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Big benefit from high hold, particularly at MBS, drives a small beat over consensus.  Despite higher whisper numbers, 2011 estimates continue to look reasonable. We will have a detailed analysis later but here are our conf call notes.


"We are pleased to report record financial results for the fourth quarter of 2010. We set quarterly records for net revenue, adjusted property EBITDA, and adjusted property EBITDA margin during the quarter. Strong revenue growth and margin expansion in Macau, together with outstanding results at Marina Bay Sands in Singapore and improving results in Las Vegas and Bethlehem, contributed to an industry-leading financial performance."

- Sheldon G. Adelson, chairman and CEO




  • Confident that their EBITDA growth will continue into 2011 - as validated by their January results
  • 806MM shares is their fully diluted share count in the quarter
  • Singapore - 1Q2011 - most of the remaining elements of the property will be launched: Lion King, Museum, and Water Show on the Bay
    • Mice business continues to grow
    • Visitor arrivals to Singapore have increased over 20%
    • LVS now owns the 2 top MICE hotels in Asia
    • The Singapore market is still growing, and the subway stop at their property opening in 2012 will help them
    • They are in the process of adding 300 more slot units
    • Think that CNY will be a big growth catalyst for them
  • Macau
    • EBITDA should be the true metric on which performance is judged, not GGR. Their market share of EBITDA was more than 2x that of SJM.
    • "Remember you can't put GGR in the bank"
  • Sands Bethlehem: 300 room hotel will open in May
  • Development pipeline:
    • Visited with government and tourism officials all over the world at their request to discuss the development of a MBS-like resort
    • Talking to Korea, Taiwan and Japan
    • Also to Florida and Texas


  • Margin pressure in Macau due to wage pressures and competitive pressures?
    • Wage pressures are under control for now
  • Lot 3- will they get an extension?
    • Feel confident that they will get an extension if they want it. But they can monetize.
  • Still waiting to hear from the government on the FS condos.  Feels very confident that they will get something approved in the quarter.  Just received some pages commenting on issues at FS condos
  • FS Plaza had a hold issue - only 1.55%.  That was reversed over the last few weeks. They have made more than $20MM of EBITDA in just Jan 2011. The limited # of junket reps there make it more volatile - they are looking to bring in more junkets to make it less so.
  • Seasonality in MBS - saw some softness in November and saw strength during Christmas and New Year's.  CNY should be great ... they are still learning.
  • EBITDA is over $110MM in January at MBS. Wouldn't let one month's drop in RC determine what the future of Singapore will be.
  • In Vegas, experienced over 90,000 room nights during January and lowered their comps considerably to get a better customer in. Rates are somewhat under pressure but are seeing some improvement in January.  There is a lot more competition now at the high end.  Have high expectations on their Intercontinental alliance.  They have cut out almost all of their comps except to their best customers - which is resulting in a substantial increase in cash income
  •  Labor expectation for Sites 5 & 6.  Expect to get 3,000 workers from Galaxy's site at the end of February. Still plan on opening a portion of Ph1 - 1000 rooms, one of the mass casinos and a VIP casino. Have 3,500 employees now.
    • May 2012 is the scheduled completion of PH1 of Sites 5 & 6. What happens afterwards depends on the labor situation.
  • Singapore ramp of non-gaming amenities - running in the mid-to- high 80's for occupancy - close to their 90% target. Their MICE business in the first quarter of 11' is good.  The rate is good. Think that they are at 80-85% of their potential in their life cycle for non-gaming revenues.  Have about 40 more retail stores to open. Probably 55-60% of the way there for retail EBITDA - which will get a nice boost when the subway opens.  Sales are $982/psft now. Mid 80's EBITDA run rate on the Mall - think that eventually they can do $170MM of EBITDA there in a few years
  • Concentrating on improving the junket business.  Think that there is huge upside there for them.  
  • 16-24% is the range of their direct business at their properties in Macau. At Venetian its 18.6%. 
  • They are in the process of looking for a CEO of MBS and they will take their time. Looking for a broad based business person.
  • Any commentary of 2012 business in Vegas?
    • Have 781,000 rooms nights - and the forecasted ADR is closer to $200 vs. this year's $180
  • Singapore - slot win per unit per day is great- what is their capacity to add more aside from the 300 they are adding?
    • Not sure - the market is very deep for Mass and Slot drop/ handle - thinks $1-1.5BN
    • Will add 300 games by end of Q1
  • Mark Juliano is moving over to the casino side in Singapore this weekend. Also hired a SVP marketing executive formerly from Starwood.
  • Dividends?
    • Haven't really spoken about it
    • But are talking about paying down $2BN of debt in Macau
    • Aren't paying down debt in Singapore yet
  • Has no reason to think that they won't earn $3BN of EBITDA this year including a $1BN in Singapore
  • CNY should be huge all across their regions this year
  • Demand in Las Vegas for CNY is huge- they are completely sold out
  • They are talking about getting grants and incentives in Europe as well. Will take an approach of bidding out construction going forward.
  • Their 270 moving day average is 2.93% in Singapore... so according to Sheldon you don't need to adjust the hold % for the high hold this quarter
  • In another location where Intercontinental is partnered - they brought in 44% of hotel revenue
  • Relationship with their junket reps is improving - they will have 40 private gaming rooms that are junket operated in the VIP casino at sites 5 & 6

