RWS - will have a majority of the share.
  • Had over 3MM visitors in Q3
  • In 3Q they stepped up their marketing programs overseas
  • Many of the visitors to USS were repeat guests
  • The theme park was cash generating
  • VIP win was 55% of total gaming receipts, down from 60% in 2Q
  • Operated more than 100 tables in VIP and 370 tables, 1200 slots



  • Margins should be between 45-60% going forward
  • When USS ramps up, it will be margin accretive
  • Provision of bad debt? Increased in the quarter?
    • Level was the same as in Q2 and don't expect any increase in that level
  • Rebate rates?
    • Still at similar level as 2Q
  • Market share - 53% right now, where will it be headed in VIP and Mass?
    • Over time they expect the market to skew to towards the better product and management, which they believe they have. 
    • In terms of their marketing plan, they are still in the process of rolling it out. So they still view the market as virgin territory.
    • Expect growth to be quite healthy
  • Theme park was cash positive in the quarter
  • October - it was possibly more robust than September
  • % of total revenue from non gaming: 10-20%
  • Slot revenue %: no comment
  • Regulatory risk - Singaporeans are generating a significant percentage of their revenues and perhaps the government would like to reduce that over time?
    • Doesn't think that that is a regulatory risk as long as they continue to operate under the rules
    • Local contribution will shift over time as marketing programs roll out
  • What is the table and slot limit at their facility?
    • Depends on whether they are in the main or VIP area
    • Theoretically they can increase to 560 tables with no problem
  • Market share based on RC share?
    • They are higher than 53% - "much higher" than LVS's
  • Trade receiveables increase to S$423 - all applicable to RWS but not all is casino related.  70-80% is casino related, same as last quarter. Quarter on casino receivables have increased substantially
    • Believe that they are doing a good job between balancing revenue growth and credit extension
  • Opportunity in Japan and other jurisdictions in Asia
    • They will look at Japan very seriously
    • They will look at "developed" Asia opps
  • Time frame of Japan
    • Legislators are still doing the research
    • If everything goes well, they expect a bill passage by end of 2011/early 2012
  • It will take some time for the junkets to be licensed. Looking at early next year.
  • Sense of seasonality - difficult to quantify, but they did say that August is a "ghost" month. Expect the 4th quarter to have a stronger showing because they have a lot of school holidays. Their results were in-line with their expectations.
  • Level of demand for junket oriented play that they are currently unable to serve
    • "There is very huge demand"
    • It's a very virgin market so pinning the number down is very difficult
  • S$300MM operating expenses per day excluding taxes.  As the theme park continues to ramp, the margins will get better. There will be an one-off operating expense related to the park opening in 4Q2011. There were some, but not very significant, start up costs related to show and attraction openings.
  • Busing program - they are very happy with it. 
  • Should we think about the current level of EBITDA as the new base vs what they saw last quarter?
    • Think it's a good base to look at and grow off of
  • Which segment has low hanging fruit?
    • Mid level and high end of the market
  • What kind of junkets would the Singapore government consider licensing?
    • Government is cautious but also pragmatic. Similar to the Australian junkets.
    • The process of licensing is just very lengthy, still hopeful to see licenses by 1Q2011
  • What kind of market growth is possible for next year?
    • Size of the market is really anyone's guess. They still see lots of potential.
    • Not sure how much junkets can grow the market
  • No view on Australia.  There is a possibility of dividend of payments. Lots of variables - like when and if the junkets come online.
  • Month before Chinese New Year is usually a very slow month so depending on how good Chinese NY's is determines whether the 4th Q is the strongest
  • Sheldon's thoughts on S$8BN in 2011?
    • Won't comment
  • Revenues from the Sinaporeans is very low.  Most of their high rollers are from other regions.
  • Non-gaming revenues margins are lower than 47% - much lower
  • Bad Debt - impairment loss on trade receiveble - related to Singapore ($23.5MM). Ratios are similar Q to Q
  • Goal for the Group is to build out the Resorts World brand
  • VIP RC volume was about the same as last quarter
  • Therefore casino receivables increased as a % of RC. Analyst calculated a 40% growth in receivables
    • Market mix is different from Q2 to Q3 so you can't look at it this way
  • Rough estimate of Chinese customers
    • At least 10-20% on the main gaming floor is acheiveable, but significantly higher in VIP

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