Likely earnings beats, higher estimates, and new junket business drive a favorable thesis.  Industry-wide junket liquidity/credit conditions remain our only concern.



The stock has taken one on the chin, not as bad as 0200.HK (Melco), but MPEL is down 11% in the last week.  So what’s driving the move down?  We think it is related to general Macau concerns - the weak start to February and the fear that Chinese tightening will constrict the Macau junket business.  We are not worried at all with the former but the latter should always be a concern.


As we stated when we posted the pre-Chinese New Year (CNY) celebration revenues for February, the numbers are irrelevant.  CNY-related gambling really didn’t begin until last Sunday and our guys on the ground are indicating huge volumes and traffic.  While we never bought into the hype of a HK$20 billion month, we are sticking with our projection of HK$17-18 billion.  Maybe that would disappoint some people but assuming MPEL maintains its share, the company would be on pace to easily beat Q1 estimates.


The second issue is real; although with all our contacts in Macau, we can’t say we’ve seen any indication of a liquidity driven junket slowdown.  We’ve statistically tested the relationship between Chinese monetary policy and junket volumes and the causal relationship has been real and significant historically.  However, the relationship broke apart during the last 6 months of tightening.  Does that mean it won’t be reestablished?  Of course not, and we are monitoring that closely.


So what are the positive catalysts?  A second blowout quarter in a row from the gang that couldn’t shoot straight for one.  See our 1/11/11 note, “MPEL: AN ENCORE PERFORMANCE” for the details.  Our EBITDA estimate is 20% above the Street for Q4.  The good times should continue as January was strong and Q1 estimates look too low.  So far during CNY, we are hearing that MPEL’s volumes and hold is strong.


Looking ahead to Q2, Galaxy could announce that the April opening of Galaxy Macau will be pushed back to June.  Cotai cannibalization on MPEL’s City of Dreams (CoD) has been a worry for investors.  An additional two months of CoD operating without the additional competition should allow for another beat in Q2.  Finally, we think MPEL could pick up some of SJM’s junket business in the coming months as we wrote about in our 01/27/11 note, “MPEL: FAMILY SQUABBLES AND OTHER CATALYSTS".


MCD rallied 2.6% yesterday, but on no volume.  Given yesterday’s strength, we added to our short position in MCD in the Hedgeye portfolio.  Were January trends a game changer for MCD?  I’m not convinced.  Yesterday, MCD reported that January systemwide sales grew 7.4%, or 6.7% in constant currencies, against an easy comparison.  As we move through the balance of the year, these trends will slow. 


As you can see from the first chart below, the street is forecasting accelerating sales trends as we progress through the year with little impact on operating profit margins from higher inflation.


We believe that the street’s expectations are very aggressive, as reflected by our 2011 estimates, as shown in the second chart below.  We expect to see earnings revisions through the balance of the year. 






Howard Penney

Managing Director

R3: GIL, DSW, ADI, and Kmart



February 9, 2010



  • Requiring registration for an e-commerce site before allowing consumers to make a purchase may actually do more damage than good.  According to a survey by Janrain, 75% of consumers will avoid creating a new user account for an e-commerce site, with 54% leaving the site or not returning, 17% going to a different site if possible, and 4% leaving/avoiding the site.  Of those that actually take the time to register, 76% admit to providing incorrect or incomplete information.
  • Kmart is pulling out all the stops to elevate its image as an affordable fashion apparel destination.  To coincide with NY Fashion Week (beginning tomorrow), the company is launching @KMartFashion on Twitter,  social brand channels on Facebook and YouTube, a Spring ad campaign in Vogue, and the launch of a Concierge service which will service 50 editors, bloggers and fashionistas over the course of the week.  At the end of the day, we still remain skeptical that Kmart’s image will benefit from such efforts.
  • Management of “basics” maker Gildan suggested the price of cotton is likely to come back to trading in a range of $0.90-$1.20 next year following a ‘soft landing.’  With prices currently near $1.80, it would appear that management is suggesting current level are at or near peak. Price increases at retail still remain the biggest wild card over the back half as elasticity has yet to be tested in the modern retail era.  Socks and underwear are definitely categories to watch.



