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SINGAPORE Q1 REVIEW

Slowing growth is the story.  Hold-aided Genting increasing its market share lead.

 

 

The Singapore gaming market generated US$4.9BN (S$6.5BN) in gross gaming revenues over the 4 trailing quarters.  Over the same period, Macau casinos took home US$25.7BN and Las Vegas casinos reported US$5.8BN in gaming revenues.  On an EBITDA basis, S’pore market cashed in S$3.0BN (US$2.3BN).  Relative to 4Q, S’pore 1Q revenues jumped almost 10% to a new quarterly record of S$1.9BN, the highest QoQ growth rate among the three markets.  However, Rolling Chip (RC) hold was high (3.3% vs a TTM rate of 3%) during the quarter which contributed virtually all of the QoQ growth. 

 

In terms of market share, Genting came out on top again in Q1.  As the charts below show, Genting increased its lead over LVS in EBITDA and revenue share since Q4 due mainly to high hold.  However, LVS regained 10 percentage points in VIP RC share after Genting reported an 18.5% sequential  drop in VIP RC.  The company blames high hold for some of the sequential drop explaining that players wager less when they are losing. 

 

So where do we go from here?  Expectations have been so high for the S’pore market in 2011 that modest growth (5-10%) for the rest of the year may not be enough to satisfy the Bulls.  The 5% sequential drop in market VIP RC in Q1 is concerning (comparatively, Macau has not seen a QoQ drop in VIP RC since Q4 2008), and the junket licensing catalyst may not happen any time soon.  Mass has been relatively flat since the sequential jump in 3Q 2010.  Slots have exhibited decent sequential growth but that growth rate has slowed substantially.  Of course, Golden Week may reverse these trends temporarily, but we would not be surprised to see some disappointed bulls expecting Macau type growth.

 

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AS EXPECTED, MACAU SLOWS

No change to HK$22-24 BN projection for May.

 

 

Macau table gaming revenues totaled HK$11.7 billion for the first 15 days of the month.  The pace slowed dramatically from Golden Week with average daily table revenues falling from HK$899 million in the first 10 days down to HK$528 million.  A drop off is not surprising given the Golden Week impact on the first 10 days.  We still think total gaming revenues projects out in the HK$22-24 billion range for the full month (+33-45% YoY growth), including slots.  Absent the Galaxy Macau contribution (opened yesterday), which is not in these numbers, we would be leaning toward the low end of the range.  However, Galaxy Macau is likely to spur incremental visitation so we are sticking with our original projection. 

 

The only significant market share move from last week was Wynn, giving up significant share mainly to SJM.  No doubt luck played a role but we are starting to wonder if WYNN can maintain its stock price momentum in the face of lower market share, new competition from Galaxy Macau, slowing market growth, and the later opening date of Wynn Cotai to 2015.

 

AS EXPECTED, MACAU SLOWS - macau1


KNAPP TRACK: APRIL COMPS SEQUENTIALLY SLOWER

Malcolm Knapp released estimated casual dining comparable restaurant sales for April over the weekend.  Casual dining companies have seen solid 1Q results but the sequential slowdown indicated by Knapp Track data for April could point to a more difficult 2Q sales environment.

 

Estimated comparable restaurant sales growth in April was +1.6%.  Final March comparable restaurant sales growth was +2.4% (versus the prior estimate of +1.9%).  The sequential decline from March to April, in terms of the two-year average trend, was -55 basis points. 

 

Comparable guest counts in the casual dining space grew +0.2% in April on a year-over-year basis.  The final March guest counts growth number was +0.40% (versus the prior estimate of -0.10%).  The sequential decline from March to April, in terms of the two-year trend, was -75 basis points.

 

If this latest Knapp Track data point does, in fact, point to a more difficult 2Q sales environment, it would corroborate with what we are seeing in the broader consumer economy for 2Q to-date.  Below is some text from Friday's Macro post titled, "INCREMENTAL THOUGHTS ON THE CONSUMER":

 

"Although consumer spending growth remains healthy, the latest retail sales data suggest that growth may be slowing on the margin (including the issues with seasonal adjustment for Easter).  The government reported that sales growth in April disappointed, with core sales growing 0.2% (the weakest result since December 2010.  Yes, rising gasoline prices are taking a toll on sales at retailers and there are some signs that discretionary purchases are beginning to slow.  Department stores and housing related retailers had a poor showing in April, while restaurants may be losing some share to the grocery store channel.  The government’s attempt to increase take home pay from reduced social security withholding is being fully absorbed by higher gasoline prices.  As noted above, the recent job picture is not good and wage income is growing only modestly and that growth is largely dependent on government.  Therefore, the outlook for retail sales has become less certain and the risk to the downside is growing every week."

 

That gas prices continue to be a concern for restaurant companies was noted by many casual dining and quick service management teams during the first quarter earnings season.  Expectations are for gasoline prices to moderate over the remainder of the year but, if gas price inflation does not moderate, it could have a dampening effect on comps for the restaurant space.  I have previously highlighted CBRL, CAKE, and CPKI as three names that could be negatively impacted by elevated gas prices.

 

We continue to favor EAT, RUTH, and KONA. 

