The Macau Metro Monitor, February 24, 2011


The government announced yesterday it would extend the income subsidy until the end of this year.  The government will raise the limit to MOP4,400 from MOP4,000 to help beneficiaries cope with rising inflation.  Last year, around 6,000 people were covered by the income subsidy scheme.



Starting on Monday, Macau’s imported workers will get a new blue card, which will allow them to use the automatic border checkpoints for Macau ID holders.  Each blue card will cost MOP100.  At the end of December, the number of non-resident workers stood at 75,800, up by about 700 people over the previous month.


In-line quarter with higher ship share in 2010.  Expects higher North American replacements but lower expansion units in 2011.



”Our impressive widescreen innovation in North America helped the Group achieve value and share growth in the outright sale segment in 2010, despite a double-digit fall in overall demand. The fee per day performance of our new gaming operations products is also very encouraging, and significantly ahead of the average fee per day performance of our legacy products. Portfolio quality is key to performance improvement. As a result, we expect to continue to see faster progress in those markets such as North America where our turnaround program is more advanced, than Australia and Japan. Momentum is improving across all key markets and by full year 2011, we expect to see consistent evidence of better games and stronger product portfolios delivering tangible value in these markets, whether that’s improvement in average prices, higher fee per day results, stabilizing share numbers or healthier margins."


-Jamie Odell, CEO and Managing Director of Aristocrat





2011 NA Outlook

  • Continued volatility and global markets to remain subdued.
  • Expects marginal improvement in the replacement cycle to be more than offset by fewer new and expansion units, resulting in an overall market that is slightly down in 2011, excluding any new jurisdictional openings.
  • Will focus on restoring and growing its gaming operations base on the strength of new product releases.
  • Major jurisdictional expansion and new casino openings are expected from 2012 onwards.
  • Overall operational performance for 1H 2011 is expected to be marginally lower compared to the prior corresponding period. 
  • 2H 2011 will be substantially stronger with momentum to build through further major new participation game releases and new systems modules in North America, more new product launched in Australia, and two key licensed games released in Japan. 




North America

  • Challenging year. Fewer new casino openings or expansions. There has been no significant improvement in the replacement cycle.
  • In local currency, revenue declined US$25.6 million (7.9% YoY) and profit declined US$8.8 million or 7.0% YoY.
  • Overall margin improved modestly, driven by higher ASP although this was partially offset by the impact of lower sales volumes combined with a flat fixed cost base.
  • ASP increased 2.6% YoY to US$15,054 per unit.
    • This improvement was predominantly driven by the release of the new Viridian WS and Viridian Slant Vii products. The ASP for these new products for the period was above the overall business ASP.  However, this was partially offset by customer mix. The Viridian WS and Viridian Slant Vii have become well established across the North American marketplace, with over 5,000 installations at the period end.
  • Units sold in the period declined 7.3% to 7,662, compared to market decline of ~12%.
  • Overall profit contribution to the Group from unit sales improved marginally YoY despite the lower volume of unit sales representing improved margins driven by the release of the new Viridian WS™ and Viridian Slant Vii™ products during the reporting period.
  • Sales of software conversions decreased 7.9% to 7,114 reflecting fewer MKVI game titles released to market as customers transition to the new Gen7™ platform and the Group reduces support for its MKVI platform.
  • Gaming ops installed base decreased 739 units YoY
    • Most of the churn in the installed base during the period represented products existing at the beginning of the period which declined by 1,969 units, or 31% of the opening installed base. 
    • New games - Godard’s Rockin’ OlivesTM, Big Top Jackpot, Reel Tall Tales and Kentucky DerbyTM - stemmed the decline with more than 850 units installed at the end of the period.
    • Due to the timing of regulatory approval of the new games pipeline in the latter part of 4Q (except Kentucky DerbyTM) the installed base unit numbers were not maintained. The gaming operations installed base is expected to be restored as a result of the games released late in 4Q and a continuation of product scheduled for release through the course of the 2011 reporting period.  This recovery will be led by new games developed for the VERVE HD cabinet such as Godard’s Rockin’ OlivesTM, released in 2010 and performing well above the overall average FPD, followed by TarzanTM and Mission ImpossibleTM scheduled for release in 2011.
  • Gaming ops average FPD (fee per day) from US$42 in 2009 to US$39 in 2010. The decline in FPD was influenced by the continued aging of the install base in the absence of new product releases through the period as well as the continued trend of lower operator revenues.
  • In addition to the gaming operations installed base, there were a total of 1,875 standard game leases, earning an average US$20 per day, compared to 2,335 earning US$18 per day as at 31 December 2009.  This decline was partially offset by the release of Viridian WS™ and Viridian Slant Vii™, with approximately 350 units in the field on standard leases at the end of the period.
  • Systems revenue was down 20.7% YoY with gross margins down 9.1% YoY.
  • OASIS 360 Casino Management System netted 2 new customers


