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LIZ: You Gotta Buy This Thing


We met with the management of LIZ Friday following the release of our LIZ Black Book titled “Get in While you Can.” If anything, we came away even more positive on LIZ. Here are our top takeaways:

  • Asset Sales: The recent sales of LIZ’s fragrance business and Mexx are not likely to be the company’s last before year-end. With both deals coming after management’s recent public stance that it has “multiple irons in the fire” it has investors questioning if deal activity is done for now. The reality is that we’d be surprised if any of the brands currently in the Partnered Brands portfolio are around this time next year. With the Mexx deal now out of the way, management is highly focused on reducing debt. Additional sales are the most realistic means to this end near-term.
  • Juicy Product Evolution: It’s rare that a management team isn’t bullish on product for an upcoming season, but we’ve met with CEO Bill McComb on multiple occasions and it was hard not to notice his incremental bullishness on Juicy. This is great to see from a timing perspective as were at the point where Spring orders are just coming in. With the company now starting to receive orders for Spring ’12 when the first of Leann Nealz’ new product will hit shelves, there’s reason to believe a turn in Juicy is more reality than hope at this stage. When all anyone wants to talk about is momentum at Kate, this was great to hear.
  • Juicy Asia: The partnership for Juicy in Asia (similar to the one in place with Kate) that was expected to be announced by July is now expected to be made by year-end. Resources were reallocated to get the Mexx deal done this summer – nothing else to read into regarding the delay here. Our sense is that comps are still running up +30%-60%.
  • Juicy Management: Similar to the leadership structure at Kate Spade, we think that LIZ will soon hire a co-president who will be tasked with running the operational side of Juicy alongside Leann Nealz. Not only should this add to the bench strength at Juicy, but more importantly will free up McComb’s time to focus elsewhere (i.e. consummating deals) and will allow Leann to focus time on where she’s strong.
  • Lucky: Q4 will be a key quarter for brand and is likely when operating margins should flip from a marginal loss to positive.
  • Kate: Apparel now accounts for ~30% of sales (i.e. it’s not just handbags). While management wants to keep apparel at less than 50% on a go forward basis, the goal would be for the category to settle in at 30%-40% of sales.
  • CapEx is running at ~$80mm annually, but will be reduced to ~$60mm post Mexx.
  • Guidance: When management provided its guidance for $180mm-$220mm in EBITDA for next year they assumed a consumption environment similar to the 2H of 2009, were only 2-months into the positive comp trends at Lucky, and had not yet seen the incremental margin improvement yet at Juicy. They remain cautious seemingly because of what they’re reading/hearing, not because of what they are seeing. We’re at $230mm in EBITDA next year.

Lastly, while not a specific takeaway from the meeting per se, we’d note that our view on LIZ has been largely received with blank stares and considerable disinterest from clients over the last few quarters. That is starting to change as the path towards earnings visibility begins to improve at LIZ. This remains one of our top long ideas.


Please see our recent Black Book “Get in While You Can” for far more detail on LIZ and the key developments within each of the company’s brands.



Casey Flavin




Twisted: SP500 Levels, Refreshed

POSITION: Long Utilities


There’s a twisted message in the FOMC statement in that it’s very bullish for the US Dollar. Bernanke is done. He’s in a box and can’t do a whole heck of a lot more to debauch the Dollar anymore. What’s good for the US Dollar is good for Americans (not Oil or Energy stocks).


Here are the lines that matter across durations in our risk management model: 

  1. Long-term TAIL resistance = 1266
  2. Immediate-term TRADE resistance = 1229
  3. Immediate-term TRADE support = 1182 

In other words, despite today’s twisting, the SP500 remains bullish TRADE and bearish TAIL. No change day-over-day or week-over-week. If 1182 breaks, that will change – and that’s when you want to get back in the saddle on the short side more aggressively again. Not yet.