 

 

Howard Penney

Managing Director


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CAB: Thoughts on the Credit Book

After seeing CAB's Master Trust Data (which I understand only enough to be dangerous) I looked to Josh Steiner for his color. I was surprised with his response, to say the least.

 

Cabela's reports April master trust data

  • Gross charge-offs 2.84% vs 2.92% in Mar and 3.30% in Feb
  • Total delinquencies 0.87% vs 0.89% in Mar and 1.04% in Feb
    • 30-59 days 0.34% vs 0.34% in Mar and 0.41% in Feb
    • 60-89 days 0.24% vs 0.27% in Mar and 0.29% in Feb
    • 90+ days 0.28% vs 0.28% in Mar and 0.33% in Feb
  • Payment rate 43.91% vs 42.21% in Mar and 39.21% in Feb
  • Portfolio Yield 20.67% vs 21.68% in Mar and 19.73% in Feb

Josh Steiner: Hedgeye Financials Sector Head

"Credit quality is exceptional in this book. For reference, their NCOs and DQs are below half the levels seen at the majors. That’s obviously not a catalyst of any kind, but it is an interesting observation that their profile is so much better than the country’s as a whole.

 

Looking at the data, net charge-offs are improving sequentially in line with the industry. Delinquencies, the more important gauge, are essentially flat sequentially though still trending lower. Early-stage delinquencies are the more telling component because that’s the new-new, and those were flat month over month. Payment rate up sequentially. This simply tells you that people were paying more of their bill this month vs. last. For reference, the payment rate is generally the least interesting number that comes out. The yield is down a point sequentially but up vs. Feb. – overall, yields will bounce around a fair amount.

 

Frankly, I’m surprised by how high yields are relative to these charge-off rates. This must be an extremely profitable, albeit small, portfolio they’re running."


Sports Apparel/FW: April Showers?

 

Athletic apparel and footwear weekly POS data has been volatile the past two weeks. It’s not off the chart positive, nor is it negative. But anytime volatility creeps into the equation on these metrics, we always take a closer look. Monthly numbers due out tonight will tell us a lot. Stay tuned.

 

Here are a few key callouts from the week:

  • Athletic specialty retailers slowed on the margin while the mass/discount channel outperformed both family and athletic specialty for the second time in three weeks for the first time since January.
  • ASPs increases remain above 5% in athletic apparel – a positive for margins and DKS, HIBB, FL and FINL, but…
  • … footwear ASPs are down for the fourth consecutive week. We suspect this is primarily due to BOGO driven holiday sales activity (now included in the sample data) as well as a modest increase in promotional activity during the wettest April in 20-years. This will be an important factor to watch in the coming weeks as we expect positive price increases to reflect demand.
  • Adidas continues to outperform peers in apparel up +31% with Under Armour and VF (The North Face) up +17% and +10% respectively and all three gaining share on the week reflecting Adidas’ continued focus and success in the family channel. Interestingly, Nike market share declined as the brand sequentially increased prices while most peers dialed back pricing resulting in a more modest sales performance.
  • Running Apparel again topped category performance on the week up +43% with all performance t-shirts (+29%) the other callout to the upside.
  • Adidas also outperformed in footwear on the week up 23% with technical running brands (Saucony, Brooks, and Asics) all up over +5% as well.
  • Nike +330bps and Adidas +116bps remain the primary share gainers primarily at the expense of Skechers’ toning induced decline. We’d also highlight that several summer 2011 Brand Jordan styles were released earlier this year in April ahead of the holiday pulling brand sales forward.

Sports Apparel/FW: April Showers? - FW App Agg Table 5 11 11

 

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Sports Apparel/FW: April Showers? - App Region chrt 5 11 11

 

Casey Flavin

Director


DKS: Look Elsewhere

 

We actually think that DKS has decent business momentum due to the category it is in, which is something not many retailers can say these days.  But the reality is that our 6% comp expectation is 1% above the Street, and we’re both coming in $0.02 ahead of the high end of guidance.


Over the past two years, the company has come in above initial guidance – which it raised in this the quarter that it’s about  to report. But we think that this year will be different. We don’t think we’ll see guidance go higher due to margin pressures and the overall uncertainty associated with the Macro climate. But also remember that one of its largest vendors (Acuschnet: Titleist/Foot Joy) is being spun off of its parent. That’s not bad. In fact it might be good. But it’s simply different. Foot Locker is comping positive for the first time in a very long time – and therefore traffic is shifting, on the margin, to the mall. It might only be slight, but it matters.

 

Keep in mind that this is not a good business. Yes, Dick’s is ‘best in class,’ we COMPLETELY get that.  Yeah, manage it about as good as it gets in this business.  But that does not make it a good business. Margins are at peak today at 9%, though they’ve averaged closer to 4% over the past 10 years. At the same time, return on assets is perennially hugging the 7% mark and working capital turns of 2x. That gives us a sub-10% RNOA how we do the math, and that’s BEFORE actually charging the company for the leases.  Imagine that? Actually baking property costs into the model?  That reminds me of a presentation I saw in the tech bubble when an analyst was talking about a term called ‘profit before costs.’  I call that revenue.