January Schmanuary

January sales results provided a surprisingly solid end to the retail fiscal year, with about two-thirds of today’s sales reports surpassing (tempered) expectations.  With January sales volumes amongst the lowest of the year, the relevance of such results can be debated.  However, the reality of the sequential uptick has two important takeaways.  First, most retailers end the year with clean inventories and less clearance on a year over year basis.  This sets up well for the Spring transition.  This is also the reason why we saw some companies raise their EPS guidance, even in some cases with lower than planned sales results (JCP, KSS).  Second, the weather was barely mentioned as an excuse.  Only a handful of retailers including Costco, BJ’s, JCP, and HOTT cited the impact of stormy weather on the month and actually quantified it.  Despite this, COST and BJ still exceeded expectations.  Others with winter apparel and footwear exposure likely benefited, leaving little reason to mention record snowfalls and deep freezes as an excuse.

We do not expect this strength to continue, especially as first quarter compares are challenging and prices at retail are beginning to creep higher.  With that said, the facts are the facts and the two-year same store sales run-rate for the broad index reached its highest level since 2007.  Time to focus on 2011 with full attention and unfortunately less clarity than we’ve seen surrounding the retail environment in well over a year. 


January Schmanuary - TotalSSS


Callouts from today’s reports:

  • While e-commerce sales remained robust for most, sales were actually down 6% at hottopic.com and only up 2.6% for jcpenney.com.  Sites with strong growth included Kohl’s (+60%) and Macy’s (+27.2%).
  • ROST continues to take advantage of the environment to secure closeouts at favorable (current) prices ahead of cost increases.  The company ended January with pack-away up 900 bps y/y  to 47%.  Inventories did increase slightly since December as well going from up 19% in total to up 25%.
  • Consumer electronics remained weak for the month as measured by performance at COST and TGT.  COST noted that TV unit sales were flat while overall dollars were down in the mid single digit range.  Target noted that overall hardlines declined by mid single digits, driven by weakness in electronics, music, movies, and books.
  • Comparisons are still overrated- for Nordstrom.  The company reported its 17th consecutive month of traffic increases.
  • Men’s apparel was cited as a leading category for the month by: JWN, KSS, and TGT.
  • COST noted that while inflation is tracking about 1% for food and sundries, the levels of increases have subsided a bit relative to recent months.  Meat and deli showed the highest levels of inflation, up mid single digits.
  • KSS noted that clearance levels were down 9% year over year.  Clearly a help to margins and a potential headwind for sales.
  • Aeropostale noted that average unit retail decreased in the low double-digits, primarily due to increased promotional activity vs. last year.
  • American Eagle noted that less promotional activity and a higher mix of accessory sales resulted in a flat average unit retail price for the month.
  • Big Lots noted that the later timing of income tax refunds and the reduced availability of income tax refund anticipation loans, impacted a portion of their customer base and certain discretionary categories, particularly furniture.  
  • Next month’s sales day will be even less hectic, with all three teen retailers (ARO, AEO, & ANF) ceasing to report monthly sales. Let the speculating begin!          