Waiting and watching,



Keith R. McCullough
Chief Executive Officer


Twisted: SP500 Levels, Refreshed - SPX


Q & A session

  • Haven't gone through the details of their thoughts on dividends. That will be discussed at their next board meeting in a few weeks.
  • They will not be able to put a shovel in the ground in Europe for at least 2 years. Feel that development in Spain is within their control. There are 980MM people in visitation range of Spain. If all visitors to Las Vegas were unique, which they are not, that would imply 13% penetration.
  • Thoughts on Florida / Genting development: Not possible that they can execute on their design for $3BN but more likely like $6BN. Every single floor needs different designs - especially the curved walls... Genting is fighting against Nevada state gaming regulations.  As far as Miami is concerned, if you put in more than one integrated resort, there isn't enough business to support that because the Seminoles already have 7 locations. They will look at the tax rate, minimum investment and other provisions before they decide on whether they want to participate in that market.
  • Phase I: 4 buildings in Spain and wouldn't go to the next phase until they see that the market demand is there. In Macau they also wanted to Phase but ran into that issue for 2008.  Need enough critical mass in the first phase to support casino, convention, hotel and retail business. 
  • All the other projects they are looking at in other Asian countries are single structures - ala MBS
  • Even if they commit to $20BN of project, they are all likely to be staggered with equity contributions of just ~30%. Think that the costs of most projects would be $9-10BN (at most). All constructions loans are non-recourse. Thinking about the name Europa for their Spanish development.
  • Think that if they build in Japan, it would cost around $4BN. 
  • They still own Site 3 in Macau as well... well, they lease it ... which is another development opportunity that they are discussing with the government of Macau. Site 3 will be a more Mass market oriented building so it will be substantially less expensive then their other projects and smaller.  It will not be a $4BN property. Not even sure if they can get approval on their design.
  • If they pay dividends, would it need to come out of Sands China?
    • A: actually the larger % will come from Singapore, not Macau. Also, don't expect that the dividend will be so huge... or rather that hasn't been determined yet.
  • Think that the reason that other Cotai projects haven't gotten approval is because the government wants more Venetian like projects - not gambling halls
  • Doesn't think that the government will allow Macau style junket reps. 
  • Where do they want to be on a target leverage basis given their cash flow and development pipeline?
    • A: 3x - and they will be there on a gross basis in 2011
  • Projecting $300-$400MM of maintenance capex in their existing building which include adding new VIP rooms and keeping the property fresh. Bottom line is that unlike other gaming operators they will not be cash constrained on maintaining their properties. Made a mistake for waiting 7 years to refresh Sands Macau.
  • Thoughts on Phillipines: The political structure is too dangerous for them - too corrupt and there is also a lot of product going into that market
  • Massachusetts: Told the governor that if they do more than 2 casinos, LVS isn't interested. There is too much gaming dilution in the USA.  Current bill proposes 3 casinos and 1 slot parlor.  If they don't get the location that they think is ideal, they will not participate because New Hampshire may legalize too.  There is a $500MM min capex and good relationships with unions are needed (which they lack).
  • How much retail real estate do they own?
    • A: 350 tenants and 800,000 SQFT (leasable - GLA).  They had sales of over $3000/SQFT on the first floor of their Grand Canal Shoppes in Macau.  That's $360/SQFT of rental income to them... Cap rates in Asia are about 4-5%. Malls in Macau are not yet mature because they don't have the bridge from Cotai Central yet. Thinks that the monetization of their retail real estate would retire all their debt.
  • Korea or Japan would be their preferred gaming locations if they had to choose 

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Global FX Update

Conclusion: The U.S. Dollar remains the dominant factor in our 27-factor Global Macro model and it continues to signal to us to be outright short or have extremely low levels of exposure to commodities and emerging market currencies over the intermediate term.


Positions: Long the U.S. Dollar (UUP).


Given recent developments across the global foreign exchange market, we thought we’d take the time to briefly provide you with our updated thoughts as it relates to managing the FX risk on your screens. Having a call on this asset class (particularly vs. the USD) is crucial to determining the associated costs of entering, exiting, and hedging one’s exposure to assets denominated in foreign currencies – including the FX impact on cross-border investment returns.


