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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.
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.
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