Marc Jacobs Open Pop-Up Shop - Robert Duffy has been known to reshuffle his enclave of Marc by Marc Jacobs stores on Bleecker Street in Manhattan when the mood strikes him, and the 10th anniversary of the secondary line is as good a reason as any. As of yesterday, the Little Marc store at 382 Bleecker has been made over into a pop-up shop housing a capsule collection of Marc by Marc clothes (women’s and men’s) and accessories reissued for the anniversary; the space will be open for two weeks, selling pieces such as military jackets, flag-print dresses, belts with fruit buckles for girls and T-shirts and field jackets for boys.  <WWD>

Hedgeye Retail’s Take:  With a mini real-estate empire in the West Village, the company remains creative in its efforts not only merchandise creatively but also to continuously rebrand specific stores.  Imagine if retailers with multiple locations in the same mall mixed things up on a quarterly basis?


Retail Stocks Hit New Post-Recession Highs - Retail stocks hit fresh multiyear highs Tuesday as investors fostered hopes that the consumer resurgence seen in January would continue. The S&P Retail Index jumped 1.5 percent, or 7.6 points, to 517.13 — its best close since July 2007. The Dow Jones Industrial Average increased 0.6 percent, or 71.52 points, to 12,233.15, a level not seen since June 2008. Retail gainers included Urban Outfitters Inc., up 5.6 percent to $37.06; J.C. Penney Co. Inc., 4.9 percent to $35.03; Chico’s FAS Inc., 4.2 percent to $11.95, and Dillard’s Inc., 3.9 percent to $42.04. Vendors also picked up steam, and among those logging new 52-week highs were Under Armour Inc., which closed up 2.3 percent to $66.99; Fossil Inc., 2.2 percent to $78.21, and Polo Ralph Lauren Corp., 1.7 percent to $115.77. <WWD>

Hedgeye Retail’s Take:  History suggests that January sales do little to establish Spring trends.  With that said, there’s no denying the year ended on a positive note with inventories clean and clearance levels low.


Copenhagen Goes Back to Basics  - Offering toned down, classic collections devoid of glitter and frills, brands showing at the Gallery, CPH Vision and Terminal-2 trade shows here last week during Copenhagen Fashion Week expressed a focused, back-to-basics approach. “The party is over. It’s more basic and simple, we’re looking for good solid brands as customers are willing to pay for quality items that last,” said Anja Torjusen, a buyer for Moshi Moshi, which has three stores in Denmark. Torjusen lauded Surface to Air’s collection and the sailor jackets by American label Fidelity. “It’s about being honest and connecting with real women,” agreed Sam Jones, fashion director of Style Passport, a soon-to-be-launched British online store specializing in beauty and fashion items for stylish vacations. So far, around 50 labels, such as Anya Hindmarch and J Brand, will be stocked by the site, which is due to go live on March 8th. < WWD>

Hedgeye Retail’s Take:   Don’t ignore the trends out of Copenhagen, which is one of THE places that many retailers and designers look to for cues.  It’s way too early to call a trend, but certainly Gap and American Apparel would come to mind of basics are on the rebound.


Nike Taps Exec to Head Affiliates Group -  Nike has named a new head for its affiliate division. Roger Wyett, VP and CEO of Hurley International, will become president of Nike Affiliates, overseeing Cole Haan, Converse, Hurley International and Umbro. Prior to Hurley, Wyett served as global VP of apparel for Nike. He joined the company in 1994 and will replace Eunan McLaughlin, who announced his retirement. <WWD>

Hedgeye Retail’s Take:   With a cash balance on the rise, the time may be nearing for the affiliates group to add an additional brand to its portfolio. 


U.S. consumers saw 4.9 trillion web display ads in 2010 -  Online display advertising continues to grow, according to a new report from web measurement firm comScore Inc. The report says U.S. Internet users saw 4.9 trillion display ads last year. That number stands to grow as more major brand marketers invest in all facets of online advertising. EBay led the way among retail-related sites with 36.8 billion impressions in 2010.  The comScore “2010 U.S. Digital Year in Review” report says that 104 different advertisers delivered at least 1 billion display ad impressions each in the fourth quarter, up 30% from 80 advertisers a year earlier. <InternetRetailer>

Hedgeye Retail’s Take:  Take note of the real estate on your screens, which continues to shrink as more and more ads get pushed your way. 