As it stands now, we are currently bullish on the U.S. Dollar and long it via the ETF “UUP” in our Virtual Portfolio (having been accurate on 22 of the past 23 positions). This is a meaningful stance we have taken and is also underscored by our recent decision to reduce our exposure to commodities within our Dynamic Asset Allocation to ZERO percent.


For context, we’ve only been this bullish on the U.S. Dollar twice since our firm’s inception just over three years ago: 2Q08 and 1Q10. Though no two periods of economic history are alike, the chart below provides useful reference points for what happened to the commodity complex after prior episodes of Hedgeye USD-bullishness:


Global FX Update - 1


As a corollary to the USD-breakout, commodities as an asset class (as measured by the CRB Index) remain broken across our TREND and TAIL durations. We’ve been calling for this Deflating the Inflation and that outlook was the primary reason we were on time in getting out of the long side of things like crude oil and energy stocks back in 2Q11. Regarding crude oil specifically, earlier today we initiated a short position in Brent (ETF: “BNO”) in our Virtual Portfolio.


Global FX Update - 2


Bernanke’s Box and our call for Europe to ease monetary policy in the latter part of the year remain the two primary reasons we have called for and seen recent U.S. Dollar strength:


“Slowing growth in the Eurozone will have the FX market pricing in less and less hawkishness out of the ECB relative to the Fed on a go-forward basis (don’t forget that the socialist Mario Draghi takes over in November and the Europeans have a full 125bps of potential interest rates to cut). EUR bearishness is USD bullish (57.6% of DXY basket).”

- “Emerging vs. Developed Markets: Aggressively Framing Up the Debate”, June 24


“In aggregate, CPI readings should continue to keep the Federal Reserve in a box as it relates to implementing incremental easing.”

- “Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation”, August 18


“Our view of incremental easing remains that the Federal Reserve will be in a proverbial box in terms of incremental easing until at least the end of 2011, if not well into 2012. The primary reason for this is simply that the data will not support further easing… inflation was running at much lower levels, largely below 1%, when the first two rounds of quantitative easing were implemented. Currently, this measure of inflation is north of 3% and set to remain at that level through the next couple of quarters based our models.”

- “The Fed Remains in a Box”, August 26


Above all, the U.S. Dollar’s quantitative setup is quite bullish and price remains the dominant factor in our Global Macro framework:


Global FX Update - 3


Of course, Christine Lagarde and the IMF’s soon-to-be-announced La Bazooka (see: today’s Early Look) could work to strengthen the Euro for a TRADE, but the prevailing quantitative setup (bearish TAIL) remains the trend. We covered our Euro short (ETF: “FXE”) yesterday in anticipation of such immediate-term price action, especially given how crowded this trade is. In fact, as of the most recent reporting period, the EUR/USD garnered the highest number of bearish wagers by hedge funds and other large speculators since July ‘10 (54,459 net-short contracts on Sept 13 vs. 2,539 net-long contracts on Aug 23).


Global FX Update - 4


Of course, being bullish on the dollar implicitly implies that we’re bearish on most emerging market currencies and that is a key risk to monitor as it relates to the performance of your foreign currency-denominated assets. In this space, a general shift towards dovish monetary policy, massive external debt issuance in recent years, and a general repatriation of US dollars are all combining to put downward pressure on the exchange rates of these economies:


Global FX Update - 5


For the sake of brevity, we won’t go into further detail on this topic now; we have, however, put together a long list of detailed notes and data points we’ve been sending to clients on a one-off basis as it relates to the rising external debt burdens and the recent “flows” out of emerging market (and European) assets and [perhaps] into liquid, large-cap U.S. equities – which have been largely outperforming much of world on a quarter-to-date basis. Email us if you’d like us to follow up with you directly.