Eric Levine



YUM finished 2010 strong with 4Q10 results that came in better than expectations on both the top and bottom line. Earnings of $0.63 per share easily beat the street’s $0.60 per share estimate and the reported 8% comp growth in China and 5% comp growth in the U.S. came in much better than the street’s 6.0% and 2.8% estimates in China and the U.S., respectively.  YUM’s YRI segment was the only division to fall short of same-store sales expectations with the company reporting 1% comp growth versus the nearly 3% consensus estimate.  That being said, the company’s restaurant margins during the quarter were stronger than street estimates across the board.


YUM’s CEO David Novak opened his remarks on the earnings call by saying, “I'm especially pleased to announce that 2010 was one of our best years as a company. We reported 17% full-year EPS growth excluding special items, marking the ninth straight year that we exceeded our annual target of at least 10%. In fact, 17% EPS growth is our best ever and what makes us even more impressive is that it was driven by a 15% increase in operating profit including gains across all three of our business divisions.”  These comments, alone, set the stage for a more difficult 2011 on a relative basis as the company will be lapping these strong results.


Although the company maintained its confidence in its ability to grow EPS by at least 10% in 2011, management did highlight expected headwinds, which will hurt operating profit growth and margins in 2011:


  • Commodity inflation – guided to +5% in China, +4% in the U.S. and +3% for YRI.  Management is hedged for about 6-9 months, but still has about $40 million of commodity exposure in China and the U.S. if prices don’t improve from current levels.


Hedgeye thought: These incremental costs will definitely have a negative impact on margins in 2011, but this is not a problem that is unique to YUM. 


  • Continued labor inflation in China – guided to a mid-teen increase in wages.  Labor increases are not a new phenomenon in China but there were two wage rate increases in 2010, which had a sizeable impact on the labor expense line in 4Q10 and should continue to impact it, particularly in the first half of 2011.


Hedgeye thought: Again, this higher wage inflation is not unique to YUM.  That being said, YUM investors have become accustomed to restaurant-level margin growth after seven quarters of growth prior to the slight decline reported in 4Q10.  The company already implemented a price increase in China in early 1Q11, which management said should cover about three-quarters of the expected inflation impact, but margins are expected to decline YOY.  Specifically, in 1Q11, the company is lapping 1Q10’s 26% margin, which management said is not a sustainable level. 


  • China: Lapping 2010’s one-time $16 million benefit from participating in the World Expo in Shanghai and facing $25 million in incremental tax expenses in 2011 from a new business tax – Combined, these two items are expected to have a 5% negative impact on China’s 2011 profits.


Hedgeye thought: These one-time items only exasperate the already difficult operating profit and margin comparisons the company faces in 2011. Although management has tried to set reasonable margin expectations, investors may not react positively to reported margin declines in what is now YUM’s most important segment from a profit contribution standpoint.


 These headwinds will take a toll on YOY growth in 2011, but again, most of these issues are beyond management’s control.  Going beyond the expected $20 million foreign currency benefit in both China and YRI, margins should be supported in FY11 and beyond by the company’s current refranchising strategy in the U.S. and YRI and growth in emerging markets.


