- MGM will report Q3 EPS on Wednesday morning. I expect a sequential decline in trends from Q2 and a decidedly more negative outlook for Q4. Will management be so bold as to predict a Q1 positive inflection point? Obviously, MGM is still trying to raise financing for CityCenter and is incentivized to put the best Las Vegas face forward. Hopefully, though, the company will be more realistic this time around.
- YouTubing: The following are some important metrics and quotes from the Q2 release and transcript that should be updated on Wednesday:
• CityCenter Residential - 1,421 units sold or 54% of inventory for $1bn as of early August
• Regarding closure rate for CityCenter residential – “we feel very, very confident in the quality of the customers that we’ve not only signed up but are signing up today as well who are entering into new contracts”
• $1.65bn in committed financing for CityCenter
• All in cost of CityCenter of $9.1 billion
• Capex for “remainder of 2008 and 2009 significantly below recent past”
We already know business is not good and likely will not recover until mid-2009 at the earliest. For us, the big issues relate to the balance sheet and financing, both for CityCenter and MGM corporate, covenants, and CityCenter residential sales and close rates. MGM has a $1.3 billion bond maturity in 2009 and a $1.1 billion in 2010.
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We’re 6% below the Street on the quarter, and 12% below for the upcoming 12 months. This is almost entirely due to weak gross margins. It’s been our view for a while that with UA growing into lower margin businesses with dominant competition and high cost of growth, Gross Margins should come down. Well, we’re finally there.
I cannot look through weak GMs by any means, but what I like is that UA has consistently driven its SG&A ratio despite over-delivering on the top line. In other words, it has been adding the assets to fuel the top line, and also has cost levers to pull in case revs fail to deliver. We go over this more in our 9/18 post (UA: Warming Up To The Armour).
It’s tough for me to find a company where I can identify the top line doubling over 4 years. I think that even in this economy, UA will see it. 6.5x EBITDA is not cheap relative to some other names in retail (trading as low as 2.5x-3.0x), but I’ll pay a premium for growth in this environment – especially given that some peers will cease to exist.
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In an interview this morning Bill Gross said that he anticipates a credit “loosening”, resulting from the launch of the Treasury Department’s commercial paper program today, that should start to be felt in the credit markets before the week is out. Gross (the man of the hour as of late), while continuing to express discomfort over Paulson & Co.’s policy decisions, said that he anticipates that the new window will have its desired effect in the near term.
Thawing or “loosening” in the commercial paper market is crucial for Paulson’s “jumper cable” strategy. It is hoped that cheap short term money will act like a bloody mary for hung-over borrowers and that they will return to more normal drinking patterns soon.
As outlined below, we are already starting to seeing to see spreads narrow - this action in the CP market should only facilitate a further narrowing.
Keith McCullough & Andrew Barber
Research Edge LLC
Nation’s Restaurant News reported that Wal-Mart is focusing a considerable amount of marketing dollars to steal breakfast sales. The company is now airing a commercial that asserts families can save $900 per year by having breakfast at home once a week rather than buying a fast food breakfast, which the commercial states can cost up to $5 per person. Wal-Mart is going after breakfast share at the same time most QSR operators have targeted breakfast as a new source of incremental sales.
Please refer to the link below to view WMT’s commercial pushing breakfast sales.
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