In preparation for WYNN’s Q2 earnings release tonight, we’ve put together the pertinent forward looking commentary from WYNN’s Q1 earnings call.
YOUTUBE from Q1 earnings call
- [Market share/capacity] “We’ve got 10% of the table games in the marketplace, we have 14% of the market share. And on slots we’ve got 8% of the slots in the marketplace in the first quarter and we’ve got 22% of the market captured.”
- [Cotai project] “The cost will be in that range, between $2 billion and $3 billion…. It’s 1500 – 1580 rooms of which 900 are suites.”
- [Table allocation] “We’re up to currently around 499 games, which include 11 poker games, so we’re getting close to the table allocation but there’s a little room.”
- [Comparisons] “We want to point out that up until now and continuing until the 21st of April, the Macau numbers are comparing Encore and Wynn Macau for a total of 1,000 rooms to just Wynn. Wynn Encore in Macau opened up on April 21st, so we get our first year-to-year comparisons where the facilities are equal, starting in the last week of April and, of course, all of May and thereafter. So we are benefiting from the fact that our hotel is larger compared to its size last year and that’s going to last for another three or four days and then we’re up against an equal facility.”
- [Market trends] “I don’t see the market getting much better from the January, February numbers that LBCDA announced but we certainly have seen a different trend in terms of finding customers who not only want to stay here and they want to eat here and they want to exist at our retail stores and our showroom; and so we have been very focused on all of our hotel channels, how we think about our revenue management system, how we’re thinking about our website and we’re trying to bring in a guest who is willing to pay for the amenities that we offer.”
- [2011 visibility] “So what we’ve seen at our end of the market, the luxury end, is the second quarter still feels pretty good. July is soft, which I think you’ll hear from all the other operators, but the fourth quarter, just based on our convention bookings and October in particular also feels pretty good. So outside of large macro events, like gas going to $4.50, we feel pretty good about our position in the market the rest of the year…. The summer will be tough when we go to the automobile people. But that’s, you know, July and August. But, you know, the convention business... starts around the 10th or 15th [August] with some of the fashion and jewelry stuff.”
- [Rates] “We’re more confident now in holding our rates. So in the first quarter of this year, 20% of our business was through the leisure segment, the lowest end of the segment. Last year in the first quarter it was 32%, so we were able to shift a lot of the low end segment to our casino, to our convention area and to our promotional area which really helped us drive more cash revenue and the higher ADR; it’s a better customer.”
- [Room renovations]“We take care of the property; and we upgraded it while we remodeled it and that was another reason why we get higher rates and we’ll be able to get higher rates going forward. We continue to press ahead with increases, which will continue into next quarter.
Buying PENN for a TRADE in the Hedgeye virtual portfolio.
Keith bought PENN in the virtual portfolio ahead of its earnings report this coming Thursday. According to his model, there is good support around $38-39 level. As we wrote in “PENN: 5X WOULD BE A TREND” (7/14/2011), we believe PENN will come in ahead of the street on Q2 EBITDA, revenues, and EPS. Market share gains, outstanding WV table revenues, and property-level margin improvements should drive a Q2 beat.
Friday’s price weakness can be attributed to an analyst downgrade. The gist of the downgrade was concerns of tougher comps in the 2H of 2011 when the onset of table games in WV and PA anniversaries. Not exactly groundbreaking analysis. Here is the chart.
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There are a lot of reasons to be concerned about CAKE this quarter, but I think the top line will prevail. Along with the rest of the industry CAKE has outperformed the market significantly this year but in-line with the S&P 500 over the past 5 days. I certainly have my concerns for 2H11, but will address those after the company reports 2Q11 earnings, when I believe they will be more pertinent.
2Q11 SAME STORE SALES TRENDS
- The 2Q EPS estimate is based on an assumed range of comparable sales between 1.5% and 3%.
- CAKE has 1.4% of price on the menu exiting 1Q11.
- Assuming no change in two-year average trends, SSS will be 3.3% for the quarter
- Over the past three quarters, CAKE has benefited from an ongoing improvement in menu mix as beverage sales continued to stabilize.
- Broader casual dining trends continue to improve
EPS ESTIMATES - NOT MUCH UPSIDE
Coming into this year, CAKE had 60% of their costs contracted for. The remaining 40% must be purchased on the spot markets for the balance of the year. As of the last update in April, management guided to approximately 3.5% food cost inflation for the year, with +4.5% in the first half and +2.5% in the back half of the year. The reason for the drop off in inflation in the back half of the year was to come, according to management, from easier dairy cost compares in the fourth quarter. The company does not have dairy costs locked.