U.S.:  I typically have a hard time finding anything positive to say about YUM’s U.S. business, but the company’s significant progress on refranchising company units in the fourth quarter, combined with the recent announcement that YUM intends to sell its entire Long John Silver’s and A&W restaurant business, is a definite step in the right direction.  The company does not expect the eventual sale of this business to have a material impact on its ongoing earnings, but it signals that management wants to better align its focus in the U.S. on what matters to profitability and that is Taco Bell.


To that end, the company sold 306 company-owned units to franchisees during the fourth quarter and 404 for the full year.  The bulk of those units (330) were Pizza Hut and KFC restaurants, which again lessens YUM’s profit exposure to those concepts in the U.S.  The company plans to refranchise another 500 units in 2011, with KFC expected to drive the majority of those sales.  With KFC same-store sales down about 4% in 2010, following on the heels of the prior three years of declines, this decreased company ownership will be welcomed by investors. Given the current state of business, these KFC sales may not yield the highest of proceeds for YUM, but at least it will allow the company to shed some of the restaurants which have been a drag on margins.


 Management attributed the 60 bps of U.S. restaurant-level margin improvement in 4Q10 and 30 bps for the full year to refranchising.  With most of the refranchising occurring during the fourth quarter, in addition to the continued refranchising initiatives planned for 2011, YUM should see an even greater benefit to margins going forward.


YRI: Restaurant margins increased 80 bps in 2010 and 190 bps in 4Q10, driven primarily by YUM’s equity business in Thailand and the refranchising of the company’s Taiwan business in the first quarter.  2011 margins will be helped even further by the fact that the company completed the refranchising of its Mexico business during 4Q10. Specifically, management stated that the Mexico refranchising should have a positive impact on 2011 operating profit of about $10 million.  YUM will focus on the U.K. market in 2011 to further execute its refranchising efforts.


Sales were sluggish overall for YRI during 2010.  System sales grew 9% in the company’s emerging markets, however, far outpacing the 4% growth in its developed markets in 4Q10.  YUM opened 548 of its total 884 new YRI units in 2010 in emerging markets so sales growth should improve as the company further accelerates its development in these higher growth markets.


In conclusion, on top of the expected outlined headwinds and the fact that the company is facing difficult comparisons in 2011, I am somewhat concerned about the company’s current same-store sales guidance, which seems quite aggressive across the board given reported trends during the fourth quarter.  Despite the same-store sales growth upside reported in China and U.S. during the fourth quarter, two-year average trends actually decelerated slightly from the third quarter for China, YRI and Taco Bell in the U.S.  The 2011 comp guidance for China (up at least 4%), YRI (up at least 2-3%) and U.S.’s Taco Bell (+3%) all assume a significant acceleration in two-year average trends from 4Q10 reported levels.


YUM – HIGH HOPES FOR 2011 - yum china 4q10


YUM – HIGH HOPES FOR 2011 - yum us 4q10


YUM – HIGH HOPES FOR 2011 - yum yri 4q10


Howard Penney

Managing Director

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Falling Like a BRICk: Is India the Next Egypt?

Conclusion: Inflation in India continues to come in hot, increasing the likelihood of Egyptian-style social unrest in the world’s second-largest country (population). Moreover, slowing growth, accelerating inflation, tighter monetary policy, and an erosion of financial liquidity continues to make Indian equities one of our top short ideas.


Position: Bearish on Indian Equities and Indian Debt (officially since November 9th).


Pulling up a chart of Indian equities, we can’t help but make the inference alluded to in the title of this note. The SENSEX, down (-10%) YTD including today’s +2% gain, is the world’s worst performing equity market outside of Egypt. Putting the perpetually bullish “BRIC” storytelling aside, India is home to many of the same problems facing Egyptian citizens and politicians:


A large percentage of its population in poverty: Roughly 71% of India’s citizens live on less than $2/day at PPP and ~25% of its population lives below the government-established poverty line, which, apparently, is a lot lower than $2/day.