  • Market conditions remained difficult in 2010, as indicated with New South Wales (NSW) showing a 10% decline and QLD a 16% decline in units shipped YoY
  • Platform unit sales reduced by 1,555 units or 29.4%, with less volume into the NSW and QLD markets, offset by an improvement in unit sales into the Victorian (VIC)/Tasmanian (TAS) market.
  • Game conversions were down 23.1% YoY



  • 2011 NA outlook
    • Improved operating performance supported by new products (particularly in 2H) despite flat market
    • Maintain ship share in outright sales and improve margins from move to widescreen
    • New gaming operations product releases achieving higher FPD in 1H
    • In 2H, uplift in gaming ops installed base and FPD; New products achieving higher FPD than legacy
    • Debuting Stepper widescreen in 2H 
  • Still sees 5-year plan on track
  • Highest NA ship share in 4Q
  • Viridian commanded $1,000 price premium over other company products
  • In NA, 600 widescreen games, 30 casinos in 15 states; averaging 1.3x normal performance
  • Aging installed base contributed to gaming ops decline
  • Newer games averaging over $50 FPD
  • Australia:
    • Ship share fell 10.2% to mid 20s
    • 2011 outlook:
      • No material change in overall demand
      • Order book building steadily
      • Improve ship share and margins due to broader product portfolio tailored for Australian market
      • Ship share to mid-30s by 2H
  • Japan:
    • Improved pachislot market; but legacy product was uncompetitive
    • 4-5 new license games for 2011
    • For 2011, 25,000 total unit sales (supported by 2 key licensed games) - weighted towards 2H
  • Asia Pacific
    • Market leading share of new openings in Singapore and leader position in Macau
    • Should obtain 60% share of Galaxy Macau floor
  • Debt credit facility extended out to 2013


  • Participation increase on floors?
    • Class III declined slightly. Not planning on casinos increasing participation games.
  • 1st time that US participation sales higher than EGM sales
  • Aging installed base will drag 1H 2011 results
  • US: 61,000 slots in 2010; 2011 will be ~60,000. Replacement cycle is relatively flat. Visibility remains poor; pleased with Q4 share but struggling in Q1.
  • Singapore: 1,000 units on floors; RWS: 34% share; MBS: just above 40% share
  • 2010 NA installed base: ended at 5,700; Rocking Olives has 500. Withdrawals coming towards end of the year for new products; placed 3,000 and withdraw 3,700 for 2010.
  • Australian market ship share: need Viridian widescreen launch to increase share; 350 new games for 2011
  • In 1H, 28 new games for New South Wales.
  • 2011 average tax rate: 28%
  • Total MKVI installed base: 100,000-105,000
  • Inventory levels will be lower in 1H 2011 with release of VERVE cabinet in NA.


Fiscal 1Q11 earnings of $0.61 per share came in $0.13 per share better than street expectations (only about a $0.02 per share benefit from a lower tax rate), but the company slightly lowered its full-year EPS guidance to $1.40-1.65 from $1.41 to 1.68.  Despite the better-than-expected same-store sales growth of +1.5% at Jack in the Box company restaurants (versus the street’s +1.2% estimate and management’s guidance of -1 to +1%) and the fact that 1Q11 marks JACK’s first quarter of positive comp growth at Jack in the Box after six quarters of decline, investors will likely be disappointed that there is no flow through to guidance from the first quarter earnings surprise. 


Although management is likely being cautious, and maybe even practical, it will also be viewed negatively that the company did not raise the low end of its -2% to +2% full-year comp growth guidance at Jack in the Box company restaurants as a -2% result would imply a sequential slowdown in two-year average trends from 1Q11 levels.  Given the changes in guidance, higher commodity costs are the primary driver of the lower earnings guidance for the balance of the year.


Below I outline the positive and negative offsets included in the current guidance versus the company’s prior outlook.




  • Qdoba system same-store sales growth now expected to be +3-5% (from prior guidance of +2-4%)
  • Tax rate:  targeting 35-36% (versus 37-38%)
  • Anticipated refranchising gains:  $0.70 to $0.82 per share (versus prior range of $0.66 to $0.78 per share)



  • Commodity costs are expected to be up 3-4% (from prior expectation of +1-2%)
  • Restaurant operating margin expected to range from 13 to 14% (had said 14 to 14.5%)



  • Jack in the Box company same-store sales growth guidance unchanged at -2 to +2%
  • New unit development plans are mostly unchanged (only expected to open 19 company-owned Jack in the Box restaurants versus prior guidance of 25)
  • SG&A expense unchanged in the mid-10% range


We will be back with more details after the company’s earnings call tomorrow.