Guidance for the 2H11 assumes that commodity prices, dairy in particular, will not be at the high levels we saw in the fourth quarter last year. As the charts below illustrate, dairy costs are currently higher than they were in 4Q10. Of course, there has been significant volatility of late and there is potential for a snap-back. However, management may be forced to revise its expectations with respect to the dairy component of food costs if prices in cheese and milk markets remain anywhere close to where they are currently trending.
POSSIBLE FINANCIAL ENGEERING LURKING IN THE SHADOWS
It seems possible to me that CAKE may announce that it will be returning some excess capital to shareholders. It will likely come in the form of share repurchases and/or a dividend. Currently, the average dividend yields for SBUX, MCD, DRI, and YUM are 1.3%, 2.79%, 2.62% and 2.16%, respectively. CAKE could certainly get to a 2% yield and this would provide some support to the current stock price.
SALES TAX RECEIPTS LOOK BETTER THAN BAD
Sales tax receipts grew in California and Florida on a year-over-year basis. On a two-year basis, as the chart below indicates, there was a sequential slowing in sales tax receipts growth but the slowdown is hardly substantial. California and Florida account for 21% and 13%, respectively, of CAKE’s system units.
Conclusion: In what was a soft week from an equity performance perspective, we saw a couple key positive divergences where we expected them in – Chinese equities and Indonesian equities. On the currency side, a negative divergence from the AUD suggests prices may begin to support our bearish thesis.
This is the second installment of our now-weekly recap of prices, economic data, and key policy action throughout Asia. We’re aiming to keep our prose tight here, so if you’d like to dialogue more deeply regarding anything you see below, please reach out to us at .
In what was a soft week from an equity performance perspective, we saw a couple key positive divergences where we expected them in – Chinese equities and Indonesian equities. On the currency side, a negative divergence from the AUD suggests prices may begin to support our bearish thesis. From a credit perspective, Asian CDS didn't buy the hype associated with the European "stress" tests and backed up accordingly.
KEY ECONOMIC & POLICY DATA
China: YoY CPI (+6.4%) and PPI (+7.1%) accelerated in June (the former to a 3yr-high). We remain bullish on Chinese equities as CPI and monetary tightening expectations recede in 2H. China’s decision to incrementally invest in agricultural and pork supplies is incrementally bearish for CPI (137bps of June’s headline increase was due to rising pork prices). Copper imports rose for the first time in three months in June – supportive of China’s solid June/2Q economic data.
Japan: PPI accelerated to +2.5% YoY and, not surprisingly, the BoJ responded by keeping interest rates at zero percent. We continue to believe ZIRP has many unintended consequences over the long-term TAIL – not the least of which is structurally depressed growth rates. Despite nearly two decades of aggressive easing, Japan’s average YoY Real GDP growth has trended at a 0.85% pace. Email us for our Japan’s Jugular presentation if you also believe this time is NOT different.
India: The IPO market has slumped -80% YoY largely due to weakness in the equity market, which we are becoming incrementally more positive on after having been appropriately bearish since early November. As it relates to our outstanding concerns, this week provided a lot of clarity and pushes them closer to the rear-view mirror. Among them were Chief Economic Advisor C Rangarajan’s near-capitulation on India achieving its deficit reduction target in the current fiscal year, as well as a sequential slowing of YoY Industrial Production growth in May. Headline inflation via the WPI series accelerated in June to +9.4% YoY. We expect it to peak in August, but remain sticky and much higher than the government and the central bank’s official +6% target by March 2012.
South Korea: The Unemployment Rate held flat at 3.3% in June as Household Credit growth accelerated in the same month to +6.1% YoY, supporting a positive near-term view for Korean consumption growth. Slowing Discount and Department Store Sales growth in June pares back any optimism on his front, however. Also, Money Supply (M2) growth at a seven-year low in May (+3.7% YoY) suggests there is perhaps more cause for concern as it relates to aggregate economic activity going forward. That is among the reasons the Bank of Korea kept its Benchmark Policy Rate flat at 3.25% - in addition to lowering its 2011 GDP forecast -20bps to +4.3% and increasing its 2011 CPI forecast to +10bps to +4%.