Eroding public accountability and trust in government: The recent arrest and pending trial of former telecommunications minister Andimuthu Raja highlights the gridlock occurring in Indian politics in the wake of corruption charges lobbed against many present and former members of Prime Minister Monmohan Singh’s ruling Congress Party.


The arrest, perhaps three years too late, makes Raja the first former minister of India to be arrested while his party was still in power. While that may seem like a bullish data point as far as accountability goes, Prime Minster Sign continues to refuse a joint probe into the auction in question. The opposition to Singh’s preference for opacity, led by Arun Jaitley’s Bharatiya Janata Party, has stalled parliament and disrupted the most recent session (Dec) so much so that it was the least productive in 25 years.


With food inflation running in the mid-to-high teens, an unproductive government is not exactly what India needs at this moment. The BJP is already staging demonstrations across the country in protest of these rising prices. Facing elections in five States over the next five months, Singh’s coalition government is predicted to lose the ~40-42 seats by a recent poll published by the India Today news magazine.


A major inflation problem: India’s benchmark Wholesale Price Index continues to hover roughly +400bps higher than the central bank’s target, accelerating in December to +8.4% YoY. Food, fuel and primary articles inflation continue to be driving forces, each accelerating last week to +17.1% YoY, +11.6% YoY, and +18.44% YoY respectively.


Falling Like a BRICk: Is India the Next Egypt? - 1


Could India Become the Next Egypt?


Aside from sheer size, the only thing separating India from many of the MENA economies is its incredibly robust growth profile – on track to grow almost +9% YoY in 2010. Unfortunately, both we and the SENSEX’s performance (or lack thereof) believe that accelerating growth is in the rear view. In a report we published on January 26th titled: “Top Emerging Market Short Ideas: Indian Equities”, we wrote:


“While we’re not calling for a significant draw-down in Indian growth, we do think the confluence of tough comps, accelerating inflation, tighter monetary policy and a general erosion of financial liquidity could cause Indian GDP growth to slow sequentially by a full (-100bps) in 1H11.”


The main takeaway here is that India, which some believe is immune to the contagious effects of the Jasmine Revolution because of its burgeoning economy, could become much, much less immune as growth slows and inflation accelerates throughout the year.


While we’d be reckless to forecast a social upheaval at this point, India does screen “positively” on our metrics for identifying potential problem countries like Egypt and Tunisia. In fact, it’s among the poorest on two of our preferred metrics:


Falling Like a BRICk: Is India the Next Egypt? - 2


Using this data, we created an index to identify which countries would be most likely to experience some sort of uprising or social unrest as a result of accelerating inflation – i.e. which country’s citizens will be most disgruntled with rising prices of food and fuel, understanding full well that people don’t risk their lives rioting because of “core” inflation.


The chart below sums the rankings (1-17) for each of the countries in the chart above on “Median Age” and “Percentage of Population Living Below the Poverty Line”. As you can see, India screens “favorably” here, receiving the same score as Egypt:


Falling Like a BRICk: Is India the Next Egypt? - 3


Add in a government that is losing both credibility and support by the day and the potential for growth to experience a measured slowdown, and it’s clear to see that India has every possibility to become the next Egypt in the event we continue to see the parabolic moves in commodity prices. Currently the US dollar is broken on all three of our core investment durations, so further weakness there only perpetuates the likelihood of this outcome.


Falling Like a BRICk: Is India the Next Egypt? - 4


Falling Like a BRICk: Is India the Next Egypt? - 5


Perhaps that’s why India is broken TRADE, TREND, and TAIL as well. The performance of Indian assets now hinges squarely on The Ber-nank’s Burning Bone. Keep your eye on the US dollar as it relates to India and other emerging markets. Indian equities remain one of our top short ideas not currently in the Virtual Portfolio.