JACK – FIRST LOOK - jack sss


JACK – FIRST LOOK - jack quadrant



Howard Penney

Managing Director

Early Look

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Good Better Best

The overlay of a luxury retailer, a traditional department store, and the world’s largest off-pricer yields an interesting observation.  Inventory management relative to sales momentum is still very well controlled in the mall while the y/y improvement at TJX has been sequentially decelerating.  Being in-market buying goods at year-end is definitely a factor here, but the multi-year run of taking inventory out of the system and improving turns is going to be incrementally less impactful for TJX in 2011.


Both SKS and DDS still have room to go given both are still in mean reversion mode in their efforts to return to prior peak margins. 


Additional TJX thoughts:

  • Similar to ROST, TJX mentioned that they are taking advantage of buying opportunities in the marketplace. Specifically, a 4% increase in in-store inventory levels at year end was the direct result of “much larger available quantities of end-of-season branded products”.  We continue to believe supply disruptions, lack of clarity on pricing, and cost-induced strategy changes for branded vendors will ultimately result in further advantageous buying opportunities for the off price community.
  • Despite an expectation for a pick-up in “disruption” in the apparel space from a sales/margin perspective, we also believe we may see a pick-up in special make up product in 2011.  With units generally planned down for most first-cost retailers, it’s likely that excess factory capacity could lead to some planned buys for the off-pricers.  Even if factories are willing run production at lower margins, it still nets profit dollars against fixed costs that would otherwise go unused.  Expect to hear more about this as the year progresses.
  • Unlike M and VFC, TJX remains very conservative with its forecasting coming off of a record year of sales and profits.  In fact, TJX has reported positive comps in 32 of the last 33 months (Jan ’09 was the only negative).  As such, the outlook for 2011 calls for just a 1-2% increase.  Overall inventory per store expected to be down again for 2011.

Good Better Best - tjx sks dds

Accelerating Athletic Apparel Trends


Weekly athletic apparel sales accelerated on a sequential basis across all channels for the second straight week. Consistent with the recent trend, the greatest improvement came from both the family and discount/mass channels with athletic specialty breaking out from the +3%-4% range reported over the last 4-weeks to +7.7% this week. It’s also worth noting that ASPs decelerated in both the athletic specialty and family channel (less than 1%) driving unit volume while pricing at discount /mass retailers increased considerably last week. Our prior commentary regarding what appears to be healthy inventory positions at retail as we transition out of the holiday appear to be magnified in the discount/mass channel. Finally, sales growth was positive and improved sequentially across all regions for the first time since the first week of the 2011 lead by New England, the Mid-Atlantic, and the Midwest all of which have outperformed in the first few weeks of Q2 (good for DKS). The Pacific/Mountain regions continue to underperform though each were up +9% and +11% respectively (less good for BGFV).


Accelerating Athletic Apparel Trends - FW App App Table 2 23 11


Accelerating Athletic Apparel Trends - FW App App 1Yr 2 23 11


Accelerating Athletic Apparel Trends - FW App App 2Yr 2 23 11


Accelerating Athletic Apparel Trends - FW App Reg 2 23 11


Casey Flavin


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities

Conclusion: Though we covered our oversold short position in Japanese equities today in the Hedgeye Virtual Portfolio, we remain outwardly bearish on Japan’s intermediate-term TREND and long-term TAIL.


This morning we covered our short position in the EWJ for a gain. We’ll look to re-short Japanese equities on a bounce back up to its immediate-term TRADE line of resistance at 10,909.


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 1


Watching how US equities trade will be critical here, as both markets have been the beneficiaries of the “flows” into relative “safe havens”. If 1,307 in the S&P 500 doesn’t hold or if it can’t close above 1,330 in the immediate term, the probability of a meaningful bounce in Japanese equities dwindles. In an environment of Global Stagflation, these “safe havens” will wind up looking like relative value traps over the intermediate-term TREND.


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 2


Regarding Global Stagflation specifically, Japan’s January trade data revealed more of the nasty tea leaves that we’ve been harping on since early November: 

  • YoY Export growth slowed sequentially by (-1,150bps) to +1.4%, driven primarily by a sharp reduction in Asian demand (China down sequentially: +1% YoY vs. +20.1% in Dec; Shipments to Asia down sequentially: +0.4% YoY vs. +14.8% in Dec);
  • YoY Import growth accelerated sequentially by +180bps to +12.4%, driven primarily by rising commodity prices, including Brent crude oil, which was up +29% YoY in Jan;
  • Japan's Trade Balance swung into a deficit for the first time in 22 months in Jan: (¥471.4B) vs. ¥727.7B in December. 

Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 3


Of course, any bull worth his shirt at a market top will find a way to massage this data into a less-bearish mosaic:


Seiji Adachi, Senior Economist at Deutsche Securities, argues that the timing of the Lunar New Year is distorting Japanese trade data a bit, as Japanese exporters started scaling back shipments to Asia in late January to accommodate for the early Feb start to the Lunar New Year (Feb 2-8 in 2011 vs. Feb 14-20 in 2010). He argues, “It’s hard to project how much the Lunar New Year holidays will affect trade as they change every year, so we need to look at the overall trend through March.”


In rebuttal to this view, the data shows that growth in the value of Japanese exports slowed on a global basis: 

  • YoY Export growth to the US slowed (-1,050bps) to +6% in Jan; and
  • YoY Export growth to the EU slowed (-900bps) to +0.7% in Jan. 

As we’ve been forecasting since October 5th via our Consumption Cannonball thesis, US consumption growth is slowing – a trend further highlighted by WMT’s sales/inventory problem. We knew that austerity and higher interest/tax rates would weigh heavily on consumption patterns in the EU, but it appears the US consumption dominoes are at the Tipping Point, and are currently being nudged by near $100 WTI crude oil prices.


Back to Japan specifically, Japanese stocks have indeed benefitted from the overwhelmingly bullish sentiment that is commonly associated with being at/near the top of a global economic cycle. Citing lagging 4Q global growth data points, Japanese Officials, CFOs, Economists, and PMs have all taken advantage of their chance(s) in the past few weeks to upgrade their assessment of the Japanese economy: 

  • Officials: Both the BOJ and the Japanese government upgraded economic outlooks, with the BOJ specifically raising their growth projections for the year ending in March to +3.3% vs. +2.1% prior;
  • Corporations: Toshiba, Cannon, and Toyota are among a handful of large Japanese exporters who recently guided higher on “strengthening Asian demand” and “robust US consumer demand”;
  • Sell-Side: Bloomberg consensus estimates for Japan’s 1Q11 GDP advanced from +0.5% QoQ SAAR in early Jan to +1.1% QoQ SAAR today; and
  • Buy-Side: “The worst of the economic conditions are behind us… If the global economy continues to recover, that should boost Japanese stocks.” – Junichi Misawa, Head of Equity Investment at STB Asset Management, which oversees $14B AUM. 

In stark contrast to such bullish sentiment, we continue to stick with the intermediate-term call embedded in our Japan’s Jugular thesis which shows just how vulnerable the Japanese economy is in a situation of Global Stagflation. In fact, Japan is among the least defensive economies in the world in such a scenario:


Hedgeye’s current global growth outlook (decidedly bearish) does not bode well for Japanese export and manufacturing growth, which, in turn, bodes poorly for Japanese employment and wage growth:


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 4


The current global inflation trends bode exceptionally poorly for Japanese consumption growth, as rising food and energy prices tax Japanese consumers who have been accustomed to 10-plus years of flat-to-negative nominal wage growth and prices. In fact, four out of five Japanese citizens say higher prices would be “unfavorable” in a January BOJ survey – the common reason: lack of wage growth:


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 5


The current global inflation trends are a headwind for Japanese corporate earnings, whose deflationary mindsets will continue to force them to Take it in the Margin as COGS increases fail to be met with offsetting sell-through price hikes:


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 6


Last but certainly not least, the current global inflation trends are an unmitigated disaster for Japanese consumption growth on a combined government and private basis. It is without question that the Japanese economy is the least equipped to deal with rising interest rates, which is one of the many reasons it has kept rates near zero for such an “extended and exceptional” period of time.


Even the slightest backup in yields confounds the Japanese government budget, where debt service accounts for 44.8% of organic revenue (tax receipts + fee collections) – up +1,320bps from 31.6% in 2001, just ten years ago.


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 7


To this point, the nominal yields on 10Y JGBs have backed up +41bps since bottoming out on October 6th (coincidentally one day after we published our Japan’s Jugular thesis). The more interest rates continue to back up, the more resolve Prime Minister Naoto Kan will have in his fight to hike the consumption tax. Should the current massive opposition to Kan’s proposal win out, Japan will be forced to issue additional debt to fund its burgeoning fixed social security expenditures, which currently consume 31.1% of total revenue – up +990bps from 21.2% in 2001, just ten years ago.


Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 9


We continue to maintain that sovereign debt buildup past the Rubicon of 90% Debt/GDP structurally impairs economic growth – a stance supported by eight centuries of empirical data. Japan is no exception here and Pavlovian investors who flock to Japanese equities, JGBs, and the yen as “safe havens” in times of heightened risk will be surprised to the downside on both an intermediate and long-term duration.


Darius Dale



Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities - 8


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