Australia: Prime Minister Julia Gillard released the details of her controversial carbon emissions tax and, as expected, it was not well-received by the private sector. As Australian growth looks to slow, we think unpopular policies like these may ultimately cost the now-unpopular Gillard her job. To the former point, falling Consumer Confidence (July 92.8 vs. 101.2 prior), sequentially slowing Business Confidence (0 in June vs. 6 prior), slowing Corporate Investment (Corporate Deposit-to-Loan Ratio up to 1.25x vs. 1.15x prior), and a downwardly-sloping House Price Outlook (from +0.6% NTM in 1Q to -1.4% NTM in 2Q) all suggest the economy is headed into a protracted slowdown. We’ve been early and right on the slope of Aussie economic growth and as our Deflating the Inflation theme plays out globally, we expect the Aussie dollar (AUD) to experience a decent correction. The interest rate futures market is now pricing in an RBA rate cut as early as December. When we turned bearish from a research perspective, traders were pricing in a rate hike as early as last month.
New Zealand: Nearly the polar opposite of Australia from a data perspective, New Zealand’s REINZ House Price Index accelerated in June to +14.8% YoY vs. +10.8% YoY prior. Further, strong (albeit lagging) 1Q11 GDP data (+0.8% QoQ vs. +0.5% QoQ prior) was a positive for the Kiwi dollar (up +0.9% week-over-week). Declining Consumer Confidence is a cause for concern here, with the ANZ Index ticking down in July to 109.4 vs. 112.5 prior.
Thailand: The Pheu Thai continues to make headlines with its populist policy objectives, as an unnamed source in the Ministry of Finance leaked that the party is looking to increase the current year’s fiscal deficit by +14.8% in short order. The Bank of Thailand responded appropriately and hiked rates +25bps to 3% and officially cited the new government’s planned fiscal spending and minimum wage initiatives as reasons to front-load the taming of inflationary expectations. From a long-term TAIL perspective, we think they are just getting started.
Singapore: As we expected, Singapore’s 2Q GDP report was a bomb. Growth on both a YoY basis and QoQ basis slowed dramatically to +0.5% and -7.8%, respectively. Each of the three main components (Manufacturing, Construction, and Services) slowed sequentially on a YoY basis, indicating broad-based weakness throughout the economy. Additionally, slowing Private Home Sales growth (-25% MoM in June) suggests the government’s YTD efforts to reduce property prices are having an effect on the supply/demand dynamics of this market.
Indonesia: Bank Indonesia (the nation’s central bank) kept its Benchmark Policy Rate flat at 6.75% and stated that inflation may end the year below 5% - exactly what our models have been telling us. We remain bullish of Indonesian equities as growth looks to bottom out in 2Q/3Q alongside the potential for interest rate cuts.
Conclusion: Over the next few years, we expect investors to negatively reset their expectations for Peru’s long-term growth potential as a result of structurally higher inflation and interest rates (provided the central bank is allowed to remain independent). That’s bearish for Peruvian equities and we’ll look to short strength on rallies over the long-term TAIL absent a change in political strategies by new President Ollanta Humala.
Position: Short Peruvian Equities (EPU).
This afternoon, we added a short position in Peruvian equities to our Virtual Portfolio. We written extensively on our long-term outlook for Peru and are using today’s “strength” (Lima General up +13bps) to express our conviction in a core belief that Big Government Intervention (via a measured shift towards socialism in Peru’s case) is negative for the long-term health of any functioning economy. Simply put, we think newly elected President Ollanta Humala will grow increasingly motivated to over-tax the country’s vast mineral resource initiatives, as well as use pension funds and potentially FX reserves in an attempt to push his populist agenda.
Any attempts on Humala’s behalf to run the currency devaluation/overregulation strategies of his long-time mentor, President Hugo Chavez of Venezuela, and we’re likely to see a measured uptick in CPI in Peru over the long-term TAIL. That’s bullish for Peruvian interest rates and bearish for Peruvian growth, and we’d argue that the long-term expectations for both require an adjustment that is negative for Peruvian equities. Some would argue that the “Humala effect” is priced in with the Lima General down -13.4% YTD, but we firmly believe the process by which the market resets the aforementioned expectations will be one that plays out over the long-term TAIL.
Near-term, however (we prefer to keep our catalysts as close in duration as possible on the short side), we think Peruvian growth is slowing. In fact, Peru’s monthly Real GDP growth slowed to +0.47% MoM in May, good for the slowest pace in over a year and our models portend more downside from a YoY perspective for at least the next two quarters. From an inflation perspective, easy comps will supply upward pressure to Peru’s YoY CPI over the intermediate-term trend. Indeed, Peru is one of the few countries we model that won’t necessarily see the full benefit of our Deflating the Inflation thesis playing out in the commodity complex.
Net-net, we’re short Peru and the future socialism embedded therein. For more background on this thesis, please refer to our April 27 report titled: “Everyone’s a Winner – Except Peru”.
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