While the market continues to shrug off the obvious implication of higher commodity costs on corporate profitability, we remain very cautious and skeptical that the current rally in 2011 has legs. Corporate profitability has recovered to the peak levels of 2007 and the current forward view of the market does not factor in margin decline from the ongoing surge in inflation.
Looking at the beverage industry specifically, the consensus call is for increased beverage industry profits in 2011, despite elevated input costs. Additional broader headwinds include weak consumer confidence and tepid job creation numbers. It also seems clear that the consensus believes that the consumer will absorbed increased prices, while companies are planning to focus on manufacturing cost controls, which are designed leave operating margins unharmed during 2011. We have reason to be skeptical that this scenario will play out as planned.
The first real “data points” will be coming from the annual Consumer Analyst Group of New York (CAGNY) meeting on Feb. 21-25.
Consistent with the overall theme of elevated expectations, SAM looks vulnerable. While alcohol sales remain relatively resilient through economic cycles, SAM seems like a prime example of how to play U.S. Stagflation. This will become more visible as we move progress in 2011. In the short run beer volume in 4Q10 look strong. According to IRI data, domestic beer and spirits sales were tracking about 2% higher in 4Q10 year-over-year.
Boston Beer is a company that fits our profile for a consumer short idea; revenue slowing, costs rising, and unpredictability surrounding operations and the competitive landscape in 2011. SAM is currently a short idea in the Hedgeye Virtual Portfolio for all of these reasons. Below I show four charts detailing the lay of the land for SAM from a top line and margin perspective.
Revenue growth is a concern for Boston Beer looking into the next few quarters and it will be interesting to learn, when the company next reports on March 9th, of the company’s progress on driving sales and competing against a rapidly growing number of competitors. On the last earnings call of November 4th, management warned that initiatives being taken to “further address the increasing competitive activity and to grow our brands…it is possible that these decisions might result in slower earnings growth in 2011 as we forsake earnings in the short term in order to build our organizational capabilities and support our brands at appropriate levels.”
In the first three quarters of 2010, SAM experienced year-over-year depletion growth of 14%, 13% and 7%, respectively.
Looking at the chart below, detailing revenue growth, it is clear that even without the aforementioned initiatives slowing growth, difficult comps may be difficult to hurdle as the company moves through 2011.
Probably the most concerning aspect of the outlook for SAM is in their costs. In November, management stated that they would provide an update with full year results in the middle of Q1 but, even then, won’t “have a really good view as to all the costs and benefits and trade-offs”. While management anticipates full-year revenue per barrel increases of approximately 1% through minor price optimizations, it is clear that from an earnings standpoint, there is likely a considerable amount of pressure coming down the tracks. This is illustrated below in a chart of SAM EBIT margin versus an Enhanced Grain and Oilseed Index.
On a year-over-year basis, it is clear that the melt up in grain prices is not good news for SAM’s margins and, while implementing the new sales initiatives may grow market share (or at least preserve it), the unfavorable impact on margins may be occurring at an inopportune time, as the chart above shows. Margins seem ripe for a correction.
As we can see from the chart below, over the last number of months, sentiment has not been very negative on the stock. Per Bloomberg, there are only five analysts offering ratings on the name.
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Nowhere was that more evident than with LVS which puts a lot of perspective into Sheldon's comments last night.
Total revenues grew 32% YoY in January, a little short of the 40% pace where the month was heading in the first part of January. We estimate that direct play was 8% this January vs. 7% last year. Adjusting for direct play, hold for both periods was high, just north of 3%, so there was no impact on market growth.
Sheldon was very bullish about January on the LVS call but after looking at the detail, the enthusiasm may be fleeting. It’s all hold percentage yet market share wasn’t even that great. As we noted earlier this week, LVS’s market share was almost 18%, above Q4 but still well below the 2010 average of 19-20%. LVS’s hold percentage was through the ceiling, especially at Four Seasons. However, Rolling Chip (VIP volume) market share was very low- at 1.1% in line with the last two months. Mass market share declined to 24.2%, the LVS' lowest share since we've been tracking the numbers (early 07'). Rolling Chip share was 11%, in-line with December but also the lowest since pre-Venetian. The underlying January metrics just were not good for LVS despite Sheldon’s assertions.
Wynn’s lower share looks like it was a combination of weaker hold relative to the last 2 months and lost VIP volume share. Mass market share actually increased sequentially to 11.9%, its highest since March 2009. That should bode well for profitability. MPEL’s Mass share was a strong 9.9%, below Nov/Dec but well above the average of rest of the year. MGM continues to perform very well, posting its 3rd highest Rolling Chip share since August 2009 ever and its 2nd highest Mass share ever, in January.