Darius Dale



Falling Like a BRICk: Is India the Next Egypt? - 6

The Golden Haze: Gold Levels, Refreshed

POSITION: no position


We currently do not have a short position in Gold, but here are the 3 most important macro factors to consider before re-shorting it:

  1. First, the “fundamental” – Gold underperforms when real interest rates are positive and rising.
  2. Second, the correlation trade – Gold currently has a POSITIVE correlation with the US Dollar of +0.86, and while the USD is up today, this is the first day that it has been up by more than 50bps since the State of the Union address. Dollar down from here supports gold down.
  3. Finally, the risk management setup – despite today’s rally, Gold remains broken on both our TRADE and TREND durations with those lines outlined in the chart we have attached below. 

In conclusion, the call is to short gold as it scales back up toward $1371.



Keith R. McCullough
Chief Executive Officer


The Golden Haze: Gold Levels, Refreshed - 1


The sequential improvement in 4Q10 GDP growth from 3Q came to +0.62%.   On the margin, this is a positive and it is important to note that net trade accounted for +5.1% of the sequential change in GDP growth for the quarter.  A significant inventory drawdown was the opposing big ticket item on the list, going from a contribution to GDP growth of +1.6% in 3Q to -3.7% in 4Q, thereby dragging the quarterly sequential change in growth by -5.3%. 


A noteworthy point to consider in the 4Q10 data is that the narrowing of the trade deficit contributed 3.4% to GDP growth, which ended up growing by a net +3.2%.  The 3.4% estimate is from the BEA and is based on two months of available data.  Given the time-honored tradition of government massaging of the data, I would submit that it is highly likely that the advance estimate will be revised at the end of each of the next two months.  The 4Q09 advance estimate ended up being high by 0.7% after all revisions were complete.  Clearly, if history is any guide, there is revision risk to the downside of 4Q’s GDP growth number.


Consistent with the “we see no inflation” theme in Washington, the reported inflation-adjusted (Real) annualized growth rate of +3.17% benefited from a relatively low annualized inflation assumption of +0.3% for the quarter, down from +2% in 3Q10.  This compares to the current inflation estimates, including the December year-over-year CPI numbers of +2.6% (up from +1.5% in 3Q10) and the PPI finished goods numbers for December of +4.0%.  Needless to say, a more realistic view of inflation would significantly diminish the +3.17% GDP growth the data currently shows if the +0.3% deflator proves optimistic.

There are also other potential red flags that need to be monitored:

  1. After five quarters of a significant inventory build-up, a reduced pace of relative inventory increase reduced the reported real fourth-quarter GDP growth rate by 3.70%.  This will continue to be a BIG headwind for 2011. 
  2. The net growth of Governmental spending has also reversed.  Governments on a local level are tightening their belts given the fiscal realities they are facing and electoral mandates they have been given to do so.  Whatever one’s political ideology, the political environment in Washington and the fiscal scorecard point to the trend in Government spending remaining a drag for some time to come.  This is in line with our Hedgeye Macro Q1 theme, American Sacrifice.
  3. After five quarters of being a drag, the quarter-to-quarter contraction in the quantity of imported goods and services was a net sequential positive of +4.9% to GDP growth.  The recent rapid increase in commodity prices (read: debauchery of the dollar) has caused a correspondingly rapid decrease in reported imports. Going forward, the sharp rise in commodity prices will limit the purchasing power of the consumer. If the 33% swing in the quarter-to-quarter price of imported goods is correct, real discretionary consumer spending could be in for a significant change in trajectory.
  4. About +0.83% of GDP growth came from a recovery in residential housing investment, which is reportedly now growing at a tepid +0.08% annualized rate. This was the second positive quarter for residential housing investment during the year, but only the third over the past four years.  With housing prices in a continued decline this will unlikely persist. 
  5. Consumer spending was reported to have strengthened by about +1.3%, with consumer goods now being shown to have an annualized growth rate of 2.26%.


Howard Penney

Managing Director