 

Where we could be wrong on the quarter, however, is in those very occupancy costs. While Hibbett and Foot Locker can leverage occupancy costs on a flat comp, DKS needs about 4%.  We’re talking 5-6% comps here. So the flow-through on (an unsustainable) 7% would be material. But with the stock trading at 24x earnings, and just over 10x EBITDA, we think that near term expectations are way too high for a poor quality business.

 

Here’s a look at some of the key modeling considerations for the quarter: 

 

Sales: +8.4% on a +6% comp - This represents a 2-year deceleration of nearly 350bps. A few factors to bear in mind…

a)      Given the company’s mix consisting of primarily hardlines (54%) with the balance apparel (28%) and footwear (18%), we have good visibility into sales performance for half the business through our industry sports data. In the case of DKS, greater exposure to apparel is favorable with the category up +9% while footwear increased nearly 4% during the quarter. Our proprietary blended mix, which as been within a +/- 200bps margin in seven of the last eight quarters suggests a positive comp of +7.3% in the 1Q. However, with golf facing its toughest compare of the year (+12.4%) aided by continued double-digit growth in e-commerce, we anticipate a LSD comp in hardlines and the total aggregate comp to be slightly lower at +6% for the quarter.

b)      Within footwear, two the company’s leading footwear categories have improved considerably versus last year with running up +21% compared to +12% last year and basketball up +3% vs. -3% alleviating a drag from the prior year.  Similar to Foot Locker, while toning is a concern, we see favorable growth in running, basketball, and cross trainers driving higher sales and ASPs.

c)       One of the realities to consider during the quarter is that we had the wettest April in 20-years. This impacts the company’s Team sports sales and there were few if any retailers that didn’t highlight the Northeast and Northern Midwest as the weakest performing regions in April last week. Just how much weather may have impacted sales is tough to quantify, but it clearly dampens potential upside to sales.

d)      Unlike most other retailers that are benefiting from the weaker USD, DKS does not have a FX tailwind to help boost the top-line.

e)      Over the last two-years, management at Dicks has had a history of sandbagging comp expectations. Take a look at the chart below. The company has exceeded the midpoint of same store sales guidance by an average of +470bps over the last eight quarters coming in less than 200bps better only once in Q2 F09 when shares responded with a ~10% correction. Our +6% comp estimate implies only 150bps above guidance and is slightly higher than the Street’s expectation for +5% (+50bps). I liken this ~200bps ‘buffer’ similar to the markets margin of beat expectation when Ralph Lauren reports each quarter – there’s an expectation, that if met is not received favorably. While the Street sits at +5%, we think the market expects significantly higher.

 

GM +50bps

a)      Merchandise margins accounted for 140bps of gross margin expansion in 2010 with occupancy leverage accounting for another ~60-80bps. While management expects little to no occupancy leverage in 2011, the company is increasingly reliant on continued improvement in merchandise margins driven primarily by more favorable mix, inventory management, an regionalization efforts, which better tailors product to specific geographies. The fact that the later was not already in place for a best-in-class industry retailer is surprising if not downright scary, but certainly presents opportunity for further improvement.

b)      With an average lease duration of approximately 10-years, the company only turns 10% of its portfolio each year compared to most retailers that have an average duration closer to 5-years limiting the magnitude of occupancy leverage relative to peers. Coupled with tougher compares when occupancy leverage added 60bps to the Q1 last year, we expect little by way of contribution in the 1Q and the year for that matter.

c)       Inventories are in good shape heading into the quarter. With an increase in private label sales now representing over 15% of total sales we expect more favorable product mix to account for the 50bps expansion in the quarter muted by the 200bps expansion realized in Q1 last year.

d)      What’s good for the top-line weighs on margins. With apparel accounting for ~28% of sales compared to Foot Locker at around 10% - higher costs are starting to be felt throughout the supply chain and DKS is no different. Management’s comments over the last two quarters concerns me here: 

  •  
    • First, in Q3 management commented that it was buying for Q3 and Q4 of 2011 and not seeing “any pressure that makes us uncomfortable.”
    • Then, on the Q4 call Ed Stack (CEO) highlighted that he, “do(es) see some of that pricing increase affecting some of our private-brand products, some of our vendors. But there's a number of our important vendors that have had very little increases in price in the back half of 2011. But I get a little bit concerned that we're going to see that hit us in 2012.” Sounds like management was just starting to face reality by the end of 2010. If tone is any indication of how they’re managing higher costs, our sense is that management is not adequately planning for the pending margin hit.

SG&A +7% (-30bps)

a)      Two key factors to consider in Q1 is that the company anniversaries nearly $8mm in one-time technology related investments in the company’s new headquarters, DC, and online efforts in addition to various marketing initiatives.

b)      The company also front-loaded marketing spend in the 4Q to drive Q1 sales. We suspect the company realized a favorable shift in spend in Q1 as a result. 

 

DKS: Look Elsewhere - DKS CompGuid 5 11

 

DKS: Look Elsewhere - DKS HIBB S 5 11

 

DKS: Look Elsewhere - DKS comps 5 11

 

 

 


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