The U.S. Dollar remains the dominant factor in our 27-factor Global Macro model and it continues to signal to us to be outright short or have extremely low levels of exposure to commodities and emerging market currencies over the intermediate term.


Darius Dale


Solid Athletic Trends

Good numbers for the week for footwear and apparel on the eve of several weeks where comps should start getting very easy. Good news all around.



Apparel sales for the week (per Sportscan) accelerated meaningfully, taking the 3-week average to about 12%. Footwear (per NPD) is a less impressive low single digit rate, but in looking at the really underlying trend we see it accelerating from a trough of -4% last month.  The most notable point here is that we’re currently comping against some of the most difficult numbers in all of Fall 2010. Starting next week, both categories begin to comp against much easier yy numbers. Nike remains the most balanced grower, while a notable callout is Adidas US, which continues to track about +150bp of share gain – meaningful on top of a paltry 4.6% share base. UnderArmour is still putting up mid-teens growth in the channels captured. While footwear has started to accelerate in just the last few weeks, inventories ended last quarter +74%. We realize that this is not a fair 1 to 1 comparison, but it’s directionally bad.


Solid Athletic Trends - fw   app


Solid Athletic Trends - footwear sales growth


Solid Athletic Trends - fw share


Solid Athletic Trends - apparel table


Solid Athletic Trends - fw chart 1


Solid Athletic Trends - FW 2 year 9 21


Comments from Mike Leven and Ken Kay




  • LVS is one of 16 companies with a market cap > $10BN with a projected Revenue CAGR > 20% from 2011-2013E and one of 6 companies with a 2013E FCF > 8%
  • Have a very seasoned management team in case anything happens to Sheldon
  • The management team's job is to execute on Sheldon's vision
  • 2Q11 EBITDA: 45% Singapore, 43% Macau, 10% Las Vegas, 2% PA (88% from Asia)
  • Opening of Sands Cotai Central at the end of 1Q12; it will be the only new opening for at least 4 years
  • Looking at development opportunities in jurisdictions considering gaming expansion: Japan, Korea, Vietnam, Taiwan, and Europe
  • Consensus for 2012 EBITDA: $4,073MM ($1.9BN for Macau, $1.7BN at MBS, $385MM for Vegas, and $96MM for PA)
  • Organic growth opportunities in all their operating jurisdictions
    • Macau: improving VIP competitiveness and expansion of regional transportation infrastructure
    • Singapore: Broadening and deepening VIP expansion; MTR train opening in 1Q12 right by their property and the opening of the deep water cruise terminal in 2012
    • Vegas: refurbishment and renovations
    • PA: retail mall outlet opening


  • Expect further economies of scale on the cost side when Sands Cotai Central opens
  • CAPEX: 2011E: $1,545; 2012E: 1,462MM; 2013E: $893MM (40% maintenance - $350-400MM per year or 3% of revenues)
  • In 3Q11/4Q11, they will refinance VML/VOL credit facilities which are complete but waiting for Macau government approval; in November 2011, they plan to redeem $712MM of preferred stock; and in 2012, they will refinance the Singapore Credit facility.
  • By 2013, assuming no new developments, they will have no net debt (or $729MM of net leverage of .2x)
  • FCF yield should be 9% by 2013 or $3.1BN
  • Cash Balance projected to be $5.6BN in 2012 and $8.14BN by 2013;  +$1BN of R/C capacity - so they will be in a very unique position to pursue a number of development opportunities
  • They will use this cash in new developments and return cash to shareholders through dividends and stock buyback as well as debt reduction
  • Future development projects will be developed with 25-35% equity
  • Working on the tax efficient repatriation of cash flow,  They have $450MM of NOL's; $1BN may be repatriated from MBS and nearly $6BN of foreign tax credits generated from the Macau gaming taxes paid that can offset tax liabilities.


  • Have been in the process of retooling their development department led by Mike Lentz
  • Steps: Strategy/ Opportunity Definition; Feasibility assessment; Concept development; Negotiations; Design Development; Execution