Of course all eyes are now focused on Chinese New Year…
Y-o-Y Table Revenue Observations:
LVS table revenues grew only 8% in January compared to market growth of 33%
- Sands was up 11.6%, driven by a 25% increase in VIP which was offset by a 10% decrease in Mass
- Although hold, adjusted for 15% direct play (in-line with 4Q10), was about 3.3%, last’s year’s comparison using a 10% direct play estimate was even higher at 3.4%
- Junket RC increased
- Venetian was the only property to see revenues decline 7.5%, with VIP down 20% somewhat offset by Mass up 14%
- Junket VIP RC decreased 4.2% but hold was weak and up against a tough comp. Assuming 19% direct play, in-line with 4Q10, we estimate that hold was 2.63% compared to 3.50% hold in Jan 2010
- Four Seasons was up 65% y-o-y driven by 79% VIP growth and 13% Mass growth
- Junket VIP RC decreased 36%, but the massive hold which we estimate was north of 5% (assuming 4Q10 54% direct play levels) more than made up the difference, especially compared to the low 2.2% hold in Jan 2010 (assuming 43% direct play)
Wynn table revenues were up 43%
- Mass was up 54% and VIP increased 40%
- Junket RC increased 20% and an easy hold comp helped comparisons
- Assuming 12% of total VIP play was direct, we estimate that hold was 3% compared to 2.7% last year (assuming 10% direct play)
Crown table revenues grew 21%, with Mass growing 38% and VIP growing 18%
- Altira was up 36.6%, with Mass up 27% and VIP up 37%
- VIP RC was up 13% and hold comparisons were favorable. We estimate that hold was 3.3% compared to 2.8% last year.
- CoD table revenue was up 10%, entirely driven by Mass growth
- Mass revenues grew 41% while VIP only grew 3%
- VIP growth was negatively impacted by a difficult hold comparison. Junket VIP RC grew 44%, Jan 2010 hold was 3.8% vs. 2.8% this month, assuming 15% direct play
Despite the family drama, SJM revs grew 38%
- Mass was up 11.6% and VIP was up 54%
Galaxy table revenue was up 50%, driven almost entirely by 57.6% VIP growth while Mass grew only 5.4%
- Starworld continued to perform well with table revenue up 64%, driven by 71.5% growth in VIP revenues and 4% growth in Mass win
MGM table revenue was up the most in January, growing 58%
- Mass revenue growth was very strong at 54%, while VIP grew 59%
- Junket rolling chip was up 73%
LVS share ticked up to 17.8% from 16.7% in December, but was still below its 2010 average of 19.5%
- Sands' share was flat sequentially at 6%
- Venetian’s share decreased to 8%. All-time low market shares for the property were set this month in Mass, VIP, and Junket RC volume
- Mass share declined 160bps to 14.7% from 16.3% in December
- VIP share declined 1.1% to 5.8%
- Junket RC declined to 5.4%
- FS share increased to 3.4% on the back of massive hold
- Junket RC share of 1.1% remained at the bottom- in-line with the last 2 months
- VIP share increased to 3.8% from a low of 1.0% in December
- Mass share was flat sequentially at 2%
WYNN's share at dropped 3% to 13.9% from 16.9% in December
- Mass market share ticked up 40bps to 11.9%- its best share month since April 09
- VIP market share decreased to 14.6% or 3.9% sequentially, compared to its 2010 average of 16%
Crown's market share increased to 14.5% from 14.2% in December
- Altira’s share increased to 6.7%- 1.8% sequentially - the properties’ best share month since September 2009. The share gain was entirely from gains on the VIP side.
- CoD’s share decreased 1.5% sequentially to 7.8%
- Mass market share declined to 8.1% from a high of 8.8% in December
- VIP market share declined 1.8% to 7.8% while Junket RC share only decreased 20bps sequentially to 7.8%
SJM's share increased 1.5% to 32.2% from December levels, with share gains coming mostly from Mass
Galaxy's share also increased 1.5% sequentially to 11.8%
- Starworld's market share grew to 10.1% from 9.1% in the previous month
MGM's share decreased to 10.3%, from 11.6% in December
- Mass share increased 170bps to 9.1%- which was the property’s second highest share
- VIP share declined 2.2% sequentially to 10.7% but VIP chip share only decreased 50bps
Slot revenue grew 26.7% YoY in January to $102MM, the second best month on record after October 2010 when slot revenues hit $111MM.
- MGM slot revenues grew the most at 123% reaching $17MM – a record for the property
- At 39% YoY growth, WYNN had the second highest growth with slot revenue reaching $22MM in-line with October levels and a high for the property
- Crown’s slot revenues grew 26.6% reaching $19MM
- SJM grew 17.9% to $14MM
- LVS slot revenues were flat YoY at $28MM
- Galaxy was the only operator with negative YoY, declining 7.7% to just $2MM
For the sixth month in a row, the employment data released this morning by the Bureau of Labor Statistics were positive for Quick Service restaurant stocks.
The data, detailed in the chart below, shows that the 20-24 year old age cohort saw month-over-month employment growth of +3.6% versus +2.3% in December. Unemployment in this demographic, a key source of traffic for QSR companies, is extremely high on an absolute scale but this acceleration in employment growth for young people is - on the margin - positive.
MCD, SONC, JACK, BKC, YUM, and WEN have all mentioned unemployment among younger age cohorts as being a primary impediment to same-store sales growth over the past year or so.
While the preponderance of the news of late has not been positive for QSR, specifically as it relates to commodity cost headwinds, this data point is positive on the margin.
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