DSW to merge with Retail Ventures - Footwear retailer DSW Inc said it agreed to merge with its largest shareholder Retail Ventures Inc  in an all-stock deal, and raised its full-year outlook. Retail Ventures will become a wholly-owned subsidiary of DSW in a tax-free exchange of shares at an exchange ratio of 0.435 DSW shares per RVI share, DSW said in a statement.The merger eliminates the complexity and public company expenses associated with Retail Ventures, whose only operating business is its 62 percent stake in DSW, the company said. <Reuters>

Hedgeye Retail’s Take:  Overshadowed here by the transaction is the fact that sales accelerated in 4Q, coming in at 14.9% on top of a 12.9% increase LY.  So much for tough compares.


Adidas Sees 15% to 20% Annual Growth in China -  Adidas will grow 15% to 20% annually in China over the next five years and exceed 1 billion euros ($1.36 billion) in revenue this year, Adidas Chief Executive Officer Herbert Hainer in an interview on German television. He also expects the company overall to see significant growth this year after a strong 2010. "We have a very good 2010 behind us -- we have developed enormously well. And we will continue to grow in 2011," Hainer told Deutsches Anleger Fernsehen, according to Reuters. Adidas' full-year 2010 results are due on March 2. "We are lucky, that we have the women's soccer world cup and many other sport events on top of that (in 2011)," he added. <SportsOneSource>

Hedgeye Retail’s Take:   Nothing new here as China growth for most global brands with an established presence in the region are looking to grow by a similar amount.  What is surprising is that Hainer mentions the women’s world cup as a key driver of growth in 2011.  What about toning?


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%


Notable news items and price action over the past twenty four hours.

  • MCD was added to the “Key Calls” list at UBS.  Shares are Buy rated with a price target of $86.
  • MCD’s largest global franchisee is preparing for a U.S. IPO, according to the Financial Times.
  • BWLD reported after the close.  Comps slowed and the Gap-to-Knapp went negative on a one-year basis.  Highly favorable chicken wing prices and other margin gains helped the company beat on the bottom line.
  • BWLD target raised to $55 from $52 at Deutsche Bank.
  • GMCR has been outperforming the QSR space and is not the best performing QSR stock over the last week and month.  Yesterday the stock gained 3.2% on good volume.
  • SBUX also saw its share price gain, by 2.4%, on accelerating volume.



Howard Penney

Managing Director


The Macau Metro Monitor, February 9, 2011



A Transportation Infrastructure Office (GIT) spokesperson said the Macau government has challenged Bombardier's injunction by claiming the injunction would seriously harm the population, by delaying the construction works of LRT and the conclusion of the regional transportation network it belongs to.  Last week, GIT said the injunction would not have “a great impact on the project’s full development.”


The challenge was filed at the Court of Second Instance (TSI).  TSI should reach a final decision within two weeks.  If the court accepts the injunction, Bombardier is likely to launch a legal appeal against the tender decision, which means the LRT process could remain frozen for up to a year


Another bidder in the MRT tender, Siemens, has requested more details on the process from the government. The company has not decided whether also to pursue an injunction.



Stanley Ho still has not received a formal proposal from family members to solve the dispute over his assets distribution.  Mr. Oldham, Ho's lawyer, said a new court case would be filed today against Mr. Ho's family to recover his assets.


Resorts World Sentosa hosted more than 1,000 events last year, while Marina Bay Sands hosted 700 events.  The Singapore Expo is adding a new convention wing called Max Atria which has 23 meeting rooms and function areas.  It is scheduled to open in 1Q 2012.



According to the Monetary Authority, domestic loans to the private sector grew 4.9% on a monthly basis to MOP130.5BN in December.  Loans to restaurants, hotels and similar businesses, personal housing loans and loans to the gaming sector increased QoQ at 20.9%, 11.3% and 7.5%, respectively.

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